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MOB Transaction Market “Gaining Momentum”

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Healthcare Realty Trust Inc.’s third quarter results and positive operating fundamentals continued to exemplify the intrinsic value of the firm’s medical office portfolio. That was according to Todd Meredith, CEO of the REIT. “The company’s same-store metrics consistently outpaced norms for the sector, anchored by steady tenant demand, solid tenant retention and rising rental rates.”

On the firm’s Q3 earnings call, Meredith said that the strength of the REIT’s medical office properties lies in their integral locations on leading hospital campuses, where higher acuity patients drive the need for specialists and concentration is high in top markets, where thriving population centers ensure increasing demand for healthcare services.

“As the MOB transaction market has gained momentum in recent years, we have remained sober and purposeful in our investing,” Meredith said on the call. “We view Healthcare Realty’s relative valuation as a reflection of our commitment to sustainable growth and careful management of risk. Quality, not quantity, has led us to an enviable balance of higher growth and lower risk. With today’s market dynamics, our focus is on extending our competitive advantage through operational performance and continuous improvement of our portfolio through recycling of assets, an often underappreciated but effective form of long-term value creation.”

He noted that the REIT has no interest in chasing large portfolios at historically steep pricing with subpar growth merely for the sake of buying assets. “As cost of capital has risen in recent quarters, experience compels us to be more patient and prudent, targeting investments where we can better control quality and avoid performance diluting assets often embedded in larger portfolios.”

Much of the firm’s recent acquisition activity, he said, “has encompassed redevelopment potential that has expanded our development pipeline, generating a store of future value that can be garnered for years to come. Our development pace is somewhat tempered by our adherence to an on-campus focus, where supply is constrained, rent growth is demonstratively higher and risk is lower as a result of perpetual demand for more specialized hospital-based tenants.”

Although off-campus healthcare delivery has gained attention, he explained that most MOB investors have gravitated toward on-campus investments as they achieve scale and lower their cost of capital. “Off-campus properties are much easier to accumulate, but there are many costly and probable risks that play out over time; namely slower growth, lower tenant retention and difficulty backfilling vacancies, which in our experience leads to longer downtime, rent roll-down, and costlier capital and tenant improvements.”

He added that “While we tend to avoid off-campus properties for these reasons, they do serve a clinical role, meeting the rising demand for low-acuity care and improving population health across markets, but not to the detriment of on-campus services where health systems are actively centralizing and expanding their more complex inpatient and outpatient care. This optimization of services across different settings will effectively meet patient demand, ease cost pressures and bolster profit margins.”

Overall, Meredith noted, the company’s investment strategy has been consistent over 25 years, honed through hands-on experience and acumen gained over multiple lease cycles, both on and off-campus. “We see growth potential and lasting value creation across our portfolio through operational knowhow, disciplined investing and adept portfolio management. With outpatient care shaping the future of an industry that exceeds 18% of GDP and is projected to grow 5.5% annually, Healthcare Realty is well-positioned to deliver steady growth with a low-risk profile in years ahead.”