New healthcare group soars

IN TWO YEARS, LAUTH PROPERTY GROUP BUILDS STURDY PORTFOLIO 

 

By Jessica Griffith

 

When Lauth Property Group decided to create a healthcare division in recent years, the real estate development and construction firm brought in an expert.

In 2003, the Indianapolis-based company hired Todd Jensen, a regional vice president from Hammes Co.’s Washington, D.C., office. Mr. Jensen has 15 years of real estate experience, including a decade in the healthcare industry.

New business arrived swiftly for Lauth’s Healthcare Group. In fact, in 2005 the group had about $125 million in projects signed and started, accounting for 30 percent of the company’s overall construction starts.

“Todd has built a substantial pipeline in 26 short months,” says Mike Curless, an executive vice president at Lauth and one of four owners. The company employs 286 people and reported revenue of $221 million in 2004 and $280 million in 2005.

Recognizing a niche

Lauth built a few medical office buildings (MOBs) in the early 1990s, but it wasn’t until 2001 that the company identified healthcare as a potential area for growth.

“It wasn’t a focus of the company,” says Mr. Jensen, who serves as senior vice president for healthcare. “It was more reactive than proactive; a local project manager would find them and ask them to be the contractor.”

Once Mr. Jensen joined the company, he switched to an active approach. He called hospitals and health systems, utilizing contacts from Lauth’s regional offices in Charlotte, N.C.; Denver; Dallas; Orlando, Fla., and Phoenix, and its headquarters in Indianapolis. The location of some of those offices helped attract healthcare clients, Mr. Curless says.

“The population migration to the Sun Belt and Southeast and the overall expansion of healthcare real estate as the boomer generation ages contributes to the strong fundamentals that make healthcare a viable strategy,” he says.

Many of Lauth’s healthcare projects are in those two regions. One example is a 55,000 square foot cancer center for the St. Francis Cancer Institute in suburban Richmond, Va. The project is under construction and scheduled for completion this summer.

“This was sourced by a relationship in our Charlotte office,” Mr. Jensen says.  “One of the guys in our office and industrial group identified the opportunity and pursued it.”

Mr. Jensen says the building is an example of the way Lauth uses its network to attract healthcare business. The company has completed projects in more than 30 states and is licensed as a general contractor in every state except Hawaii.

“That willingness and ability to work in virtually any market in the country has enabled us to win business, especially from companies with multiple market requirements,” Mr. Curless says.

Lauth’s Healthcare Group employs 25 people in five of the company’s six offices, and Mr. Jensen says he is looking for healthcare staff members in Phoenix, which is booming with new hospitals and medical office buildings (MOBs).

In building the Healthcare Group, Mr. Jensen drew staff both from within Lauth and from outside firms. He declined to say, however, whether he hired anyone away from his former employer, Hammes.

Ability to multi-task

Officials with Mechanicsburg, Pa.-based Select Medical Corp. say they chose Lauth to develop about a dozen specialty hospitals in multiple cities because of the firm’s breadth of experience and its ability to staff projects in various locations.

Lauth will assist Select Medical in everything from site selection to development and construction, says David Cross, senior vice president with Select Medical, which operates 101 specialty hospitals that focus on medically complex patients. Most of its facilities are hospitals within hospitals (HIHs).

“These are the sickest of the sick,” Mr. Cross says. The specialty hospitals provide intensive care and the average stay is 25 days. Select Medical also operates 730 outpatient rehab clinics throughout the country and provides rehab services to numerous other healthcare organizations.

“We have so many hospitals under development that we needed to seek outside resources to complement ours,” Mr. Cross adds. “We were taken with Lauth’s level of resources. There’s an awful lot involved in these deals, with site selection, regulatory requirements, civil engineering, etc. They are experienced in all of those areas.”

Four of the projects are under construction in Orlando and Tallahassee, Fla; Dallas; and Augusta, Ga.

Vertical integration

 

Chairman and CEO Robert L. Lauth Jr. founded the company in 1977 and for more than two decades the company concentrated on retail, office and industrial properties. Two of its more well-known projects are Clay Terrace Lifestyle Center in Carmel, Ind., which has more than 500,000 square feet of retail space and 76,000 square feet of offices; and INTECH Park, an Indianapolis office park with 750,000 square feet and a tenant list that includes Eli Lilly and Alcoa.

In 1994, Lauth marked $1 billion in finished projects.

Lauth employs a vertical strategy, serving as both developer and general contractor for its projects. The company also offers financing, property management, sales and leasing and can subcontract design services.

“This helps us control the process better and control costs better,” Mr. Jensen says. “We’re often in a place to begin construction earlier because we can start work with less preleasing.”

