July 25, 2019
John B. Mugford

Despite What Seems to be a Slowdown in MOB Offerings, Montecito Medical Real Estate is on Pace to Invest $900 Million in 2019

For four straight years, medical office building sales have topped $11 billion in annual volume, according to Revista data.

However, so far in 2019, MOB sales have slowed a bit, with the volume coming in at $1.5 billion in Q1. And while the volume in Q2 has to be compiled, it was certain to be bolstered by the $1.25 billion purchase of the CNL Healthcare Properties MOB portfolio by Welltower Inc. (NYSE: WELL).

MOB investors are reporting that the number of offerings seems down a bit so far in 2019, while they and other sector professionals note that a rebound could be in the offing and that the volume for the year could indeed end up close to, or even surpass $10 billion or so.

Slow down or not, one HRE investment firm continues to find deals that meet its criteria, putting it on a pace to meet its 2019 goal of making MOB investments totaling $900 million for the year.

As of last week, Nashville, Tenn.-based Montecito Medical Real Estate, which started investing in MOBs in 2005, had closed on or had deals under contract that would bring its year-to-date total to $600 million.

“We’re going to get there [to $900 million for the year],” Edward W. “Chip” Conk, president and CEO, says. Conk, along with his brother, Chris, senior VP of acquisitions and principal, and his sister, Joellyn Shannon, VP of marketing and strategic initiatives, own the company.

Shannon reports that one of the company’s most recent deals involved its July purchase of an 87,791 square foot MOB in Lynchburg, Va., that is fully occupied by Ortho Virginia. The price was not disclosed.

Montecito, which has grown to 35 employees, has made about $3.6 billion of investments since entering the medical space in 2005. Prior to that, the owners of the company ran Montecito Property Co., which at the time was based in Santa Barbara, Calif., and was involved in acquiring apartment buildings and converting them to condominiums.

“This year does seem a bit different than recent years for MOB sales, with not as many deals being offered so far and, perhaps, sellers’ expectations being perhaps too high when it comes to pricing,” Chip Conk says. “But to us, the capital markets are great, there’s lots of good debt, and it’s become one of the favorite classes of investing. But we’re doing very well, so I’m not complaining in the least and am very hopeful that we’ll continue to find deals to our liking.”

Doing so, according to Conk, entails lots of hard work by a company and key team members who have been finding and underwriting MOB deals for 14 years now.

“We’ve been fortunate, as we’ve got the same core team that’s been with us for 14 years,” Conk says. “That includes people in asset management, acquisitions, underwriting — a lot of people with a lot of experience in medical and we can move pretty quickly because we know the space and all we do is medical office.

“It comes down to a lot of hard work, as we know what we’re doing and can move very quickly and we never … we close everything we take under,” he adds. “We’ve been fortunate to have lots of good references, so when sellers are thinking of selling, a lot of them look to us and we’re often on their list. And we can close quickly and they know we’re going to close and we don’t re-trade deals.”

Keys to finding good deals, Mr. Conk says, are having patience and “establishing relationships” with hospitals and physician groups.

“It might take five years before we close a deal as part of a relationship we’ve established,” he says. “But because we do that and establish those relationships, we have a very big pipeline. A lot of our deals are done with large physician groups, and they are not necessarily always trying to get the absolute last penny out of a sale but are happy to work with someone like us who does what we say we will do.”

Some of Montecito’s most notable purchases so far in 2019 include its January purchase of a three-MOB portfolio in Wisconsin and Illinois from Milwaukee-based Irgens for $75.3 million. The deal included the 100,000 square foot Tosa Health Center, which is anchored by the Medical College of Wisconsin, in the Milwaukee suburb of Wauwatosa.

In May, Montecito acquired the 85,000 square foot Fresenius Healthcare facility in Walnut Grove, Calif., for $41 million.

In May, the company also acquireda 221,000 square foot multi-specialty outpatient facility in Murfreesboro, Tenn., for an undisclosed price. In a news release at the time, Conk said: “The selling physicians reinvested back in to the entity acquiring the property, so they maintain some ownership in this prime real estate.”

John B. Mugford is the editor of Healthcare Real Estate Insights. For more information on HREI – please visit HREInsights.com