H2C MEDICAL OFFICE BUILDING QUARTERLY UPDATE

Q122 MOB Report

 MOBs Set Record for 12-Month Sales Volume and Pricing 

May 2022

Record MOB transaction volume resulted in record-low average cap rates for MOBs.

Exhibit One

Introduction

Medical office building (“MOB”) sales volume topped $3.3 billion in the first quarter of 2022 and $16.8 billion since Q1 2021—a 12-month gross sales volume record for MOB sales (1). First quarter sales volume was 78 percent higher than in Q1 2021 as investors seemingly rushed to acquire and recapitalize assets utilizing fixed-rate leverage prior to interest rate hikes. The record transaction volume resulted in record-low average cap rates for MOBs, which reached 6.14 percent over a trailing 12-month period. 

Source: Based on an H2C analysis of industry data from RCAnalytics.

Two portfolio recapitalizations that closed in January accounted for over 30 percent of the quarterly transaction volume. Diversified Healthcare Realty  Trust (NASDAQ: DHC) sold an 80 percent interest in a 10-property portfolio that included two buildings located on the campus of and leased to Cedars Sinai (AA-/Aa3/NR) totaling 331,000 square feet in Los Angeles. The portfolio was valued at $702.5 million. In addition, Dallas-based MedProperties Holdings recapitalized a 23-property, 1,006,029-square-foot portfolio located across 12 states for $350 million, 71 percent of which was leased to hospitals and health systems and investment-grade,  credit-rated tenants (2). 

Record sales volume and record-high valuations for MOBs point to the strength of the MOB sales market, and there is still time for sellers to capitalize on the strong market. However, federal interest rate hikes that began in the first  quarter present a hurdle for continued reduction in average cap rates. It should be expected that the first quarter of 2022 was the last quarter of data that doesn’t factor rising interest rates, as a majority of the transactions were under a definitive and closed prior to interest rate hikes. It is predicted that average MOB cap rates will stabilize and increase over the course of 2022. However, a substantial increase in cap rates isn’t expected given the growth in investment and investors’ “dry powder” coupled with the strong appetite for acquisitions in the healthcare real estate sector. 

As cap rates have hit all-time lows and interest rates have ticked up, H2C has seen an uptick in investors seeking healthcare real estate assets such as inpatient rehabilitation facilities (“IRFs”), long-term acute care hospitals (“LTACHs”), behavioral health facilities, and appetite for assets with shorter-than-typical lease terms remaining to quell the effect of more expensive debt. 

There is still time for sellers to capitalize on the strong MOB sales market.

Q4 saw cap rates across all regions decrease, with the largest fluctuation occurring in the Midwest and the Southwest.

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Source: Based on an H2C analysis of industry data from RCAnalytics.

Investment Sales and Trends

The largest transaction in the first quarter was completed between Diversified Healthcare Trust (NYSE: DHC) and two global investors for an 80 percent stake in a $702.5 million portfolio for seven MOBs and three life science assets located across five states. The investors acquired a 41 percent and 39 percent equity interest in the joint venture respectively, while DHC retained a 20 percent equity interest in the portfolio. The reported cap rate was 4.98 percent for the 1.1 million square foot portfolio that was 97 percent occupied, with a weighted average lease term of 6.6 years (3). ​

Regional Review (4)

The West region had the greatest transaction volume compared with other RCA-tracked regions at $1.1 billion. Of this volume, $397.7 million was attributed to the aforementioned DHC joint venture, of which one of the ten properties was located in Los Angeles. The Cedars-Sinai Medical Office Towers was valued at a national record of $1,202 per square foot. 

In March, Vukota Capital Management and its joint-venture partner, Harrison Street Real Estate Capital, monetized an eight-property portfolio for $215 million to Healthcare Realty Trust (NYSE: HR). The 323,745-square-foot portfolio, located throughout different markets in California, transacted for $664 per square foot. 

Notably, Q4 saw cap rates across all regions decrease, with the largest fluctuation occurring in the Midwest and the Southwest, decreasing by an average of 8.1 percent. The West region recorded both the lowest cap rate and highest per square foot metrics at the beginning of 2022 at 5.1 percent and $458 per square feet. 

