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Section 1: 8-K (8-K)

mrt-8k_20171113.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 13, 2017

 

MEDEQUITIES REALTY TRUST, INC.

(Exact name of Registrant as Specified in Its Charter)

 

 

Maryland

001-37887

46-5477146

(State or Other Jurisdiction

of Incorporation)

(Commission File Number)

(IRS Employer

Identification No.)

 

 

 

3100 West End Avenue, Suite 1000

Nashville, TN

 

37203

(Address of Principal Executive Offices)

 

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (615) 627-4710

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instructions A.2. below):

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



Item 7.01.  Regulation FD Disclosure.

Beginning on November 14, 2017, MedEquities Realty Trust, Inc. (the “Company”) will use the presentation materials that are included as Exhibit 99.1 to this Current Report on Form 8-K in meetings with investors. A copy of the presentation materials will also be available on the Company’s website, www.medequities.com.

In accordance with General Instructions B.2 and B.6 of Form 8-K, the information included in this Current Report on Form 8-K, including Exhibit 99.1 attached hereto, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing made by the Company under the Exchange Act or the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.

 

Item 9.01.  Financial Statements and Exhibits.

(d) Exhibits.

 

Exhibit

Number

 

Description

 

 

 

99.1

 

Investor presentation, dated November 2017

 

 

 

 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

MedEquities Realty Trust, Inc.

 

 

 

 

Date: November 13, 2017

 

By:

/s/ Jeffery C. Walraven

 

 

 

Jeffery C. Walraven

 

 

 

Executive Vice President and Chief Financial Officer

 

 

 

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Section 2: EX-99.1 (EX-99.1)

mrt-ex991_6.pptx.htm

Slide 0

Investor Presentation November 2017 Exhibit 99.1

Slide 1

Disclaimer Forward-looking Statements Various statements in this presentation are “forward-looking statements” within the meaning of the U.S. federal securities laws. Forward-looking statements provide our current expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about our strategic plans and objectives, potential property acquisitions and investments, anticipated capital expenditures (and access to capital), amounts of anticipated cash distributions to our stockholders in the future and other matters. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” "will" and variations of these words and other similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and/or could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. For a description of factors that may cause the Company’s actual results or performance to differ from its forward-looking statements, see the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission (the “SEC”) on February 27, 2017, and other documents filed by the Company with the SEC, including the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017. You are cautioned to not place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Information regarding our operators, tenants, and guarantors This presentation includes information regarding certain of our tenants and guarantors, which are not subject to SEC reporting requirements. The information related to our tenants and guarantors contained in this report was provided to us by such tenants or guarantors, as applicable, or was derived from publicly available information. We have not independently investigated or verified this information. We have no reason to believe that this information is inaccurate in any material respect, but we cannot provide any assurance of its accuracy. We are providing this data for informational purposes only. Definitions and Reconciliations For definitions of certain terms used throughout this presentation, including certain non-GAAP financial measures, see the Glossary included in the Appendix on pages 26-28. For reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures, see pages 21-22 in the Appendix. Unless otherwise noted, information set forth herein is as of September 30, 2017. On the cover: from top to bottom - Baylor Scott & White Medical Center - Lakeway, Lakeway, TX; Horizon Specialty Hospital of Henderson, Las Vegas, NV; Mira Vista Court, Fort Worth, TX; Physical Rehabilitation and Wellness Center of Spartanburg, Spartanburg, SC.

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MedEquities Overview Self-advised healthcare REIT with a growth strategy focused on generating attractive risk-adjusted returns across the continuum of acute and post-acute services where demand is needs-based $578 million invested in newly originated assets1 9 leading operators 1.84x guarantor-level EBITDAR coverage3 Selectively pursue acquisition pipeline Aa32 hospital operator 13.1 year weighted average lease term1 1 As of September 30, 2017 2 Lakeway Hospital is operated by a subsidiary of Baylor Scott & White Holdings, a healthcare operator with outstanding bonds rated Aa3 by Moody’s 3 For Stabilized Facilities for the trailing twelve month period ended 6/30/2017. 4 Based on third quarter 2017 dividend annualized. 5 Based on 11/10/2017 closing price. 6 As of November 7, 2017, we had $53.3mm of additional available borrowing capacity based on current borrowing base assets. 7.8% dividend yield5 Well covered dividend 72% AFFO payout ratio $0.84 dividend4 Conservative leverage; net debt/gross assets of 24.6% Baylor Scott & White Medical Center – Lakeway, Lakeway, TX Mountain’s Edge Hospital Las Vegas, NV Continuum of care Mira Vista Court Fort Worth, TX Kentfield Rehab and Specialty Hospital Kentfield, CA Ample available liquidity; $300mm revolver6 Conservative leverage; net debt/gross assets of 32.9%1

