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Cover Story: The Next Stage

Stage Equity Partners plans to stick with the same proven acquisition strategy that has served it well during the past 10 years, but perhaps with a few tweaks

By Murray W. Wolf

Partners Russell Brenner (left) and Brian Howard have made Skokie, Ill.-based Stage Equity Partners a serious player in healthcare real estate by focusing on value-add, middle-market, off-campus medical office buildings. (Photo courtesy of Stage Equity Partners)

Conventional wisdom holds that a recession is a terrible time to start a business. However, some believe that it might just be the very best time. That’s because you will probably face fewer competitors, and those you do face might be less formidable than they might be when the economy is strong.

Whether or not you believe that contrarian view, it’s hard to argue with results. Launched in mid-2009, Stage Equity Partners (SEP) LLC is one firm that has defied the odds. Today, with a decade of success under its belt, the Skokie, Ill.-based private healthcare real estate (HRE) investment firm continues to build on its proven business model while adapting to the changing market.

‘The time was right’

A Detroit native, Brian Howard moved to Chicago to be closer to his wife’s family after graduating from the University of Michigan Law School in 2001. As a young attorney, he worked for the downtown Chicago office of the law firm Jenner & Block LLP from 2001 to 2005. Then he accepted an offer from one of his law firm clients to become general counsel for Baum Development LLC, a Chicago-based commercial real estate (CRE) development firm.

Next, in 2007, Mr. Howard made the leap to the HRE space when he joined Healthcare Development Partners (HDP) LLC, led by president and managing member Todd Bryant. It was while he was at HDP that he says he first began to get involved in hospital-anchored medical office development.

“Then, in ’09, when the market hit a downturn, I decided the time was right for me to go off on my own,” Mr. Howard says.

“At the time, the REITs (real estate investment trusts) and institutions weren’t focused on medical office buildings (MOBs) that were either off-campus or physician-anchored,” he explains. “At the time, everything had to be on a hospital campus. That what the REITs and the Heitmans of the world all wanted.”

But Mr. Howard says other investment opportunities were being disregarded, namely off-campus, “middle-market” MOBs, which he defines as deals in the $5 million to $25 million range. He says acquisitions of that size were too big for small investors but below the radar of healthcare REITs and real estate investment management firms like the aforementioned Heitman LLC.

In addition, he believed that there was a further opportunity to invest in the type of “value-add” MOBs that the REITs and institutional investors were also passing over at that time. Those tended to be facilities with higher vacancy rates, shorter-term leases, a need for capital improvements or all of the above. “No one else was focusing on those,” he says.

Importantly for a small investor, financing those kinds of acquisitions also required less money up front. “The equity checks were smaller,” he says.

“And my business plan, which still rings true, was, ‘You know what? I see a lot of really well-located medical office buildings… but I can buy them at better yields than what the REITs are paying on the on-campus stuff,’ ” Mr. Howard says. His “secret sauce” would be his ability to leverage his operational experience in property management and in working with tenants. So he registered a limited liability company in May 2009, naming it Stage Equity Partners.

Why Stage Equity?

“I really didn’t want to start a company called Howard something, because ultimately I wanted everyone to work together for company beyond the owner’s name,” he explains. “I picked Stage for a couple reasons. One, it sounded private equity-like and seemed sophisticated, as in early or late stage investments, etc. Second, I love music and just thought the Stage name sounded cool.”

Cool factor aside, the harsh reality was that Mr. Howard was simply an ambitious 33-year-old with a wife and two young children to support who, at the tail end of the Great Recession, had just put up $100,000 of his own money to acquire properties most other investors didn’t want. His inauspicious start as “a one-man band” included a desk in back of a shared conference room in a residential real estate developer’s office.

Working the plan

Although he believed in his business plan, Mr. Howard acknowledges, the situation was “very scary.”

But he soon zeroed in on his first potential acquisition, a three-story, 26,324 square foot MOB in the Chicago suburb of Oak Lawn. But 2009-10 was “such a weird time,” he says, that it was difficult to secure financing.