Northeast Region

In January, Hammes Partners acquired Bedford Medical Park, a four-building private healthcare campus totaling 108,121 square feet. The 98 percent-occupied property has credit tenants such as Catholic Medical Center, Bedford Ambulatory Center, and New Hampshire Orthopaedic Center. Hammes Partners acquired the campus for $39.8 million which equated to $368 per square foot. 

In February, BG Capital, a Greater-Philadelphia based real estate investment company, acquired Constitution Health Plaza, a former hospital that was converted into a 295,000-square-foot MOB and office complex. The 95 percent-leased building sold for $77 million which equated to $261 per square foot. BG Capital acquired the property in partnership with Morristown, N.J.-based The Hampshire Cos. and Arbah Capital of Saudi Arabia. 

Also, MedCraft Healthcare Real Estate recently acquired Patriot Medical Center a 9.5-acre site with two office buildings in Guildford, Conn., for $26.7 million, or $334 per square foot. According to CoStar data, the buildings at 800 Boston Post Road have a combined 80,000 square feet of space. The outpatient center is fully leased and anchored by a large regional hospital system, Yale New Haven Hospital. Established physician groups make up the balance of the space. Also, the property benefits from being less than half a mile from YNHH Shoreline Hospital (1,154 beds). 

New York-based New York-Presbyterian Health System recently acquired a 25-acre site with two office buildings in White Plains that it plans to repurpose into an outpatient campus. According to CoStar data, the buildings at 1111 and 1129 Westchester Ave. have a combined 376,993 square feet of space. The system paid $83.3 million, or $221 per square foot for the buildings. The outpatient campus will offer a wide range of services provided by its affiliated practice with ColumbiaDoctors. 

Mid-Atlantic Region

In January, Montecito acquired a three-story, 54,000-square-foot MOB in Hagerstown, about 70 miles northwest of Baltimore. The Trilogy Professional Center is anchored by Capital Women’s Care is the dominant specialty provider in the area, with more than 180 physicians, is the largest OB/GYN practice in Maryland and one of the largest in the United States. The group maintains more than 55 locations across Maryland, Virginia and in the Washington, D.C., area. the group provides a full range of women’s health services, with specialized space for 3D mammography and a full array of ultrasound for all obstetric and gynecological needs. Montecito noted that physicians have opted to retain a share of ownership in the MOB. The acquisition price of $19.4 million equals $360 per square foot. 

Also, Remedy Medical Properties recently acquired Ashville Eye Associates at 8 Medical Park Drive Asheville, N.C. The 44,402-square-foot medical office building sold for $22.8 million, or $513 per square foot. The single-tenant building located within a community of medical office buildings centered around Mission Hospital’s outpatient center across the street from the Property. Mission Hospital’s main campus (815 beds) is located approximately three miles away. 

In February, Evergreen Medical Properties acquired a 47,924-square-foot medical office building in the St. Matthews submarket of Louisville, Ky. The Property is a fully leased, multi-tenant medical office building located within a major medical corridor, with proximity to major hospitals, including Baptist Health Louisville (519 beds) and Norton Women’s & Children’s Hospital (373 beds). The Property is anchored by Baptist Health Louisville (NR/A+/NR) with services at the location that include women’s diagnostic imaging. Other tenants include the Dupont Surgery Center and the Koby Karp Doctors Eye Institute. The purchase price of $17.7 million equated to $369 per square foot. 

West Region

In January, Anchor Health Properties acquired a two-story, 40,000-square-foot, Class A medical office building located in the highly affluent Los Gatos submarket of San Francisco, Calif. Featuring proximity to several local hospitals, including Good Samaritan Hospital (NR/AA-/NR), Santa Clara Valley Medical Center, and El Camino Hospital (NR/AA/NR), the asset is strategically positioned at 15400 Los Gatos Boulevard. The property is 100 percent occupied by Palo Alto Medical Foundation, a division of Sutter Health (NR/A1/NR), a not-for-profit healthcare system headquartered in Sacramento, Calif., and was completed in 2015 as a build to suit design for the health system. The $53.1 million purchase price equated to a national record of $1,328 per square foot. 

