Healthcare: JVs Between REITs and Funds are on the way

from Crittenden

As medical office further heats up, expect new faces and strategies to compete for properties. Funds and private investors will increase profiles in a sector currently dominated by public and non-traded REITs. Some buyers will gain a foothold through redevelopments and distressed-asset purchases. As the cycle matures, joint ventures between hungry REIT medical office buyers and private equity may become reality. REITs Health Care Property Investors (HCP), Health Care Trust of America and private investors Noyack Medical Partners and Sunvest Properties are among those striking deals coast-tocoast. They’ll likely compete against newly formed American Realty Capital Healthcare Trust and KBS Strategic Opportunity REIT for assets.

More opportunity funds should follow KBS Strategic Opportunity REIT’s inaugural $52 per s.f. purchase of a distressed medical office building in suburban Atlanta; the properties are 51% leased. Clearly the buyer is gingerly testing the asset class. This deal isn’t KBS Realty Advisors’ first medical-office building purchase, however, so don’t be surprised to see more acquisitions.

New Investor Enters the Ring

American Realty Capital Healthcare Trust aims to raise up to $1.5B in a blind pool offering to acquire assets at discounts to replacement costs, and make debt and equity purchases. Look for the month-old investor to operate in the $10M to $50M average price range for acquisitions of medical-office buildings occupied by such businesses as rehabilitation centers and hospitals, surgery centers and senior housing. Also considered will be properties leased to health-related tenants such as diagnostic-service providers, health insurers and pharmaceutical companies.

Besides asset buys, look for eventual dealmaker interest in stock purchases, loan purchases and writing new loans. Concerning debt activity, anticipate action on first mortgages, bridge and mezzanine loans, plus securitized paper. Joint ventures will be considered, although the company won’t be in the market for land acquisitions or development. There’s a forecasted three- to five year initial hold period. Sponsor

American Realty Capital V/American Realty Capital Advisors is known for various REITs including netlease buyer American Realty Capital Trust. American Realty Capital Healthcare Properties will manage and lease properties acquired by American Realty Capital Healthcare Trust, which aims to qualify as a REIT by December 2011.

Among potential competitors is Noyack Medical Partners’ $300M fund, which eyes medical office as part of a broader focus on health care-related buildings nationwide. Half of the fund could be used for medical office building acquisitions. Anticipate interest in properties in high-population areas from Maine south to Virginia, with typical price ranges from $5M to $75M. Both multi-tenant and single-tenant properties occupied by physician groups and hospitals are considered, as are diagnostic properties and long-term acute care and specialty hospitals. Portfolio and one-off acquisitions of well-leased on- and off-campus properties will be considered. Noyack Medical Partners counts medical condominiums, medical office, headquarter buildings and research and development assets in Indiana, Maine, New Hampshire and New York as part of its portfolio.

The investor could compete against Seavest Properties and a host of active REITs in the sector. The private buyer and developer will use capital from its year-old, $100M Seavest Properties III fund for acquisitions of on campus and specialty center properties in fast-growing California, Louisiana, North Carolina and Texas markets. The buyer is evaluating nearly $60M worth of deals that could close in coming months. Assets sought will typically range from 50,000 s.f. to more than 250,000 s.f. Dealmakers scan smaller markets for 8%-plus cap rates or better. For credit properties in larger markets, cap rates of below-8% would be considered in on and off-market deals.

On the REIT side, competitors include HCP — with an estimated $300M in cash. The REIT’s recent offmarket deals, which include a pair of properties in San Antonio and Bountiful, Utah, at an 8.8% cap rate, augur additional off-market deals ahead. Look for interest in areas with a concentration of companyowned properties. Dallas, Houston, Nashville and Florida markets will be a focus. Drawing the investor to these and other deals will likely be a proximity to existing assets.

Healthcare Trust of America, on the heels of a recent Pittsburgh acquisition, should scout additional assets through various structures including sale/leasebacks. Additional interest is stabilized assets is certain as the public, non-traded REIT could exceed its estimated $500M acquisitions volume during 2009. Typically the long-term buyer looks for stable yields and deals offering turnaround with upside potential nationwide.


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