Nationwide Health Properties Inc. is pulling back from its aggressive medical real estate buying of recent years.
The Newport Beach-based owner of senior housing, nursing homes and medical office buildings has seen financing for deals become more costly. At the same time, Nationwide is seeing vacancies rise for medical space.
That has the company looking to conserve cash for now.
“Until we are convinced that we can reliably replenish deployed capital, we have reoriented ourselves from an acquisitive growth-oriented mindset to one of conserving capital and maximizing liquidity,” said Chief Executive Doug Pasquale on Nationwide’s recent earnings call.
Nationwide’s new strategy is an about-face from recent years, when it aggressively sought out deals, including a $915 million buy a year ago of 28 medical office buildings from San Diego-based Pacific Medical Buildings,including Mission Medical Plaza in Mission Viejo and St. Joseph Medical Plaza in Orange.
That deal also gave Nationwide the right to buy an additional $1 billion in medical office buildings during seven years through a development agreement with Pacific. Nationwide also bought half of PMB Real Estate Services LLC, Pacific’s property management company.
But Nationwide said that it doesn’t plan to exercise any additional buying rights.
“Absent a dramatically favorable change in the capital markets, we are not obligated and do not expect to acquire any other (medical offices) originally contemplated by our agreement” with Pacific, Pasquale said on the call.
Pasquale wasn’t available for further comment last week.
Nationwide owns 583 healthcare buildings in 43 states. About 280 are senior communities that offer their residents help with daily living tasks. Another 200-plus are nursing homes for sick or injured patients. About 80 are medical office buildings for doctors and others.
Nationwide leases its buildings to operators such as Tennessee-based Brookdale Senior Living Inc., Hearthstone Senior Services LP of Texas, Irvine-based Sun Healthcare Group Inc. and Alabama’s Healthsouth Corp.
Nationwide said it expects senior housing to be flat or deteriorate somewhat this year if unemployment continues to rise. Senior housing is considered the most vulnerable sector for healthcare real estate investors because it’s most exposed to the slow economy as people can no longer afford to pay its costs.
Funds From Operations
As for overall financial performance, Nationwide said it expects its funds from operations to be $225.2 million to $230.3 million, down from last year’s $236.5 million.
Funds from operations are considered a good measure of a real estate investment trust’s strength as it gives a more accurate picture of cash performance.
Analysts on average expecting Nationwide’s funds from operations to come in at $227.2 million this year.
“We feel (Nationwide) has limited growth prospects in the near term,” said David AuBuchon, an analyst with Milwaukee investment bank Robert W. Baird & Co.
Some on Wall Street are cautious about medical office buildings, which Nationwide made a big push into through the Pacific deal. National vacancy rates on medical office buildings have risen from 6.9% in 2000 to 11.5% today, accor-ding to CoStar Group Inc., leading to lower rents.
But Pasquale cited the rising demand for healthcare from aging baby boomers as well as steady doctor tenants who don’t
typically move offices in fear of losing patients as encouraging signs for Nationwide’s buildings.
Down the road, analysts are more optimistic about medical office buildings: AuBuchon said that the sector has “an encouraging future” for healthcare investors.
Right now, medical office buildings make up 20% of Nationwide’s portfolio.
While Nationwide plans to step away from buying, it’s not out of the market entirely, said Donald Bradley, the company’s chief investment officer.
Nationwide is “definitely out in the market, we’re definitely looking and we’re looking for some very accretive opportunities should they present themselves,” he said.
