As originally published in Healthcare Real Estate Insights on June 18, 2024.

HREI talks with Steve Reedy, head of the bank’s Medical Office Banking unit

Since interest rates began rising quite quickly and steeply starting in March 2022 – and with the U.S. Federal Reserve Bank raising its targeted interest rate 11 times during the subsequent 20 months – the medical outpatient building (MOB) sector’s sales volume has fallen to historic lows.

There are several reasons for this sales slowdown, including a widening gap between what sellers are willing to accept and what buyers are willing to pay. But many industry sources say that one of the biggest challenges has been securing debt for development, acquisitions and refinancings.

Those same sources indicate that the MOB and healthcare real estate (HRE) sector is not the culprit, as the property type’s fundamentals have remained as solid as ever. Yet it, too, has suffered as many large, publicly traded banks have broadly cut back on all commercial real estate lending.

To pick up some of the slack left by the larger, national banks that had for years dominated lending in the HRE sector, borrowers have had some success turning to smaller local and regional banks, as well as syndications of lenders.

However, not all big, national lenders with healthcare business units are on the sidelines. Some have remained quite active, including First Citizens Bank, part of Raleigh, N.C.-based First Citizens Bancshares Inc. (Nasdaq: FCNCA).

The bank’s Medical Office Banking unit was launched in 2016, when it was part of New York-based CIT Group, which was then acquired by First Citizens in January 2022. The unit, part of the bank’s Healthcare Finance group, has reported steady lending volumes in the MOB space during the past few years.

We recently had the chance to catch up with and ask some questions of Steven Reedy, who is based in Jacksonville, Fla., and is managing director with First Citizens and head of Medical Office Banking.

HREI: Thanks for chatting with us, Steve. To get a sense of the scope of your business, can you tell us how much loan volume the First Citizens Medical Office Banking division has completed in recent years?  

Reedy: CIT Group launched its highly specialized Medical Office Banking program in 2016. Then in January 2022, CIT merged with and became a division of First Citizens Bank.  The Medical Office Banking team provides relationship banking to our MOB sponsors that are focused on investing in clinical medical office, ambulatory surgery centers, and specialty hospitals. We have consistently originated MOB loan volume in excess of $600MM since 2021.

HREI: Are you purely involved in acquisitions, or do you do development loans as well? How many are on your team with First Citizens?

Reedy: I manage a team of 12 bankers that specializes in originating, underwriting, and managing a loan portfolio secured by Medical Outpatient Buildings that deliver needed clinical healthcare services. First Citizens Bank is actively providing capital for investment sales/acquisitions, refinancing and for select development opportunities.

HREI: In February, at the InterFace Healthcare West Conference in Los Angeles, you were on a capital markets panel and noted that your medical office banking unit with First Citizens has increased its loan volumes annually over the last three years or so. How has the division been able to do so?

Reedy: In the years after we launched the Medical Office Banking platform at CIT,  we won respect and earned a solid reputation as a reliable partner by actively banking our MOB clients and providing consistent results. We take great pride in the strength and efficiency of our business development, underwriting and portfolio management abilities, as well as in our track record of solid and timely execution. The First Citizens Bank Medical Office Banking team follows a model of asking the right questions upfront so that we can structure financing terms that satisfy the needs of our customers and provide the bank with its required protections and returns. First Citizens Bank has been very supportive of our platform and has provided the necessary resources to continue the success and growth of our business.

HREI: On that panel, you also noted that you anticipate that 2024 will see continued increases. Does that still hold true, and why is that?

Reedy: First Citizens Bank continues to actively provide solutions for its Medical Office Banking clients. We are on pace in 2024 to originate new loan volume consistent with the past 3-year average. Our originations to date in 2024 include established sponsor relationships as well as the addition of two new client relationships. We continue to be active in providing acquisition capital, refinancing capital, and development capital. While aggregate market investment sales activity is off from recent highs, 1Q24 MOB investment sales volumes were solid and the MOB investment sales market continues to remain healthy.  

HREI: Everyone involved in the sector knows that the medical office building sales volume has slowed significantly in the past 18 months to two years, do you see it picking up anytime soon?