Also, In January, Oregon Health & Science University (“OHSU”) (NR/AA-/NR) bought back OHSU Knight Institute located at 15700 SW Greystone Ct. in Beaverton, Oregon. The 53,483-square-foot Property sold for $36.2 million, or approximately $676 per square foot. Services at the property include family medicine, women’s health, sports medicine, geriatrics/senior care, and behavioral health. The outpatient facility is ideally located between Kaiser Permanente’s Westside Medical Center (126-beds) and St. Vincent Hospital East Pavilion (277-beds) as primary referral sources. 

Southwest Region

In January, Nashville, Tenn.-based Healthcare Realty Trust (NYSE: HR) acquired three MOBs with a total of 118,993 square feet in San Antonio for $42.3 million, or $355 per square foot. The MOBs have an overall occupancy rate of 93 percent and are located at 155, 225 and 255 E. Sonterra Blvd. The medical campus came online in three phases, between 2002 and 2004, and is leased to a mix of tenants representing various medical specialties including oncology, radiology, and orthopedics, among others. The medical park is part of a medical corridor near the 399-bed North Central Baptist Hospital (NR/A+/NR) and the 242-bed Methodist Stone Oak Hospital. 

Meanwhile, Ascension Medical Center Seton in Austin, which is part of St. Louis-based Ascension Health (NR/AA+/NR), recently announced plans for a $320 million, 282,000-square-foot tower focused on women’s health on its campus. The new tower is planned for a site at 34th Street and Medical Parkway and would include: 28 inpatient beds for women’s clinical services; capacity for about 7,500 deliveries annually; private neonatal intensive care unit (NICU) rooms; a dedicated OB-GYN emergency department; a teaching and learning center; capacity for additional surgeries and a wide variety of services; and additional parking. 

In February, Wentworth Healthcare Properties (“Wentworth”), acquired a $56 million portfolio of four MOBs totaling 180,000 square feet and includes three properties in Arizona and one in Colorado. The Portfolio of Class A medical office campuses, with nine buildings in total, are 80 percent leased to a large collection of some of the most dominant national and regional healthcare providers. The Properties are in two of the fastest growing markets in the country: Phoenix and Denver. 

In March, Remedy Medical Properties acquired a 137,415-square-foot property in Tulsa, Okla., located at 4800 S 109th East Avenue. The Property is anchored by Tulsa Bone & Joints Therapy and Union Pines Surgery Center and the $72.5 million purchase price equated to $374 per square foot. The Property is also only five miles from St. Francis Hospital (1,112 beds), which is the primary hospital in southeast Tulsa. 

Midwest Region

In January, MedProperties Realty Advisors acquired the three-MOB campus, 118,003-square-foot Mississippi Valley Health Campus (MVHC) in Davenport. MVHC occupies the full 12.54 acres site at 3400, 3385, and 3365 Dexter Court adjacent to the 139-bed UnityPoint Health - Trinity Bettendorf Hospital (NR/AA-/NR). Davenport, which is two-and-a-half hours west of Chicago, is Iowa’s third largest city and part of the Quad Cities area. Anchor tenant Mississippi Valley Surgery Center inked a long-term lease as part of the transaction, helping to ensure long-term stability for the asset. Overall, the campus is 92 percent leased to 15 tenants with a weighted average lease term (WALT) of more than 10 years. The property benefits from occupancy by most major specialties, creating a diversified tenant mix. The property sold for a price of $32.1 million, or $272 per square foot. 

 

IRA Capital (“IRA”) acquired the ProHealth Care Headquarter Building in Waukesha (Milwaukee), Wis. The 112,000-square-foot office property was constructed in 2002 as a built-to-suit headquarter location for ProHealth Care Inc. (“ProHealth”). ProHealth recently signed a long-term lease to solidify its occupancy through 2032. The property houses the health system’s executive management team as well as mission-critical functions, and a raised floor data center that serves ProHealth’s hospitals and clinics. The purchase price of approximately $23.9 million equated to $213 per square foot. 

