News & Analysis: (August 2006)

M&O nabs Novant portfolio

MEADOWS & OHLY ACQUIRES EIGHT MOBs FOR $121.7 MILLION

By John Mugford

 

As expected, interest was extremely keen for a portfolio of five Class A medical office buildings (MOBs) offered for sale in recent months by Novant Health Inc., a growing, eight-hospital system based in Winston-Salem, N.C.

After receiving offers from a cadre of bidders – including a who’s who of public and private real estate investment trusts (REITs), pension funds and other investors – Novant chose to sell the 656,000 square foot portfolio to long-time Norcross (Atlanta), Ga.-based healthcare developer Meadows & Ohly LLC, which also lined up a financial partner in the acquisition.

The acquisition price was $121.7 million, according to Philip “P.J.” Camp of New York-based Shattuck Hammond Partners LLC, which marketed the properties for Novant.

The sale price equals about $185.52 per square foot, with a cap rate of about 6.8 percent, according to Mr. Camp. Three of the MOBs are on the campus of 531-bed Presbyterian Hospital in Charlotte, N.C., while one is on the campus of Presbyterian Hospital Huntersville, just north of Charlotte, and the other is on the campus of Presbyterian Hospital Matthews, southeast of Charlotte.

For Meadows & Ohly, a longtime developer, owner (typically with physicians as investors) and property manager, the acquisition marks the first time the company has acquired properties through a competitive bid, auction-like process. Meadows & Ohly will assume management duties for the MOBs as well, according to those involved in the transaction.

During the years, Meadows & Ohly has acquired four MOBs in off-market transactions from hospital systems with which it has had longstanding relationships, according to president Carleton A. “Carl” Ohly.

In those acquisitions, the health providers were looking to divest themselves of ancillary real estate in order to garner capital to invest in other areas of their operations – what Mr. Ohly calls the “classic model of why hospital systems are looking to sell MOBs today.”

That scenario holds true for Novant, a financially healthy system that operates myriad outpatient clinics as well as its eight hospitals, the largest of which is the 847-bed Forsythe Medical Center in Winston-Salem. The system, in fact, is in the midst of investing about $1 billion into upgrading and expanding its network in western North Carolina.

“We got involved in bidding for this portfolio because we had started targeting our marketing efforts to Presbyterian Hospital in Charlotte – to develop a new MOB for them – about three years ago,” says Mr. Ohly. “Not only is Novant an excellent system and Presbyterian an excellent hospital, but we were looking at Charlotte as a place where we wanted to get a foot in the door. When this opportunity presented itself, and our equity partners were interested, we decided to got involved.”

The company’s undisclosed financial partner for the Novant acquisition is a private equity group that makes a variety of investments, including real estate, and in recent years, on-campus MOBs, according to Mr. Ohly. Mr. Ohly says that he and others with Meadows & Ohly have a 20-year relationship with some of the equity group’s key individuals, whom Mr. Ohly calls “entrepreneurs.”

“They understand fully how we like to operate, and we understand how they do business and we feel very comfortable together,” he says. “They know that we’re interested in long-term ownership of these properties – we don’t look to own these for five years, or seven years.”

Lots & lots of interest

As noted earlier, the bidding for the Novant portfolio was “a very competitive process because of the very strong hospital system and the fact these are quality, on-campus buildings that are fully occupied,” says Mr. Camp of Shattuck Hammond Partners.

While Mr. Camp did not say how many bidders forwarded offers for the portfolio, he adds, “We knew this would generate plenty of serious interest so there was no need to market to a huge universe – it was strategically targeted.”

In the end, Novant, which retained ownership of the land beneath the MOBs, chose to sell to Meadows & Ohly because of its reputation and track record as a developer in addition to its ability to bring capital to the table through its equity partner.

