Transactions (July 2006)

A hospital redevelopment success story

642,000 S.F. ELIZABETH PLACE IS ON THE BLOCK IN DAYTON, OHIO

 

By John Mugford

 

Here at Healthcare Real Estate Insights^™, we’re not in the practice of writing promotional pieces about medical properties on the sale block.

But in Dayton, Ohio, the Washington, D.C.-based office of Marcus & Millichap is marketing quite a unique medical facility: the redeveloped and repositioned former Franciscan Medical Center. The 622-bed hospital, long known as St. Elizabeth’s, was a mainstay close to Dayton’s central business district for about 120 years.

Quite a bit has been written in a variety of publications about the difficulties of repositioning and redeveloping former hospitals.

But in Dayton, it looks like a former day trader, Norm Schwab, has put enough sweat equity and enthusiasm into repositioning the 642,000 square foot former hospital to make such a conversion work.

The former hospital is now a medical mall called Elizabeth Place. With nine interconnected buildings built between 1952 and 1996, the facility has an occupancy rate of about 71 percent.

After pumping $27 million into improving the property since 2002, Mr. Schwab, who has some equity investors, has decided to sell the facility, which sits on 26 acres – 7 acres of which are developable. Marcus & Millichap has the property listed for $53 million, which includes 1,460 parking spaces. The ARGUS pro forma cap rate is listed as 8 percent.

According to Jim Kornick a senior associate and director with Marcus & Millichap, Mr. Schwab, who had no medical real estate experience prior to acquiring the hospital building, came to the conclusion that now is the right time to sell. Mr. Schwab believes an experienced real estate firm or investor will be able to carry the project to its full potential, according to Mr. Kornick.

“He’s provided the critical mass for the project,” says Mr. Kornick. “The next owner will probably have experience in such endeavors and will have a definite strategy and see the potential for improving on the return on the investment.

“There’s a great deal of value to be added considering that most of the current tenants were signed to very low lease rates and shorter terms. The specialty hospitals are on 10-year leases, with options. And the facility is located near several acute-care hospitals, including the 865-bed Miami Valley Hospital.”

Against the odds

Back in 2000, Franciscan Medical Center was gasping for air.

When the hospital’s parent, the Franciscan Sisters of the Poor, announced that it would either sell or close the facility, Nashville-based Vanguard Health System made a run at acquiring it, as did a group of physicians. After negotiations with both entities failed – as well as with other suitors – the Franciscan Sisters closed the hospital. It sat mothballed for a couple of years.

Enter Mr. Schwab, who was working as a day trader in Chicago at the time. He, along with some equity investors, acquired the 642,000 square foot facility and 26 acres for – according to Mr. Kornick –  “next to nothing.” In this case, that meant $3.3 million.

There were doubters about the property’s prospects for success. For one thing, Mr. Schwab, along with property manager Patsy Boatright, took on the redevelopment and leasing of the massive facility on their own — without hiring a major commercial real estate firm. Ms. Boatright has worked at the facility for more than 20 years, as she was previously employed by Franciscan Medical Center.

In addition, observers did not necessarily view the location as a prime location for such a project. In fact, a local business publication quoted a developer as saying Elizabeth Place was likely to be hampered by the city of Dayton’s stagnant population growth.

But Mr. Schwab and his small crew persevered and made the project work, according to Mr. Kornick. Elizabeth Place landed 15 tenants and filled about a quarter of the space in the first year.

Today, as noted earlier, the facility is 71 percent occupied, with its tenant list including four specialty centers: a surgery center, an acute rehabilitation center, a long-term acute care (LTAC) hospital and a bariatric/cosmetic surgery center. Other tenants include Wright State University’s Boonshoft School of Medicine, the clinical and administrative offices of certain Montgomery County health offices, and others, about 90 percent of which are medical related. The remaining tenants include a variety of retailers catering to the tenants and their patients.

Mr. Kornick says that in addition to the critical mass already created by the signing of valuable, destination-type tenants, the facility includes amenities such as an auditorium, a view of the Miami River, easy access to I-75 and U.S. Route 35, and adjacent facilities that house a nursing home and a heart hospital.

“What’s impressive about the project is that it’s brought in a lot of tenants from outside of the market – which pleased local business leaders who did not want to see a simple reshuffling of the area’s medical tenants,” says Mr. Kornick.

After marketing Elizabeth Place to quite a number of potential buyers throughout the country, Marcus & Millichap was looking to close the bidding process in coming weeks, Mr. Kornick says. q

Windrose acquires

MOBs for $29.4M

from Baptist Health

BIRMINGHAM, Ala. – Indianapolis-based Windrose Medical Properties Trust Inc. (NYSE: WRS) is continuing with its aggressive strategy of buying up medical office buildings (MOBs). In early June, the real estate investment trust (REIT) announced that it had closed on the acquisition of five MOBs from Birmingham-based Baptist Health System (BHS).

The sale price for the on-campus properties, which have a total of about 334,400 rentable square feet, was $29.4 million.

For BHS, the impetus to sell was based on strategy, as the provider was looking to get out of owning MOBs and focusing on its core mission of providing healthcare to patients, according to system officials.

