Transactions: New publicly traded REIT, Physicians Realty Trust, continues making deals

MILWAUKEE – Physicians Realty Trust (NYSE: DOC), which raised about $123.8 million in an initial public offering (IPO) that closed in July, has made a number of significant acquisitions in recent months.

According to new releases as well as data from Real Capital Analytics, the new healthcare REIT has made three separate purchases since September, spending about $93.1 million.
According to John Thomas, president and CEO, Physicians Realty Trust is interested in acquiring MOBs, outpatient facilities and small specialty hospitals that perhaps don’t interest larger REITs. Mr. Thomas was interviewed by NAREIT (National Association of Real Estate Investment Trusts) at the recent REIT World Convention in San Francisco.

“We’re focused on the medical office building and small specialty hospital investments,” Mr. Thomas said during an interview posted on REIT.com. “We could invest in other asset classes, but we’re focused on medical office buildings.

“The average medical office building transaction is about $20 million dollars. The big three REITs, in particular, have gotten so big, a $20 million dollar investment is way beneath where they can spend their time and attention. So we saw a gap in the market, a very fragmented market.”

He went on to explain that the country is home to about $4 billion worth of healthcare real estate assets, noting that about 80 percent of those properties are owned by hospitals, health systems and physician groups. The overall U.S. healthcare industry, he said, is a $3 trillion business today that is expected to grow to about $4 trillion by 2020.

“We just want to collect a billion dollars of rent,” he noted. “So we’re at the bottom of that funnel.”

Here’s a look at the Physicians Realty Trust’s recent transactions:

• $40 million sale-leaseback purchase of a surgical hospital and adjacent MOB in El Paso, Texas, occupied by the Foundation Surgical Hospital of El Paso LLC.

The operator of the hospital is a joint venture (JV) owned by more than 60 physicians and Foundation Surgical Hospital Affiliates, a subsidiary of Oklahoma City-based Graymark Healthcare Inc. (OTCQB: GRMH). The 77,000 square foot hospital has 40 beds and six operating rooms. The adjacent MOB, which is 100 percent occupied, has 40,000 rentable square feet of space. It is leased by the hospital and sub-leased by hospital services and physicians.

Upon the sale closing, the operating company and the hospital entered into a new 15-year absolute-net lease for the hospital and a new five-year, triple-net lease for 100 percent of the MOB.

• $37.5 million transaction involving the 60,000 square foot Crescent City Surgical Centre in Metairie, La., a suburb of New Orleans. According to Physicians Realty Trust, the transaction involved 29 physicians contributing their ownership interest in the facility to a limited liability company owned by the REIT.

Upon contributing their membership stakes, the physicians received 954,877 operating partnership units, valued at $11.53 million.

The surgical center, built in 2010, includes clinical space and inpatient rooms and provides a variety of outpatient and inpatient surgical services in eight operating rooms. Crescent City Surgical entered into a 15-year, absolute-net lease for 100 percent of the building upon the closing of the deal.

• $15.6 million acquisition of the Foundation Outpatient Care Building in Oklahoma City. The 52,000 square foot building is master leased by Oklahoma City-based Foundation Surgical Affiliates LLC, which subleases space to a JV of the LLC and 30 physicians. The facility includes an ambulatory surgery center (ASC) and clinical physician office space. The outpatient care building is currently on a new 10-year absolute net master lease, with subleases to the ASC and physicians.

In addition to the above transactions, Physicians Realty Trust recently entered an agreement to provide a secured mezzanine loan of about $6.9 million to affiliates of Dallas-based MedProperties Holdings LLC, a private healthcare real estate investor. The loan is secured by MedProperties’ ownership interests in two specialty hospitals, one in San Antonio and one in Scottsdale, Ariz.