This advantage helped Lauth land an anchor tenant in the North Meridian Medical Pavilion, a 180,000 square foot MOB in Carmel.

Community Care Inc. of Brentwood, Tenn., will open a 14,000 square foot ambulatory surgery center in the office building. Several medical buildings were proposed in the Meridian area, but timing was critical for Community Care, says Jeff Stockard, vice president and chief operating officer of the company.

“Lauth had the guts to go ahead and start construction once I had signed a letter of intent, a non-binding letter, I might add,” Mr. Stockard says. “We had several choices in the Meridian area, but I knew when they were willing to do that, their building would be the first one finished.”

The surgery center is scheduled to open this month. Mr. Stockard says most of Community Care’s surgical centers are in stand-alone buildings, including one in downtown Indianapolis. A multitenant situation required Community Care to deal with such issues as public restrooms and elevators, but Mr. Stockard says Lauth was willing to negotiate compromises on space usage.

Most of Lauth’s healthcare projects to date are outpatient facilities such as MOBs, clinics and ambulatory surgery centers, but the company also has built small, rural hospitals. Projects are under way in Colorado, Florida, Georgia, Indiana, North Carolina, Ohio, Texas, Virginia and West Virginia.

Trend-tracking

The healthcare team concentrates on projects that Lauth will develop and own, a nod both to the company’s preferred strategy and to trends in the medical industry.

“Increasingly, hospitals and healthcare providers are looking for off-balance-sheet financing,” Mr. Jensen says. “We thought hospitals and health systems would start looking for third-party capital 10 years ago, but it’s taken longer than we expected.”

He says Lauth is in an excellent position to finance projects because the privately held company has “substantial” financial resources.

Many of Lauth’s projects are 20 percent to 40 percent leased by nearby hospitals, with the remainder of the space occupied by physician groups or individual doctors. Some of the deals allow hospitals, doctors, or a combination of both to take an ownership stake in the building.

As Mr. Jensen looks to the future of healthcare real estate, he sees increased interest from outside capital investors as having an impact on the industry. Another factor is what Mr. Jensen calls the “retailization” of healthcare.

“Not only do hospitals have a nice hotel or upscale mall feel to them, many are considering putting convenience retail inside the hospital,” he says. This could include anything from a café to small shops.

“Also, when you look at outpatient facilities, where they are located and the types of services they offer, healthcare is almost like retail in location,” Mr. Jensen adds.

For example, many healthcare facilities offer wellness services similar to what one might find in a spa. And, these facilities often are located in mixed-use corridors amid commercial and retail businesses.

“A developer may want to do a major retail development, but often the city wants to see a mix of uses and healthcare is a good complement,” he says.

Growth plans

In 2006, Lauth expects to start about 800,000 square feet of healthcare space with a value of $160 million. The company anticipates growth of 25 percent per year in dollar value, Mr. Jensen adds.

The company recently added a Phoenix office and Mr. Jensen says Lauth will “seriously consider” an office in the Northeast in the near future.

Marketing in the healthcare group is targeted toward healthcare providers, from hospitals and health systems to physician practices. Efforts are directed toward project ownership and finance and the group has not pursued fee-for-service developments.

A complete development package appeals to companies such as WakeMed Hospital & Health in Raleigh, N.C., which is partnering with Lauth to build a 60,000 square foot MOB in the Brier Creek region of Raleigh.

It’s an area that currently has no medical services, says Carolyn Knaup, vice president for ambulatory services at WakeMed.

WakeMed will not own a portion of the building, but will give doctors a stake in ownership in exchange for signing a 10-year lease, Ms. Knaup says.

“That is extremely attractive to physicians,” she says.

WakeMed will lease 20,000 square feet in the building for outpatient rehab, laboratory space and radiology, as well as space doctors can rent by the half-day. About three-fourths of the remaining space already is leased, although the building is not yet under construction and will not open until 2007.

“That speaks volumes for the concept, for Lauth and for its relationship with local brokers,” Ms. Knaup says. “They have been very responsive to our needs and it is not the typical landlord relationship.” q

STATS

Headquarters: Indianapolis; with offices in Charlotte, N.C.; Dallas; Denver; Orlando, Fla.; and Phoenix

Revenues: $280 million in 2005

Healthcare Projects: $125 million signed or started in 2005; $160 million projected for 2006

Employees: 25 in healthcare; 280 overall in company

Founded: 1977

Chairman and CEO: Robert L. Lauth, founder

CONTACTS

Contact: Todd Jensen, senior vice president for healthcare

Main Phone: (317) 848-6500

Web site: wwwlauthproperty.com