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Medical Office Building Sales Fell Nearly 50 Percent In Q2, But The Sector’s Outlook Is Strong

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The volume of MOB investment sales transactions in the second quarter of 2020 totaled around $2.2 billion, a 43 percent decrease compared to a year ago. In the first quarter of 2020, MOB investment sales volume reached $3.7 billion, according to data firm Real Capital Analytics (RCA).

The CoStar Group, another provider of commercial real estate data, pegs MOB investment sales volume at around $2.1 billion in the second quarter, a drop of 54 percent from $4.7 billion from a year ago.

“The volume of sales has absolutely hit pause, it hit the brakes really hard in the second quarter. You saw a significant drop in sales volume,” says Keith Pierce, research manager for Southeastern region with real estate services firm Transwestern. “The price per square foot did not really shift that much for those sales that did close. But by and large, just everybody froze in late March and largely stayed frozen until sometime in June.”

Average cap rates on transactions involving MOB assets remained at 6.6 percent at the end of the second quarter, flat with the figure from a year ago and the first quarter of 2020, according to RCA. CoStar pegs average MOB cap rates at 6.7 percent, also registering no change from the previous quarter.

“I anticipate seeing somewhat of a flattening,” says Russell Brenner, president of the medical office and life sciences division with real estate investment firm CA. “Once the market truly opens up again and lenders, which have been very selective in where they lend, come back into the market in droves and in a more significant way, I think you may well see cap rates continue to fall. But for probably the next two three quarters, I think it will be a largely flattening of cap rates.”

Earlier during the pandemic, many Americans largely postponed elective procedures, which put a dent on revenues for medical office tenants. But in states where those facilities are reopening, industry sources are reporting pent-up demand.

“We saw very few delinquencies, perhaps a handful of rent deferral requests, but by and large, the healthcare medical office tenancy as a whole stood up very well,” says Brenner. “Certainly now that elective procedures are back on in most parts of the country, MOBs are poised to bounce back and will continue to be a stable and reliable asset class.”

“Medical practices are running at 90 to 95 percent of pre-pandemic levels,” says Steve Hall, senior managing director for healthcare advisory services at Transwestern, who expects this level of demand to continue through the end of the year.

“Many of the company’s tenants are back to 80 percent of pre-pandemic levels of procedures and services,” says Jon Boley, senior vice president of acquisitions and development for HSA PrimeCare, a firm that develops, leases and manages medical facilities.

“The reason these businesses are not back to 100 percent is because they are having to do above-standard cleaning in order to disinfect surgery centers throughout the day,” Hall notes. “A factor that will shore up MOB assets in the future is the dearth of new construction happening right now. During a pandemic, a lot of people aren’t pulling the trigger on a brand new construction. The lack of construction going on right now I think is really going to keep the market strong since there is not going to be oversupply.”

 

Source: HREI

Kayne Anderson Buys 34-Property Medical Office, Senior Housing Portfolio From Welltower

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The real estate private equity arm of Kayne Anderson Capital Advisors, Kayne Anderson Real Estate, has completed an acquisition of 34 Welltower properties, including seven senior housing properties in Florida.

The portfolio consists of 27 medical office buildings located across the U.S. along with the senior housing communities. An unspecified third-party company exercised the right of first offer to buy another medical office building property. The gross sales price for all of the properties combined was about $1 billion, according to Welltower.

Kayne Anderson Real Estate will own and operate the senior housing portfolio with its operating partners, MB Real Estate and Bonita Springs, Florida-based Discovery Senior Living. Kayne previously owned all but one of the newly acquired senior housing assets, and had originally sold them to Welltower in 2015, according to Max Newland, leader of the firm’s senior housing real estate team.

The announcement came as Welltower released its second-quarter earnings Wednesday afternoon. Welltower reported normalized funds from operations (FFO) attributable to common stockholders of 86 cents per share in 2Q20, beating analysts’ expectations by three cents.

The senior housing properties, formerly part of Welltower’s senior housing operating (SHO) portfolio, were managed by Discovery Senior Living, and were sold in April. Six of the properties, which were sold in May, were held in a joint venture with an institutional partner in which Welltower kept a stake of almost 54%. Welltower sold the other SHO property — a newly developed community in which Welltower owned a 97.5% stake — in June.

Seventeen of the outpatient medical properties were sold for proceeds of $329 million, with an additional nine properties sold in July for proceeds of $173 million, according to the Toledo, Ohio-based REIT. Welltower expects to complete the final outpatient medical property sale to Kayne Anderson in the third quarter of this year. The REIT also expects the other outpatient medical property sale, pursuant to a right of first refusal, to close in the same time frame.

Chad Lavender and Ryan Maconachy of Newmark Knight Frank acted as advisors for Welltower on the sale, while Wells Fargo Bank financed the senior housing assets through its Freddie Mac Seller Servicer business. Additionally, Capital One Bank NA led financing for the medical office assets.

“This portfolio is a very compelling addition to our platform — institutional quality medical office buildings with long duration leases and seniors housing assets with strong current cash flow and near-term value enhancements through significant capital improvements,” said Kayne Anderson Real Estate Chief Investment Officer David Selznick in a press release. “We believe KA Real Estate’s operator-oriented investment platform positions us very well to continue to acquire attractive assets and create favorable risk-adjusted returns for our investors.”

