The story behind Canada’a first publicly traded REIT focused exclusively on medical office buildings is simple and compelling.
“I’m a second-generation medical office building developer from the States and I came up to Canada looking for opportunities in medical office, knowing that you have universal health and in the U.S. we don’t,” said Andrew Shapack, chief executive of GT Canada Medical Properties Real Estate Investment Trust.
Upon coming north of the border he quickly came in contact with Edward Thornley, who according to his partner has built more than 50 medical buildings since 1972. “We thought that we should join forces and try to consolidate this asset class,” said Shapack.
For the past two years, the two have “been running full speed.” The REIT purchased its first property in March of 2010 and another five properties last December, including one building that was under construction.
The REIT went public on January 4 of this year and trades under the symbol of MOB (Medical Office Building) on the TSX Venture Exchange. “We have refinanced our portfolio, we have an acquisition line of credit and we are operating,” said Shapack.
The CEO of the new REIT got the idea while working as a REIT lawyer in New York. He noted that there were no medical office REITs in Canada while there were “a dozen or so” medical and healthcare REITs in the U.S. “I saw an incredibly exciting and potentially hugely lucrative for shareholders opportunity.”
The most obvious – and positive – difference between the U.S. and Canadian markets when it comes to creating and growing a medical office building REIT is Canada’s universal health care system, noted Shapack, who currently lives in Detroit but is preparing to move his family to Toronto.
Canada’s system of socialized medicine means that people will seek medical services when they need them, not just when they can afford them which is often the case for America’s for-profit system. “This real estate asset class is insulated from macro-economic trends,” said the GT Canada CEO. “Patients see their doctors as a function of their age, their health and their lifestyle. It has nothing to do with inflation, interest rates, employment, GDP or retail sales.”
Demographics are also trending in the new REIT’s favor. “When you consider the rapidly aging population and the incredible frequency of patient visits as somebody hits age 40, 50, 60, 70. There is going to be a tidal wave of demand for medical services and both countries, North America is under-built for this demand. We think getting out there and consolidating these buildings before that wave hits is a compelling business plan.”
It seems such an obvious investment play, why aren’t there more medical building REITs? “I don’t know,” said Shapack. “There is another REIT called Northwest Healthcare, they were the private company that our CFO Sean Nakamoto used to be the head of acquisitions for.”
NorthWest Healthcare Properties REIT describes itself as Canada’s largest non-government owner and manager of medical office buildings and healthcare facilities with over 50 properties located from coast to coast, clustered in Calgary, Edmonton, Toronto, Montreal, and Halifax.
“Because it is a Mom and Pop asset class, because they are rarely listed by sales brokers, it would make sense that this is one of the last asset classes to get institutionalized,” said Shapack. “It requires the most amount of tree shaking, the most amount of heavy lifting. When you look at it from that standpoint it is not a surprise this is the last or one one of the last to become a REIT.”
The GT Medical Canada REIT is looking to buy “typical” medical buildings of 30,000 to 40,000 feet which typically run three to four stories. “The better ones have a good mix of [General Practitioners] with specialists who orbit around them and the really good ones will have a pharmacy, lab and an X-ray.
Each medical office building operates as a self-contained system, Shapack has found. “The doctors refer to each other, it is very important to them who is above them, who is below them. You are kind of buying into these little universes, but it creates the highest tenant retention of any of the asset classes. It is not uncommon to buy a 20-year-old building with all original tenants.”
As an asset class, medical office buildings do not have institution ownership. Instead, most are owned by doctors or a group of local investors.
Finding the right properties to buy is a painstaking, often word-of-mouth process. The medical building REIT also considers itself a picky buyer. A “disciplined” operator will look at five properties for every one it buys and the REIT conforms to that trend, said Shapack.
“When you only have six properties and you buy 11, it is a much bigger problem than if you have 100 properties and you buy 1,” he said. “I wouldn’t say that it is has to be perfect but I would say that it has to be pretty much right down the line of what we are looking for in these early days.”