Taking the Pulse of the Medical Office Building Market: Q&A With HTA's Scott Peters

Healthcare Trust of America (HTA) has been busy of late as the Scottsdale-based real estate investment trust recently went public.

AZRE magazine sat down the company’s Chairman, President & CEO, Scott Peters, to find out more.

Q: I understand your company went public in June of last year. Can you tell us a little about that?

A: Yes, in June of 2012, HTA listed its shares on the NYSE under the ticker symbol “HTA” in an innovative structure that enabled it to become public without raising capital. With a market value of more than $2.4B, HTA offers investors access to a high quality portfolio of defensive healthcare properties, a conservative capital structure, an investment grade rating, and an attractive dividend yield of $0.575 per share.

Q: The company has been around since 2006 when you formed as a non-traded REIT. How have your investors fared?

A: Individuals who invested in HTA since the beginning, and reinvested in company stock have earned a total return of more than 77%, or more than 9.5% per annum. This return has consisted primarily of our steady and predictable dividend – currently 5.1%, plus some appreciation of principal. Investors in HTA have significantly outperformed the S&P 500 and other broadly held investments during that same period of time. As a publicly traded company, we now have access to lower cost capital which should enable us to continue to perform for investors.

Q: Healthcare Trust of America is one of the largest national owners of medical office buildings and is headquartered in Scottsdale. Tell us about your company and its scope both nationally.

A: Healthcare Trust of America is one of the largest dedicated owners of medical office buildings in the country. We have more than 12.6 MSF of medical real estate, located in 27 states throughout the country. More than 95% of our portfolio is affiliated with leading health systems, with more than 72% of it being located directly on or adjacent to a health system campus. These locations provide for the most efficient patient care and generally have high barriers for competition.

Scott Peters

Scott Peters

We are headquartered in Scottsdale, but do the leasing and property management for more than 80% of our portfolio through our regional offices in Indianapolis, Atlanta, Charleston (S.C.) and here in Scottsdale. We believe this operating platform will enable us to continue to expand our reach and presence in key markets across the nation.

Q: HTA also has a significant concentration of assets here in Arizona. Tell us about your portfolio here.

A: We have more than 1 MSF of assets in the greater Phoenix area, making us one of the largest owners of medical office buildings in the valley. We are primarily focused on our portfolio located in the west valley, including Sun City, northwest Phoenix, and Estrella, but we also have properties in northern Phoenix/Desert Ridge area.

Q: Do you have significant operations here locally?

A: In addition to being our corporate headquarters, we have also made Scottsdale the head of our South/Southwest regional operations which now includes both property management and leasing. In December of 2012, we brought regional leasing onto our platform with the hiring of Chelsea Maddox, who joined our team as Director of Leasing, South/Southwest Region. She is responsible for the leasing activities for more than 1.2 MSF of assets throughout Arizona and 3.3 MSF of assets in the Southwest.  In addition, we hired two Leasing Associates, Katie Kelle and Sumer Riddle along with our Leasing Coordinator, Patti Perkins to round out the South/Southwest Leasing team.

Q: There are many different parts of healthcare real estate – from medical office buildings, to assisted living properties, to skilled nursing facilities. Why do you focus exclusively on MOB’s?

A: HTA is focused almost exclusively on the Medical Office Building sector. Within the healthcare sector, medical office is considered to have the lowest risk profile. It has the lowest exposure to government reimbursement. It also is driven by traditional real estate fundamentals and is not dependent upon the success or failures of a single operating company. Additionally the MOB sector allows us to concentrate all of our efforts on maintaining and building our relationships with health systems and developers in this sector; relationships which are key to our long term success.

This is significantly different than the model of the larger, diversified healthcare REITs you mentioned. Each of these invests in a disparate set of businesses, from skilled nursing and assisted living facilities, to medical office and even life science buildings. HTA is dedicated to only one asset type, medical office buildings.

Q: The healthcare industry is undergoing a number of changes right now. Please talk about them and their impact on medical real estate. Specifically, please describe the impact of the Affordable Care Act on healthcare real estate.

A: The Affordable Care Act did two or three things that were very strong positives for the medical office sector. First, is the well reported fact that the Affordable Care Act will bring about coverage for 30 to 40 million individuals. This will undoubtedly expand the number of patients coming into our facilities to see doctors, physicians’ assistants and nurses.

The second thing, which is somewhat underreported, is the fact that the healthcare act, and its focus on lowering costs, is forcing health systems to start acting like businesses – paying attention to the bottom line and increasing integration between hospitals, physicians, and insurance companies. This has caused health systems to move procedures to the most cost efficient setting – mostly MOB’s. It has also resulted in health systems buying physician practices – at which point they generally move them to their on campus medical office buildings, which is good for us.

Finally, the Affordable Care Act will require significant capital expenditures by health systems as they invest in the integration of care, from the acquisition of physician groups to implementation of new technology. Many of this capital can be funded through the monetization of health system’s real estate, which is not core to their mission of caring for patients. Public REITs, which have the lowest cost of capital in the real estate industry, are the logical buyers in these situations. There are more than $250B worth of MOB’s in the U.S., with less than 10% of that held by public REITs. We expect that number to increase greatly over the next decade.

Q: What is your exposure to government cuts to Medicare and Medicaid?

A: Our overall exposure to these government programs is very limited. On average, physicians receive only a very small portion of their overall revenue from Medicare and Medicaid. Hospitals receive a bit more, but any cuts are expected to be offset by the overall increase in health coverage provided by the Affordable Care Act. In addition, as the landlord, we represent a very small portion of a physician or health systems total profit and loss – in the magnitude of representing only 2% to 3% for hospitals. This provides significant cushion should cuts become more meaningful than currently expected.

Q: Many areas of real estate are starting to see some level of recovery. How is this playing out in the medical office sector?

A: On a national level, we have started to see an improvement in the level of activity in the medical real estate space over the last 6 months. The recent election results coupled with the Supreme Court’s ruling this summer have affirmed that the Affordable Care Act will be implemented in its current form. In many of our markets, we have seen this lead to an increase in activity at medical offices located on hospital campuses, as health systems continue to acquire physician groups and put them in their most efficient locations that provide increased synergies. Independent physicians are joining larger physician groups to take advantage of economies of scale and share the increased administrative burden.

As a company, we are seeing most of our growth in markets where we actively manage our own properties – about 80% of our markets currently. In these markets, we are closer to our health system and physician tenants, and have improved our ability to grow relationships and meet tenant needs. The forward looking health systems are recognizing the benefits of having a capable real estate partner that can provide the space and portfolio flexibility they need, in a partnership that can grow over time. This has especially been the case with our health system relationships in the Indianapolis, Pittsburgh, Boston, and Greenville markets.

Q: How is the local medical office space performing?

A: In many ways, the Phoenix market is still in the early stages of this national trend. The economic downturn certainly took its toll in this market. Fast growing submarkets, particularly in the west valley, were hit hard by the deceleration in growth. This impacted health systems and physicians by reducing patient visits and increasing billing uncertainty with insurance companies. However, we think the market has largely stabilized in 2012 and are encouraged by the outlook for 2013 and beyond. The west valley, in particular, will show the best opportunities for growth as new home construction resumes and growth continues.