On April 29th, Todd Stender and Philip DeFelice with Wells Fargo Securities hosted a conference call with Chris Bodnar, Senior Vice President within the Healthcare Capital Markets Group at CBRE to discuss the state of the transaction market within the medical office building (MOB) sector. Below are some of the more-relevant questions and answers from this discussion.
Key Points
No Material Changes Expected in For-Sale Supply. Supply of product for sale is expected to remain essentially unchanged from 2012 levels and portfolios of $50MM+ of healthcare-affiliated facilities remain limited. Large portfolios seldom change hands so obtaining size and scale can often take time.
Though That Could Begin to Change. Hospital consolidation remains ongoing as healthcare systems evaluate ways to cut costs and achieve scale in the wake of the Affordable Care Act (ACA). Consolidation of healthcare systems should continue due to several factors including further reimbursement cuts, coding change and technology/IT requirements, aging infrastructure, etc. The changing requirements–many of which require capital investments–are forcing health systems to reevaluate how best to utilize their balance sheets. Owned real estate should continue to come to market and at an increasing rate as health systems have been somewhat distracted due to the more pressing operating environment during implementation of the ACA. Now more than ever, hospitals should focus on core operating competencies; ownership of the real estate may prove too onerous. Also given the enhanced partnerships with physician groups, there is an increasing desire to break free of the landlord/tenant portion of the relationship and focus solely on healthcare delivery. Finally, not-for-profit hospitals will likely need to address operating efficiencies and uses of capital more than ever in order to effectively compete in this new environment; incremental real estate may become more available as a result.
The HC Space Remains Highly Fragmented Compared to Other Industries. Currently, there are over 5,800 hospitals in the U.S. The top 5 health systems own 11.5% of hospitals; this remains relatively low compared to other industries where regulations and required scale has forced consolidation (i.e. the top 5 airlines account for 68% of the industry; the top 5 retail pharmacy companies account for nearly 71% of the market).
Investor Appetite Continues to Remain Strong. In general, interested institutional capital for MOBs is expanding. To note: pension funds and foreign capital are increasingly seeking core deals along with the REITs. Specifically, CBRE estimates that non-traded REITs have recently raised approximately $6B of equity; current ests are about $12MM per day. Also, high net worth investors remain interested in MOBs and are legitimate competitors in some markets.
Pricing Survey Points to Further Cap Rate Compression. Per CBRE’s most recent “Healthcare Real Estate Investor/Developer Survey,” further cap rate compression is likely. The gap between on-campus and off-campus pricing has gradually been narrowing. Long-term single-tenant initial yields have priced more aggressively than multi-tenanted assets. Also, the buyer pool has seemed to increase somewhat for high credit single-tenant long-term leases in this historically low yield environment as investors seem to value some of these deals as credit plays on the in-place tenant. Further investor survey results contained herein.
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