In a recent memo, the firm said REIT stocks' "almost unprecedented discount" to estimated NAV makes them potentially attractive takeover targets. WLRK noted that it is immaterial whether discounts to NAV are real or, as some believe, only leading indicators of changes to come in underlying property valuations, as they are one of the key factors stimulating hedge funds and shareholder activists to push for a sale or strategic change in a growing number of REITs.

WLR & K pointed out that credit market troubles and increased scrutiny of REITs' balance sheets are creating liquidity concerns. According to the memo, those REITs with near-term debt maturities or creditors with "loan-to-own" motivations are especially affected by the increased liquidity concerns.

However, though domestic credit markets continue to be "extremely tight," WLRK notes that there seem to still be plenty of domestic and foreign equity available for friendly and unfriendly investment in the sector.

On Feb. 12, American Campus Communities Inc. announced that it entered a definitive merger agreement to acquire GMH Communities Trust's student housing business for approximately $1.4 billion, including outstanding debt totaling approximately $963 million.

In a separate transaction a U.S. subsidiary of Balfour Beatty plc is acquiring the company's military housing business.

Meanwhile, Post Properties Inc. said Jan. 23 that its board of directors authorized management to initiate a formal process to pursue a possible business combination and to seek proposals from potentially interested parties.

On Feb. 4, Post shareholder Pentwater Growth Fund Ltd. sent a letter to Post notifying its board of directors and secretary that it intends in person or by proxy to nominate an alternate slate of directors at Post's 2008 annual meeting.

WLR & K stated: "Whether responding to truly desperate credit circumstances (as in Macklowe, Centro [Properties Group]) or merely to speculation and rumor (as in General Growth [Properties Inc.]), or to something in between (as in Glimcher [Realty Trust], Cedar [Shopping Centers Inc.], One Liberty [Properties Inc.], American Land Lease [Inc.]); whether dealing with a volatile mix of would-be buyers, shareholder activists and inside management (as in Post, Maguire [Properties Inc.]); or instead acting pro-actively to achieve old-fashioned strategic combinations (as in American Campus/GMH), the REIT industry is today as active and diverse as ever, and significantly more dangerous for those who have not carefully prepared."

Harry Macklowe, who owns Macklowe Properties, attracted attention recently when he scrambled to repay debt acquired in order to purchase seven Manhattan, N.Y., office buildings formerly owned by Equity Office Properties Trust in 2007. Macklowe acquired the properties in a $7.2 billion transaction financed through $5.8 billion of borrowings from Deutsche Bank. He also borrowed $1.2 billion from Fortress Investment Group LLC.

The loans were due Feb. 9. The Wall Street Journal reported Feb. 15 that Macklowe won an extension on his debt from Fortress and had reached an agreement with Deutsche Bank, though not all subordinate lenders have agreed to an extension.

During the week ended Jan. 25, shareholder ROCA Real Estate Securities Fund LP on separate occasions urged Glimcher, Cedar and One Liberty to review strategic alternatives.

ROCA sent a letter to Cedar Shopping Centers shortly after another Cedar shareholder, Inland American Real Estate Trust Inc., filed a Schedule 13D on Jan. 22, in which it said that it held the maximum amount of stock held under the company's charter and planned to ask Cedar to waive the limit to permit it to purchase additional shares. Inland said in its filing that it was considering seeking control of the company. On Feb. 14, Inland announced in an amended Schedule 13D that Cedar had agreed to waive the ownership limitation.

In the wake of the activism being seen in REITs recently, WLRK said it is "vitally important" for REITs and their boards to analyze potential threats before they arise.

The firm included an updated "REIT Preparedness Checklist" in its note in an attempt to provide a "roadmap" to help REITs land in a position where they are ready to respond to takeover threats.

"While each REIT would do well to create and implement a customized preparedness response plan and checklist based on its own particular situation and the likely potential threats it may face, the following action items are relevant to many REITs in the current environment," WLR&K said.

Among other things, the firm recommends that REITs monitor trading and ownership of equity and debt securities, paying attention to increased ownership by any potential activist or "threatening" entities. WLRK also recommends that REITs examine their balance sheets, taking lower asset valuations and market conditions into the analysis; consider capital markets activities such as buying their own debt or equity securities; and analyze debt covenants and other restrictions. To the last point, WLRK suggests seeking early amendment of covenants that could be triggered in a downturn.