Slide 3

Update on 2017 Investment Activity $91.2 Million of Announced Investments 9.1% Weighted Average Initial Lease Yield Added 5 New Tenant Relationships Added 3 New States IN, CT, TN Expanded into Behavioral Sector with 2 Leading Operators New Relationships Provide Opportunities for Additional Transactions Note: data on this slide reflects acquisitions announced and/or funded in 2017 through November 7, 2017

Slide 4

1 Annualized rental and interest income is total monthly rent, including straight-line rent and amortization of lease incentives, and interest income for leases and loans in place as of September 30, 2017, multiplied by twelve. Annualized rental income excludes certain property operating expenses that are reimbursable by tenants, which are included as rental income. Figures include $9.4 million for Lakeway Hospital, $0.9 million of interest for the Vibra mortgage loan, $0.7 million of interest for the Medistar Gemini mortgage loan and $1.2mm for the Advanced Diagnostics Hospital East (“ADHE”) mortgage loan which is included within the ACH sector; map excludes loan interest secured by Springfield, MA LTACH and Webster, TX MOB, which represent approximately 3% of ARI and interest income. 2 Includes one ALF connected to a SNF. 3 Figures include ADHE Mortgage Loan as we exercised our purchase option on the facility in November 2017. 4 Includes 166 beds in the AAC sober living facilities that are not licensed for treatment. Summary of Healthcare Real Estate Portfolio Texas (53% of ARI1) Headquarters SNF2 LTACH MOB ACH IRF El Paso California (24% of ARI1) South Carolina (3% of ARI1) Nevada (13% of ARI1) San Francisco Las Vegas San Diego Amarillo Nashville Spartanburg San Antonio Dallas 32 properties3 $578 million gross acquisitions $57.9 million annualized rental and interest income1 2,805 beds3,4 Asset type breakdown Total ARI1 = $57.9 million Los Angeles Houston Connecticut (2% of ARI1) BH Indiana (3% of ARI1) Indianapolis Hartford

Slide 5

Capital Partner for Experienced, Growth-Minded Operators 1 Annualized rental and interest income is total monthly rent, including straight-line rent and amortization of lease incentives, and interest income for leases and loans in place as of September 30, 2017, multiplied by twelve. Annualized rental income excludes certain property operating expenses that are reimbursable by tenants, which are included as rental income. Figures include $9.4 million for Lakeway Hospital, $0.9 million of interest for the Vibra mortgage loan, $0.7 million of interest for the Medistar Gemini mortgage loan and $1.2mm for the Advanced Diagnostics Hospital East (“ADHE”) mortgage loan. Annualized Rental and Interest Income by Operator1 7 leading, growing regional operators; 1 best-in-class hospital operator; 1 national behavioral health provider

