Transactions (December 2006)

JVs pave way for Bremner-Duke merger

DEAL WOULD BE THE LATEST TO BLEND PUBLIC COMPANY WITH MED REAL ESTATE FIRM

 

By John Mugford

 

Since 2004, Bremner Healthcare Real Estate and Duke Realty Corp., both of Indianapolis, have been developing healthcare facilities in joint ventures. In fact, when it came to doing medical developments together in the past couple of years, the names of the two separate firms nearly became synonymous – as in Bremner-Duke.

It looks as if the firms are about to take the next step.

In recent weeks, Duke Realty (NYSE: DRE), one of the largest commercial real estate firms in the country with about 113 million square feet of rentable space, announced that it plans to acquire Bremner Healthcare for an undisclosed price. Bremner will become known as Bremner-Duke Healthcare Real Estate and will operate as a separate division – the healthcare division – of the overall company. The transaction does not require the approval of Duke’s shareholders and is expected to close in early 2007.

While financial details of the transaction were not disclosed, officials did say the entire Bremner team will be retained and will continue to look for development opportunities throughout the country. Duke will also acquire the remaining 50 percent ownership interests in the healthcare facilities it has developed in a partnership with Bremner.

Since the partnership was formed in 2004, Bremner and Duke have collaborated on nine healthcare projects with a total of 784,000 square feet of space.

The Bremner-Duke partnership represented a classic example of how major capital sources, such as Duke, have entered the healthcare arena in recent years. In this case, Duke teamed with an experienced healthcare developer and owner in order to enter the growing field of medical real estate. Duke provided a major infusion of capital and broad commercial real estate knowledge while Bremner provided the specialized healthcare real estate expertise.

Now, Duke’s acquisition of Bremner provides another classic example of today’s M&A activities in the healthcare arena. The partnership gives Bremner more of a nationwide presence than it had before. The deal also provides Bremner with more capital to do deals.

For Duke, the acquisition of Bremner gives it an immediate entrance into healthcare without having to build its own healthcare division from scratch. It also gives it an instant portfolio of healthcare properties without having to acquire such properties through the typical RFP bidding process.

Another recent example of such a merger was Toledo, Ohio-based Health Care REIT’s pending acquisition of Windrose Medical Properties Trust (NYSE:WMP) of Indianapolis.

Healthcare REIT (NYSE:HCN), which had focused mainly on senior healthcare and living facilities, was looking to enter the MOB market. Instead of looking to make acquisitions on a piecemeal basis in order to build up such a portfolio, HCN was able to obtain 92 outpatient facilities, including 75 MOBs, in one fell swoop. Its acquisition of Windrose – for about $877 million – is expected to close in early 2007. As part of the merger, Windrose would become a wholly owned subsidiary of Health Care REIT.

(For more on that merger, please see “Winds of Change at HCN” in the September 2006 issue of Healthcare Real Estate Insights^™.)

Other recent M&A activity involving healthcare real estate firms includes CB Richard Ellis’s pending acquisition of Trammell Crow Co., including Trammell Crow Healthcare Services, and Health Care Property Investors’ (NYSE:HCP) acquisition of CNL Retirement Properties Inc. several months ago. Back in 2004, CNL itself had acquired a 55 percent interest in Palm Beach Gardens, Fla.-based DASCO Cos., one of the country’s largest MOB developers and owners.

As has been the case in several of those mergers and acquisitions, officials with both Bremner and Duke say their merged firm will be able to hit the streets with added resources and a larger presence, which is expected to lead to more business. Duke operates offices in 19 major cities.

For Duke, part of the lure in teaming with Bremner is the growing healthcare industry, according to Denny Oklak, Duke’s chairman and CEO.

“Healthcare expenditures in the United States are expected to exceed $33 billion by 2010, a 50 percent increase over 2002,” said Mr. Oklak in a news release. “Almost 35 percent of these expenditures will be fore outpatient facilities such as medical office buildings, surgery centers, and clinics.”

For Bremner, the merger allows it to pursue healthcare clients on a more national scale instead of the more regional scale it has focused on in the past. Jim Bremner, the current president and CEO of Bremner Healthcare is slated to become the president of the Bremner-Duke Healthcare Real Estate Division.

“The healthcare real estate industry has become more sophisticated over the past few years,” said Mr. Bremner in a news release. “Combining Bremner with the Duke organization will allow us to serve our clients at a much higher level.

