Newport Beach-based healthcare real estate investor Nationwide Health Properties Inc. has been big on senior housing and nursing homes. Now it’s following baby boomers to the doctor’s office.
Late last month, Nationwide said it’s paying $915 million to San Diego’s Pacific Medical Buildings for 28 medical office buildings, including Mission Medical Plaza in Mission Viejo and St. Joseph Medical Plaza in Orange.
The deal also includes Nationwide funding for Pacific Medical to develop more buildings, which Nationwide would own a stake in.
Nationwide is getting 2 million square feet of medical office space and the right to buy an additional $1 billion in medical office buildings over seven years through a development agreement.
The company also bought half of PMB Real Estate Services LLC, Pacific’s property management company.
The deal marks an expansion and diversification for Nationwide, which had a market value of about $3 billion last week.
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Mission Medical Plaza: part of 28-building buy |
Company Breakdown
The company owns 567 healthcare buildings in 43 states. The bulk,about 275,are senior homes that offer residents help with daily tasks. About 200 are nursing homes for sick or injured patients.
Nationwide owns buildings and leases them to facility operators including Alabama’s Healthsouth Corp., Irvine’s Sun Healthcare Group Inc. and Chicago’s Brookdale Senior Living Inc.
Last month’s acquisition boosts Nationwide’s ownership of medical office buildings from about 10% to 30% of its holdings.
“We really felt it was important to have another asset class within the healthcare space that we could invest in,” said Douglas Pasquale, Nationwide’s chief executive.
The company wanted to be in at least three types of healthcare buildings, according to Pasquale.
“Medical office buildings were the most logical one,” he said.
Medical offices have their appeal. They’ve held up during prior economic downturns. Tenants,from family doctors to specialists,don’t turn over that often.
And medical office buildings don’t have the same level of risk as nursing homes or assisted living, where operators have gone bankrupt, faced litigation or been hit by cuts in federal Medicare or Medicaid reimbursement.
Medical offices also are seen benefiting from aging baby boomers.
“Baby boomers, who are now beginning to enter their early 60s, are seeking and will continue to be seeking increased medical care for many decades to come,” Nationwide said in a presentation to analysts and investors after announcing the deal. “This generation, more so than any prior generation, is focused on living longer and healthier lives.”
Boosting the company’s ownership of medical offices allows it “to get ahead of the curve with respect to healthcare needs.”
The Pacific deal gives Nationwide a mix of about 50% assisted living facilities, and 20% nursing homes 30% medical offices, Pasquale said.
“That’s a composition that we like,” he said.
The move brings Nationwide into closer competition with other medical office owners, including Long Beach’s HCP Inc. and Santa Ana-based Grubb & Ellis Co.
Nationwide’s medical office portfolio could grow, according to Pasquale.
“I wouldn’t be shocked if our medical office building portfolio crept up to 40% or even approaching 50% at times in our history,” he said.
Nationwide’s investment in nursing homes is likely to shrink, Pasquale said.
“We like (nursing homes),” he said. “But we like them on a very select basis.”
The company prefers to buy newer nursing homes, which are few and far between.
“Frankly, there’s not a lot of that available today,” Pasquale said. “Whenever we can find development opportunities or acquisition opportunities for new generational skilled nursing, we will enthusiastically pursue those.”
Prior Office Buy
Two years ago, Nationwide started a $50 million venture with Broe Cos. of Denver for 800,000 square feet of medical office space.
“From that, we felt really strong about it,” said Derrick Pete, Nationwide’s vice president of corporate development, referring to medical offices.
Nationwide made some $400 million worth of medical office investments last year.
The deal with Pacific was some 18 months in the making, Pete said.
“I got involved and really researched capacity, looking for potential targets that might fit the profile we were looking for,” he said.
Wall Street has mixed feelings about the deal. Analysts like the diversification but worry about the cost of buying the buildings, which have a capitalization rate,or expected return from rents and fees,of 6.1%.
Nationwide’s shares are down slightly since the deal was announced Feb. 25.
“We believe the pressure on the shares is a reflection of concern that the price tag for the deal was too steep,” wrote Robert Mains, an Albany, N.Y.-based analyst with Morgan Keegan & Co., a Memphis investment bank. “We won’t argue that a 6.1% cap rate isn’t low. However, we note that these are (medical office buildings) affiliated with high-quality hospitals and thus should be steady performers.”
Mains said he also likes the deal’s access for Nationwide to buildings planned across the country and its stake in Pacific’s property management arm.
The deal is “transformative with far more pros than cons,” said Omotayo Okunsaya of UBS Investment Research.
The pros, according to Okunsaya, include reducing Nationwide’s reliance on operators that rely on unpredictable federal funding.
Nationwide’s 50% stake in Pacific’s property management arm “diversifies (Nationwide’s) income stream,” Okunsaya said.
The deal also calls for Jeffrey Rush, a doctor who is Pacific’s chairman and largest shareholder, to become a Nationwide director after the first part of the deal closes this year.