Slide 6

Capital Partner for Experienced, Growth-Minded Operators Operator Number of Facilities FY 2016 Revenue 43 (17 states) $818 million Largest privately owned LTACH operator Experienced LTACH and IRF operator 90 (10 states) $578 million One of the largest privately owned post-acute operators 20 $253 million Award winning operator with an average CMS rating of 4.6 stars4 Has grown from 1 SNF in 1998 to 20 facilities with over 2,200 beds 48 hospitals1 $8.4 billion Parent is Aa3 rated credit, $10.8 billion in total assets Largest not-for-profit health care system in Texas, and one of the largest in the United States More than 1,000 patient care sites, with over 44,000 employees (5,500 active physicians) 212 $84 million3 Founded by former CEO and COO of Paramount Healthcare Founders and predecessor companies have long history of health care experience 18 (5 states) -- Approx. 3,100 licensed beds in acute care and behavioral hospitals and senior living facilities in 5 states 29 $102 million 22 skilled long-term care facilities (two of which are pediatric based) and 7 assisted living facilities in Indiana 30 (8 states) $280 million Leading provider of inpatient drug and alcohol addiction treatment services in the behavioral health sector (NYSE: AAC) 12 inpatient and 18 outpatient facilities with over 1,300 beds Source: Company information as of December 2016. 1 According to Baylor Scott and White website. 2 Includes 11 facilities owned or leased by GruenePointe, which are managed by OnPointe, and 10 additional facilities operated by OnPointe. 3 Represents revenue from GruenePointe. 4 Average star rating reflects those facilities owned by the Company.

Slide 7

Facility and Guarantor Lease Coverage and Lease Expirations EBITDAR rent coverage1 Weighted average lease term of 13.1 years2 (By annualized rental income as of September 2017) Baylor Scott & White Medical Center – Lakeway3 3.6x for the tenant (Scott & White Hospital Round Rock) 17.2x for the guarantor (Baylor University Medical Center) 1 The facility coverage ratios include only our stabilized, single-tenanted facilities. Our non-stabilized property as of June 30, 2017 was Mountain’s Edge Hospital. Lakeway Hospital is excluded from all operator metrics as a result of Baylor Scott & White's lack of reporting requirements for facility level financial information. Guarantor coverage ratios are based on actual guarantor coverage for the operators during the period weighted by MRT rent. For leases that have been in place for less than 12 months, the rental expense included in the ratios above is based on annualized base rent. 2 North Brownsville Medical Plaza medical office building not shown in chart. 3 Coverage reflects revenue less expenses for the twelve months ended June 30, 2016 sourced from IRS form 990 as a multiple of the contractual Lakeway Hospital lease payment.

Slide 8

Differentiated Investment Strategy Acute Highest acuity Post-Acute LTACH IRF SNF Acute Care Hospital Seniors Housing CCRC Memory Care AL IL Behavioral Behavioral/ Psychiatric Higher Acuity Lower Acuity Increasing interdependence across continuum of care Operators are adapting by narrowing their networks of relationships and forming strategic partnerships with both payors and other providers focused on providing high-quality care MRT’s focus helps drive premium cap rates while mitigating risk Regional operators better suited to quickly adapt to changes in the market Many thriving operators in higher acuity spectrum that are well-positioned to execute business plans, but are underserved by other capital providers Focus on off-market deals and developing long-term relationships

Slide 9

Acquisition Opportunities $600+ billion of institutional quality healthcare real estate MRT will invest with operators across the continuum of acute and post-acute assets Source: Stifel Nicolaus Medical office buildings / outpatient facilities 43% MRT’s target sectors Pipeline Summary Pipeline of ~$585 million Diversification among operator, geography and facility type Initial cash yields range from approximately 8.00% to 9.25% Sourced off-market and target-marketed Will continue to be selective and pursue assets that create the best long-term value for shareholders

Slide 10

Accelerating Improvement in Operating Results Total Assets ($ in thousands) Consolidated Adjusted EBITDA1 ($ in thousands) AFFO/Share Attributable to Common Shareholders Dividend Payout Ratio Based on AFFO/Share 1 See page 22 in the Appendix for a reconciliation of adjusted EBITDA to net income attributable to common stockholders.

Slide 11

Flexible Capital Structure Closed $425mm credit facility in February 2017 Comprised of $300mm revolver and $125mm term loan1 Lower revolver borrowing costs (L + 175 to 300 depending on leverage) Accordion feature up to $700mm and ability to fund second term loan Credit Facility Lowers Borrowing Costs Mix of Fixed & Floating Interest Rates Debt Composition Entered into interest rate swap agreements with $125mm notional value Interest rate is approximately 3.6% and is comprised of the 1.84% swap rate plus the applicable margin under the credit facility (currently 1.75%) Revolver balance of $82.5mm and term loan balance of $125.0mm at September 30, 2017 Revolver matures 2021 or 2022 if the one-year extension option is exercised Term loan matures 2022 No Near-Term Maturities 1 As of November 7, 2017, we had $53.3mm of additional available borrowing capacity based on current borrowing base assets.