“The decision came down to whether to sell to a big capital source such as a REIT, or to a developer that brings capital to the table but that also brings healthcare development and management expertise to the table – the idea being that developing a relationship with a developer could lead to more development deals in the pipeline,” says Mr. Camp. “Novant chose Meadows & Ohly for that reason from a high-quality list of firms that were involved in the bidding.”

In addition, Mr. Camps says Meadows & Ohly “maintained its pricing” throughout the due diligence process, even though interest rates fluctuated quite a bit during the several-months period.

“Bidders always have a chance to reflect upon their offer and some make changes – but Meadows & Ohly did not,” Mr. Camp says.

As part of the transaction, Meadows & Ohly has entered a letter of intent to develop a future MOB at Presbyterian Hospital – the fourth on-campus office building – for Novant.

Still the same

Even though acquiring the Novant portfolio through a competitive bid process was a first for Meadows & Ohly, the long-time developer does not plan to change its business strategy anytime soon, says Mr. Ohly.

Over the years, Meadows & Ohly has delivered more than 50 MOBs with about 5 million square feet of space. In most of its developments in recent years, the firm has retained a minority ownership share of the real estate while physician-investors own the rest. The company’s current portfolio totals about 3 million square feet of MOB space: it jointly owns about 1.8 million square feet with physicians and provides third-party management services for about 1.2 million square feet of MOB space.

“For 35 years now we’ve believed in the brother-in-law model of doing business – you know, like you’re going in business with your brother-in-law,” says Mr. Ohly, “and that means that we offer the doctors an opportunity to make a good investment in the buildings where they practice.

“We know we probably leave money on the table with our way of doing business, but we’re in it for the long-term cash flow and capital gains, and we’re not going to change that. We know that when the doctors are happy the hospitals are happy. And that’s when they call you back for more work.”

Because of the way the deal worked out, physicians are not involved in the ownership of the portfolio that Meadows & Ohly acquired from Novant. But Mr. Ohly says physicians will be given opportunities to invest in any future on-campus developments the company does for the provider.

While Mr. Ohly says the firm has not adopted a strategy of acquiring MOBs or portfolios of MOBs, he suspects that if all goes well with the Novant portfolio, the equity investment group will be interested in funding more acquisitions.

“That probably won’t take place anytime real soon because we need time to digest and adjust to having these new properties,” says Mr. Ohly. “We’re not interested in growing too fast. But we are interested in continuing to do development deals, and hopefully, if we do a good job for Novant, that will lead to more business with them. Typically, when a hospital system works with us they call on us again.”

As a result of taking over the management of the Novant MOBs, Meadows & Ohly has moved several people to Charlotte to oversee the newly acquired properties and to work closely with Novant officials, Mr. Ohly says. The Charlotte office is being led by Jay Bowling, a partner with the firm.

 

“The idea is that we’re not going to get stars in our eyes and go out and start bidding on and buying everything that comes down the pike,” Mr. Ohly says. “If we did that, we’d be losing the fundamentals on which we built this business. And we’re not going to lose those fundamentals – at least as long as I’m here.” q

1-COLUMN SIDEBAR:

The Novant portfolio

Here’s a closer look at the MOBs acquired by Meadows & Ohly and its equity partner from Novant Health:

■ Metroview Building – 88,000 square feet; attached to Presbyterian Hospital in Charlotte.

■ Presbyterian Medical Tower – 142,000 square feet; attached to Presbyterian Hospital.

■ Midtown Medical Plaza – 220,000 square feet attached to Presbyterian Hospital.

■ Physicians Plaza – 102,000 square feet; attached to Presbyterian Hospital Huntersville, Huntersville, N.C.

■ Presbyterian MOB – 98,000 square feet; attached to Presbyterian Hospital Matthews, Matthews, N.C.

 

CUTLINE FOR PHOTO (IF WE HAVE ROOM):

 

The 88,000 square foot Metroview MOB in charlotte, N.C., was part of the portfolio of buildings that Meadows & Ohly LLC acquired in recent weeks from Novant Health Inc.

Photo courtesy of Meadwos & Ohly LLC