“In 2010, when I put this Oak Lawn deal under contract and as I was trying to raise the equity, people in the real estate industry said, ‘What are you doing? You’re paying an eight-and-a-half cap on a medical office building in Oak Lawn? Do you know anyone that wants an 8 percent return? I don’t.’ They all wanted huge upside,” Mr. Howard recalls. “Nobody wanted to buy stabilized medical office buildings. They wanted to buy the Sears Tower on a discount.”

Institutional investors also want a track record, he notes, so he had to overcome a lot of skeptics.

“You aren’t real until you close the first deal,” he says. “You need that first deal as a springboard.”

But as he searched for financing, the weeks and months dragged on.

“I was not only not making money, I was losing money,” Mr. Howard recalls. “My wife was not thrilled with that. And, keep in mind, in 2010, I had young children. I had a three-year-old and a one-year-old… And I was spending money trying to get real estate…”

Fortunately, his wife, Rebecca, remained supportive despite her concerns.

“You need the buy-in, because if the homelife is not steady, the pressure is just unbearable,” Mr. Howard says. “That’s one thing that I don’t have to worry about these days anymore. But it was a real concern. Raising a young family with a pretty new company, a crazy market. Those were sleepless times.”

As it turned out, the brokers marketing the Oak Lawn MOB were Chris Bodnar and Lee Asher of what was then known as CB Richard Ellis, which was renamed CBRE Group Inc. (NYSE: CBRE) in 2011. At the time, Messrs. Bodnar and Asher, now both vice chairmen with CBRE, had recently started a healthcare group and ended up working closely with Mr. Howard on the deal.

“I was introduced to Lee Asher and did a handful of deals with Lee early, early on,” he says.

Asked why he and Mr. Bodnar were willing to take a risk on an undercapitalized startup HRE investment firm with a 30-something owner, Mr. Asher says, “Brian had studied the healthcare real estate sector and clearly understood the value proposition for investing in medical office and underlying fundamentals well ahead of some of players that invest in the space today.”

With the help of CBRE, Mr. Howard persevered and, finally, secured the equity he needed.

“I had one investor, a client in my old law firm, who I brought it to, whose assistant lived near Oak Lawn and was familiar with the building, and he wrote the entire equity check,” he says. “So the stars aligned, frankly. We were fortunate.”

Thus Mr. Howard was finally able to close the Oak Lawn transaction, acquiring the MOB from MedProperties Group for $8.725 million in June 2010, according to the CRE data service Real Capital Analytics Inc. (RCA). CBRE brokered the deal – and also helped SEP sell the building to the New York-based private REIT ARC Healthcare Trust II for $10.3 million in August 2013, according to RCA data.

“I probably made a bunch of mistakes” on that first deal, Mr. Howard acknowledges, but “we sold that building three years later to a REIT and (it) turned out great.

“It would be impossible for me to do that today,” he adds. “I think I timed it right… But I made a lot of mistakes along the way.”

That first deal “put some money on the table” and relieved some of the financial pressure, he adds. And the same investor that put up the equity for the Oak Lawn MOB acquisition continued to participate in Mr. Howard’s subsequent deals.

“So from ’09, I had a family office that was my backer. I did four deals with them,” he says.

BOMA boost

Messrs. Bodnar and Asher not only helped Mr. Howard to make money, they helped him to make a name for himself in the HRE space. Mr. Bodnar, who was scheduled to moderate a capital markets panel discussion at the 2011 BOMA International MOBs & Healthcare Facilities Conference in Dallas, arranged to include Mr. Howard as a panelist.

“I had closed one deal and I was a quote unquote ‘expert’ who’s on a BOMA panel,” Mr. Howard recalls, “and I just talked about the one deal that I closed.”

“Chris and I met Brian for lunch at a BOMA conference 10 years ago,” CBRE’s Mr. Asher recalls. “At this point, I think Brian had bought one MOB and was trying to figure out how to make a name for himself in the sector. We told him it was fairly simple: ‘Next building you buy, do what you say you are going to do.’

