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Health-Care Law Heats Up Medical Office Deal Talks

By Veronica Dagher Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Consolidation talks in the medical office building sector are heating up as the industry digests the new health-care law that is expected to increase the number of insured Americans looking for outpatient services. The industry, populated with buildings that house doctor's offices and diagnostics devices such as X-ray machines and chemotherapy treatment centers, is first likely to see more deals of publicly-owned companies purchasing smaller, privately-owned rivals before larger deals get done, said Richard Anderson, an analyst at BMO Capital Markets. "You have to crawl before you can walk," he told Dow Jones Newswires. It's still early, but to the extent hospitals get squeezed, they may need more third-party capital--possibly from healthcare REITs--to develop or redevelop outpatient facilities, Anderson said. Those pressures could cause more deal-making to occur. Around four years ago, the medical office building sector was hot as investors looked to the aging population as a growth driver. However, as some investors chased higher returns elsewhere, medical office buildings became less of a focus. While the sector is fragmented with many small and regional players, publicly traded health-care REITS own a sizable stake in the billion-dollar industry, a stake that may soon be expanding. "The industry will likely see transactions increase by the end of the year," said John Arabia, managing director at REIT research firm GreenStreet Advisors. Among the publicly traded players, Healthcare Realty Trust Inc. (HR), with a market cap of about $1.4 billion, has been mentioned as a possible acquisition target. The company holds a roughly $2.3 billion portfolio comprised mostly of medical office buildings and hospitals that could be especially appealing to a company looking to gain a foothold in the sector or gain greater market share. Potential buyers could include Ventas Inc. (VTR), with a market cap of $7.1 billion or HCP Inc. (HCP), which clocks in around $9.3 billion. People close to the matter confirmed Ventas has approached Healthcare Realty at least once about the possibility of a takeout. Ventas and Healthcare Realty wouldn't comment, and HCP wasn't available for comment. Although HCP has been the most active acquirer among healthcare REITs, analysts have said it is less likely to make a large medical office acquisition as it already has a strong presence in the area. Ventas could be a logical buyer in the sector due, in part, to its strong balance sheet. The company has been one of the most vocal in the healthcare REIT space about its desire for medical office buildings. An acquisition of Healthcare Realty's roughly 204 properties would give it a meaningful presence in the sector. Healthcare Realty was mentioned about four years ago as a takeover target but a whole-sale purchase of the company never materialized. While talk of deal-making has heated up, the likelihood of Healthcare Realty or other large targets being acquired in the near term may be small. Analysts say there are willing sellers and some buyers out there looking, but they continue to haggle on price. And while health-care reform may add more patients into the system, several executives and analysts have questioned how significant the impact will be on medical office buildings, partly because many of the newly insured are young and may be less likely to make doctor visits. Still, Anderson said the industry could see some acquisition activity from companies that aren't primarily involved in the healthcare sector, such as Duke Realty Corp. (DRE), an industrial and office property REIT. Duke Realty wasn't available for comment. -By Veronica Dagher, Dow Jones Newswires; 212-416-2261; [email protected]

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