Slide 12

Common shares outstanding 31,756 Market price per common share as of 11/10/2017 $10.81 Market capitalization of common stock $343,282 Total Debt $207,500 Total Market Capitalization $550,782 Balance Sheet Positioned for Growth Total Debt $207,500 Less: Cash ($7,264) Net Debt $200,236 Gross Assets1 $608,380 Net Debt/Gross Assets 32.9% Net Debt/Total Market Capitalization2 36.4% Net Debt/Consolidated Adjusted EBITDA3, annualized 3.7x Market Capitalization at 9/30/2017 Conservative leverage Ample available liquidity; $300mm revolver with balance of $82.5mm at November 7, 20174 Leverage Metrics at 9/30/2017 1 The carrying amount of total assets plus accumulated depreciation and amortization, as reported in the Company’s consolidated financial statements. 2 Total debt plus market capitalization of common stock. 3 Adjusted EBITDA for third quarter of 2017 annualized. See page 22 in the Appendix for a reconciliation of adjusted EBITDA to net income attributable to common stockholders. 4 As of November 7, 2017, we had $53.3mm of additional available borrowing capacity based on current borrowing base assets.

Slide 13

Opportunities to Increase Shareholder Value Accretive Asset Growth Grow asset base through acquisitions that meet underwriting criteria and return thresholds Portfolio Management Enhance portfolio diversification across tenant, state, and type Actively monitor operator performance and further improve strength of tenant group Balance Sheet Management Target conservative leverage of net debt/gross assets of 35%-45% Achieve longer-term debt maturities and at fixed interest rates Shareholder Return Improve cost of capital Grow FFO & AFFO per share metrics Focus on growing dividend over long-term

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Appendix

Slide 15

Update on GruenePointe Holdings – Summary GruenePointe Holdings (“GPH”) leases from MRT a portfolio of 10 SNFs located in Texas that are managed by OnPointe OnPointe manages a total of 21 SNFs, including our portfolio of 10, located in New Mexico, Colorado, and Texas The master lease with GPH contains EBITDAR and fixed charge coverage ratio covenants of 1.2x and 1.1x, respectively For the trailing twelve month period ended June 30, 2017, GPH reported EBITDAR and fixed charge coverage ratios of 1.06x and 0.90x, respectively, which were below the covenant levels We have been closely monitoring the operating performance of the GPH portfolio and expect to grant a temporary waiver to GPH with respect to these two financial covenants with a term of approximately 12 to 18 months Trailing twelve month rent coverage on an EBITDARM basis was at 1.36x, providing sufficient operating income to cover the rent payment Management fee is subordinated to the rent payment OnPointe is only entitled to receive a cash management fee of 3.0% of revenues until EBITDAR rent coverage is sustained above 1.5x GPH has continued to make its monthly rent payment in full and on time GPH has not asked for a rent deferral or concession nor do we expect such will be requested MRT benefits from significant guarantees and collateral in excess of approximately $16.3mm that stand behind the lease Provides coverage of approximately 1.3x the annualized monthly cash rent in September of $12.8mm Lease guarantees and other collateral have not been used to make any rent payments

Slide 16

Update on GruenePointe Holdings – Corrective Action Plan We believe that part of the decline in census stemmed from mismanagement by a regional executive who has since been replaced and from higher than expected costs from certain purchased services and contracted nursing labor GPH is executing a corrective action plan to address the operational shortfalls in the portfolio and have begun to see positive results GPH’s Corrective Action Plan Hired a new executive team Brought in a very strong SVP of operations focused on clinical and quality metrics Replaced certain facility administrators, DONs and other key clinical personnel where needed Negotiating pricing with therapy and pharma service providers Reducing utilization of contracted nursing labor Plan to reopen an 18 bed memory care unit that was closed by the prior regional executive Preliminary Impact of GPH’s Corrective Action Plan Census appears to have bottomed Preliminary data indicate occupancy in Q3 2017 increased to 79.6% from a low of 78.1% in Q2 2017 CMS survey results have fewer and less severe deficiencies Avoidable re-hospitalizations have declined CMS star ratings have begun to tick up