In February, Tampa, Fla.-based Sila Realty Trust Inc. (“Sila”) an HRE-focused non-traded REIT, acquired a three-building complex with 132,617 square feet of rentable space and two parcels totaling 1.52 acres in Clive, outside of Des Moines, Iowa. The portfolio includes three fully leased MOBs on the four-building Mercy Wellness Campus. The campus is across the street from the 82-bed MercyOne West Des Moines Medical Center and the 95-bed UnityPoint Health–Methodist West Hospital (A1/AA-/NR). Sila now owns all four MOBs on the cam
pus. The purchase price of approximately $47 million equated to $354 per square foot. 

Southeast Region

In January, A pair of projects totaling about $124.5 million and slated for completion in 2023 are planned for the University of Arkansas for Medical Sciences (UAMS) (Aa2/NR/NR) campus in Little Rock. Arkansas Business News reports that the projects entail the following: the $68.5 million, 158,000-square-foot Orthopedic & Spine Hospital that will include operating rooms, patient rooms, offices and orthopedic trauma space; and the future $56 million, 59,855 square foot Radiation Oncology Center, which will augment the UAMS Winthrop P. Rockefeller Cancer Institute and house the state’s first proton therapy center. 

In February, North Palm Beach, Fla.-based AW Property Co., sold an ownership position in a 13-MOB portfolio in various Florida markets with a total of 478,000 square feet of space. In a $170 million transaction, AW Property Co. recapped the portfolio and formed joint venture (JV) ownership partnership with Atlanta-based Invesco Real Estate, (NYSE: IVZ). According to AW, the portfolio it recapped with Invesco is 97 percent occupied, with 12 of the 13 buildings being on or adjacent to hospital campuses, providing “stability with premier hospital affiliation.” Of the 13 MOBs, two are single-tenant assets. The MOBs, in close proximity to preeminent Florida hospitals including Sarasota Memorial Hospital (A1/AA-/NR), Baptist Health South Florida (A1, NR, NR), Lee Health (A2/NR/NR), Memorial Healthcare and HCA Healthcare. 

Also, In February, IRA Capital (“IRA”) acquired Naples Surgical Center, an 86,300-square-foot, state-of-the art surgical hospital and multi-specialty care center in Naples, Florida. The Class-A medical facility was constructed in 2015 and is 100 percent occupied by two of Southwest Florida’s leading health systems, NCH Health System (NCH) and Physicians Regional Healthcare System (PRHS). The facility is strategically located directly across from NCH’s 261-bed North Naples Hospital and PRHS recently signed a 55,000-square-foot lease to occupy the entire second and third floors as an orthopedic and spine surgical hospital. The purchase price of approximately $66 million equated to $765 per square foot at a 6 percent capitalization rate. 

In March, Remedy Medical Properties, in partnership with Kayne Anderson, acquired the Charter Realty MOB Portfolio consisting of eight buildings across Florida, North Carolina, Tennessee, and Texas. The assets are over 90 percent occupied and 75 percent leased by high-caliber investment-grade tenants, including leading hospitals and health systems from the region. The purchase price of approximately $91 million equated to $487 per square foot. ​

Footnotes:

  1. Based on H2C analysis of industry data from RCAnalytics.

  2. Based on H2C analysis of industry data.

  3. Based on H2c analysis of industry data.

  4. All regional data based on H2C analysis of Industry data from RCAnalytics.

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Source: Based on an H2C analysis of industry data from RCAnalytics.

About H2C Securities Inc. ("H2C")

H2C is a strategic advisory and investment banking firm committed to providing superior advice to healthcare organizations, higher education institutions, andrelated companies throughout the United States. H2C’s professionals have a long track record of success in healthcare and higher education mergers and acquisitions, capital markets, and real estate transactions, acting as lead advisors on hundreds of transactions representing billions of dollars in value.

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