The H2C Securities Inc. (“H2C”) real estate investment banking team (“REIB”) capped off 2021 having advised on nearly $400 million in transaction volume, with more than $1.1 billion in transactions over the past 24 months.

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Three key trends drove H2C’s activity in this space:

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Trend No. 1: Demand for Specialized Healthcare Real Estate Assets

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Demand for medical office buildings (“MOBs”) has steadily risen from private and institutional investors, pushing average MOB cap rates to all-time lows. The sustained level of market interest and limited supply of good opportunities to acquire traditional MOBs has created a very strong market for healthcare specialty assets such as inpatient rehabilitation facilities (“IRFs”) and behavioral healthcare real estate. H2C has led the industry in IRF transactions over the past two years and has developed a track record and expertise in these subsector asset classes, leveraging its experience to handle:

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• In August, MCR Companies retained H2C to secure equity capital for its acquisition and value-add strategy for its acquisition of a 269,650-square foot, multi-tenant behavioral health facility in Phoenix, Ariz. H2C conducted a highly structured and efficient process resulting in multiple options for MCR and, ultimately, a monetization of the asset to a strategic buyer for over 45 percent of the original acquisition price.

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• H2C served as the exclusive advisor to a privately held joint venture that is developing a 62-bed, 74,640- square-foot inpatient rehabilitation facility (“IRF”) and long-term acute care hospital (“LTACH”) in Ohio to secure a construction loan. The financing successfully closed in less than 120 days from process launch, demonstrating a highly efficient process that garnered interest from national lenders as well as small-to- midsized regional banks.

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Trend No. 2: Health Systems Acquiring Long-Term Leased Core Assets

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Select well-capitalized health systems have sought to acquire core hospitals and adjacent-to-campus assets that they have historically leased as a long-term investment. While many health systems have unlocked value from owned real estate, this activity has primarily consisted of monetization of outpatient clinics, unprofitable service lines with underlying real estate (e.g., senior living), and off-campus MOBs, it is the opposite trend for on-campus and core assets. By acquiring these assets, health systems can remove the applicable lease liability / right-of-use-asset from the balance sheet, realize rent savings through continued occupancy, and sometimes achieve additional real estate tax savings.

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• H2C advised ProHealth Care, Inc., a Wisconsin-based not-for-profit health system (“ProHealth”), in connection with its acquisition of three MOBs and the restructuring of a long-term lease for four assets throughout its primary market area. The three properties acquired from a publicly traded REIT represent long-term strategic assets for the health system. Further, the transaction enables the health system to gain full ownership of 105,000 square feet across from a hospital and two MOBs while lowering its overall cost of occupancy.

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• In the third quarter, H2C advised a not-for-profit health system based in the Midwest on its acquisition of a 59,559-square-foot MOB that is adjacent to one of its hospitals. The $15.9 million acquisition will allow the health system to expand its footprint within space it would have had to lease, consolidate practices into strategic locations, and realize savings through rent and, potentially, real estate taxes.

 

Trend No. 3: Securing Alternative Capital Sources

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Due to the impact of the COVID-19 pandemic, many senior living and skilled nursing owners and operators found typical debt sources to be challenging throughout the year, as many lenders were not willing to invest as readily into the sector as they typically had. H2C built upon its core expertise and reputation as an experienced healthcare REIB group to execute across the continuum of care for developers and investors.

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Notable transactions include the following:

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• Throughout 2021, H2C advised Mainstay Senior Living and secured financing for three acquisitions and the refinancing of a portfolio of senior living and skilled nursing communities. As the operator has grown its company from a more local owner and operator to a strong regional enterprise, Mainstay sought to identify alternative financing sources that would allow for the company to expand.

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• H2C served as the exclusive advisor to a privately held joint venture between Arbah Capital, Madison Marquette, and Meridian Senior Living to secure a Shariah-compliant construction loan to develop a 127- unit, 116,228-square-foot senior living community in Punta Gorda Isles, Fla. The construction loan closed in July with a historically hotel development-focused regional lender.

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