Health-Care Law Heats Up Medical Office Deal Talks
April 21 2010 - 2:40PM
Dow Jones News
Consolidation talks in the medical office building sector are
heating up as the industry digests the new health-care law that is
expected to increase the number of insured Americans looking for
outpatient services.
The industry, populated with buildings that house doctor's
offices and diagnostics devices such as X-ray machines and
chemotherapy treatment centers, is first likely to see more deals
of publicly-owned companies purchasing smaller, privately-owned
rivals before larger deals get done, said Richard Anderson, an
analyst at BMO Capital Markets.
"You have to crawl before you can walk," he told Dow Jones
Newswires.
It's still early, but to the extent hospitals get squeezed, they
may need more third-party capital--possibly from healthcare
REITs--to develop or redevelop outpatient facilities, Anderson
said. Those pressures could cause more deal-making to occur.
Around four years ago, the medical office building sector was
hot as investors looked to the aging population as a growth driver.
However, as some investors chased higher returns elsewhere, medical
office buildings became less of a focus. While the sector is
fragmented with many small and regional players, publicly traded
health-care REITS own a sizable stake in the billion-dollar
industry, a stake that may soon be expanding.
"The industry will likely see transactions increase by the end
of the year," said John Arabia, managing director at REIT research
firm GreenStreet Advisors.
Among the publicly traded players, Healthcare Realty Trust Inc.
(HR), with a market cap of about $1.4 billion, has been mentioned
as a possible acquisition target. The company holds a roughly $2.3
billion portfolio comprised mostly of medical office buildings and
hospitals that could be especially appealing to a company looking
to gain a foothold in the sector or gain greater market share.
Potential buyers could include Ventas Inc. (VTR), with a market
cap of $7.1 billion or HCP Inc. (HCP), which clocks in around $9.3
billion. People close to the matter confirmed Ventas has approached
Healthcare Realty at least once about the possibility of a takeout.
Ventas and Healthcare Realty wouldn't comment, and HCP wasn't
available for comment.
Although HCP has been the most active acquirer among healthcare
REITs, analysts have said it is less likely to make a large medical
office acquisition as it already has a strong presence in the
area.
Ventas could be a logical buyer in the sector due, in part, to
its strong balance sheet. The company has been one of the most
vocal in the healthcare REIT space about its desire for medical
office buildings. An acquisition of Healthcare Realty's roughly 204
properties would give it a meaningful presence in the sector.
Healthcare Realty was mentioned about four years ago as a
takeover target but a whole-sale purchase of the company never
materialized.
While talk of deal-making has heated up, the likelihood of
Healthcare Realty or other large targets being acquired in the near
term may be small. Analysts say there are willing sellers and some
buyers out there looking, but they continue to haggle on price.
And while health-care reform may add more patients into the
system, several executives and analysts have questioned how
significant the impact will be on medical office buildings, partly
because many of the newly insured are young and may be less likely
to make doctor visits.
Still, Anderson said the industry could see some acquisition
activity from companies that aren't primarily involved in the
healthcare sector, such as Duke Realty Corp. (DRE), an industrial
and office property REIT.
Duke Realty wasn't available for comment.
-By Veronica Dagher, Dow Jones Newswires; 212-416-2261;
veronica.dagher@dowjones.com
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