Nationwide Takes $915M Medical Office Portfolio

Nationwide Health Properties Inc. has inked a series of deals with Pacific Medical Buildings (PMB) to buy $915 million worth of properties from PMB over the next two years, as well as acquire a 50 percent interest in PMB Real Estate Services L.L.C., a medical office management company.The deals also stipulate that Nationwide Health may–but is not obligated to–acquire as much as $1 billion worth of medical office buildings from PMB over the next seven years.”This acquisition provides us with a long-term growth platform,” Douglas Pasquale, Nationwide Health’s president & CEO, said this morning during a conference call. “We sought a company with a sizable portfolio of Class A buildings in high-barrier-to-entry growth markets. Second, we desired development opportunities with a proven developer that has an established relationship with large and growing hospital systems. Andthird, we required a company with seasoned property management capabilities. PMB satisfies or exceeds all these objectives.”He added that larger economic and demographic trends will sustain demand for medical office buildings in the years ahead. “Baby boomers, who are beginning to enter their early 60s, will seek increased medical care for decades to come,” he said. “Our increased [medical office building] presence allows us to get ahead of the curve with respect to thehealthcare needs of this important demographic group. Imortantly, the services provided in MOBs are recession-resistant, due to their needs-driven nature.”He also noted that the portfolio is enhanced due to its links to various hospitals. “The PMB portfolio includes more than a dozen investment-grade systems, such as Catholic Healthcare West, St. Joseph’s and Providence Health,” he said.The acquisitions began late last year, with Newport Beach, Calif.-based Nationwide Health’s purchase of seven properties from PMB in Washington state for $120 million. This year, 16 properties will trade hands for $485 million, and in 2009, Nationwide Health will acquire three more for $180 million. In 2010, two more will trade for $130 million, providedtheir occupancies are stabilized at 95 percent. Upon completion, the transaction will add over 2 million square feet of medical office space to Nationwide Health’s portfolio, taking it to a total of 4.2 million square feet, about 90 percent of which is located on hospital campuses and 55 percent is in California.The average price per square foot for the portfolio is $420, with a 6.1 percent cap rate overall. According to Pasquale, as part of the transaction, the REIT will assume about $201 million of debt with an average interest rate of 5.9 percent. Otherwise the deal will be financed by the sale of about $100 million in “partnership units” (stock) and the proceeds from the company’s recent sale of 24 assisted living and dementia properties to Emeritus Corp.Pasquale noted during the call that the state of the credit markets isn’t going to affect the financing of the transactions. “In this time of capital market instability, it’s important to know that the financing for the 2008 acquisition is already in place.”The acquisitions come on the heels of a strong fourth quarter for Nationwide Health. Funds from operation, a key metric among REITs, was $0.56 per share in 4Q07, up 12.5 percent compared with the FFO in 4Q06, $0.48 per share. According to Pasquale, the 2008 acquisitions should add between $0.01 to $0.02 to FFO per share this year.