President of Norvin Healthcare Properties explains that successful healthcare real estate investors need an eye for opportunity, a bold strategy and a trusting relationship with provider-tenants
More than 1,300 healthcare executives and real estate professionals flocked to the BOMA Medical Office Buildings (MOBs) + Healthcare Real Estate Conference in Houston last week to learn from presentations and panel discussions by leading industry experts.
One such session, titled “Deals Defining the Investment Landscape,” used case studies of notable recent transactions to illustrate how astute investors can profit in today’s highly competitive healthcare real estate market. The session featured Norman Livingston, President of Norvin Healthcare Properties, along with Clayton Mitchell of Kaiser Permanente, Mark Burkemper of Harrison Street Real Estate and Paul Nelson of Invesco Real Estate, with Steve Leathers of JLL as the moderator.
Mr. Livingston devoted his part of the session to a case study on the January 2018 acquisition by New York-based Norvin of the five-building, 505,000 square foot Pin Oak Portfolio in the Houston submarket of Bellaire, Texas.
“The Pin Oak deal was an atypical transaction for Norvin,” Mr. Livingston began, noting that his firm usually invests in properties that are 100 percent leased by medical users, not mixed-use properties like Pin Oak.
“Usually when we’ve been offered a mixed-use medical office building, our first reaction is that it’s either a failed office building that couldn’t sustain its occupancy or a failed medical building that couldn’t attract a sufficient volume of healthcare tenants,” he told the audience. “But the Pin Oak portfolio was different. It had a number of unique qualities that led us to believe we could create a thriving campus that catered exclusively to healthcare tenants.”
The Pin Oak campus is a local landmark at the intersection of U.S. Interstate 610 and Bellaire Boulevard, Mr. Livingston said, with “terrific access” and visibility from the 610 Loop. He added that it is also in an “irreplaceable infill location” in the affluent submarket of Bellaire and convenient to several of Houston’s other major submarkets including The Galleria, the Central Business District, Rice Village “and, most importantly, the Texas Medical Center,” only about three miles away.
In addition, although the Pin Oak buildings were “tired” and in need of capital upgrades, Mr. Livingston continued, the complex had sustained a stable overall average occupancy of more than 90 percent for more than a decade. What’s more, although Pin Oak was originally intended as a traditional office complex, 58 percent of the space had gradually come to be occupied by healthcare providers. Many of those were also prominent institutions Norvin has served at other locations during its 18 years of doing business in the Houston area, including Houston Methodist, Memorial Hermann Health System, UT Medical Group and Texas Children’s Hospital, among others.
“They were all there, and I’ve always felt that having those institutions serves as almost an anchor to attract other healthcare institutions,” he said. The complex also offers potential synergies with Norvin’s other local holdings which, counting the Pin Oak Portfolio, include 12 healthcare properties totaling more than 1.2 million square feet in the Texas Medical Center and elsewhere in Greater Houston.
Mr. Livingston told the BOMA MOB conference audience that he sees excellent upside potential for the Pin Oak Portfolio. By leveraging off of Norvin’s expertise and healthcare relationships in Houston, Norvin intends to convert the campus to 100 percent healthcare. Since office rents in the complex average about 15 percent less than medical rents, he sees an opportunity to increase overall cash flow by gradually repositioning and rebranding the property to appeal to a larger audience of healthcare tenants. Leasing efforts should also benefit from the major capital improvements and cosmetic upgrades that are planned, including improved wayfinding and tenant amenities. Most importantly, Norvin was able to acquire the property at a capitalization rate of about 8 percent, which he noted was more akin to office building transactions and considerably less than the cap rate for most Houston-area medical properties.
“By converting the portfolio to medical we saw an arbitrage opportunity where we could exploit the difference between office cap rates and medical cap rates,” Mr. Livingston said.
The Pin Oak property is being positioned as a competitive alternative to the nearby Texas Medical Center with free parking, lower rents, a favorable patient experience and a very desirable location, Mr. Livingston concluded.
In telling the Pin Oak story to the BOMA MOB conference audience, Mr. Livingston was ostensibly sharing a glimpse at an acquisition and strategy that appears poised to deliver a healthy return for Norvin and its investors. But he emphasized that success in the healthcare real estate business hinges on much more than a compelling deal and a good business plan.
“It takes a long time to build relationships with health systems,” he emphasized. “It’s a lot of trust. They want to know that you’re getting into a relationship with them, that you’re a long term holder, that you’re not going to turn around and flip that property in a couple of years. They want to know that you’re sensitive to the values and culture of that institution. And so we work to convey that message.”
About Norvin Healthcare Properties
Norvin is a private real estate investment and operating company with a nationwide focus on core and opportunistic investments in the healthcare sector. Norvin owns acute and post-acute care hospitals, clinical and diagnostic facilities and medical office buildings. Since its founding in 1998, Norvin has worked closely with health systems, operators and other constituents in the healthcare community. Norvin distinguishes itself by providing a deep understanding of and appreciation for the unique capital and real estate issues within the constantly evolving healthcare industry. The Norvin team combines extensive capital markets experience, real estate operating capabilities and financial agility to provide superior risk-adjusted returns on investments.
Norvin maintains strong landlord-tenant relationships with numerous health systems including Ascension, Catholic Health Initiatives, Hospital Corporation of America, Houston Methodist, Kindred Healthcare, MD Anderson Cancer Center, Memorial Hermann Health System, Mount Sinai Health System, NYU Medical, OakBend Medical Center, Seton Health System, Texas A&M Medical School, Texas Children’s Hospital, UT Physicians, The University of Texas Medical Branch, LifeBridge Health, Frederick Memorial Hospital and many others. Norvin maintains offices in New York City and Houston. For more information, please visit www.norvin.com.
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