News & Analysis/Page 1: Rendina-Windrose deal (January 2007)

Rendina, HCN strike big deal

SALE OF 18 MOBs TO SPUR FURTHER GROWTH FOR RENDINA

By John Mugford

Folks involved in healthcare real estate say their business is heavily relationship-driven – perhaps more so than many others.

A fine example of this can found in a recent medical office building (MOB) portfolio transaction between Palm Beach Gardens, Fla.-based Rendina Cos. and the Windrose Medical Properties division of Toledo, Ohio-based Health Care REIT.

Windrose, which was recently acquired by and is now a division of Toledo, Ohio-based Health Care REIT Inc. (NYSE: HCN), has entered into an agreement to acquire 18 MOBs from Rendina, a prolific medical office developer since its founding in 1998. The sale, for an undisclosed price, would also include Windrose’s acquisition of Rendina’s affiliated property management group, Paramount Real Estate Services.

The closing is expected in the second quarter of 2007.

“All of the properties have securitized loans, so it will be a while before this deal closes,” says A. David Carrillo, Rendina’s president and chief operating officer. Rendina is a privately owned firm that has developed, owned and managed hundreds of thousands of square feet of MOBs since the late Bruce Rendina founded the firm in 1998.

Fred Farrar, the president of the Windrose division of HCN, did not provide many details about the portfolio, such as square footage and exact locations of the buildings. He did say that the buildings are in 10 states, and he called the 18 buildings a “young portfolio, an outstanding portfolio – Rendina is one of the finest medical office building developers in the country.”

Mr. Farrar continued: “Most of the lease terms are for 10 years and have meaningful lease terms remaining. There’s a very strong revenue stream in place for an extended period of time; and the portfolio has a very low amount of deferred-maintenance and re-leasing considerations.”

As noted earlier, the transaction is an extension of a relationship established between Windrose and Rendina back in 2002. According to Rendina officials, Mr. Rendina, who died in December after a long battle with brain cancer, favored doing business with people and firms he knew and trusted.

Such was the case concerning Mr. Rendina’s feelings towards Windrose, including the firm’s Fred Klipsch, now vice chairman of HCN, and Mr. Farrar. According to executives of both firms, Messrs. Klipsch and Farrar began establishing a relationship with Mr. Rendina and his company not long after establishing Windrose as a publicly traded healthcare real estate investment trust (REIT) in 2002.

Earning their stripes

“Windrose basically courted us from 2002 to 2005, showing Bruce and the rest of us that they were quality owners worthy of acquiring assets from Rendina,” says Mr. Carrillo.

“They learned, as all of us have, that Bruce would not sell to just anyone. He figured his reputation was on the line with his hospital/clients, as well as his physician/clients and friends. He didn’t want to jeopardize those relationships and the trust that our clients felts towards us.”

After the three-year courtship, Rendina finally sold about 28 properties to Windrose in 2005, including a 22-building portfolio for about $241 million.  But there was a catch: it wasn’t the portfolio Windrose preferred.

Initially, Windrose wanted to acquire the 18 properties that compose the most recently portfolio transaction, as well as the property management group, Paramount. But Mr. Rendina and other Rendina Cos.’ officials decided to sell Windrose the first portfolio, perhaps as kind of a test, if you will.

“Windrose has done a great job with that initial portfolio,” says Mr. Carrillo. “And while we are generally a long-term holder of assets, the price was good enough in this case for us to sell, and the buyer is certainly a quality owner. In fact, after the way they’ve performed with the first portfolio, this was Windrose’s portfolio to lose. We did not put the portfolio out to bid.”

Mr. Carrillo acknowledges that HCN’s acquisition of Windrose in late 2006 caused Rendina officials “to pause.” But Rendina decided to move forward with the sale after meeting with Health Care REIT’s CEO George Chapman, who assured Rendina his firm is in the business for the long haul.

“We realize that Windrose is rather autonomous within the Health Care REIT organization, but we wanted to make sure we felt comfortable with this transaction if things changed tomorrow within the structure at HCN,” says Mr. Carrillo. “We wanted assurances that HCN would hold these assets for the long-term.”

