Medical Properties Trust Inc. (MPT) has agreed to a series of transactions with Ernest Health Inc. to add 16 existing post acute care hospitals to MPT’s investment portfolio for approximately $300 million. In addition, MPT will acquire a significant percentage of Ernest Health’s operations, in partnership with Ernest Health’s management team. This $400 million transaction increases Medical Properties Trust’s overall assets by 25 percent, to more than $2 billion.

Upon completion of the transactions, MPT is expected to have investments in 78 hospital facilities in 24 states, total assets of approximately $2 billion and no tenant group that represents more than 20 percent of its total assets. The transactions are expected to add approximately $0.19 per share in funds from operations in the 12 months following the closing, which is anticipated to occur during the first quarter of 2012. Based on MPT’s most recently disclosed expectations of future FFO, the incremental FFO from the Ernest transactions will represent an increase of 26 percent.

Founded in 2003, Ernest Health, Inc. is an operator of long-term acute care hospitals (LTACHs) and inpatient rehabilitation hospitals (IRFs). Headquartered in Albuquerque, N.M., Ernest operates 16 properties (8 LTACHs and 8 IRFs) with 606 beds across nine states. Subsequent to the transactions, Ernest will be managed pursuant to agreements with current executive management, including Ernest CEO Darby Brockette.

“We have known the Ernest management team for a long time and we have watched the company grow from its inception during the same year MPT was founded,” said Edward K Aldag, Jr., chairman, president and CEO of Medical Properties Trust Inc., said in a statement.

Transaction details

As part of the transaction, MPT will acquire the real estate assets of 12 Ernest facilities for an aggregate purchase price of $200 million, and lease the properties back to Ernest under a master lease structure with an initial term of 20 years and three five-year extension options. The real estate of four other Ernest facilities will serve as first lien collateral under a $100 million master mortgage loan with economic terms substantially similar to the master lease. The master lease, the master mortgage loan and the development agreements are all cross-defaulted and cross-collateralized.

A venture between an MPT affiliate and existing management of Ernest will acquire Ernest Health Inc. for approximately $100 million, including approximately $96.5 million in MPT financing. MPT will have rights to a significant percentage of the profits and distributions of Ernest.

The company intends to fund the acquisition with a combination of borrowings under MPT’s revolving credit facility, borrowings under a new term loan facility, as described below, net proceeds from other debt or equity capital market issuances, or a combination of the foregoing.

RBC Capital Markets, LLC acted as MPT’s exclusive financial advisor for this transaction.

In connection with announcement of the Ernest transactions, on January 31, MPT received a commitment letter and term sheet for an $80.0 million senior unsecured term loan facility from J.P. Morgan Chase Bank N.A. and RBC Capital Markets LLC. The company expects to close and fund the new term loan facility concurrently with the closing of the Ernest transactions.

MPT’s existing revolving credit facility includes an accordion feature pursuant to which borrowings there under can be increased up to $400.0 million from $330.0 million. The company requested a $70 million increase in its revolving credit facility contemporaneously with the closing of the new term loan facility.