“Then we pulled out a draft of a package at the table for an MOB we were about to take to market that happened to fit his investment criteria. Brian subsequently submitted an LOI, flawlessly negotiated the PSA, managed due diligence hitting all the milestones and closed on time without incident. The seller was as impressed, as we were with Brian as a buyer.

“From that point forward, we knew the next time we had a deal Brian (now SEP) were bidding on, we could confidently endorse them as a buyer.”

Mr. Asher says CBRE has done about a half-dozen transactions with SEP over the years.

Attending that BOMA conference also allowed Mr. Howard to form a key business relationship. During the panel discussion, he sat next to Doug Whitman, then chief operating officer of Healthcare Realty Trust Inc. (NYSE: HR). (Mr. Whitman is now HR’s senior VP, finance, and treasurer.)

“And because of that, we then hooked up with Healthcare Realty Trust and bought two buildings from them,” he says. “Deals beget deals.”

The HR transactions were another credibility builder, Mr. Howard says. He was able to say to other sellers and investors, “A big REIT trusted us, why shouldn’t you? Since then we’ve bought like 26 buildings in eight states.”

A friend becomes a partner

By 2012, with his first deal done, the recession over and more transactions the works, Mr. Howard was ready to take on a partner.

A few years earlier, during Mr. Howard’s stint with Baum Development, which is an affiliate of Baum Realty Group, he got acquainted with Russell Brenner, a private equity CRE investor and the husband of Janika Brenner, who has worked at Baum since 2003 and is currently a principal there. (In a 2015 St. Valentine’s Day article, Bisnow Chicago featured Russell and Janika Brenner as one of five CRE “Power Couples in Love.”)

“I met (Mr. Howard), I think, at a company picnic while he was general counsel” at Baum in the mid-2000s, Mr. Brenner recalls. “So he and I had been friends first through that and had stayed in touch for many years.”

While Mr. Howard’s career path eventually led to the creation of SEP, Mr. Brenner pursued a somewhat different path.

“My whole professional life has been spent in real estate in one form or another,” he says. After graduating from Tufts University with a B.A. in English in 1996, he worked in office leasing, tenant representation and brokerage for Goldie B. Wolfe & Co., a Chicago-based boutique CRE brokerage firm that was later acquired by Insignia Financial Group.

By 2000, Mr. Brenner says, “I was starting to make some hay as a broker but wanted to get on the principal side and joined a syndicator, a real estate private equity firm in Chicago that was acquiring a variety of commercial properties ranging from office to hotels, a lot of shopping centers, quite a bit of retail – just about everything except, ironically, medical office.”

That firm was Syndicated Equities, where Mr. Brenner was a senior principal from 2000 to 2012.

“And when the former partnership had lived through the downturn and we were reemerging on the other side, it seemed it was time to shuffle the deck and take what I had done and the relationships that I had built and move on to the next chapter,” he says.

Mr. Brenner’s partnership at the private equity firm “ultimately unwound. My partners and I went our separate ways… and I was planning to go off on my own. As part of that, he had concluded that he wanted to “focus in a specific niche. I really wanted to focus and go deep into a niche. It could have been retail; it could have been office… I was evaluating all the different asset types.

“And so when Brian and I rekindled our conversation, he was bringing me up to speed on what was happening in the healthcare space. I said, ‘You know what? This makes sense. I see the writing on the wall for the retail market. I see the potential roadblocks going into conventional office.’ It just made sense to me.

“And then when Brian dipped his toe into the healthcare waters… I thought, ‘Why not? Why not partner with someone who was a friend, who I respected professionally, and liked personally and socially?’ ”

So Mr. Brenner says he decided to “try out this niche that seemed to have all of the boxes checked.” He says HRE was “a growing sector, it wasn’t heavily picked over at the time we got together and we thought that there was great opportunity for us the next umpteen years.” The sector has “all the demographic tailwinds behind us with the aging population” and “the baby boomers retiring and needing more hospital visits and physician visits.”