Windrose rolling

Health Care REIT announced in September that it was in the process of acquiring Windrose, the owner of a portfolio of 92 outpatient buildings, most of which are MOBs. For HCN, the estimated $877 million acquisition ushered the firm into the medical office arena in one stroke of the pen – an arena the firm had targeted entering at the outset of 2006. Since its founding 36 years earlier, HCN had concentrated primarily on senior living facilities and was looking to diversify its portfolio.

As far as Windrose’s Messrs. Klipsch and Farrar, as well as Dan Loftus, the firm’s secretary and general counsel, are concerned, becoming a part of HCN provides them with a wider net and deeper pockets with which to acquire MOBs – what they call the “fun” part of their jobs.

In the September edition of Healthcare Real Estate Insights^™, Mr. Farrar stated: “In today’s low-cap rate environment, we at Windrose will be able to pursue opportunities that we might have been challenged to pursue before.” (For more information, please see “Winds of change at HCN” on Page 1 of the September edition.)

Mr. Farrar also added in the article: “Dan Loftus and I will be freed up from the distractions of having to raise capital and looking for debt sources when we look for and make acquisitions.”

Prior to the merger, Windrose’s goal was to acquire about $100 worth of assets annually and to develop, through HADC, its development arm, about $50 million worth of MOBs each year. That is expected to increase when the merger closes, which is expected soon. Prior to the closing, HCN provided Windrose with a $125 million line of credit to acquire properties.

HCN officials are expected to outline the company’s expectations and for goals for 2007 during a February conference call. Prior to its acquisition of Windrose, HCN typically invested – both through acquisitions and development — between $525 million and $600 million in healthcare facilities.

Utilizing the cash

With the sale or pending sale of nearly 50 properties during the past two years, as well as the sale of its property management unit and the recent death of its founder and namesake, some have wondered if Rendina Cos. will soon close up shop.

But that couldn’t be further from the truth, according to company officials. They say that the sale transactions provide the firm with an influx of cash that it plans to use to hit the streets and ramp up its development activity, including putting an emphasis on new geographic areas and new clients. One area Rendina officials are pinpointing is the Midwest, including the ever-expanding Chicago market.

While officials with the privately held Rendina Cos. would not divulge information about their current MOB portfolio, they did say that following the sale to Windrose the firm is still in possession of more than 750,000 square feet of properties, mostly in the Sun Belt. The company also has new projects under development or planned.

In previous years, Rendina typically developed about 2 million square feet of space or more annually, according to officials. It’s worked with about 30 healthcare systems over the years.

But company officials say they foresee increasing their development goals dramatically in coming years as they reach out to new clients , including non-hospital system clients, and new geographic areas. The sale of the recent portfolio helps the firm get a good jump on that prospect.

“We’ve always been quite conservative in our growth – we didn’t advertise ourselves much and grew through word of mouth,” says Todd H. Varney, Rendina’s executive vice president. “And we’ll continue to serve the client-base we’ve built over the years. But we know there are more clients out there that we can serve. We’ve done business in about 20 states so far, and there are more areas that we can expand into.”

Richard Rendina, the firm’s newly named chairman and CEO and the son of founder Bruce Rendina, says that while the firm has always looked to grow, the effort now will now be more “intensified.” He added that Rendina has remained quite busy over the years working with the top five or six for-profit systems and several dozen not-for-profit systems.

“It’s a new year and we consider this a new opportunity for us to grow this company,” says Mr. Rendina. “That’s what our father would have wanted us to do. My brother Michael and I, as well as the other officers, are going to put our stamp on this business. Our father would be proud of what we’re going to do.”

As a result of the portfolio sale to HCN, Rendina will be able to invest more cash into its developments, thereby increasing its yields. Also, because managing properties takes up plenty of time and effort, selling the 18 buildings frees the firm from some of those responsibilities and allows it to focus more effort on building new relationships and developing properties, according to Rendina officials.

The firm says it will continue offering physicians ownership stakes in the MOBs it develops. While Rendina typically offers physicians several choices of how they would like to invest in MOBs, the doctors typically choose the firm’s Equity Participation Program, in which physicians are offered 50 percent of the equity appreciation and 50 percent of the positive cash flow of a building.

The model was developed by Bruce Rendina and Donald A. Sands, the co-founders of another MOB developer, Palm Beach Gardens-based DASCO, back in the 1980s. Since its founding in 1998, Rendina Cos. has distributed more than $150 million back to the physician/investors through the program. q