Orange County Business Journal | $150M Sale of MV Medical Offices Sets Benchmark

Francine Marlenee In the News, In The News

REAL ESTATE: 4 buildings near Mission Hospital total 263,000 SF

By Mark Mueller

A four-building collection of medical office properties surrounding Mission Hospital in Mission Viejo has changed hands for the second time since 2014 in what looks to be Orange County’s biggest office sale so far this year.

Healthcare Trust of America Inc., a Scottsdale, Ariz.-based real estate investment trust that owns and operates medical office buildings, last month completed the purchase of the buildings, which total about 263,000 square feet.

The properties—just off the San Diego (I-5) Freeway next to the Shops at Mission Viejo mall—sold for about $150 million altogether, according to property records.

The deal works out to an average of about $570 per square foot, roughly $200 more than the going rate for traditional office sales in South OC.

The most prominent building is Mission Medical Tower, a five-story, 120,000-square-foot office on Crown Valley Parkway.

It sold for about $77 million, or a little more than $640 per square foot, based on a reading of taxes paid for it.

Also trading hands was a trio of multitenant offices at 27800 Medical Center Road. They total about 143,000 square feet and sold for nearly $73 million, or close to $510 per square foot.

The four buildings cater to a variety of healthcare-related tenants, and CoStar Group Inc. records show their occupancy rates ranging from 86% to 95%.

Innovation Flip

The Innovation Institute LLC, a La Palma-based for-profit healthcare company backed in part by Providence St. Joseph Health, the nonprofit owner and operator of Mission Hospital, sold the properties.

The deal appears to have been a money-maker for the institute, which paid about $130 million for the buildings two years ago, according to CoStar records.

The institute’s stated goal is to advance innovation in healthcare by developing products and services stemming from inventions and ideas of doctors and employees.

In August, it announced plans to launch an investment fund that would take “meaningful” stakes in healthcare startups at “Series B and beyond” with investments.

It’s not known whether proceeds from the office sale will be used to help seed the fund; officials did not respond to requests for comment on the deal last week.

The four Mission Viejo offices were the only local real estate holdings that the institute is known to have bought since its 2013 creation.

Along with Providence St. Joseph Health—which provided a loan to the Innovation Institute to help fund its 2014 buy of the Mission Viejo offices—the four other co-owners of the institute are Children’s Hospital of Orange County in Orange; Franciscan Missionaries of Our Lady Health System in Baton Rouge, La.; Bon Secours Health System in Marriottsville, Md.; and Avera Health in Sioux Falls, S.D.

Grubb Ties

The Mission Viejo purchase marks a return home of sorts for Healthcare Trust of America, which bills itself as the largest dedicated owner and operator of medical office buildings in the U.S.

The company got its start as a healthcare property investment offshoot of Grubb & Ellis Co. when the commercial real estate brokerage was based in Santa Ana. It is no longer associated with the brokerage and has operated independently for close to eight years.

Healthcare Trust is headed by chief executive Scott Peters, who was chief executive of Grubb & Ellis before stepping down from the brokerage in 2008.

The REIT owned 17 million square feet of leasable space in the U.S. as of last month, according to company filings. It owned only one OC building as of earlier this year—a 104,000-square-foot building in Cypress—according to its latest annual report that came out in February.

The company has a market value of about $4.6 billion. It spent $435.8 million on acquisitions in the first half of the year, prior to the Mission Viejo purchases.

Its acquisition strategy is “centered around key markets, key cities and clustered asset management synergies that we believe result in superior returns,” Peters said in an August conference call prior to the Orange County purchases.

Executives at Healthcare Trust did not return requests for comment on the local office acquisitions last week.

Other deals in Orange County appear likely for the REIT, based on recent executive comments.

“We’ve always wanted to be in 20 to 25 core markets,” Peters told analysts in early August. “I think our view right now is that we’re in a good 15 markets.”

“We’d like to be in another three, four, five or six markets,” he said. “We’ve identified them. We’re starting to see opportunities there. The biggest thing for us is … that we want depth and we want critical mass in a market.”

The Mission Viejo sale is the latest big-dollar, REIT-driven sale of a medical property in South Orange County.

In April, the San Juan Medical Center, a two-story, 40,551-square-foot medical office building in San Juan Capistrano that opened last year, was sold to JLL Income Property Trust, a Chicago-based REIT that invests in a variety of property types.

The JLL REIT paid about $27 million for the building, which was developed by Irvine-based Accretive Realty Advisors Inc.

The sale worked out to nearly $665 per square foot, roughly double the going rate for traditional office sales in South OC.

The property, next to the Santa Ana (I-5) Freeway and a few blocks north of Ortega Highway, opened last year. It’s fully leased, with MemorialCare Medical Foundation and Fresenius Dialysis as its largest tenants.

Excerpt from: Orange County Business Journal