News and Analysis (May 2006)

New player makes jump to MOBs


By John Mugford


Jacksonville, Fla.-based Montecito Property Co. LLC has become quite a significant player in the residential condo-conversion industry, in which it buys multifamily properties and turns them into upscale condominiums.

“Significant” could be considered an understatement, as the company in the last year acquired about $1 billion worth of multifamily properties, all in the Sun Belt, to be redeveloped and sold as condominiums. It also recorded sales of about $1 billion in 2005

Now, like a growing number of companies, Montecito has joined the ranks of firms adding concentrations in healthcare real estate, namely medical office buildings (MOBs). The company plans to acquire, in partnerships or with investors, hundreds of millions of dollars worth of MOBs, according to Montecito partner Bruce Taylor.

As it did with its entry into the residential condo-conversion market, Montecito has hit the ground running. In April it’s newly formed affiliate, Montecito Medical Investment Realty LLC, in a joint venture with Newport Beach, Calif.-based Buchanan Street Partners, closed on the acquisition of 14 MOBs with a total of 583,912 square feet – for an average MOB size of almost 42,000 square feet. Further details about the portfolio were not supplied. Buchanan Street is a real estate investment bank.

While financial details of the transaction were also not disclosed, if Montecito and Buchanan Street paid the current national sales average for MOBs of about $200 per square foot, the price would have been somewhere in the neighborhood of $11.7 million.

In April, Healthcare Real Estate Insightsreported that the average nationwide sale price per square foot (PSF) for MOBs had, for the first time, reached $200. (Please see “Average MOB sale price hits $200 PSF” in the April 2006 edition of HREI). The statistics were compiled by national brokerage firm Marcus & Millichap.

The buildings acquired by Montecito and Buchanan Street are mostly in the Sun Belt and mostly on or near hospital campuses of for-profit, Nashville, Tenn.-based HCA Inc. (NYSE: HCA), the nation’s largest hospital company. Ten of the MOBs are in Florida, while the others are in Richmond, Va., Glendale, Ariz., and two in Fort Wayne, Ind.  

The seller was Boca Raton, Fla.-based Greenfield Group, which will continue to manage the properties.

“It’s been reported that we’re looking to convert the MOBs to condos, and that’s just not necessarily the case,” Mr. Taylor says. “It was reported that way most likely because we’re known for condo conversions in the residential market. But for these medical properties, we’re going to look at market conditions and position the properties in the way we think they will be most successful.”

The acquisition was an off-market deal, as Montecito’s CEO Chip Conk had developed a relationship with Greenfield in recent years.

“In terms of location, this acquisition kind of parallels what we’ve done in residential because we’ve done a lot of condos in the top second-home markets – and these properties are mainly in the Sun Belt,” says Mr. Taylor. “When you look at how many Baby Boomers in the country who are turning 60 each day, it’s a crazy number. As we see it, it’s a natural progression for us to get in that business based on the healthcare needs of aging Baby Boomers, and other demographic and medical trends.”

As Mr. Taylor notes, an estimated 7,900 Baby Boomers turn 60 each day, according to the U.S. Census Bureau.

More acquisitions planned

According to Mr. Taylor, the Greenfield acquisition is likely to be the tip of the iceberg for Montecito, as it is planning to acquire up to $1 billion worth of MOBs. Future acquisitions could take a variety of ownership structures, such as forming partnerships, or starting a fund with investors.

“The Greenfield acquisition is part of a strategic expansion we’ve been planning for some time,” Mr. Conk stated in a press release.

“The seven partners in Montecito have a wealth of knowledge in real estate and we know how to close transactions,” Mr. Taylor says. “We think there are a lot of good deals out there, and we plan to grow in this industry, as the industry itself is going to continue to grow.”

The press release from Montecito indicates the company’s strategy: “Ours is a long-view strategy,” stated James P. Josephson, Montecito Medical’s vice president of finance. “We will be in key markets throughout North America acquiring well-located, cash-flow stable properties with strong growth potential.”

“Once the full portfolio is acquired, we plan to strategically dispose select elements over a four-year period,” Mr. Josephson explained.  “Our aim is to maximize a risk-adjusted return on invested capital for all our equity partners.” q

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