There are plenty of things that can make a deal go south for an investor: A major tenant has options to break a lease early. Last-minute negotiations go awry. Structural issues arise that a seller refuses to address.
But seldom is it because the potential investor finds out at the last minute that a multinational tenant, and the anchor tenant at a property, is considering consolidating its operations and moving out of the building soon after the deal is done.
That’s just what happened to Newton-based Senior Housing Properties Trust recently. The firm, which specializes in owning, operating and acquiring assisted living, elderly care and medical office properties, has acquired more than a billion dollars worth of real estate in the last year alone, a third of which were medical office buildings.
Locally, the real estate investment trust (REIT) has agreed to purchase a 35,000-square-foot medical office building within the Route 128 belt that is fully master leased to a Massachusetts-based healthcare system. In December 2010, the trust bought 1295 Boylston St. in Boston’s Fenway neighborhood, a fully leased property with Children’s Hospital as a major tenant.
So officials at the Newton-based REIT have seen their share of deals that worked.
A Different Deal
But this deal was different, very different, according to David Hegarty, president of the trust. The REIT previously had a 171,211-square-foot medical office building in central Connecticut under agreement with a price tag of $31.5 million. The property was fully leased and anchored by a multinational healthcare services provider. But in the midst of performing due diligence on the property, trust officials abruptly cancelled the deal last month.
News of the deal’s termination was broken in the company’s first quarter earnings release. Hegarty declined to give the property’s exact address, citing confidentiality agreements.
“We learned the tenant was exploring alternatives for relocating operations or possibly consolidating its operations, so we decided not to take the risk since they were considering relocating soon after we would have bought it,” Hegarty told Banker & Tradesman. “It actually came as a surprise to the seller. It’s too bad because it was a multinational company with a lot of growth planned, but also consolidation plans. It’s certainly not common, but it’s not the first time it’s happened. But it is definitely rare.”
Rare, but not unheard of, especially in the world of hospital and health care-related mergers and acquisitions, which are certainly happening in central Connecticut, sources told Banker & Tradesman. Several hospitals, including the Hospital of Central Connecticut, have recently allied themselves with Hartford Healthcare, a growing provider in the state.
And when a building’s ownership is in question, it can be uneasy for tenants. When a healthcare facility is purchased, especially by an entity like a REIT that is focused on returns for stockholders, tenants can be forced to reconsider their future in that facility.
“Sometimes the rate of return necessary for an investor could cause rents to rise for tenants, and the hospital or healthcare system doesn’t want to jostle its doctors around that much by charging more rent and taking away some perks of working in that building, so they’ll decide to just move elsewhere,” explained Tim King, vice president of healthcare real estate for Jones Lang LaSalle in Boston. “Usually buildings need some improvements, especially when new owners come in, and at $183 plus improvements, the investor could price themselves out of the market, so that can kill deals. Either way, it’s surprising for a building of that size with such a brand of healthcare in that area with so many patients that must go there for care. It’s odd for a healthcare institution to pull out of such a [large] patient-capture location.”