Another thing that appealed to Mr. Brenner about HRE was that it was a relatively small niche.

“And I thought, ‘What a great opportunity for two young guys to partner up and really make a name and a place for themselves within that niche because the landscape was much narrower – far fewer than, say, for example, I spent years going to the ICSC (International Council of Shopping Centers) conference in Las Vegas with 30, 40 thousand people.”

By contrast, there were less than a thousand people at first BOMA MOB conference he attended.

“It’s a much more close-knit, insular group and they’re more transaction-focused than any other niche industry meeting than I attended in the past,” he says.

“I just seemed all the stars were aligning and we thought, ‘Let’s go do this together. Two heads are better than one. We can go build a business around buying and operating mid-market medical office buildings.’

“The two of us really built the business from 2012 to where we are now,” Mr. Howard says.

“He and I have been together and focused in the healthcare space… and it has been a really nice run ever since,” Mr. Brenner says.

And unlike some business arrangements that can strain a friendship, Messrs. Howard and Brenner say working together has made their relationship stronger.

“We were friends but have grown much closer over time as we’ve become partners,” Mr. Brenner says. “And our kids are friendly with one another, our wives are friendly. I think we have good work-life balance…

“We enjoy one another’s company. We travel quite a bit for business and stretch business into pleasure when we can. So it’s always nice to have a travel companion who sees the world the way that you do, and we can kind of kill two birds with one stone – get some good work done on behalf of the office and also have fun doing it.”

Mr. Howard carries the title of founder and president; Mr. Brenner’s title is partner. They office in Skokie because it’s about midway between Mr. Howard’s home in Highland Park and Mr. Brenner’s home in Chicago.

Growing the business

Mr. Brenner says SEP specializes in “picking up those kind of value-add, core-plus, mid-market in size deals that the 800-pound gorillas in our space either can’t afford to play with because they’re smaller or have too many moving pieces and don’t have the time roll up their sleeves and dig in, which we are well-equipped to do. We dig in, stabilize an asset and then, typically, have used the private REITs, the private equity funds, as our takeout.”

“Everyone says, ‘You have sticky tenants.’ But the fact is if you take good care of your tenants… you can really reduce the risk,” Mr. Howard says. “So our focus was on building up a portfolio and operating it really efficiently, and that’s what we did.”

One example of the SEP business model in action was the value-add acquisition and disposition of the Morrow Medical Center in suburban Atlanta.

“We bought a building in Morrow, Ga.,” Mr. Howard says, referring to a two-story, 37,813 square foot MOB that the firm acquired from MB Financial for about $5.8 million in December 2013, according to RCA data.

Built in 1991, the Morrow MOB was plagued by vacancies and short-term leases when SEP acquired it, he says. The firm invested in capital improvements to the parking lot, landscaping, lobby and restrooms “and made it much more current, got tenants to extend, filled up vacancy. And then we sold it to a REIT that had passed on the acquisition opportunity in 2013.”

According to RCA data, the sale closed in June 2015 and the buyer was ARC Healthcare Trust II, which paid $7.5 million for the property – almost 30 percent more than SEP had paid about a year-and-a-half earlier.

Acquiring value-add MOBs, making leasing and capital improvements, and selling them within a few years is a staple of SEP’s strategy.

“We have roundtripped 10 deals already,” Mr. Howard says.

“Our metrics are the same as everyone else’s,” he says. They seek “Class A” buildings and locations that are affiliated with a strong hospital or physician group. But SEP is willing to do deals with physician credit.

“The other thing I think that we do well is that we’re pretty entrepreneurial,” Mr. Howard explains. “So we’ll bring in the physicians. We’ll let them invest in the deal with us, which anchors them to the building and incentivizes. It aligns everyone’s interests.