Slide 17

Timeline and Operating Statistics for GPH & Texas SNF Portfolio 2015 2016 2017 7/2015 MRT acquires real estate portfolio for $145mm 11/2016 OnPointe hires new President/COO and CFO 2/2017 OnPointe hires SVP Ops with clinical focus 8/2015 OnPointe begins managing, appoint regional executive to manage portfolio Q1 2017 begin replacing facility admins & DONs 2/2017 OnPointe terminates regional executive Q3 2017 begin to see occupancy improvement Q1 2017 CMS quality metric hits low TX SNF Portfolio Rent Coverage, Quarterly1 TX SNF Portfolio Occupancy, Quarterly1 Average CMS Quality Star Rating for TX SNF Portfolio Preliminary Q3 2017 Data TX SNF Portfolio Q-Mix, Quarterly Preliminary Q3 2017 Data 1 Data shown are on a quarterly basis (not on a trailing twelve month basis as reported elsewhere). Rent coverage metrics shown are for the 10-facility Texas SNF portfolio calculated as EBITDARM, EBITDAR using a management fee of 3.0% of revenues that OnPointe is currently able to be paid, and EBITDAR using a management fee of 5.0% of revenues which is used to calculate the lease covenant metrics divided by the quarterly cash rent payment.

Slide 18

GPH Ownership, Management, and Guarantee Structure GPH Tenant of TX SNF Portfolio3 Principals of OnPointe Health GPH Partners MRT Lessor OnPointe Health2 Own 34% of GPH Own 66% of GPH $6.0mm in personal guarantees from Owners of GPH $2.1mm lease deposit $6.0mm pledge of equity secured by newly-developed $24.0mm facility4 GPH unconditional lease guarantee Distributions to owners restricted to pass-through income taxes only $2.2mm guarantee from OnPointe Management Company1 MRT’s Collateral & Guarantees in Excess of $16.3mm GPH Ownership & Management Structure Management Agreement 1 An affiliate of OnPointe Health has guaranteed the lease payment up to an amount of the trialing twelve month management fee, which was approximately $2.2mm as of 6/30/2017. 2 OnPointe Management Company (an affiliate of OnPointe Health) manages the GPH portfolio and has common ownership with OnPointe Health. 3 GPH is the tenant of 11 stabilized facilities, 10 of which MRT owns, and one that is owned by an unrelated third party. GPH also owns one recently developed, but not yet opened facility that has a development cost of approximately $24.0mm and secured debt of approximately $13.0mm.

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Consolidated Balance Sheets

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Consolidated Statements of Operations – GAAP

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Reconciliations of Non-GAAP Measures Figures in thousands except per share amounts

Slide 22

Reconciliations of Non-GAAP Measures Figures in thousands except per share amounts

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Acute Care Hospitals High portion of spending on hospital care Critical component of healthcare infrastructure ü Gateway to healthcare delivery, discharging patients into lower acuity healthcare settings ü Greater control of healthcare delivery and payments under bundled plans and ACOs ü Strong fundamentals with growing demand and declining supply ü Source: Centers for Medicare and Medicaid Services, 2015 Source: AHA Hospital Statistics Acute care hospitals U.S. number of hospital beds vs. adjusted average daily census1 1 Adjusted average daily census is an estimate of the average number of patients (both inpatients and outpatients) receiving care each day during the reporting period Limited competition for acquisitions ü

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Skilled Nursing Facilities Certified nursing facilities (000’s) Post-acute care discharge destination of Medicare fee-for-service in 2015 Most common destination for post-acute care for hospital discharges requiring continued medical care ü Admission volumes driven by flat and constrained supply coupled with a growing aging population ü Highly fragmented sector with REITs owning limited percentage of total SNF assets allowing for future consolidation ü Source: American Health Care Association (AHCA) Research Department from CMS OSCAR/CASPER survey data (2001-2015) Source: MedPAC data book, Health Care Spending and the Medicare Program, June 2017 Focus on high quality, growing regional operators that are thriving and will continue to serve market ü

