May 24, 2019
John B. Mugford

Welltower – CNL’s $1.25B Boosts MOB Sales

Deal reinforces strategy of creating value by packaging MOBs into large portfolios

With MOB sales off to a somewhat slow start in early 2019, the closing of the sector’s second-biggest arm’s length deal of all time is sure to bolster the volume for the year.

On May 15, Toledo, Ohio-based Welltower Inc. (NYSE: WELL), which has invested more than $6 billion in a variety of healthcare asset types since coming off the sidelines in early to mid-2018, reported that it closed on its previously announced $1.25 billion acquisition of 55 MOBs from Orlando, Fla.-based CNL Healthcare Properties, a non-traded healthcare real estate investment trust (REIT).

Welltower reports that the deal had a capitalization (cap) rate, or an estimated first-year return, of 5.7 percent.

As noted, MOB sales were slow to start the year, with the first quarter volume totaling $1.6 billion, a drop of about 47 percent from Q1 2018 and the lowest Q1 volume of the last five years, according to Revista’s Q1 2019 Medical Real Estate Transactions Report – U.S.

The Welltower-CNL deal’s price is second only to the mid-2017 blockbuster transaction in which Duke Realty Corp. (NYSE: DRE) sold about 70 properties, or most of its MOB portfolio, to Scottsdale, Ariz.-based Healthcare Trust of America (NYSE: HTA) for about $2.25 billion. That transaction, as well as Duke’s sale of other MOBs totaling about $500 million, propelled 2017’s MOB volume to hit $15.9 billion, the all-time yearly record, according to Revista data.

While it does not look as if 2019’s volume will reach a record-setting level, sector professionals say that more deals are on the horizon for the remainder of the year. Many MOB sector professionals predict that the total volume for the year should end up right around, or more than, $10 billion — a figure that has been topped each year since 2015

According to MOB sector professionals, the Welltower-CNL deal reinforces a strategy that is quite prevalent in the MOB sector: that in which companies acquire facilities one at a time or in smaller portfolios and create value by packaging them for sale as bigger portfolios. Large and institutional investors have shown a strong interest in MOBs in recent years, and they typically prefer to acquire properties in big-scale portfolios, according to MOB professionals.

CNL Healthcare Properties did just that in accumulating its portfolio, which it did primarily from 2011 to 2015 or so. Many of the acquisitions were spearheaded by then-senior VP James Schmid, now the chief investment officer with Anchor Health Properties, and a team at the CNL REIT.

Mr. Schmid says that the sale of the CNL MOB portfolio, as well as CNL’s sale in April of four inpatient rehabilitation facilities (IRFs) to Global Medical REIT (NYSE: GMRE) for $94 million, are “resounding wins for shareholder value and something I’m proud to have been a part of. He was joined on the team back then by Kevin Maddron, Joel Sherman and Cetin Aygen.”

As for the buyers of the CNL portfolios, Mr. Schmid says: “I know that the two acquirers — Welltower and Global Medical REIT — pride themselves on tenant relationship management. I have no doubt that the portfolio will continue to prosper into the future under their leadership.”

According to Keith Konkoli, senior VP and the leader of Welltower’s MOB and outpatient segment, since the REIT announced that it had entered an agreement to acquire the CNL portfolio in early January, it has already increased the value of the assets.

“By leveraging the strength of our platform, we have made substantial progress in extending ground leases, have experienced increased leasing velocity, and have identified additional opportunities to deploy capital that helps our health system partners improve care delivery to the communities they serve, further demonstrating our unique ability to drive long-term value through meaningful collaborations with the nation’s premier health systems,” Mr. Konkoli said in a news release.

The potential sale of CNL Healthcare Properties’ MOB portfolio was first reported by Healthcare Real Estate Insights in June 2018 and publicly confirmed by CNL in September of that year. At the time, the non-traded REIT and its parent organization, CNL Financial Group, began exploring strategic alternatives to provide liquidity to its shareholders through the potential sale of its MOB portfolio, as well as several other healthcare facilities. Its MOB portfolio contained 63 properties, only 55 of which were included in the Welltower sale.

Stephen H. Mauldin, president and CEO of CNL Healthcare Properties, noted in a news release that the sale to Welltower “represents a strong, early value realization step for CNL Healthcare Properties and our approximately 45,755 stockholders. This is the first sizeable transaction in our carefully orchestrated strategic alternatives process to provide liquidity to investors, and we are very pleased with the outcome.”