“We do a lot of sale-leasebacks with doctors and I think what’s attractive is when we say to them, ‘Look, you sell the building to us now. You take some chips off the table. You take all your risk off. You’d let us manage the whole thing. All you would do is practice medicine and co-invest with us. Down the road, when there’s an opportunity, we’ll exit. You’ll get cash along the way and you’ll get a second pop.’ And we’ve been fortunate to do that.”

Mr. Howard estimates that about 30 percent of SEP’s deals involve physician investment.

And there is no “special treatment” or free equity for the physician-tenants, he says.

“They write a check. They invest and they’re on the same terms and conditions as us – as me, I’m an investor in all my deals… We allow them to invest in the deal and they’re paying themselves a return on a building that they know. It’s worked out really well.”

And sometimes you just get lucky, Mr. Howard says, as on occasion SEP has bought an MOB leased to physicians and then that physician group was acquired by a hospital or health system with a higher credit rating – instantly making the asset more desirable.

“Then it’s a totally different profile of a deal,” he says. “And then a REIT who may not have looked at it before all of a sudden will be interested. And we’ve sold those to REITs as well.”

Recent acquisitions

SEP buys four or five buildings a year in “core markets,” Mr. Howard says. “We do not run a volume shop. We find deals that work and we run with them. We have more investor demand than deals that fit our profile. We look at every deal; we don’t bid on every deal.”

The company continue to focus on “singles and doubles,” he says, referring mid-market and value-add properties where there is less competition.

Since its founding in 2009, SEP has acquired 26 buildings in eight states, Mr. Howard says, and still owns about half of them. The firm is “still looking and buying,” he says.

“Over the last 18 months, we bought four buildings in Wisconsin… A relationship called me up two years ago about a building in Milwaukee, anchored by Children’s Hospital of Wisconsin. Nice market, probably 80 percent occupied with Children’s to sign a long-term lease, great visibility off the highway. We bought it.”

The deal involved a three-story, 30,600 MOB at 4655 N. Port Washington Road in Milwaukee. The purchase price was about $3.7 million, according to RCA data, and the seller was locally based Weas Development Company.

“After we bought it, a local broker brought us an on-campus MOB in Green Bay, long-term lease with a hospital,” Mr. Howard says. “We bought that. Then another broker found out about those and then we bought two more Children’s Hospitals in Wisconsin, in Milwaukee.” Now SEP owns four Wisconsin MOBs totaling about 125,000 square feet.

“And my gut says we’re going to do really well with those,” Mr. Howard says. “What we’ve kind of stumbled on is maybe spending a little time and understanding the network in these… secondary markets pays off.”

Messrs. Howard and Brenner hope lighting will strike again in the Birmingham, Ala., area, where they recently acquired the fully leased, two-story, 21,019 Inverness Dental & Medical Plaza in suburban Hoover, Ala. The deal was a sale-leaseback from Inverness Dental Associates LLC. SEP paid $6.475 million, according to RCA data.

“Our hope is that we recreate what we just did in Milwaukee in Birmingham – you know, we buy one building. We do well with the tenants and brokers and the market. All of a sudden, we put out a press release, everyone finds out about it, we do a second deal, a third and a fourth. Then we manage these things and maybe if the stars align, we have a portfolio sale.”

In addition to Wisconsin and Alabama, the firm currently owns assets in the Chicago, Atlanta and Myrtle Beach, S.C. areas. It had five buildings in Texas at one point, which have all now been sold… The firm also owns properties Florida, including a one story, 29,108 square foot MOB in Lady Lake, near The Villages, one of the nation’s fastest-growing metro areas and home to a huge retirement community of the same name.

No institutional partner

In addition to its willingness to buy value-add, off-campus, mid-market MOBs, another point of differentiation, Mr. Howard says, is that SEP has no institutional capital partner. From the start, the firm’s primary source of capital has been high net worth individuals and family offices.

“We’re kind of a throwback,” Mr. Howard says. “We have a private investment group of high net worth and family offices that invest with us on every deal… They’re very sophisticated and very loyal, and we’ve done very well for them,” he says.

