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Transactions: $1.2 billion deal kicks off 2019’s MOB sales

Here are a few more details about Welltower’s pending acquisition from CNL

The 218,489 square foot Midtown Medical Plaza in Charlotte, N.C., is one of the 55 properties Welltower has agreed to acquire from CNL Healthcare Properties. (Photo courtesy of Welltower)

By John B. Mugford

After a big finish to 2018, Welltower Inc. (NYSE: WELL) is kicking off 2019 with one of the biggest arm’s length medical office building (MOB) transactions ever recorded.

The Toledo, Ohio-based healthcare real estate investment trust (REIT), which made facility acquisitions totaling $559 million during the fourth quarter (Q4) of last year, entered an exclusive agreement in late December 2018 to pay $1.25 billion for acquire 55 MOBs in 16 states from Orlando, Fla.-based CNL Healthcare Properties, a non-traded healthcare REIT.

It is anticipated that the sale will close during the first half of 2019.

The CNL MOB portfolio has a total of about 3.3 million square feet of space and is about 94 percent leased, according to information provided by Welltower, which adds that about 92 percent of the space is affiliated with “some of the nation’s premier health systems,” including: Winston-Salem, N.C.-based Novant Health, which has an A1 rating from Moody’s Investment Services; Houston-based Memorial Hermann (Moody’s: A1); and Cleveland Clinic (Moody’s: Aa2).

For CNL, the sale will include 55 of the 63 MOBs that comprise its MOB portfolio. It is monetizing the assets as part of its “ongoing process to pursue strategic alternatives to provide liquidity for its shareholders,” according to a January 2019 news release.

Because the Welltower deal will leave CNL with eight remaining MOBs, the non-traded REIT, in a letter to its shareholders, wrote: “We will continue to hold the remaining eight of the 63 properties for sale as we pursue separate efforts to market and sell them. The company believes that selling the eight properties separately from the larger transaction should assist to maximize value for shareholders.”

After the sale of the MOBs, CNL Healthcare Properties’ holdings will primarily consist of seniors housing facilities, of which it owns 87 communities in 31 states. It is also looking to sell six skilled nursing facilities it owns in Arkansas, “which included post-acute care facilities and specialty hospitals, that were initially marketed by CNL,” according to the letter to its shareholders.

The January announcement of the pending MOB portfolio deal did not identify specific properties or provide much more information. But an “Outpatient Medical Acquisition Update” slide presentation posted to the Welltower website provides details not included in the news release.

Welltower highlighted about a dozen of the properties involved in the deal, including:

■ UT Cancer Institute Building, Knoxville, Tenn.

■ Physicians Plaza Huntersville, Huntersville, N.C.

■ 330 Physicians Center, Rome, Ga.

■ Calvert Medical Arts Center, Prince Frederick, Md.

■ Red Bank Professional Office Building, Cincinnati

■ MedHelp MOB, Birmingham, Ala.

■ Siena Pavilion V and VI, Henderson, Nev.

■ Midtown Medical Plaza, Charlotte, N.C.

■ Claremont Medical Office, Claremont, Calif.

■ Spivey Station Physicians Center, Jonesboro, Ga.

■ Coral Springs MOB I and II, Coral Springs, Fla.

■ Chula Vista Medical Arts Center – Plaza II, Chula Vista, Calif.

In addition, Welltower’s “Outpatient Medical Acquisition Update” presentation noted that, in terms of budgeted net operating income (NOI) from the CNL Portfolio acquisition, 26 percent of the NOI would come from properties in North Carolina, 12 percent from California, 10 percent from Texas, 8 percent from Tennessee, 7 percent from Florida and 37 percent total from the other 11 states. The initial cash yield, or capitalization (cap) rate, is anticipated to be 5.7 percent, with a 2.4 percent weighted average annual rent increase.

An industry source tells Healthcare Real Estate Insights that the portfolio is “one of the highest-quality large portfolios to be traded in a number of years.”

As first reported by HREI in June 2018 and publicly confirmed by CNL in September 2018, CNL Healthcare Properties’ parent organization, CNL Financial Group, has been exploring strategic alternatives to provide liquidity to its shareholders through the potential sale of its MOB portfolio, as well as several other healthcare facilities.

In the letter to its shareholders, CNL explained that the process of selling its MOB portfolio began in late 2017. The process continued in 2018 when it established a special committee of its board and engaged KeyBanc Capital Markets Inc. and HFF Securities LP to act as financial advisors to the special committee.

Sources tell HREI that CNL will eventually consider another liquidity event for the remainder of its healthcare portfolio.

As noted at the outset of this story, the pending transaction is one of the largest-ever arm’s length MOB deals – meaning that only the CNL real estate assets are being acquired, not the company itself. The largest-ever arm’s length MOB deal is believed to be Scottsdale, Ariz.-based Healthcare Trust of America’s (NYSE: HTA) $2.25 billion purchase of about 70 MOBs and properties from Duke Realty Corp. (NYSE: DRE) in 2017. ❒

For a copy of the Jan. 2, 2019, Welltower news release, please visit HREInsights.com.

For a copy of the Jan. 2, 2019, CNL letter to its shareholders, please visit CNLSecurities.com.

For a copy of the Welltower “Outpatient Medical Acquisition Update” presentation, please visit Welltower.com.

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