The unexpected conundrum that publicly traded Real Estate Investment Trusts (REITs) face will stymie the Medical Office Building (MOB) acquisition market for the next 18-24 months. The sudden drop in valuation that most of traded REIT’s have experienced since January 2018 is at question. This valuation slip, coupled with required dividends and the aggressive capitalization (CAP) rates that were utilized to acquire existing MOB product during the past 2 years, have left the public REITs upside down on their net asset value (NAV). As a result, most REIT’s are left on the sideline with very limited available capital to implement additional MOB acquisitions.
Alternative capital resources now have an opportunity to find their way to align with MOB developers and private fund managers to propose as acquisition sources for hospital systems. Sellers of medical real estate, especially health systems, should be wary of capacity, management qualifications, and the long-term positions of these buyers. Most health care developers/managers have experience in either development OR asset management, but typically not in the manner that a dynamic portfolio acquisition would allow it to leverage.
Care should be given by sellers to select asset management companies that have a history of health system management (in line with parameters/expectations of the system). Research and discussion with references and review of tenant surveys would yield an in-depth analysis of the management team values and execution abilities. Further analysis of the equity and funneling sources would ensure ability of the buyer to complete the transaction seamlessly.
Time and market leverage will allow the REITs to recover their ability to participate again in the MOB acquisition market. Until that time, sellers of MOBs should be diligent in selecting from a limited pool of qualified buyers.
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