Since we learned March 2 about rumors that Duke Realty Corp. (NYSE: DRE) might be exploring the sale of some or all of its 86-asset medical office building (MOB) portfolio, we at Healthcare Real Estate Insights have been trying to determine the veracity of the story. So far, our efforts to obtain any comment from Duke Realty have been unsuccessful. But we have come into possession of a transcript of Duke Realty’s presentation at the Citi Global REIT CEO Conference, which was held March 6-8 in Hollywood, Fla.
During the Duke Realty presentation on March 7, President & CEO James B. “Jim” Connor was asked point blank what the firm’s plans are for its medical office portfolio.
Not surprisingly, Mr. Connor said, “We can’t comment on rumors in the marketplace.” But then he went on to discuss how Duke Realty might use the proceeds of a large disposition.
A March 2 Reuters article that broke the unconfirmed story of the potential sale said the portfolio could be valued at $3 billion, citing “people familiar with the matter.” According to Reuters, Duke Realty is working with investment bank Morgan Stanley on the potential sale, adding that sources said the portfolio has attracted the interest of other healthcare-oriented REITs, although there is no guarantee a sale will be concluded. That could not be confirmed with either Duke Realty or Morgan Stanley.
At the Citi conference, President & CEO Connor said Duke Realty’s plans for its MOB portfolio and business “remain consistent. We like the business and we are very good at the business.”
He added, “So, right now, we’re creating a lot of value. We continue to grow rents and grow occupancy in the existing portfolio. The development pipeline, I’m happy to report, is actually very good right now.” Duke Realty has budgeted $100 million in MOB development for 2017, he said.
Mr. Connor also said that Duke Realty has the youngest and highest-quality portfolios on average in the industrial and medical office sectors, with the longest average lease terms. The average medical office lease term is nearly 13 years.
The March 2 Reuters article speculated that the potential repeal or replacement of the Patient Protection and Affordable Care Act (PPACA) might have a negative impact on the healthcare real estate sector. But Mr. Connor downplayed that idea. He said that he had been concerned earlier in the year that uncertainty over the PPACA might affect the MOB business. But he said the most healthcare clients they have spoken with say they a comfortable with what the Trump administration and Congress seem to have in mind.
“Most of our healthcare clients continue to believe that medical office buildings, both on campus and off campus, that are affiliated, are the most cost-effective solution for them for medical care today, and are continuing to invest heavily in that sector,” he said.
Of course, it is also possible that those comments were a bit of a sales pitch for a portfolio that is indeed up for sale, although Mr. Connor wouldn’t say.
Duke Realty has also posted a link to the slide deck it used during its presentation at the Citi conference. It doesn’t provide any apparent clues about a potential MOB portfolio sale, but it does provide additional background. To view the slides, please click here.
Duke Realty has a far larger portfolio of industrial properties — 455 to be exact — so some have speculated that the firm might be planning to become a pure play industrial REIT. Industrial has become a hot sector, thanks in large part to e-commerce, which has increased demand for warehouse and distribution space. Also, most investors prefer REITs focus on a single property type, making Duke Realty’s combination of industrial and medical properties unique.
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