“On Welltower’s end, the sale significantly enhances our liquidity profile, not only affording us increased flexibility to navigate the ongoing challenges posed by the COVID-19 pandemic, but also allows us to consider opportunistic capital deployment,” Welltower Vice Chair, CIO and COO Shankh Mitra said in a press release.

A representative for Welltower declined to comment further on the sale, but said the company would provide more information during its second-quarter earnings call.

The Covid-19 pandemic impacted Welltower’s senior housing operations and occupancy in the second quarter of 2020. The REIT reported a 79.4% average occupancy rate for its SHO portfolio in July, a marked decrease from the 85.8% occupancy rate it reported in February before the pandemic hit.

Looking ahead, Welltower believes it will shed 125 to 175 basis points of occupancy in the third quarter of 2020, as move-outs are expected to exceed move-ins. And while the REIT is seeing improvements related to the degree of its occupancy declines, the company is also not out of the woods yet, according to Chairman and CEO Tom DeRosa.

“Our seniors housing and post-acute care businesses, in particular, endured significant challenges, which resulted in steep occupancy declines and a sharp increase in expenses through April and early-May,” DeRosa stated in a press release Wednesday. “However, through June and July, we have witnessed a consistent sequential improvement in seniors housing occupancy trends. While we are encouraged by these recent data points, the path to recovery remains far from certain. Therefore, we continue to prioritize the strength of our balance sheet which will enable us to navigate through near-term uncertainty and position ourselves to deploy capital opportunistically.”

 

Source: Senior Housing News

Medical Real Estate Still The Best Way To Keep Your Portfolio Healthy

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In 2018, the JSE’s SA listed property index dropped 25%. In 2019, the total return from the index was 1.92%, well below inflation. In the first five months of 2020, the index shed 39%.

Although dividends from listed property grew by 8-12% a year between 2014 and 2017, growth slowed to 3.5% in 2019, which again was below inflation. In response to the economic fall-out from Covid-19, many property companies have warned they will withhold dividends this year to strengthen their balance sheets and until they understand the full fallout from the pandemic.

The data is not looking encouraging.  Office tenants are cutting space wherever possible, having learned that their reduced workforce can work from home. Retail is under enormous pressure across the board, from the legendary brands like Edgars to the smaller independent brands, and restaurants that just don’t have the fire power to recapitalise and pay rents in a market where there are still restrictions and the consumer is unable to come to the rescue.

What’s more, if you are in the hotel and hospitality industry, then there is really no clear path to recovery at this stage and the losses will be devastating.

There’s no refuge in residential property, either. The Lightstone Residential Property Index shows national house price growth in SA peaked at 6.25% in 2014 and has slowed since then to a five-year low of 1.7% in 2019. Lightstone expects, despite the recent interest rate cuts, that growth in the residential housing market will slow again in 2020.

Two specialized sectors of the property market have continued to deliver solid returns throughout the Covid-19 crisis. Logistics is one of the winners due to online e-commerce stores which have enjoyed a surge in online shopping.

The other big winner globally is medical office buildings, whose tenants mostly offer essential services. Even those who had been required to close are already benefiting from a post-lockdown surge in patient visits as medical procedures can, in most cases, not be postponed indefinitely. Think for a moment about your dentist, who will still need to attend to those fillings even if he could not see you over the last three months.

For South Africans who invested in offshore logistics or medical buildings, the rand returns have been considerably enhanced by the latest depreciation of the rand against the dollar.

In the US, the Covid-19 crisis has hit particularly hard, with 134,000 deaths by early July, amid total confirmed cases exceeding three million. Hospitals under pressure to clear wards and scale up for the anticipated flood of Covid-19 patients have had to postpone all elective procedures and turn patients away who were not critical.

This dramatically affected the income of all medical professionals who are not directly involved in treating Covid-19 patients, and has also affected hospitals’ revenue. Even as the US emerges from lockdown, patients choose to avoid traditional hospitals in fear of being exposed to the virus. This has been a boost for medical practitioners working outside the hospital systems, as patients have sought treatment from doctors working from these independent facilities.

Orbvest, which has 19 medical office buildings under management in three US states (Texas, Georgia and New Jersey), noted rental collections declined slightly in April, during lockdown, as about 21 tenants across the entire portfolio of over 100,000 square meters requested deferment.

But by end-June, the net collection of rentals was back to 97.6%, as both Texas and Georgia re-opened their economies, and collections for the month of July already are close to normal. The nett result of the pandemic on our projected revenue will be negligible and we expect to have fully recovered before year end.

Medical property investment was not an unexpected beneficiary of the Covid-19 crisis. The argument for buying into a building tenanted by medical professionals, especially in the US, makes fundamental sense in the long term. In the US, the aging population is growing and requiring more medical care. An investment delivering a proven 8% p.a. in US dollar dividends paid quarterly, plus a capital gain share at the end of the investment period, is an essential part of a diversified portfolio for South African investors.

 

Source: Daily Maverick