“So with that group, we go out and we’re pretty picky and we’ll go buy, call it four or five buildings a year in core markets to us, around the country – ideally buying where we can own more than one building because it’s easier to manage two or three of four buildings in one market than just one.

“We’ve never really taken on an institutional partner… We control every single deal we’ve ever done. We have total control over every deal and decision-making and stick to a business plan and try to abide by it. And I think that is a little different than a lot of folks because we’re very fortunate. We have a very strong equity base.”

However, Mr. Howard said SEP is willing to bring in an equity partner for potential deals of more than $25 million. It recently teamed with a large private fund on a $50 million bid that turned out to be unsuccessful.

How has the market changed?

Back in 2009, REITs and institutional investors were not focused on off-campus, mid-market, physician-anchored, value-add MOBs. That opportunity became the basis of the SEP business plan – and it remains so today.

But, within a few years, public REITs began “pushing into their space” as off-campus MOBs became almost as popular with investors as on-campus MOBs.

From 2010 to 2014, Mr. Howard says, most of SEP’s MOB acquisitions were at capitalization (cap) rates in the range of 8.5 percent. (The cap rate is the rate of return on a CRE investment based on the income that the property is expected to generate.) Today, the national average MOB cap rate is closer to 6.5 percent, meaning that prices are higher and returns are lower.

“The private REITs have come and gone,” Mr. Howard says, but “the public REITs started pushing down into our space. So what happened was it just created a lot more competition. Healthcare became a preferred asset class.

“And what I mean was, through the downturn in the economy, what the institutions and endowments of the world realized was medical office tenants survived a recession better than most other tenants. And healthcare saw job growth – one of the only industries with job growth. So there was a lot of attention and money thrown at the space.”

Mr. Brenner agrees.

“I guess what has surprised me is how so much new capital has come into the space,” he says. “The rub is it’s made it a little bit more difficult for us to compete… and, as a result, those operators that have mandates behind them to put out X billion in any given year have to start pressing down into the mid-market space, into what was typically our wide-open playing field. And in doing that, it’s made pricing more competitive for us.”

“So… buying buildings today,” Mr. Howard says, “we’re competing with everybody. Whereas in 2012, or 2010, we weren’t really competing with the REITs and institutions. My business model was, ‘We’re going to be under the radar of the REITs and institutions. And now, we’re really not.”

As demand for off-campus MOBs has increased, SEP has both doubled down on its strengths and fine-tuned its business plan to remain competitive.

“Again, I think our  value add, or where our  biggest angle is, a lot of the REITs and institutions don’t want to buy deals with a little hair on them. So a deal that has a lot of lease roll coming due or has some vacancy just requires some work, and may not be appealing, where we are not scared of that,” Mr. Howard says.

“If it’s a market we know and a building we like, we’ll roll up our sleeves and we’ve bought buildings and fixed up lobbies and fixed up common area bathrooms, and landscaping, made them more attractive, leased up vacant space, and then sold those buildings to the institutions that passed on them on the first round.”

Another point of differentiation is the firm’s operational expertise. He says that the firm’s MOB property management skills are its “secret sauce.”

“We’re in the trenches,” he says, adding that tenants still call him directly if there’s an issue. “We’re really in the here and now. If we’re doing our job, everything else falls into place.”

Mr. Brenner adds, “We have to work a little bit harder to find those needles in a haystack, find those assets that need us to roll up our sleeves and add some value, be they sale-leasebacks, be they limited market or off-market opportunities.”

Increased competition “just makes it a little bit more difficult for us to find those,” he says. “So our answer to that is: work a little harder.”

One interesting twist, Mr. Brenner says, is that despite all the new capital flowing into the HRE space, “it is really funneled through the same number of active players…

“Let’s say it is seven or hundred people that are really active in the BOMA network or active in transacting the lion’s share of the medical office buildings across the country… You could imagine as the capital has flooded this market that it would double, it would triple, it would quadruple, it would grow exponentially. Yet it’s still the same relatively small number of players who we keep bumping into on everything – who we buy from, who we sell to, who we partner with.”

