February 11, 2022

Diversified Healthcare Trust Enters Into $703M JV

Diversified Healthcare Trust has entered into a $703 million joint venture for 10 health care properties in its office portfolio segment with two global institutional investors.

The investors acquired a 41% and 39% equity interest in the joint venture for an investment of approximately $100.7 million and $95.8 million, respectively, and DHC retained a 20% equity interest in the joint venture.

The joint venture incurred approximately $456.3 million of secured debt on the properties. The results of operations of the joint venture will be deconsolidated and DHC’s remaining 20% equity interest will be accounted for using the equity method.

New Health Care Buyers Entering the Market

Toby Scrivner, senior vice president in Northmarq's Tulsa office, solely focused on healthcare investment properties, tells GlobeSt.com that investor interest in healthcare assets has continued to increase during the past decade.

“In 2021, we saw several new healthcare-focused buyers entering the market, which only increased the competition for these attractive investment assets,” Scrivner said. “The combination of increased competition, higher construction costs and inexpensive debt is pushing pricing for these assets to new heights. We are now seeing record sales, with asset pricing exceeding $1,000 per square foot on deal sizes above $5 million.”

Larger buildings are trading as well, according to Joe Euphrat, managing principal of GreenRock Capital.

“With outpatient, more specialty services are resulting in relative increase in medical office building size with larger square footage,” he tells GlobeSt.com. “Reimbursement pressures continue of course, and from a real estate perspective, there is always the focus on ways to reduce annual occupancy costs. We have seen C-PACE being evaluated in this context in addition to being relatively accretive to the cap stack.”

Health Care Property Sector Has Evolving Definition

In the longer run, the sector is evolving due mainly to the aging population, technological advances, and greater emphasis on a healthy lifestyle, says Peter L. Curry, Esq., Real Estate Practice, Farrell Fritz, P.C. He notes that the healthcare sector loosely defines several different types of real estate, including retail, research and development, medical and pharmaceutical manufacturing, and telehealth and that all of these facets of commercial real estate are growing.

“However, some of these segments are antithetical to each other,” Curry tells GlobeSt.com. “Reliance on telehealth reduces the need to have in-person visits to medical offices and surgicare centers. Owners of healthcare sector properties will need to stay conversant with the constant changes in the delivery of medical services to patients to avoid over-reliance on types of properties that may become obsolete as medicine and healthcare continue to expand in the near and long-term future.”

DHC Properties Span Five States

DHC expects to use the cash proceeds from this transaction to fund capital expenditures, to reduce outstanding indebtedness and for other general business purposes.

These office portfolio segment properties contain an aggregate of approximately 1.1 million square feet and are located in five states. The 10-property portfolio is being sold at approximately $657 per square foot, or a 4.98% capitalization rate based on full year 2021 actual cash NOI.

As of Sept. 30, 2021, these properties were 97% occupied for a weighted average remaining lease term of 6.6 years (by annualized rental income). This transaction is expected to result in a gain on sale of approximately $320 million.

The joint venture is managed by The RMR Group, an alternative asset management company that is headquartered in Newton, Mass., and the manager of DHC.

DHC’s more than $7 billion portfolio includes 390 properties in 36 states and Washington, D.C., occupied by nearly 600 tenants, totaling approximately 10 million square feet of life science and medical office properties and approximately 28,000 senior living units.