Nationwide Health President and CEO Douglas Pasquale, during his company's fourth-quarter earnings conference call, categorized the transaction as "truly transformational." Pasquale also noted that there are a "number of compelling factors" that make MOBs an attractive component of the health care market.

Nationwide Health is not alone in its pursuit of MOBs. More and more, health care REITs are publicly stating their desire to focus on these facilities.

As recently as just a few years ago, only a few REITs had substantial investments in MOBs, including HCP Inc., Cogdell Spencer Inc., Healthcare Realty Trust Inc. and Windrose Medical Properties Trust.

Nationwide Health and Ventas Inc. have also been gradually building up a critical mass in MOBs over the years.

HCP made one of the first big moves by a REIT into the MOB space with its October 2003 purchase of a portfolio of medical office properties from MedCap Properties LLC. The company originally sold the properties into a joint venture with GE but has since bought them out the venture and has been considering putting them back into a new joint venture with another party. CEO James Flaherty III said during the company's fourth-quarter earnings call that given the current credit environment, the company has decided to pull back the current joint venture marketing of the MedCap MOB portfolio and substitute other asset dispositions as part of its delevering plan.

Healthcare Realty has decided to focus almost exclusively on MOB development, selling off many of its senior living assets. Health Care REIT Inc. acquired Windrose. With the merger, Health Care REIT added a portfolio of 92 buildings in 70 locations across the U.S., creating a company with more than 550 properties in 37 states. Further, in May 2007, Health Care REIT acquired 17 MOBs comprising 900,000 square feet, along with Paramount Real Estate Services, from affiliates of Rendina Cos. for an aggregate purchase price of $287.7 million.

Ventas said during its fourth-quarter earnings conference call that it continues to focus on MOBs as core to its acquisition strategy. In August 2007, the company promoted Christian Cummings to vice president of acquisitions, noting that he will be responsible for, among other things, managing the company's MOB portfolio.

Analysts told SNL that there are two main drivers behind the increasing focus on MOBs by health care REITs: diversification and demographics.

According to Robert Mains of Morgan Keegan, the impetus behind the trend is the realization that it is a good way for health care REITs to diversify into a non-government-reimbursement-sensitive class of assets that tends to be pretty stable.

Further to the diversification point, Jerry Doctrow of Stifel Nicolaus explained that the feeling in the market is that once companies have reached a certain size, they should be diversified. He said that the market has rewarded both market cap and diversification with higher multiples. He also noted that within health care, there is the feeling that at any given time, either because of capital market conditions or what is going on with reimbursement, that some of the segments - skilled nursing, private pay senior housing, MOBs, acute care facilities, etc. - may be working well and may be attractive and others may not be. "So if you're diversified, you always have opportunities and obviously you're protected against downside risk in any particular sector," he explained.

Flaherty said during his company's fourth-quarter earnings call that were he to rate the company's five businesses on a continuum of "not so good" to the left and "excellent" to the right, MOB and skilled nursing would be "right on the very good metric," life sciences would be on the "excellent side of very good" and hospitals and senior housing would be on the "good side of very good."

The other driver for MOB acquisitions has everything to do with the baby boomers. This generation is closing in on the 60-year mark, and while years away from really needing senior housing and skilled nursing facilities, their use of health care facilities is increasing.

"I think the medical office product in the REIT space is sort of the first line of defense to capture that baby boomer demographic who may begin to start to retire, hopefully won't be entering nursing homes too soon after retirement, more likely will be visiting doctors and have minor procedures done as they enter their senior years," BMO Capital Markets analyst Richard Anderson said during a Feb. 27 interview. "So that is the key attraction to the space from a demand perspective."

Speaking during his company's call, Pasquale said that Nationwide Health's increased MOB presence will allow it to "get ahead of the curve" with respect to the baby boomer demographic.

Mains also acknowledged that the allure of superior returns does play a role in REITs seeking out MOBs. He explained that with other types of health care assets, like nursing homes and hospitals, companies generally execute sale/leaseback transactions, signing 15- to 20-year leases with operators. Thus, they almost never turn over. The company will get an annual escalator - say 2% - rain or shine, but while there is no downside, there is no upside either. MOBs are a lot more like traditional office than the other health care assets, having three- to five-year leases. "If you're operating an office building, whether it's doctors or commercial, you do have the potential at least to generate better than average returns if you run the building really efficiently," Mains said.