Have you ever considered a fund?

Speaking of partnering, several established HRE developers and investors – Anchor Health Properties, Caddis, MBRE Healthcare and Flagship Healthcare Properties, to name just a few – have partnered with institutional capital sources in recent years to create new MOB investment funds or REITs. It’s a trend that hasn’t escaped SEP’s attention.

“We’ve toyed with a fund because most of our investors view us as a fund,” Mr. Howard says.

However, he says, “What I don’t want is to be in a position where… there’s a pressure to place capital. I like being nimble. I like that every deal stands alone. I like the fact that if the pricing is out of whack, we don’t have to spend the money. So we’ve toyed with a fund… we’ve just never pulled the trigger on it.

“It limits you,” he adds. “If you raise a big fund, there’s big management fees, there’s big asset management fees, you’re ready capital – and it’s intoxicating. You can go out and quickly amass a nice portfolio and then do a recap and bring in a big equity partner. I mean, there’s a formula for that kind of stuff. Just every time we think we’re ready to do it, we think the market’s about to retract and we stay on the sidelines.

“So we just have always stuck to the same business plan, whether it’s right or wrong. I am sure it’s limited. I am sure if we had a fund we would have bought a hundred deals by now.”

But it has worked for them, Mr. Howard says, and SEP is happy with “a bigger piece of a smaller pond.”

“I still am very thankful of how it came from way back when, 10 years ago, to where we are now. Still looking and buying. Now we have a pretty well established equity. We’re starting to look at bigger deals. We’re starting to look at portfolios. So we can compete well. The challenge is our cost of capital is still private. We still leverage on the asset level. So every deal has to stand alone.

“So we can compete. We compete really well. But if it’s a mass market, glossy deal shopped to everyone, we rarely win those deals.”

Guiding principles

Reflecting on SEP’s first decade, Mr. Howard says he knew several individuals that also tried to launch real estate-related companies shortly after the Great Recession. But, to his knowledge, none of them are still in the business.

“One guy went off to start his own law firm. A couple guys went off and started to be investors. People were trying to be developers. One guy was trying to buy residential housing. I mean, lots of different real estate companies,” he recalls. “And I think I’m the only one who made a go of it.

“And I honestly believe it’s because… you do your early deals to get a track record,” he says. If you do a good job, “you use those deals as a springboard to prove yourself so the brokers and lenders and investors, and allow yourself lead time for the future deals.”

He says that’s what SEP did “and we do that today. We’ll leave dollars on the table with lenders because it’s the relationship and that kind of stuff. I think being shortsighted… is not the way to survive in this industry.”

Messrs. Howard and Brenner say they place a premium on relationships and repeat business, and they have done multiple deals with multiple sellers.

They pride also themselves on behaving ethically, Mr. Howard says, and even if that means leaving some money on the table, he says it pays off in the long run.

“When someone does something good, you’ll never forget it,” he says.

“The medical office sector is a really small niche market which makes a buyer’s reputation even that much more important,” agrees Mr. Bodnar of CBRE. “Word travels quickly, both positive and negative.

“Brian and Russell have embraced this and have fostered a great reputation by executing with the golden rule in mind.  They execute as buyers the same way they would want to be treated as a seller.”

“I just think we have a sustainable, long-term approach to our business,” Mr. Howard says. “We tremendously value relationships of our tenants, brokers, lenders and investors, and are very hands-on in our property and asset management. As the sole decision makers, I think that differentiates us from many of our friendly competitors.

“I’ve been doing this a long time. But hopefully I am more careful each and every time.”

‘It’s working’

SEP has clearly come a long way since Mr. Howard was “a one-man band,” but it remains a small shop. In addition to Messrs. Howard and Brenner, now ages 43 and 45, respectively, the firm consists of five other professionals and staff – seven people in all.

But Mr. Howard insists that SEP is as sophisticated as any of the big firms, simply on a smaller scale.

