2Q13 National Medical Office Investor Update
HEALTHCARE REIT MARKET EVOLVING
While the equity and debt markets remain volatile due to anticipation of the Federal Reserve’s scaling back of its bond buying program, the healthcare real estate market seems to benefit from strong demand created by two newly formed non-traded healthcare REITs and one newly formed traded healthcare REIT. Due to the steady demand by investors, we don’t expect much deviation in current pricing levels for medical office buildings for at least another 12 months. Newport Beach, California based American Healthcare Investors (AHI) announced the closeout of the equity raise for their second Healthcare REIT (Griffin-American Healthcare REIT II, Inc.) which is scheduled to occur on or around October 15, 2013 and filed for their third Healthcare REIT with the SEC (Griffin American Healthcare REIT III, Inc.). In addition, American Realty Capital (ARC), based in New York, is expected to commit the balance of its raised equity for its first healthcare REIT by the end of the third quarter 2013. Meanwhile, ARC registered their second nontraded healthcare REIT (American Realty Capital Healthcare Trust II, Inc.) earlier in the year and has already announced several acquisitions, including the Oak Lawn Medical Center in the Chicago area for $10.3 million or $391 per square foot. A new entrant to the scene, Physicians Realty Trust (NYSE: DOC), recently held an $120M initial public offering (IPO) of 10,434,782 common shares at a stock price of $11.50 per share that it used to recapitalize funds managed by Ziegler & Co. which consist of a 10-state, 19-building medical office building portfolio totaling approximately 528,000 square feet. In addition, DOC recently announced a $75 million line of credit with the possibility of an increase to $250 million. This recent activity should keep healthcare investment demand strong, boding well for sellers through 2014.
Medical Office Summary by Region
The largest medical transaction in the West during the 2nd quarter was the acquisition of the UCLA Outpatient Surgery and Medical Building, a 51,342 square foot hybrid facility in Santa Monica, California housing outpatient surgery, oncology treatment, and academic and medical office facilities for UCLA medical students and faculty. UCLA signed a 30-year lease at the facility with 4% annual increases and has a set option to purchase in Year 7. The multi-award winning building was bought by Montecito Medical for $54.57 million or $1,063 per square foot. Coincidentally and in an unrelated sale, the second largest transaction in the West region during the second quarter was also located in Santa Monica at 2825 Santa Monica Boulevard. Built in 1984, the three-story medical office building totals 54,054 rentable square feet and traded for $27.5 million or about $509 per square foot. The multi-tenant building includes UCLA Santa Monica Pediatrics, House Clinic, and The Institute for Spine and Sports Care. The buyer was a partnership between Lincoln Property Co., Centennial Real Estate Co. and Artemis Real Estate Partners. Another notable transaction was the purchase of the UC Davis Medical Folsom campus by American Realty Capital Healthcare Trust for $9.46 million or $256 per square foot. The property consists of two medical office buildings totaling 36,911 square feet and is 100% leased to UC Davis Medical Group in Folsom, CA.
In the Southwest region, Talia Jevan Properties purchased the Lifeprint Health Center, an 81,875 square foot multi-tenant medical office property for $20.5 million or $250 per square foot. Located in Phoenix, the building was 98% leased at the time of sale, over half of which was leased to UnitedHealthcare, doing business as LifePrint, through 2017. The CBRE U.S. Healthcare Capital Markets Group oversaw the completion of two medical office building sales in Texas during the second quarter: the Texas U.S. Oncology Building and the Willow Creek Medical Center. The Texas U.S. Oncology Building was a 29,400 square foot two-story facility that was constructed in 2000 and was 100% leased to and guaranteed by U.S. Oncology, a subsidiary of McKesson Corporation. The building was sold for $9.5 million or $323 per square foot. In addition, CBRE advised on the sale of the Willow Creek Medical Center, a 27,993 square foot facility that was built in 2010 and was anchored by one of the most comprehensive multi-specialty surgery centers in East Texas. Located in Palestine, Texas, the Willow Creek Medical Center was purchased for $6.85 million or $245 per square foot.
