October 24, 2016

CT med-office sales spotlight sector’s rising demand

PHOTO | HBJ File
PHOTO | HBJ File
(Left) David Sessions, CEO of Avon commercial developer-landlord Casle Corp. Last April, Casle sold its medical-office portfolio to one of the nation’s leading medical-office REITs. (Right) A retail center for Farmington insurer ConnectiCare, which plans to open four storefronts this fall.
PHOTO | Contributed

Last April, one of America's leading medical-office space investors plunked down $178 million in stock for 29 medical-office properties in the Hartford region and southern Connecticut from Avon commercial developer-builder-landlord Casle Corp.

It was the first time that Arizona-based Healthcare Trust of America Inc. (HTA), a real estate investment trust (REIT) founded in 2006 with a medical-office portfolio totaling about 17.5 million square feet spread across some two dozen U.S. markets and worth around $4.2 billion, has invested in Nutmeg State real estate. But it won't be the last, HTA officers say.

Connecticut's medical-office market, as well as many others nationwide, presents an opportunity for HTA and other investors to consolidate what some see as a fractured marketplace, similar to the nation's healthcare system.

For HTA, Casle's stable roster of health-related tenants who serve Connecticut's population of aging but affluent residents were linchpins to the purchase, said HTA Chief Financial Officer Robert Milligan.

"We are interested in continuing to expand in the area, particularly around Hartford and New Haven,'' Milligan said recently.

In June, HTA followed up its Casle deal with the acquisition of a pair of Middletown medical office buildings on Saybrook Road that New York landlord Seavest LLC had bought just six years earlier. Seavest said it wasn't looking to sell, yet it got about $11 million — more than double the $4.8 million it paid for them.

Seavest, too, insists that despite selling its only two medical-office buildings in Connecticut, it hasn't given up on this state's market. Seavest says it prefers properties that are close to hospitals that are ranked high for their patient services and outcomes.

"We could very easily tomorrow find opportunity to develop or acquire in Connecticut,'' said John L. Winer, senior managing director and chief investment officer for Seavest Healthcare, the unit that ran and sold the pair of Middletown medical offices.

Connecticut's medical-office sector, HTA and other realty experts say, is among one of the most active segments of the commercial real estate market. Connecticut Children's Medical Center, Hartford Hospital, St. Francis Hospital and Medical Center, plus physician groups such as ProHealth Physicians, are among major tenants in many medical-office locales statewide. There are also myriad privately-owned urgent-care and other outpatient clinics that have cropped up in recent years.

Generally, real estate stands out right now among other investment-asset classes, Winer said, due to its relatively better rate of return than, say, money-market accounts and certificates of deposit, or certain types of equity or other investment options.

Medical offices are particularly attractive, Winer said, because they typically attract creditworthy tenants willing to commit to long-term leases in an industry that draws its share of patients in good and lean times.

But a key driver in the growth of medical-office space, he said, has been the desire of hospitals and other care providers to "unbundle'' their ambulatory, or "outpatient,'' services into suburban offices and clinics to be nearer where health consumers reside.

Demand for medical-office space also reflects Connecticut's and America's aging population.

HTA prefers markets like Connecticut that offer an aging, affluent population, Milligan said. Counting the Casle portfolio and the two Seavest properties, HTA has now invested just over $1 billion in about 3 million square feet of medical-office space in markets within a 110-mile radius of Hartford, Milligan said. Those include New Haven, Boston and White Plains, N.Y.

Casle's portfolio especially, HTA's finance chief said, was "an opportunity to come into a market like Hartford with size, with great healthcare partners in the buildings, and with a great [building] management team already with Casle and Grove Properties.''

Milligan says the success of medical offices tends to be driven more by tenants, many of which are large hospital or physician practices that typically commit to long-term leases in their buildings. By contrast, the profitability of nursing homes and other assisted-care real estate is fueled more by the operator, he said.

Casle CEO David Sessions said one other factor helped make its properties attractive to HTA. It is the decline in capitalization, or "cap" rates for many categories of income-producing real estate, Sessions said.

Tied to prevailing interest rates, the cap rate is a common real-estate industry gauge for calculating the rate of investment return on a property based on the income it generates.

"Generally, across the country, cap rates have trended downward, which increases the value of income-producing properties,'' said Sessions, adding he hasn't seen real estate cap rates this low in the last 26 years.

REITs are always buying and selling real estate into and out of their portfolios, chasing the best returns, or yields, Sessions added.

"This is very much an interest-rate sensitive market,'' he said. "They're a prudent company looking for yields demanded by investors."

But some healthcare tenants may pose a moving target for HTA and other medical-office landlords.

Mark Teare is regional director, real estate, for Trinity Health-New England, parent of St. Francis Hospital and Medical Center and four other Connecticut and New England hospitals.

Teare said Hartford's medical-office market is a combination of newer, state-of-the-art spaces and older, outmoded facilities. Meantime, Trinity-New England is drafting a regional strategic plan for all of its spaces — owned and leased — to determine how to make the most efficient use of them.

"We're going to be much more selective in our site selection, and we will also be looking at consolidation opportunities,'' he said.

Hartford Hospital, by contrast, says it has more than 100 leased medical-office building sites in Connecticut.

Retail locations, too, are candidates for medical offices, said Teare, who recently inspected a "relatively large space'' in a shopping center whose location he declined to identify. In late September, Farmington insurer ConnectiCare said it will open four retail centers this fall for face-to-face delivery of health-insurance services in Manchester, Newington, Bridgeport and Orange.

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