“Hospitals and physician groups throughout the country desire a partner with capital strength and local real estate expertise. Duke’s local presence in 19 cities provides us instant access to real estate professionals in the growing healthcare markets.”

Since it was formed in 1986 as Bremner & Wiley Inc., Bremner Healthcare has run up some impressive healthcare real estate numbers. The firm currently manages about 3.5 million square feet of healthcare space.

Since starting to focus on healthcare development in 1989, the firm has built about $1 billion worth of medical facilities, including medical office buildings (MOBs), outpatient facilities, wellness centers, surgery centers, specialty care centers and others. Bremner provides its services – development, leasing, planning, owning and management – to both health systems and physicians groups.

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No word yet on how

HCA’s LBO might

affect real estate

NASHVILLE, Tenn. – HCA Inc., which closed Nov. 17 on the largest leveraged buyout (LBO) in U.S. history, is also one of the largest owners of healthcare real estate in the country. The $33 LBO also leaves HCA with $27.7 billion in debt, begging the question: Will HCA sell some assets – possibly including real estate – to free up more cash to service the debt? So far, the nation’s largest hospital chain has had no official comment on that.

HCA had 172 wholly owned hospitals and 95 wholly owned freestanding outpatient centers as of Sept. 30, the to the firm’s most recent Form 10-Q filing with the U.S. Securities and Exchange Commission (SEC). It also had another seven hospitals and nine outpatient centers that were owned as part of joint ventures. Property and equipment was by far the largest item on HCA’s balance sheet at that time, with a stated value more than $21 billion.

But even though HCA assumed $16 billion in new debt as part of the LBO transaction and assumed $11.7 billion is existing debt, a company spokesman says the firm has made no official comment regarding the potential sale of any real estate.

“No major changes like that … were required as part of the merger agreement,” HCA spokesman Ed Fishbough told HREI^™.

During the past two years, HCA sold some of its hospitals not in major urban or suburban areas. Most recently, in a deal that closed June 1, HCA sold four Virginia hospitals to Nashville-based LifePoint Hospitals Inc. (Nasdaq: LPNT) for $239 million.

HCA was acquired by a private investor group including affiliates of Bain Capital, Kohlberg Kravis Roberts & Co., Merrill Lynch Global Private Equity, HCA founder Dr. Thomas F. Frist Jr. and HCA management.

New Jersey hospital

is top bidder for

bankrupt facility
PASSAIC, N.J. – St. Mary’s Hospital in Passaic in mid-November submitted a bid of $36.7 million for the bankruptcy-protected PBI Regional Medical Center, also of Passaic. A federal judge announced recently that St. Mary’s is the leading candidate for the acquisition.

According to news reports, St. Mary’s bid tops an earlier offer of $30 million from an investment firm.

St. Mary’s officials have said that if the hospital acquires PBI, it would likely consolidate the two acute-care hospitals, which are about two miles apart. St. Mary’s is a not-for-profit facility that, along with three other groups, had provided not-for-profit PBI with a $5 million emergency “bridge loan” loan to remain open. Those other groups are a local bank, the New Jersey Health Care Financing Administration, and a local group of donors calling themselves the “Good Samaritans.”

St. Mary’s wants to block a potential buyer from turning PBI into a for-profit hospital in a town that has too many beds, according to hospital officials. St. Mary’s, with 200 beds, operates at an average occupancy of 65 percent while PBI has 264 beds and a significantly lower occupancy.

As of recent weeks, PBI owed creditors more than $60 million and would have been forced to close if not for the bridge loan, which had to gain the approval of a U.S. Bankruptcy Court judge.

St. Mary’s officials say the hospital would finance the acquisition of PBI with a $46 million bond issue by the New Jersey Health Care Financing Administration and with financing on accounts receivable.

GP Medical Ventures,

docs team to buy

bankrupt hospital

BIRMINGHAM, Ala. – GP Medical Ventures of Nashville, Tenn., is partnering with a physicians’ group in acquiring bankrupt Carraway Methodist Medical Center in Birmingham. The joint venture will pay about $26.5 million for the 288-bed not-for-profit hospital, according to U.S. Bankruptcy Court documents. A judge approved the transaction in early November. Carraway had filed for bankruptcy protection in September, posting debts of about $144 million.

Carraway, a 288-bed not-for-profit hospital, will be converted to a for-profit facility called Physicians Medical Center, according to statements by hospital officials. The physicians’ group is composed of 54 local doctors.