Reedy: We are beginning to see signs of positive investment sales momentum. There is currently dialog and exploration of possible portfolio trades under evaluation in the market. Investors are beginning to accept the current capital markets reality and interest rate environment. I expect that investment sales volumes in the near term will remain relatively stable overall with some quarter-by-quarter variance. Certain factors -- including fund timelines, debt maturities, and increased investor appetite for the sector -- will stimulate market activity in the medium term.

HREI: Of course, the main culprits cited by people involved in the sector are rising interest rates and harder to obtain debt for MOB purchases. Can you give us your take on what has happened, and perhaps what it will take to get the sector out of the slowdown and for debt to be more accessible?

Reedy: Rising interest rates certainly contributed to the pause in the investment sales market as investors and lenders needed time to absorb the impact to cost and value. Even so, the MOB sector has proven to be resilient through various historical economic cycles and the pandemic. Values have held up reasonably well through the current inflationary period and related rising interest rate environment. Generally, investors with attractive in-place debt and equity capital are content to sit back and maintain their current positions in the near term. Factors relating to fund life and debt maturities will likely be the driving force behind near term investment sales growth. Market based debt capital is readily available for core and core plus opportunities. 

HREI: You’ve noted that First Citizens has a “very sound underwriting practice, which has resulted in very manageable maturities.” At InterFace, you noted that as “2023 unfolded, we probably had a dozen loans mature that either were sold through the investment sales process for an exit, or that were recapitalized internally on our balance sheet.” You added, “But we are not seeing any stress in the portfolio across the board. As I look out over the next three years, I think we’re in really good shape.” Does this still hold true at this point?

Reedy: The First Citizens Bank Medical Office loan portfolio continues to perform very well and as originally expected.

HREI: What about big portfolio deals? There have been MOB sales brokers who have said the number of deals is actually not lagging that much, but that the volume is down because of a lack of larger portfolio deals? What are you seeing in this regard? Why have such deals slowed so much? Is this going to change anytime soon, and if yes, why?

Reedy: We continue to see attractive new financing opportunities and robust competition among lenders, even though large portfolio trading has slowed somewhat in the current market. Many investors are taking a wait-and-see approach supported by favorable in-place capitalization and attractive investment time horizons.  Sponsors continue to aggregate high quality MOB assets with a strategy that maximizes value through cap rate compression and portfolio exit strategies. In the current market, debt providers are generally limiting very large underwriting commitments that require significant syndication, but deals are still getting done. We remain confident that the market will remain liquid and that large portfolio acquisitions will continue to get done as debt and equity investors continue to identify efficient capitalization strategies.

HREI: How about the same question for value-add deals, which were supposedly difficult to close and obtain debt for? What’s the outlook for those?

Reedy: There has been a shift in the capitalization strategy that requires a larger percentage of equity capital, as compared with recent history to finance value-add opportunities. Solid value add opportunities are getting done in the market with experienced sponsors for well-located properties with attractive up-side potential.

HREI: Are you seeing many repurposing deals?

Reedy: There is a good amount of talk within traditional commercial real estate circles regarding the possible conversion of traditional office to medical office. There are examples of successful projects within dense in fill markets with high medical office occupancy and increasing medical demand. Most of the redevelopment opportunities that we see are more aligned with a mixed-use redevelopment that fall in line with traditional CRE financing.  We are not seeing many conversion opportunities to pure medical office.

HREI: What type of clients do you work with and have you worked with – I suppose almost all of those involved in acquisitions in the sector. Any surprises in terms of who is becoming more active?

Reedy: We are proud to serve our highly specialized REIT, private equity and family office clients that invest in institutional-quality medical office properties. We are actively pursuing and growing banking relationships with MOB sponsors seeking debt capital for acquisitions, refinancing, and development. First Citizens Bank also provides treasury management, derivatives, hedging, advisory and wealth management services. 

HREI: What’s your thoughts on the market moving forward, and over the long haul? I would imagine you are bullish on the MOB and HRE sector. Can you tell us why?

Reedy: First Citizens Bank has a long history of providing innovative financing solutions to the healthcare community. The medical office sector remains strong and has proven to be stable with low cyclicality. Our MOB portfolio has been a steady performer through bull and bear markets and even through the pandemic. Our strong client focus and history of solid, consistent, and timely execution has yielded solid client banking relationships that provide opportunities to further grow and expand our business in all market conditions.

Link to original article: https://wolfmediausa.com/2024/06/18/companies-people-first-citizens-remains-active-sees-positive-signs/