Transactions: Largest single-asset MOB sale ever?

HFF brokers sale of 705,601 square foot Philadelphia building to HCP Inc. for $160.5 million

dsc_0314 (1)_Fixed Sky3PHILADELPHIA – In what looks to be the highest price ever paid in the United States for a single medical office building (MOB), Long Beach, Calif.-based HCP Inc. (NYSE: HCP) has closed on the acquisition of a 12-story facility in Philadelphia that sits across the street from one of the city’s major hospitals.

According to the national healthcare real estate group at Holliday Fenoglio Fowler (HFF), led by Managing Director W. Michael Bennett, HCP, a publicly traded real estate investment trust (REIT), paid $160.5 million for the 705,601 square foot building at 833 Chestnut St., or about $229 per square foot (PSF).

The capitalization (cap) rate, or the first-year estimated return, was about 6.7 percent, according to HFF. The seller was San Francisco-based Digital Realty Trust Inc. (NYSE: DLR), as the building has been home to a number of data center tenants over the years.

“As far as we can tell, it is the largest single-asset transaction that was not part of a portfolio to ever take place in the MOB space, and we’re very excited to have managed the marketing and sales process for the seller,” says Mr. Bennett, who is part of the HFF national healthcare team that includes Managing Directors Philip B. “Phil” Mahler and Evan Kovac, and Director Jack Dudick.

Mr. Bennett says strong interest came from a wide variety of large investors, including about 50 of whom submitted confidentiality agreements (CAs).

“We had a lot of activity concerning the building, with about seven or eight offers from interested investors before HCP was ultimately chosen,” Mr. Bennett says.

A big reason for the intense interest, he says, is that the amount of space used by medical providers continues to soar year after year. Instigating the building’s transformation from a data center and general office building into an MOB is an ongoing interest in more outpatient space by the adjacent 951-bed Thomas Jefferson University Hospital, an A+ rated (by S&P) academic medical center that is part of nearby Thomas Jefferson University.

“The amount of clinical space in the building is currently about 60 percent, but that has been trending north every year recently and continues to do so, as Thomas Jefferson has been taking most of the large spaces when they become available,” Mr. Bennett says.

As of last fall, when the building was first offered, Jefferson University Physicians, part of the health system, occupied about 26 percent of the building, with Thomas Jefferson University Hospital taking about 23 percent. Nemours Children’s Clinic had about 4 percent. Services offered by those providers include cardiology, nephrology, pediatrics, OBGYN, physical therapy and a pharmacy.

Non-medical tenants in the building, which include data center space, include the U.S. Government with 8 percent, architectural firm Ballinger with 6 percent, and Thomas Jefferson University with 2 percent. About 1 percent of the building is retail.

The average remaining lease term for the seven largest tenants, which lease about 76 percent of the occupied space, is 7.3 years, according to HFF.

According to a Form 8K filed by HCP with U.S. Securities and Exchange Commission (SEC) filing, the building is 85 percent occupied.

The building at 833 Chestnut was completed in 1927 as part of an expansion of a nearby Gimbels Bros. department store. Digital Realty acquired the facility in 2005 for $59 million from a partnership involving Trimont Real Estate Advisors and Lehman Brothers.

For HCP, the facility is the second large medical facility that it has acquired recently in Philadelphia. In the third quarter (Q3) of 2014, it paid ProMed Properties $140.6 million for the 435,357 square foot 3535 Market Street building, about two miles from 833 Chestnut.

That building, part of the 17-acre University City Science Center complex in West Philadelphia, is currently fully leased to two tenants: Children’s Hospital of Philadelphia (CHOP) and the University of Pennsylvania Health System. However, the lease for CHOP, which takes about half of the space, expires in May 2017, when the organization expected to relocate to a new facility. The University of Penn’s lease, however, doesn’t expire until 2030. q

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