CBRE’s U.S. Healthcare Capital Markets Group advised on the disposition of the largest medical office sale in the nation during the second quarter with the sale of the Piedmont West Medical Office Park, a trophy class outpatient ambulatory facility with 257,528 rentable square feet of integrated clinical care space to service the needs of Piedmont Healthcare’s patients and physicians, as well as several distinguished private physician groups and the health system’s executive offices. The transaction included the sale of the ground lease interest and improvements for Piedmont West Medical Office I, as well as the adjacent development rights for the future Piedmont West Medical Office II. The entire transaction was sold for $114.25 million. In Greensboro, North Carolina, Virtus Real Estate Capital and Flagship Healthcare Real Estate Fund acquired Professional Medical Center, an 81,570 square foot medical office building for slightly less than $12.5 million or $153 per square foot. Also of note, American Healthcare Investors acquired the Winn Medical Center Portfolio for $9.85 million or $152 per square foot. The portfolio consisted of four medical properties located adjacent to the DeKalb Medical Center that were originally constructed in 1976 and renovated in 2010-2012. Totaling approximately 65,000 square feet, the portfolio was 79% leased to 15 tenants at the time of sale.
In the Midwest region, Harrison Street Real Estate Capital acquired the leasehold interest of the WestHealth Medical Campus in Plymouth, Minnesota for $58 million or $293 per square foot. The two medical buildings were sold by Allina Health and total 198,000 square feet, which includes a six-story, 120,000 square foot facility built in 1994, and a four-story, 78,000 square foot building built in 1998. In another large portfolio purchase, American Healthcare Investors acquired the Central Indiana Medical Office Building Portfolio for $46.63 million or $203 per square foot. The eight building portfolio was the second of several tranches to be closed as part of a larger 17 building portfolio totaling approximately $123 million for 594,000 square feet of medical space in the Indianapolis metro area.
In the Northeast region, Cole Real Estate Investments acquired the Harvard Vanguard Medical Building, a newly constructed medical office building housing a multi-specialty medical practice leased by Harvard Vanguard Medical Associates for the next 17 years. The new 49,250 square foot building is located in Concord, Massachusetts and traded for slightly less than $24.4 million or $495 per square foot. Also of note in the Northeast was the acquisition of the Brooklyn Endoscopy and Ambulatory Surgery Center by NYU Langone Medical Center for $13.5 million or an estimated $1,294 per square foot, making it the highest per square foot medical transaction of the quarter. The ambulatory surgery center is approximately 10,432 square feet and was built in 2001.
The mid-Atlantic had a few notable trades in the second quarter, including the sale of the Wilkes-Barre Healthcare Facility to Carter Validus Mission Critical REIT. Located in Mountain Top, Pennsylvania, Carter Validus purchased the fee simple interest of the 15,996 rentable square foot healthcare facility for $4.375 million or $237 per square foot. The Wilkes-Barre Healthcare Facility was constructed in 2012 and was 100% leased to Wilkes-Barre Hospital. Down in Falls Church, Virginia, the Seven Corners Medical Arts Building was sold to a private capital investor for $4.35 million or $141 per square foot. The 30,864 square foot building was one of three medical office buildings on the Seven Corners Medical Campus.
Select Real Estate Transactions by Region
HEALT HCARE INDUSTRY UPDATE
• A new report by Moody’s Investors Service has concluded that hospital expenses are outpacing revenue for the first time in several years, and that the trend is “unsustainable.” Moody’s analyst Deepa Patel concluded that hospitals are still being hit by the sluggish economy, with many would-be patients finding less costly care alternatives. Moody’s expects hospital operations to remain soft through 2013.
• According to a recent report by Standard & Poor’s, the 2012 median ratios for stand-alone hospitals remained generally stable compared with the prior year. However, according to the report, some measures of financial operating performance are beginning to weaken despite revenue growth across most rating categories. The rating agency expects this trend to prevail in the next two years as incremental credit pressures continue to build. Specifically, Standard & Poor’s Ratings Services expects a further decline in utilization, slower rate increases for patient service, continued expenditure growth, including greater investment in physicians and technology, and ongoing pressures on pension costs. At the same time, the sector faces difficulty reducing expenses after successive years of consolidation and deep cost-saving measures.
• Health care merger and acquisition activity strengthened in the second quarter of 2013 according to the Irving Levin Associates report. Deal volume was up 10% versus the previous quarter, with 223 deals announced. However, the quarter underperformed (-15%) in comparison with the same quarter a year ago. Deal value rose significantly compared with the previous quarter. The preliminary total for health care M&A activity in the second quarter is $52.6 billion, up nearly 252%, compared with the $14.9 billion spent in Q1:13.
By CBRE Healthcare