GP Medical was part of a joint venture with 85 doctors at the 100-bed Houston Town & Country Hospital. The partnership faulted last month on its lease with Medical Properties Trust, a real estate investment trust (REIT) that concentrates on healthcare real estate. MPT has since turned over the lease to a new partnership, according to MPT officials.

For the Record

Children’s Hospital Boston recently acquired a 102,000 square foot MOB at 1 Brookline Place from the Winn Cos. for $59.7 million. The hospital is in negotiations to buy adjoining space at the Brookline complex, which includes another 105,000 square feet. Trammell Crow Co. represented the seller…  Jamison Properties recently acquired a 150,000 square foot MOB at 2600 Redondo Ave. in Long Beach, Calif., from Long Beach/Signal Hill Partners for $30 million. The building was fully leased to three tenants at the time of the sale. Major tenants include Long Beach Memorial Hospital and HealthCare Partners. Richard Plummer, Michael Sidney and Andrew Harper of Cushman & Wakefield represented the seller. Jamison Properties represented itself… Heitman recently acquired a 95,896 square foot medical office portfolio in the Chicago area for $22.75 million. The MacNeal Medical Office portfolio is on the campus of MacNeal Hospital in Berwyn, Ill. Erik Foster and Michael Wilson of Marcus & Millichap’s Chicago office negotiated the deal, which reportedly had a cap rate of less than 7 percent… Noyack Medical Partners of New York recently acquired two MOBs – one in Indiana and one in Maine – for a total of $11 million. The first is a 30,000 square foot MOB in Evansville, Ind. The facility is located next to the Deaconess Hospital campus. The second acquisition is Stroudwater Crossings, an MOB in Portland, Maine. The MOB is 100 percent occupied… The San Francisco office of Cohen Financial recently secured $10.4 million in refinancing debt for a 29,000 square foot Forest Medical Arts medical and dental office building in San Jose. The loan replaced construction financing. The building was 50 percent leased at the time of the new loan, and is owned by Green Valley Corp. Paul Schroeder of Cohen arranged the financing… St. Louis-based Ascension Health recently announced plans to acquire 50 percent of Wichita, Kan.-based Via Christi Health System in a non-cash deal. Via Christi operates four acute-care hospitals, one rehab hospital, an insurance company and several other healthcare facilities. It is sponsored by the Sisters of St. Joseph and Marian Health System of Tulsa, Okla. Via Christi reported operating income of $55.7 million on operating revenue of $1.2 billion in 2005. Ascension reported operating income of $497.8 million on operating revenue of $11.4 billion in 2006… Muskogee (Okla.) Regional Medical Center recently agreed to a 40-year sublease with for-profit Capella Healthcare of Franklin, Tenn. The sublease is part of a $120 million deal in which Capella would acquire certain operating assets. The 244-bed hospital currently leases its property from the city of Muskogee. The agreement will provide the hospital with $28 million for capital improvements over the next five years… Community Health Systems of Brentwood, Tenn., recently closed on two separate long-term leases of not-for-profit hospitals. Community acquired a 30-year lease on the 78-bed Campbell Hospital in Weatherford, Texas, from Parker County (Texas) Hospital District, and it signed a 30-year lease for the 47-bed Union County Hospital in the far southern-Illinois city of Anna. Community, which now has a portfolio of 77 hospitals, has managed the hospital in Anna since September 2001… Hackensack University Medical Center in New Jersey has agreed to acquire the 154-bed Pascack Valley Hospital in Westwood, N.J., from Well Care Group. Financial details were not disclosed; the deal is expected to close in early 2007. Hackensack plans to help establish new service lines at Pascack, which lost $13.7 million on revenue of $81.6 million through August of this year, according to Standard & Poor’s rating agency. Pascack has a debt rating of B+ with a negative outlook. S&P is not likely to take action on the rating until it learns more about the transaction… NTS Realty Holdings Limited Partnership (AMEX: NLP) recently announced that it has entered agreements to sell Springs Medical Office Center and Springs Office Center, two of its office buildings located in Louisville, Ky., to an unaffiliated Kentucky limited liability company. The two properties have a total of about 225,000 net rentable square feet… Trammell Crow Co. also recently announced that its healthcare unit, Trammell Crow Healthcare Services, acquired a contract to manage 2.5 million square feet of space for Cleveland Clinic in Cleveland.  Trammell Crow acquired the contract from Pittsburgh-based Armstrong Development Co. In entering the Cleveland market, Trammell Crow also acquired a commercial brokerage firm, Brandon Wiant Converse. q