Slide 25

Favorable Demographic Trends are Driving Industry Growth Source: U.S. Department of Health and Human Services Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey, 2013. Median Medical Annual Spending/Person ($) Population Age 65+ (millions) Healthcare Spending (trillion) Senior population (65+) is projected to nearly double by 2050 Life expectancies at birth expected to lengthen from 78.7 years in 2011 to 84.4 years by 20501 Healthcare expenses increase dramatically as people age Individuals age 65+ spend more per person on healthcare than all other age categories combined We believe healthcare expenditures will continue to rise as a disproportionate share of healthcare dollars is spent on older Americans due to increasing requirements for treatment and management of chronic and acute health ailments Patients with complex medical conditions have extensive needs for facility-based care and support Age Source: U.S. Census Bureau, the Statistical Abstract of the United States. Source: U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services. 1 Source: Center for Disease Control and Prevention

Slide 26

Glossary Acute Care Hospital (“ACH”): general medical and surgical hospitals that provide both inpatient and outpatient medical services and are owned and/or operated either by a non-profit or for-profit hospital or hospital system. These facilities often act as feeder hospitals to dedicated specialty facilities. Adjusted Funds From Operations (“AFFO”): AFFO is a non-GAAP measure used by many investors and analysts to measure a real estate company’s operating performance by removing the effect of items that do not reflect ongoing property operations. To calculate AFFO, we further adjust FFO for certain items that are not added to net income in NAREIT’s definition of FFO, such as acquisition expenses, non-real estate-related depreciation and amortization (including amortization of lease incentives and tenant allowances), stock based compensation expenses, and any other non-comparable or non-operating items that do not relate to the operating performance of our properties. To calculate AFFO, we also adjust FFO to remove the effect of straight-line rent revenue, which represents the recognition of net unbilled rental income expected to be collected in future periods of a lease agreement that exceeds the actual contractual rent due periodically from tenants for their use of the leased real estate under each lease. Noncontrolling interest amounts represent adjustments to reflect only our share of straight line rent revenue. Our calculation of AFFO may differ from the methodology used for calculating AFFO by certain other REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs. AFFO should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity. Assisted Living Facility (“ALF”): residential care facilities that provide housing, meals, personal care and supportive services to older persons and disabled adults who are unable to live independently. They are intended to be a less costly alternative to more restrictive, institutional settings for individuals who do not require 24-hour nursing supervision. Behavioral Health Facility (“BH”): facilities that provide inpatient and outpatient services for the treatment of behavioral health, mental illness and substance abuse. These can include facilities for intensive outpatient treatment, inpatient residential treatment, sober living rehabilitation, and psychiatric care. Consolidated Adjusted EBITDA: Consolidated Adjusted EBITDA represents Consolidated EBITDA, as defined below, adjusted further for the effects of acquisition costs, stock-based compensation expense and non-cash write-offs of straight-line rent and accounts receivable.  Both Consolidated EBITDA and Consolidated Adjusted EBITDA are relevant non-GAAP measures broadly used by investors and analysts to evaluate the operating performance of a company and to assess a company’s credit strength, including the ability to service indebtedness. Our calculations of Consolidated EBITDA and Consolidated Adjusted EBITDA may differ from the methodologies used by other companies and, accordingly, our Consolidated EBITDA and Consolidated Adjusted EBITDA may not be comparable to amounts reported by other companies.  Consolidated EBITDA and Consolidated Adjusted EBITDA should not be used as a substitute for any GAAP financial measures for the purpose of evaluating our financial performance, financial position or cash flows.

