Newport Beach-based Nationwide Health Properties Inc. is moving upstream.
Last month, the healthcare real estate investment trust struck a deal to buy 800,000 square feet of medical office space in 21 buildings spread among six states.
Change in Course
The $51 million deal, done with Denver’s Broe Cos., marks a change in course for Nationwide, which owns some 450 nursing homes, assisted living centers and retirement homes.
Medical office buildings are “a huge lake we (were) not fishing in,” said Donald Bradley, Nationwide’s chief investment officer, during a February conference call.
Nationwide, which counted a market value of nearly $1.6 billion last week, had wanted to get into medical office buildings for a while, Chief Executive Douglas Pasquale said.
The hitch has been finding someone to manage the buildings, he said.
Nationwide leases out its nursing homes and other facilities and doesn’t have a hand in their daily operations.
Enter Broe.
The real estate investor, developer and manager has a medical office management unit, InSite Properties.
The medical offices are near hospitals run by Nashville, Tenn.-based HCA Inc., also known as Hospital Corporation of America. The offices are in Georgia, Louisiana, South Carolina, Tennessee, Texas and Virginia.
One analyst is cautious about Nationwide’s medical office move.
Richard Anderson, with New York-based Harris Nesbitt & Co., downgraded Nationwide in a research note after the company released its fourth-quarter results.
“We believe the initial medical office investment, a joint venture with the Broe Cos., represents more risk than opportunity at this point,” Anderson said.
Most of the money on the line is Nationwide’s, according to Anderson. Broe put up 10%.
As an incentive to bolster performance of the facilities, Broe could be eligible for half the profits from the venture if return on equity surpasses 10.5%.
“Maybe this is (Nationwide’s) initial price to pay for breaking into the business because in our view,pay they did. Time will tell how future deals are structured,” Anderson said.
Expected returns on medical office buildings now are in line with assisted living facilities, according to Nationwide’s Bradley.
And medical office buildings don’t have the same level of risks,say an operator going bankrupt or getting tangled in litigation.
More office deals could be in the works, he said.
“If there are enough opportunities out there that we like, we’ll load up just about as much as we can,” Bradley said.
Nationwide also surprised some analysts with its recent outlook for 2006.
For the year, the company said it expects funds from operations of about $126 million. Analysts were expecting $129 million.
For 2005, Nationwide had $132 million in funds from operations before adjustments.
Revenue, which includes rent and some interest income, was up 19% to $57 million. Profit was up 14% to $24 million for the period.
As a real estate investment trust, Nationwide pays out at least 90% of its net income to shareholders.
Analyst Anderson raised another issue: Nationwide’s tight corporate structure.
Some investors might like Nationwide’s slim ranks. But they “are really relying on the top three or four guys (and board involvement),” he said.
“While we believe CEO Doug Pasquale has done a very good job righting the ship, we still think the company is thin from a management perspective,” Anderson said. “The lack of day-to-day manpower in running a $2.1 billion real estate portfolio provides us with a level of discomfort, and a danger that some on the senior staff are stretched too thin.”
