What Investors Need to Know About the MedEquities Realty Trust IPO

By Markets Fool.com

Medical spending in the U.S. is high, and it's only going to rise. It is estimated that annual American healthcare expenditures will climb by 76% from 2014 to 2024, to land at a massive $5.4 trillion.

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The ever-ballooning spend on healthcare is a boon for real estate investment trusts that specialize in medical facilities, like segment heavyweights Welltower (NYSE: HCN) and Ventas (NYSE: VTR).A new player is about to join them -- MedEquities Realty Trust. Here's a look at the company's upcoming IPO.

Good for what ails you?

MedEquities Realty Trust is a small fish compared to the likes of Welltower and Ventas. Both of these long-established REITs have portfolios that comprise over 1,000 properties.

The new healthcare REIT on the block currently holds 24 facilities, which all told contain 2,345 beds. The bulk of these -- 17 facilities, to be exact -- are skilled nursing facilities.The remainder consist of "two acute care hospitals, two long-term acute care hospitals, one assisted living facility, one inpatient rehabilitation facility and one medical office building."That concentration on skilled nursing sets MedEquities Realty Trust apart from certain peers like Ventas, which have divested their skilled nursing assets.

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Ventas spun off the business now trading as Care Capital Properties last year, while rival HCP (NYSE: HCP) is in the process of divesting its troubled HCR ManorCare unit into a stand-alone REIT called QCP.

Looking at MedEquities Realty Trust's results, it seems that the focus on nursing is producing results. On a pro forma basis, the REIT brought in total revenue of just over $56 million, and delivered a net profit of slightly more than $21 million in 2015 (its first full year of operation).

Attributable funds from operations, the standard profitability metric for REITs, was a bit over $35 million.

This Fool's take

Mashing the latter figure against the anticipated, post-IPO shares outstanding tally, then dividing that into the midpoint ($13) of the anticipated IPO price, yields a price/FFO figure of 11.2 for MedEquities Realty Trust.

That's below (i.e., cheaper) that of both Welltower's 18.7 and Ventas' 17.6, although it's richer than Care Capital Properties' 8.7.

Looking at the respective dividend policies of the four REITs, MedEquities also holds its own. Again using that IPO price midpoint, and annualizing the company's anticipated $0.21-per-share payout for Q4 2016, the REIT would have a dividend yield of 6.5%.That handily beats Welltower (4.6%) and Ventas (4.1%), but it does come up short against Care Capital Properties' 7.9%.

We should keep in mind, though, that Welltower and Ventas have proven their worth over years, if not decades, of operation. This helps justify the higher valuations.MedEquities Trust is a baby compared to them, and it's yet to demonstrate that it can grow its business as effectively as its rivals.

That said, the REIT looks quite promising in these early days. Income investors and those interested in specialty REITs should certainly keep an eye on the company. That particularly applies if it shows encouraging revenue and FFO improvements in its first few quarters as a publicly traded entity.

The details

MedEquities Realty Trust is slated to hit the market on Thursday. Over 19.9 million shares will be sold by the company, in combination with shares sold by stockholders . The expected IPO price is $12 to $14 per share. The REIT will list on the New York Stock Exchange under the ticker symbol MRT.

The leaders of the underwriting syndicate include Citigroup, JPMorgan Chase's J.P. Morgan, and Royal Bank of Canada's RBC Capital Markets.

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Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Welltower. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.