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Glossary Consolidated EBITDA: calculated as net income (computed in accordance with GAAP) plus interest expense, taxes, and depreciation and amortization. EBITDAR: represents earnings from the operator’s financial statements adjusted for non-recurring, infrequent or unusual items and before interest, taxes, depreciation, amortization and rent. EBITDAR Rent Coverage: represents the operator EBITDAR of our stabilized facilities for the trailing twelve months divided by the contractual lease rent for the same period. For the leases that have been in place for less than 12 months as of the date presented, the annualized base rent under the applicable lease as of such date is used. Funds From Operations (“FFO”): FFO is a non-GAAP measure used by many investors and analysts that follow the real estate industry. FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), represents net income (computed in accordance with GAAP), excluding gains (losses) on sales of real estate and impairments of real estate assets, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. Noncontrolling interest amounts represent adjustments to reflect only our share of depreciation and amortization. We compute FFO in accordance with NAREIT’s definition, which may differ from the methodology for calculating FFO, or similarly titled measures, used by other companies. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations. We believe that the presentation of FFO provides useful information to investors regarding our operating performance by excluding the effect of real-estate related depreciation and amortization, gains or losses from sales for real estate, including impairments, extraordinary items and the portion of items related to unconsolidated entities, all of which are based on historical cost accounting, and that FFO can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common stockholders. Our calculation of FFO may not be comparable to measures calculated by other companies that do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. FFO should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity. Gross Assets: The carrying amount of total assets plus accumulated depreciation and amortization, as reported in the company’s consolidated financial statements.

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Glossary Inpatient Rehabilitation Facility (“IRF”): facilities that provide inpatient rehabilitation services for patients recovering from injuries, organ transplants, amputations, cardiovascular surgery, strokes, and complex neurological, orthopedic and other medical conditions following stabilization of their acute medical issues. Long-term Acute Care Hospital (“LTACH”): facilities designed for patients with serious medical problems that require intense, special treatment for an extended period of time (typically at least 25 days), offer more individualized and resource-intensive care than a skilled nursing facility, nursing home or acute rehabilitation facility, and patients are typically transferred to a long-term acute care hospital from the intensive care unit of a traditional hospital. Medical Office Building (“MOB”): single-tenant or multi-tenant buildings where doctors, physician practice groups, hospitals, hospital systems or other healthcare providers lease space and are typically located near or adjacent to acute care hospitals or other facilities where healthcare services are rendered. Medical office buildings can include outpatient surgical centers, diagnostic labs, physical therapy providers and physician office space in a single building. Occupancy: occupancy is calculated by dividing the daily number of beds occupied each day during the period presented by the beds in operation (available) for the same period. Post-acute: the period of time following acute care, in which the patient continues to require elevated levels of medical treatment. Q-Mix: quality mix is presented as non-Medicaid revenue as a percentage of total revenue. Skilled Nursing Facility (“SNF”): facilities that usually house elderly patients and provide restorative, rehabilitative and nursing care for patients not requiring more extensive and sophisticated treatment that may be available at acute care hospitals or long-term acute care hospitals. They are distinct from and offer a much higher level of care for older adults compared to senior housing facilities. Patients typically enter skilled nursing facilities after hospitalization. Stabilized Portfolio: as of June 30, 2017, our stabilized, single-tenanted portfolio includes only our 17 stabilized skilled nursing facilities, our two stabilized long-term acute care hospitals, our one stabilized assisted living facility (that is connected to a skilled nursing facility in our portfolio) and our one stabilized inpatient rehabilitation facility. Our non-stabilized, single-tenanted property as of June 30, 2017 was Mountain’s Edge Hospital. We consider a facility to be non-stabilized if it is a newly completed development, is undergoing or has recently undergone a significant addition or renovation, or is being repositioned or transitioned to new operators, but in no event beyond 24 months after the date of classification as non-stabilized. Lakeway Hospital is excluded from all operator metrics as a result of Baylor Scott & White's lack of reporting requirements for facility level financial information. Acquired properties that otherwise meet the definition of a stabilized property are included in operating metrics beginning with the first full quarter of ownership.

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Mission Statement MedEquities Realty Trust provides capital primarily to the acute and post-acute services industry by making disciplined investments in healthcare facilities. We strive to be the capital partner of choice to growth-minded, facility-based healthcare operators led by proven management teams who are focused on providing efficient healthcare delivery and the highest quality outcomes. Mountain’s Edge Hospital Las Vegas, NV The Rio at Mission Trails San Antonio, TX Physical Rehabilitation and Wellness Center of Spartanburg Spartanburg, SC St. Teresa Nursing & Rehabilitation Center El Paso, TX

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