The Emerging Public-Private Valuation Gap
As the start of higher interest rates have entered into 2018 economic data, Medical Office REIT share prices have pulled back implying their portfolio values have also fallen. Healthcare Trust of America (NYSE: HTA) has seen its stock price fall from around $29 near the beginning of the year to under $25 at a recent observation. According to Y Charts (https://ycharts.com/companies/HTA/enterprise_value) , HTA’s enterprise value has fallen from over $9B at the beginning of 2018 to $7.855B as of 5/21. Healthcare Realty Trust (NYSE: HR) has seen its enterprise value fall from $5.3B in January to $4.653B as of 5/21, according to Y Charts (https://ycharts.com/companies/HR/enterprise_value).
Based upon the company’s reported total square feet as well as annualized NOI, their current implied per SF and cap rate valuations would be $325 and 6.1% for HTA and $321/5.9% for HR.
So MOB REIT implied cap rates are around 6% right now. While values have fallen in the public market, a key question is, has the private market followed suit? The short answer is “No” and the result is a growing gap in valuation between the private and public markets. To compare we look below at MOB cap rate trends and price per SF trends on an average and top quartile basis. Note that, in our estimation, HR’s and HTA’s portfolios would fall near our top quartile trend. There is no evidence within property transactions that valuations are beginning to fall. In fact, the average cap rate and the top quartile cap rate both compressed into 1Q18. As of 1Q18, the average MOB cap rate was 5.9 and the top quartile cap rate was 5.2. in addition, the top quartile price per SF is steady at over $400 per SF.
If we compare HTA and HR to the top quartile we imply between a $600M to $2B gap in valuation between public and private market valuations for HR and HTA (based on upper quartile cap rates and price per SF).
It will be interesting to see how this evolves so please stay tuned to Revista!