Medical office portfolios have continued to trade in the months following the $2.75 billion sale of 78 properties by Duke Realty Corp., but prices have cooled since that transaction was announced in May.
At the time Healthcare Trust of America Inc. emerged as the winner of an industry-wide bidding war culminating in the Duke deal, observers lauded the portfolio's rare combination of size and high quality, while suggesting that the price the buyer was willing to pay could bring more sellers to the market.
The medical office sector, typically marked by stable tenants and slow-growing but predictable rents, gained favor among healthcare real estate investors over the last year in part because of broader healthcare trends pushing many medical procedures into relatively low-cost settings.
Even as market participants at the time called the Duke transaction's sub-5% yield unusually low — arguing that Healthcare Trust of America had paid an aggressive price for a relatively slim return, coupled with muted growth potential — they predicted that the transaction could lead buyers and sellers to value even less desirable medical office properties more highly.
Evaluating those predictions remains tricky, given the unique nature of the Duke portfolio. Still, the return that Investors Real Estate Trust secured in the $417.5 million sale of its own 29-property medical office portfolio, announced Nov. 30, was significantly lower than the company had estimated in the wake of the Duke deal.
In a June investor presentation meant to highlight the way that the company believed public markets were undervaluing its multifamily portfolio, the company cited market valuations for medical office properties of $333 to $407 per square foot. In actuality, the sale is expected to value the portfolio in the $310- to $315-per-square-foot range, Robert W. Baird analyst Drew Babin noted.
Since an "overly exuberant" period after the Duke sale, the market for medical office properties has adjusted downward, Babin said. While the Duke transaction raised eyebrows with its below-5% yield, high-quality assets are now changing hands in the mid-5% range, compared to yields of 6% and above in past years, he added.
Part of the recent trend toward softer sale prices is related to the share prices of medical office-focused real estate investment trusts such as Healthcare Trust of America, Physicians Realty Trust and Healthcare Realty Trust Inc., which have fallen from midyear highs. While Investors Realty might have hoped one of those companies would make a bid for its portfolio, medical office REITs appear to be "pumping the brakes" on new investments now that their cost of equity is higher, Babin said.
Another major owner of medical office buildings, healthcare REIT giant Welltower Inc., appears to be selling a portfolio of medical office buildings, according to a report in the Milwaukee Business Journal. No estimated yield was available for the $433 million transaction, in which Aurora Health Care is the buyer.
SunTrust Robinson Humphrey analyst Eric Fleming said in a note that the disposition makes sense for Welltower because the properties, in eastern Wisconsin, are outside of the company's core strategic markets.
Welltower showed an interest in the Duke portfolio early in 2017, calling the properties a good fit with its current medical office assets. Ultimately, though, the company's bid likely fell short of the price that Healthcare Trust of America paid by a "wide margin," possibly $200 million, Mizuho Securities USA Inc. analyst Richard Anderson said in a note at the time.
In the months since, the Duke transaction's value as a precedent has been tested.
"I think the market did potentially overstate the quality for the rest of the MOB world based on that Duke comp, and now it's kind of settling into a new reality," Babin said. Still, he added: "That new reality still reflects some pretty robust pricing that's more robust than it was a year or two ago."