Significant Carter Validus Mission Critical REIT Tenant Declares Bankruptcy
May 8, 2018 | James Sprow | Blue Vault
On May 4, 2018, Bay Area Regional Medical Center, LLC ("Bay Area"), a tenant of Carter Validus Mission Critical REIT, Inc. (“the Company”) announced in a press release that it is closing its operations on May 10, 2018, and filing for bankruptcy in the near term. According to the 8-K filed with the SEC, the REIT is and has been actively communicating with Bay Area, and will seek all of its rights and remedies to enforce all obligations of the parties to the lease and any other agreements associated with the Company's investment. The Company will seek to pursue all avenues to maximize stockholder value, which may include a sale of the property or leasing of the building to a new tenant or tenants.
Carter Validus acquired its 60% interest in the Bay Area property on July 11, 2014, for $118.8 million, and it comprised 373,070 square feet of leased space, which was 100% leased as of 12/31/17. The property comprised an estimated 12% of the REIT’s gross carrying cost of all properties (cost plus capitalized improvements before depreciation) as reported in its December 31, 2017, 10-K which includes additional capitalized investment that occurred subsequent to the acquisition of approximately $38 million, based on the 60% interest. The additional investment, according to plans announced at the acquisition, was to build out the remaining four floors of the acute-care hospital in the following 18 months, which would increase the number of beds it offered to approximately 202, from 104.
Carter Validus Mission Critical REIT owned 66 properties as of May 8, 2018. Blue Vault estimates that the Bay Area Regional Medical Center’s square footage made up approximately 11.2% of the REIT’s total leased area of approximately 3.34 million square feet and 15.8% of the REIT’s healthcare property square footage. There is no reference in the Company’s 10-K for 2017 that gives the percentage of lease revenues represented by the Bay Area property, but it is very significant given the property’s percentage of the REIT’s portfolio book value and square footage.
Carter Validus Mission Critical REIT, Inc. is a publicly registered non-traded real estate investment trust, sponsored by Carter/Validus REIT Investment Management Company, LLC. Its common stock offerings beginning in December 2010 eventually raised over $1.7 billion, including DRIP proceeds before closing in June 2014. The REIT sold 16 properties during 2017, which consisted of approximately 2,656,000 rentable square feet, for an aggregate sale price of $1,153,000,000. On January 10, 2018, it sold two data center assets, which consisted of 658,000 rentable square feet, for an aggregate sale price of $142,500,000.
Blue Vault estimates that the sales of 18 properties since December 20, 2017, have combined for approximately $1.300 billion in gross proceeds to the REIT. The estimated purchase prices of the properties sold, including identifiable capitalized improvements, totaled at least $1.022 billion.
In December 2017, the Company sold the Miami International Medical Center for $88,000,000. The Company generated net proceeds on the sale of the Miami International Medical Center of $87,499,000. The net book value of the Miami International Medical Center at disposal was $93,435,000. The Company had purchased the property in 2014 for $48.6 million and made capitalized improvements estimated at $49.5 million after the purchase to redevelop the property into a healthcare facility in 2015. The Company recorded an impairment loss on real estate in continuing operations on the Miami International Medical Center of $5,936,000, based on the contractual sale price (less cost of sale) and its book carrying value. The property had lost its tenant earlier in 2017. With the loss on the Miami property, the Bay Area Regional Medical Center bankruptcy represents the second major negative impact on the Company’s healthcare portfolio in the last six months.
Bay Area Regional Medical Center CEO Stephen K. Jones Jr. told employees in an email provided to the Houston Chronicle that the company "was not able to overcome significant hurdles with managed-care companies." An estimated 900 employees will lose their jobs. Patient moveouts began immediately.
"This morning local hospitals will be notified so that they can help facilitate the transfer of our patients to their facilities," the email said. "Local EMS will be deploying resources to help move patients, and doctors will be rounding to discharge patients who can safely go home or to a lower level of care."
Spokesman Santiago Mendoza said Bay Area Regional tried for at least a year to get better reimbursement terms, but it did not have the backing of a major hospital system.
"When it came to negotiations with our managed care contracts we were unable to come to an agreement, a favorable agreement and due to overhead, we couldn't survive," Mendoza said.
Sources: Carter Validus Mission Critical REIT 8-K SEC filing, Blue Vault, Houston Chronicle
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