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German healthcare market
New York Stock Exhange-listed REIT Medical Properties Trust Inc. (MPT) made its first foray into Germany earlier this month when it agreed to pay about €184m (US$244.7m) to buy leading German rehabilitation hospital operator RHM Klinik- und Altenheimbetriebe GmbH in a sale-and-leaseback deal.
MPT is buying the real estate assets of 11 post-acute facilities located across Germany and will lease them back to the operator RHM in a 27-year master lease structure. The move comes as part of the REITs plan to add diversity to its US core portfolio and open up a new acquisition pipeline outside its home market.
According to Edward Aldag Jr, chairman and CEO of MPT, in a statement, “This investment will allow MPT and its shareholders to benefit from the stable German economy, favorable demographic trends and the operational expertise of RHM, all of which we expect will help drive FFO growth.” He added, “In a single transaction, we are adding a host of assets to our portfolio that have demonstrated long-term financial stability, have substantial lease coverage at 1.75 times EBITDAR and a track record of operational excellence.”
The RHM portfolio consists of nearly 1,800 beds with average occupancy rates significantly above the average rates for German rehabilitation clinics, claims the Deidesheim-based RHM. The operator is owned by private equity group Waterland Private Equity Investments, which will maintain its operational ownership.
For close observers of the real estate investors in German healthcare market, the deal is significant in that the US REIT is looking to replicate a market it understands well at home, where it is the only US healthcare REIT focused exclusively on funding hospitals and other facilities where patients must be admitted by doctors, in a market with universal healthcare coverage and blanket payment policies. The stability of the sector in Germany seems to be one of the market’s key attractions and helps the REIT reduce its exposure to any single operator, with its concomitant risk, it said.
MPT says the German deal helps it to reduce its exposure to its largest operator from more than 24% to 22% based on gross assets, assuming completion of all development projects. Its German partner RHM will now represent about 8% of MPT’s pro forma portfolio, complementing the remaining 92% which are located in 25 different US states. Additionally, no single property will now account for more than 3.5% of the aggregate portfolio.
MPT said it sees the deal as the start of what it sees as a platform to create a “pipeline for additional investments”. In particular, it said it sees significant consolidation opportunities in the highly-fragmented German market for well-capitalised operators.