Medequities Realty Trust, Inc. (NYSE:MRT) filed its S-11/A with the Securities and Exchange Commission for its upcoming initial public offering. The company is expected to IPO on Thursday, September 29. It hopes to raise $227.9 million through its sale of 19 million shares ($264.0 million if underwriters exercise in full their over-allotment option). Of the 19 million shares being offered, 925,333 shares will be sold by insiders, a little less than 5% of the total shares offered.

Medequities is also offering its underwriters an over-allotment option for 2.98 million additional shares. The price range is $12 to $14. Assuming Medequities prices at the mid-point of the price range and underwriters exercise in full their over-allotment option, the company will have a market cap of $432 million.

The underwriters for the offering include: FBR, J.P. Morgan, Citigroup, KeyBanc Capital Markets, Raymond James, RBC Capital Markets, JMP Securities, Fifth Third Securities and Capital One Securities.

Business summary

Founded in 2014 and headquartered in Nashville, Tennessee, Medequities Realty Trust is a REIT that is focused on commercial healthcare properties. The company states that its portfolio currently consists of 24 different healthcare facilities in California, Texas, South Carolina and Nevada that provide rents of $46.7 million.

The average leases for the properties are 13.3 years. The company also holds a debt investment of $10 million that provides annual interest payments of $0.9 million. Facilities were acquired for an initial aggregate gross purchase price of $498.9 million.

(Company Website, medequities.com)

Executive management team

John McRoberts serves as the chairman and chief executive officer for Medequities Realty Trust. He has more than 30 years of experience in acquisitions, financing and disposal of commercial healthcare investment properties. He previously cofounded and served as the CEO and president of Capstone, which was another REIT that was sold in 1998.

He then founded a tower communications company, which he sold in 2005. McRoberts subsequently acquired a controlling interest in a Birmingham, Alabama, healthcare provider, Care First. He sold it in 2015. Before Capstone, McRoberts worked in several managerial roles with AmSouth Bank for 16 years. He holds a Bachelor of Arts in business and a Master of Arts in finance from the University of Alabama.

Chief financial officer and executive vice-president Jeffery C. Walraven has 24 years of experience. Since 1999, Walraven has served as a public accountant for numerous REITs. He has extensive experience with regulatory compliance and the requirements of the Securities and Exchange Commission. Walraven holds an undergraduate degree in financial management from Bob Jones University. He also has a Master of Professional Accountancy from Clemson University and is a certified public accountant in both Florida and Tennessee.

Financial risks and highlights

Medequities Realty Trust reports that it had total revenues of $6.593 million for the three-month period that ended on June 30, 2016. For that same time period in 2015, the company had total revenues of $10.940 million. For the six-month period ending on June 30, 2016, the company had total revenues of $21.441 million, which was up by 35 percent above the same period in 2015.

The company indicates its geographic concentration and the fact that a few tenants account for a major portion of its investment portfolio as two primary risk factors. In the future, Medequities Realty Trust envisions becoming a partner with various providers and expanding its holdings. Over time, it looks towards diversification of properties and tenant types.

Overview of Competitors

At an estimated market capitalization value of $432 million, Medequities will trade at approximately 8.63x sales, using sales for the 12 months ended June 30, 2016. This valuation is lower than other healthcare REITs which are similar in size to Medequities. CareTrust REIT (NASDAQ:CTRE), a real estate investment trust focused on acquiring and leasing health-related properties trades at 11.71x sales.

Community Healthcare Trust Inc. (NYSE:CHCT), another mid-size healthcare REIT trades at 34.57x sales. And University Health Realty Income Trust (NYSE:UHT), a third US healthcare focused REIT trades at 13.46x sales. These peers all invest in healthcare-related properties and have a market cap between $200 million and $1 billion.

At the same time, Medequities' net profit margin of 37.6% is slightly higher than its peers. CareTrust REIT, Community Healthcare Trust Inc., and University Health Realty Income Trust report net profit margin of 13.56%, -17.48%, and 37.05%. Compared to its peers, Medequities appears inexpensive.

Conclusion: Consider Purchasing Shares

Medequities Realty Trust enjoys a stable source of rental income from its 21 healthcare facilities and trades at a valuation below that of other similar REITs.

IPOs have performed well so far in 2016, and Medequities is well-positioned to continue this trend. At its current valuation, we recommend investors consider purchasing shares.