Real estate investment trusts Healthpeak Properties and Physicians Realty Trust agreed to combine in an all-stock merger valued at $21 billion in a move that lets the companies build on steady cash flow often generated for owners of medical office property.
The combined company would oversee a 52 million-square-foot property portfolio, including 40 million square feet of outpatient medical office properties concentrated in high-growth markets such as Dallas, Houston, Nashville, Phoenix, and Denver. The remaining square footage is for lab space.
REIT mergers these days tend to involve owners of the same property type as the industry consolidates, according to the trade group Nareit.
In this case, the market for single-tenant medical office buildings, the type of property Healthpeak and Physicians Realty own, has performed better nationwide than traditional offices because of their ability to consistently generate revenue, according to a recent CoStar analysis. These properties often have consistent demand because many medical office spaces are owner-occupied by the physicians, analysts say, meaning that when physicians look to sell their practices, the buildings often are acquired by the succeeding practice.
“Physicians Realty Trust brings complementary strengths to Healthpeak, including its internal property management platform and established industry relationships,” Scott Brinker, president and CEO of Denver-based Healthpeak, said in a statement. “With a broader footprint in strategically important markets and a high-quality portfolio, we will be able to better serve the real estate needs of leading health system, physician, and biopharma tenants.”
The value of the $21 billion deal, which the companies are calling a merger of equals, includes the value of publicly traded shares and debt. It's expected to close in the first half of 2024.
The new company would be led by Brinker as president and CEO. John Thomas, president and CEO of Milwaukee-based Physicians Realty, will serve as vice chair of the combined board who will have an active role in strategy, relationships, and business development.
In 2023, so far 11 deals to acquire publicly listed REITs have been announced, with a total value of $33.6 billion, according to Nareit. That compares to $83 billion in acquisitions in 2022.
The deals reflect consolidation of REITs within the same property sector, Nareit said. Of the $204 billion in public REIT mergers and acquisitions from 2019-2023, 74.3% of the transaction value represents deals between listed REITs in the same property sector.
Bet on Strategic Benefits
Thomas said in a statement that the executives expect to be able to have a strong partnership: “I’ve known Scott for many years and believe that together, we will be able to leverage the power of both our platforms and people to support the growth of our health system partners and help shape the future of health care delivery,”
The merger of Healthpeak and Physicians Realty is expected to create strategic, operational and financial benefits, and produce cost savings through combined operations of at least $40 million by the end of year one and up to $60 million by the end of year two.
The two REITs have an overlapping real estate footprint of about 70% in more than 30 markets, according to Healthpeak in an analyst call discussing the deal. The overlap increases the combined companies’ competitive advantage, Healthpeak said, deepening relationships with large health systems and creating new growth opportunities.
Future real estate activity could include acquisitions, development, and joint venture recapitalizations given the increased size of the portfolio, Brinker said on the call. Some properties could be sold off to generate cash for other possible investments.
Upon completion of the deal, the combined company would operate with the Healthpeak name and is expected to trade under the ticker symbol DOC on the New York Stock Exchange. The headquarters will be in Denver, and the company expects to maintain other existing offices.
The new company plans to assume Physicians Realty’s debt and enter into a new five-year, $500 million loan at the benchmark rate of SOFR plus 85 basis points. Proceeds from the loan will be used for general corporate purposes including repayment of borrowings under Healthpeak’s short-term, unsecured debt.