To that end, the system’s board of trustees recently approved an investment of $118 million on first-phase capital improvements at its four wholly owned hospitals. The work is slated for completion in 2009.

The five properties acquired by Windrose include: the eight-story, 66,000 square foot Baptist Princeton Office Building 1; the five-story, 16,000 square foot Baptist Princeton Professional Office Building 2; the five-story; 127,000 square foot Baptist Princeton Professional Office Building 3; the two-story Baptist Health Center Cahaba Valley; and the two-story, 23,000 square foot Baptist Heath Center Trussville Clinic.

Windrose has also announced that has contracted BHS to self-develop a 60,000 square foot MOB on the Citizens Baptist Medical Center campus in Talladega, Ala. The building is part of the first phase of a $36 million master site plan at Citizen’s. Windrose’s development subsidiary, Hospital Affiliates Development Corp. (HADC), is handling the Talladega project.

Baptist, which has turned around its financial position in recent years, was represented in the transaction by New York-based Shattuck Hammond Partners LLC.

“We think Windrose made a savvy acquisition because Baptist Health is in a much better financial position and the portfolio is worth a lot more than it was just a couple of years ago,” says Philip “P.J.” Camp, principal with Shattuck Hammond. “Windrose is accustomed to dealing with strong systems, but in this case they bet on Baptist and its turnaround and we think that was a good decision.”

Hospital up for

sale 15 months

after reopening

PORTLAND, Ore. – Real estate investment trust S.J. Amoroso Properties LLC of Redwood Shores, Calif., has announced it will purchase the Physicians’ Hospital LLC in Portland. The hospital is up for sale just 15 months after it reopened under the ownership of four doctors.

The REIT, following the purchase will lease the property to a health care operator, Regency Hospital Co. of Alpharetta, Ga. Regency signed a letter of intent to operate a 60-bed acute care hospital on the site, but the letter was withdrawn May 4. The Portland Development Commission provided a $500,000 loan to assist with tenant improvements.

The for-profit hospital has had four CEOs in one year. It achieved at least two profitable months in the first six months of its operation last year. However, the Centers for Medicare and Medicaid Services (CMS) pulled the hospital’s Medicare funding in March. After 23 days, CMS revived its Medicare reimbursement and restrictions on patient admissions. CMS surveyors found two deficiencies at the hospital in February.

The hospital is still operating and offers acute medical and surgical services, urgent care, diagnostic imaging and other services. Last summer, the hospital reported that it employed 40 full-time staff.

Triple Net buys

MOB on campus

of Mayo Clinic

ROCHESTER, Minn. – Santa Ana, Calif.-based Triple Net Properties has acquired a two-story, 205,000 square foot medical office building (MOB), occupied by the Mayo Clinic in Rochester, Minn. The property is currently 100 percent leased by the Mayo Clinic and is used for medical education and research.

The building, constructed in 2000, also includes approximately 26 acres of land which could be used for expansion. The building was purchased from CEL (MN) QRS 14-40 Inc. of Delaware. Financing was provided by LaSalle Bank.

LifePoint agrees

to buy 4, not 5,

hospitals from HCA

NASHVILLE, Tenn. – HCA Inc. (NYSE: HCA), the largest U.S. hospital company, and Brentwood, Tenn.-based LifePoint Hospitals Inc. (Nasdaq: LPNT) have agreed to modifications to their previously announced hospital deal.

HCA reduced the price from a previously agreed upon $330 million for five hospitals and will now sell LifePoint only four hospitals for $254 million. All of the hospitals are in Virginia and West Virginia.

The omitted hospital, Putnam General Hospital, is located in West Virginia and is entangled in a conflict with one of its doctors. The four remaining hospitals earned collective profits of $14.6 million in 2004, while Putnam General Hospital lost $1.2 million in the same year.

LifePoint was created in 1999 when HCA spun off a portfolio of more than 50 non-urban hospitals.

For the record

Triad Hospitals of Plano, Texas is forming a not-for profit joint venture with Baptist Health System of east Tennessee. Triad will acquire 80 percent interest in four hospitals. While the purchase price was not disclosed, it will be large enough to allow Baptist to immediately pay off its $217 million id debt. Triad has also committed at least $140 million more as a line of credit to Baptist and for capital projects over the next five years… Mechanicsburg, Penn.-based Vibra Healthcare has purchased a newly constructed 60-bed long term acute care hospital in Dallas adjacent to the University of Texas Southwestern medical complex… Dallas-based The Cirrus Group has purchased a pediatric medical office complex in Plano, Texas for an undisclosed amount… Community Health Systems of Brentwood, Tenn. has acquired the 109-bed not-for-profit Mineral Area Regional Medical Center in Farmington, Mo… Indianapolis-based Clarian Health Partners has purchased 95 acres in Saxony, Ind. It is not clear what Clarian will do with the site, but plans might include a large MOB or several smaller buildings…Cincinnati, Ohio-based Al Neyer Inc. has announced plans to upgrade the Evendale medical building, also in Cincinnati. The 62,000 square foot building, which is 60 percent vacant, was purchased by Neyer from Jewish Hospital for $3.7 million. q