“People are surprised at how far reaching and how much you accomplish with a small group,” he says. “We are involved in everything we do from leasing to management to equity to debt. We do a lot. We keep it in house. We grind. We grind away… It’s working.

When a company has a lot of overhead and the economy takes a dive, he says, “you make decisions based on fees or you make decisions based on expenses rather than good business. So we’ve always just kept it lean and mean.”

“We are few in numbers though we seem to tackle much bigger projects than our numbers or our staff belies,” Mr. Brenner agrees. “In a small office, everyone has to wear different hats and multiple hats at any given time.”

Based on their respective backgrounds, Mr. Brenner said he might spend more time on leasing while Mr. Howard tends to focus more on legal work, but there’s a lot of overlap. And both principals are highly involved when it comes to sourcing deals.

“I think we both try and work our respective Rolodexes and relationship bases to stir the pot and deliver new projects and new opportunities,” Mr. Brenner says.

“And then what I think is most interesting about our partnership is we get to better solutions when there is a hurdle in front of us because of our collaboration. We both come at a problem with similar goals in mind and approaches in mind. Yet because of his background being more legal, my background maybe being more transaction-oriented, I think we complement one another. And the byproduct is a better solution.

“And we have yet to find a problem that we didn’t come out the same place. We may not always start there. But what we’ve realized is by talking it through and bringing our respective backgrounds to the table we get to a better solution. We come to a meeting of the minds… And our tenants, our investor partners, our lenders, our company are better for it.”

The next stage

“We are ambitious and we do have big plans, Mr. Howard says. “We’re starting to talk to some of our wealthier families about taking on bigger allocations and taking on bigger projects. I think that’s what you’ll see coming from us in the next year to 18 months.”

As noted earlier, the firm started by targeting MOBs in the $5 million to $25 million range, and he says, “That really hasn’t changed.” However, as mentioned earlier, the firm did recently place a $50 million bid on a potential acquisition.

Although SEP didn’t win that deal, he says, “We’re going to start looking at bigger deals and I think we’ll be able to compete. We’re starting to lay the foundation to start taking down bigger projects and bigger portfolios.”

They will do that by getting more capital from the same investor base, he says.

“We have pent up investor demand to do quality deals and we’re laying the foundation now that when time is right, we will spring on those.”

Mr. Howard said that another strategy might be to expand into third-party property management.

“We’ve never taken on third-party management. We’ve only done our own,” he says. However, he says the firm has been asked “by some of the out-of-state REITs to manage their local stuff.” He says the firm is exploring the idea, but will only expand in that area if they feel they can do it well and it won’t be “a distraction.”

Asked if SEP has ever done development, Mr. Howard says, “A little. We developed a building here in town, in Western Springs. We got lucky. We leased it on a 15-year lease to Bright  Horizons, a New York Stock Exchange-listed daycare company. It was planned for medical office, got rezoned for medical office, and then these guys came along and leased the entire building.

“And we’ve sniffed around some development deals. We’re looking at a couple now. That’s a great value-add creation.”

Because Messrs. Howard and Brenner both have development experience, Mr. Howard says SEP would probably handle any such projects in house

However, for the most part, Messrs. Howard and Brenner say they plan to stick to their proven business model.

“SEP’s investment thesis seems to be the same today as it was 10 years ago – and it has paid off,” says Mr. Asher of CBRE.

Asked if he is still as excited about the prospects for HRE as he was when he joined SEP, Mr. Brenner answers in the affirmative.

“I think the industry is evolving, has evolved and likely will continue to evolve. But I am as excited,” he says. “I think while more capital coming into our space does maybe in the short-term makes it more challenging to find good opportunities, it ultimately is a good thing for healthcare real estate and those operators who operate within the space. I think it will cause more transaction activity, it will cause more of a ready secondary market for those who are building and acquiring now…

“And I think fundamentally so many citizens needing more physicians and more hospital visits – that’s a demographic that isn’t going to go anywhere anytime soon. It’s only going to grow.

“I think both of those components make me as – if not more so – excited than we were on Day One.”

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