August 23, 2017
John B. Mugford

Highly selective Healthcare Realty Trust finds an MOB acquisition to its liking

NASHVILLE, Tenn., and ATLANTA – When Nashville-based Healthcare Realty Trust (NYSE: HR) announced second quarter (Q2) earnings on Aug. 2, there was no hint that it had a major medical office building (MOB) portfolio acquisition in the works. In fact, President and CEO Todd Meredith seemed to suggest that the MOB space could be risky for imprudent investors.

“Amid sometimes vague reimbursement guidelines and changing payment patterns, we have centered Healthcare Realty’s strategic focus and disciplined criteria at the sweet spot of healthcare real estate, the intersection of outpatient growth and on-campus safety,” Mr. Meredith told analysts. “While interest and investment is certainly heightened in MOB sector from both public and private investors, much of it is not discerning. Pricing is competitive across the spectrum, especially at the high end of quality and scale, making discipline critical. Sticking to well-designed investment criteria is strategically paramount.”

But only six days later – despite the cautious talk and after laying low for the early part of 2017 – Healthcare Realty revealed that it evidently found some MOB opportunities that met its strict investment criteria. Namely, after making three separate MOB purchases in June and July for a total of $67.1 million, the publicly traded real estate investment trust (REIT) announced on Aug. 8 that had agreed to make one of its largest purchases in years: 15 MOBs in Greater Atlanta for $612.5 million.

The seller is one of the MOB sector’s pioneer development firms, Atlanta-based Meadows & Ohly, which was founded in 1972 by Jim Meadows and Carl Ohly. The sale is Meadows and Ohly’s first big portfolio disposition since December 2014, when CNL Healthcare acquired nine properties from the developer for $238 million.

The current Meadows & Ohly portfolio has a total of 1.3 million square feet, making the price per square foot (PSF) $417. The average age of the buildings is 9.7 years and, according to a news release from Healthcare Realty, the portfolio is expected to produce $29.9 million of net operating income (NOI) in 2018 for a projected cash yield, or capitalization (cap) rate, of 4.9 percent.

With its focus on disciplined investing, Healthcare Realty appears to have made a prudent choice: the buildings, which are 96.2 percent occupied, are heavily leased to three major Atlanta-area health systems: WellStar Health System (with nine affiliated buildings in the portfolio), Piedmont Healthcare (three buildings) and Gwinnett Medical Center (three buildings). Additionally, most of the MOBs are on-campus facilities, in the “sweet spot” Mr. Meredith described before the acquisition.

The latest acquisitions add to Healthcare Realty’s portfolio, which as of June 30 had 197 properties in 26 states with a total of about 14.5 million square feet. The REIT has invested a total of $3.6 billion in healthcare properties since it went public in 1993, when it owned 21 properties.

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