Phoenix-based Healthcare Trust of America, Inc. (NYSE: HTA), the largest dedicated owner and operator of medical office buildings in the United States, announced today that it entered into a definitive agreement to acquire all of the medical office building assets and medical development platform of Duke Realty Corporation for $2.75 billion in cash, net of credits for development completions. The transaction will close in several tranches in the second and third quarter of 2017 based on and subject to the satisfaction of closing conditions.
“This transaction solidifies HTA as the dominant owner and operator of medical office buildings located in key, gateway markets in the United States,” said Chairman and Chief Executive Officer Scott D. Peters. “Duke’s medical office portfolio is a high quality mix of primarily on-campus properties that are uniquely well-located, with 85 percent located in HTA’s existing key markets. In addition, we believe the combination of our best in class property management and leasing platform and their development platform creates a full service platform that can consistently execute and deliver disciplined growth in this expanding sector.”
The consolidated portfolio includes 78 properties overall that contain 6.1 million square feet of gross leasable area that are 94 percent leased, including Duke’s proportionate interest in two unconsolidated joint venture entities. The acquisition also includes two development land parcels totaling approximately 17 acres.
HTA believes Duke’s portfolio is “of superior quality” with approximately 81 percent of the properties being located on or adjacent to a health system campus and 77 percent of their revenue from health system tenants. The portfolio is “strategically concentrated,” with approximately 85 percent located within HTA’s existing gateway markets. According to HTA, this overlap allows for substantial operating synergy opportunities for property management, leasing, and development opportunities.
HTA is also acquiring Duke’s medical office operating and development platform. HTA anticipates the platform will allow for disciplined expansion with new and existing healthcare providers within its markets.
“In addition to the strategic benefits, this acquisition will be accretive financially,” said Chief Financial Officer Robert A. Milligan. “The significant overlap in markets allows for extensive synergies in operations and leasing, which will drive margin expansion. Additionally, the portfolio was recently developed and has limited lease roll-over, creating limited on-going capital requirements which is key to cash flow accretion.”
The total consideration for the transaction is $2.75 billion, net of credits for an incremental $50 million in capital to be paid by the seller to complete properties currently under development. The transaction includes approximately $2.350 billion for the 64 stabilized operating properties and $0.4 billion for the 14 properties under development or undergoing lease-up stabilization resulting in stabilized yields in the low 5% range before synergies (and inclusive of the capital funding to complete and lease up the assets to stabilization).
In addition to the customary closing conditions, 31 properties, with a purchase price of approximately $1.3 billion are subject to rights of first refusals or offer which could reduce the size of the acquisition or delay the timing of closing if exercised.
As part of the transaction, Duke has required that HTA accept seller financing of $330 million, in the form of a senior secured first mortgage loan, which will bear interest at 4.0 percent per annum. This note will require three annual principal payments of $110 million beginning in 2018 and is not prepayable.