September 26, 2019
John B. Mugford

Healthcare Realty Trust is Finding MOB Acquisition Opportunities to its Liking

The country’s healthcare-focused REITs have always been, and are likely to continue to be, an important investor group in the medical office building (MOB) acquisitions sector.

Unfortunately, 2018 saw the REITs take a bit of hiatus when it came to investing in MOBs, as the buyer type accounted for just 18 percent of the year’s sales activity, according to Revista data. With their share prices taking a bit of a hit and MOB cap rates at or near historic lows, most of the REITs chose a conservative approach to investing.

So far in 2019, however, the REITs are once again playing a bigger role, led by Welltower Inc. (NYSE: WELL), whose investments this year have included its Q2 purchase of 55 MOBs from CNL Healthcare Properties for $1.25 billion.

Another REIT that has been quite active, albeit somewhat quietly, is Nashville, Tenn.-based Healthcare Realty Trust Inc. (NYSE: HR), which is focused primarily on MOBs.

During a recent earnings call with analysts summing up the REIT’s Q2 financial performance, Todd Meredith, president, CEO and director, said: “Our acquisition pace is up notably, and we are pleased to report nearly $200 million of completed acquisitions at mid-year. We see continued momentum, and we’ve increased our guidance for the year.”

That new 2019 acquisitions guidance, or the REIT’s predicted acquisition activity, was raised to anywhere from $225 million to $325 million for the full year, said Robert Hull, executive VP of investments, during the call.

Mr. Hull added that HR’s first-half acquisitions, which totaled $195 million and exceeded officials’ expectations, were at an average capitalization (cap) rate of 5.5 percent.

The company made acquisitions totaling $102 million in Q2 and had “another $75 million (of pending acquisitions) in advanced discussions” as of July 30, he said.

“Cap rates have remained consistent in the low- to mid-5s for higher quality, on-campus MOBs,” Mr. Hull noted. “With investor interest in medical office remaining high and a stable interest-rate environment, we don’t foresee a large move in either direction for cap rates.”

As of June 30, HR’s portfolio consisted of 201 properties with a total of 15.3 million square feet of space and an estimated value of $5.5 billion. About 93 percent of its portfolio comprises MOBs.

Mr. Meredith attributed the REIT’s strong acquisition activity so far in 2019 to a number of factors.

One of them, he noted, “involves the practice of deeply embedding ourselves in targeted, high-growth markets. Using a team-based approach, we gather local intelligence, systematically collect and analyze market data, and identify desirable properties and potential developments that are not available to the broader market.”

He added that HR is “seeing increasing benefits from the company’s solid reputation in the MOB space. Healthcare Realty is known for completing transactions smoothly, following through reliably, and taking great care of our properties and tenants.”

In addition, Mr. Meredith said the REIT’s cost of capital “has strengthened and afforded us the ability to invest more accretively. We are capitalizing on attractive market conditions to unearth more investments using our proactive sourcing process.”

Mr. Hull added the HR Trust has also been funding plenty of MOB developments as well, as it recently completed a $12 million redevelopment of an MOB it owns in Charlotte, N.C., and is nearing completion of a 151,000 square foot MOB on the campus of UW Medicine Valley Medical Center in the Seattle market. It is also planning a $19 million MOB in Colorado, a $36 million MOB in Texas and a potential $26 million MOB redevelopment project in Tennessee.

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