$1.25B Steward Health Acquisition

Upsized Equity Offering Bolsters Unique Position

Rating: Buy

Market Cap (M): $3,537; Price: $14.80 as of 09/27/2016

Price Target new: $18.00; Price Target prior:$18.00

Sector: Healthcare REITs

What's Incremental To Our View

We view MPW's $1.25B Steward Health Care System investment and upsized equity offering positively - adding a new operator relationship and portfolio diversification benefits. MPW is acquiring nine hospital properties from Steward (a Cerberus Capital Management affiliate) for $1.2B along with a $50M equity investment in Steward. Combined with the additional portfolio/capital market activities (~$800M dispositions, $300M MEDIAN investment, 11.9M share ATM), MPW projects ~10% per share accretion. We believe MPW will continue to leverage its unique market position into additional opportunities.

The deal structure with Steward Health is anticipated to be split equally between master lease (five properties) and mortgage loan arrangements (four properties) with cross-default provisions and corporate guarantees, reflecting a 10.1% GAAP cap rate and CPI based escalators. The agreement also includes the right of first refusal for MPW to acquire future Steward hospitals.
MPW will invest $50M in equity in Steward Health that, in addition to providing a 4.9% economic interest, offers certain protective rights regarding Steward credit decisions. Cerberus has also agreed to invest $150M in MPW through a private placement transaction.
The Steward deal should deliver meaningful diversification benefits, with Steward becoming MPW's largest tenant at 17.8% of assets (replacing Prime previously at 20.8%). Prime, MEDIAN, Ernest, Adeptus and RCCH fill the next five spots, representing 16.1%, 14.9%, 8.7%, 7.1% and 6.5% of total gross assets, respectively.
MPW raised ~$700M in equity through its 50M share overnight equity offering (priced at $14.50) and expects an additional $150M private placement from Cerberus. While the company initially projected an incremental ~$700M in debt, with the upsized equity offering, we think the debt offering may be more likely in the $500M range, helping MPW maintain its low leverage.
We view this deal positively, and think it further strengthens MPW as a key financial partner with its hospital tenants. We also believe the deal size and relationship should enhance MPW's recognition and unique position in the hospital sector.
We have updated our model, with our 2016 Normalized FFO estimate moving lower to $1.19 (from $1.30), reflecting the upsized equity offering and assumed incremental $500M in debt, but no Steward revenue (assume deal closes near year end for modeling purposes). Our 2017-2018 Normalized FFO estimates move higher to $1.38, and $1.47 (from $1.34 and $1.43), reflecting the expected incremental benefits of the Steward investment.