Health care REITs are never going to be able to grow occupancy and rents in good economic times in the same way commercial office operators will, Mains noted, but they are inoculated against the bad times, which bring lower occupancy and the inability to raise rents. He said, "You're going to be 90% to 95% full putting up rents 3% a year in good times and bad." Further, MOB tenants tend to be "pretty sticky," he said, so the space doesn't roll over as much as it does in commercial office, in general.

As Pasquale said on the call: "Importantly, the services provided in MOBs are recession-resistant due to its needs-driven nature. As a result, MOBs represent a stable and predictable source of cash flow, enjoying higher tenant retention rates than just about any commercial real estate class."

During her company's fourth-quarter earnings conference call, Ventas CEO Debra Cafaro attributed Ventas' 2-cent beat in part to the outperformance of the company's medical office assets, saying that they, along with the Sunrise Senior Living REIT assets, provide the "granular, highly diversified" revenue streams in its portfolio. Calling the MOB portfolio a "growing portion" of Ventas' business, Cafaro said it is producing aggregate unlevered yields of about 8%.

HCP Chief Investment Office Paul Gallagher noted during that company's recent conference call that the MOB portfolio has higher expirations but higher retention ratios than traditional office buildings, allowing the company to roll 15% to 20% of the portfolio to market each year while maintaining occupancy. Flaherty noted during the call that the MedCap portfolio "once again" exceeded expectations in 2007, posting a 100-basis-point increase in occupancy and a 3.5% same-store cash increase in NOI.

BMO's Anderson said he believes many of the health care REITs "have their eyes wide open for medical office" acquisitions, so he expects to see more bulk-sized transactions in the future. But he cautioned that the market is competitive and that more parties involved in buying the properties will mean the pricing is likely to remain competitive. At a 6.1% cap rate, he noted that the Nationwide Health acquisition "didn't come cheap."

Doctrow said the typical cap rate on medical office assets currently is around 7% to 7.5%. Nationwide Health is paying a premium because the assets are located in California in high-value, high-barrier-to-entry markets, but also because the company is paying for access to the $1 billion development stream.

"I think the issue there is not so much whether it's rich up front but the real benefits, the real proof of whether this is a good thing or a bad thing is probably a couple years off. It really comes when NHP starts buying those to-be-developed properties, which is really 2009, 2010," the analyst said. "That's when we'll know whether it was a good price or not a good price."

Mains noted that the cap rate initially gave people some concern, noting that the stock closed down 3% the day after the deal was announced. He explained, however, that there is a growing realization, at least among the REITs, that the traditional cap rate spread between health care assets and non-health-care assets doesn't make that much sense when it comes to office buildings.

"I think that the cap rates that the commercial office buildings have been going at have been way below medical office building cap rates for some time, and I think that there's a convergence," Mains said.

Addressing cap rates, Anderson said there are several factors at play. On the one hand, competition and the recognition of the unique supply and demand fundamentals surrounding medical office buildings will serve in driving cap rates down. On the other hand, the dislocation in the capital markets means that many leveraged financial buyers are stuck on the sidelines, so there is somewhat less of an audience able to participate in buying the assets.

"My guess is we'll see cap rates go up, that the capital market dislocation force being greater than the others, and the cap rates for medical office may trickle up in this period of time, but probably not so much and maybe not as much as other property types because again, we're in a period of economic uncertainty for the foreseeable future," Anderson said. "Health care real estate in general and medical office properties in specific have certain resiliencies to them as relates to the economy. People get old, sick and die and it doesn't have anything to do with GDP. So as long as that's the case, we think there'll be continued above-average interest in health care real estate, and in this case, medical office buildings and that should keep a ceiling on any major increase in cap rates."

Nationwide Health had said it was looking to acquire a big platform to grow its MOB exposure. According to Mains, many thought this meant it would have to buy Cogdell-Spencer - which itself just recently acquired a design-build firm specializing in the advance planning, designing and building of health care facilities through the U.S. - or Healthcare Realty: basically, one of the other publicly traded MOB companies.

Instead, the company got a substantial platform, with what could be $2 billion of real estate, that it found in the private market.

"So it suggests that there are opportunities to get big in this business without having to go just buy a public company," Mains said.

Ventas has also publicly stated its interest in growing the MOB side of its portfolio. Doctrow said the company has been looking at both joint venture products, which it has been doing to date, as well as conceivably a platform company.

Mains said the Nationwide Health deal suggests there are multiple avenues by which Ventas could accomplish its goal, adding, "What this transaction suggests to me is they're probably looking at something in the private markets."