News & Analysis: Triple Net REIT (March 2007)

Triple Net launches healthcare REIT



By Jessica Griffith


Triple Net Properties LLC of Santa Ana, Calif., has been buying up plenty of properties over the years. Its total portfolio of owned and managed commercial and multi-family facilities composes more than 32 million square feet.

And while the real estate firm has previously delved into medical office buildings (MOBs) and healthcare facilities, it recently launched its own privately held healthcare real estate investment trust (REIT).

The NNN Healthcare/Office REIT acquired its first properties in late January, when it purchased two medical office portfolios in Indiana. The REIT paid $14.8 million for Southpointe Office Park and Epler Park I, seven single-story medical office buildings (MOBs) in the Southport region of Indianapolis. The 97,000 square foot campus is 96 percent leased and located adjacent to 150-bed Community Hospital South, part of the Community Health Network of Indianapolis.

The REIT also bought Crawfordsville Medical Office Park and Athens Surgery Center in Crawfordsville, Ind., for $6.9 million. The four properties, which are on the campus of St. Clare Medical Center, include two small office buildings, an MOB and a surgery and imaging center. The facilities are 100 percent occupied by The Sisters of St. Francis Health Services Inc. of Perpetual Adoration.

The two acquisitions are representative of the types of properties the REIT plans to acquire in the future, says Dan Prosky, vice president of acquisitions for NNN Healthcare/Office REIT.

“It is important for us to acquire properties with favorable cap rates and a lot of those are in Texas, the Mid-Atlantic and the Midwest,” he says. “We want to acquire accretive deals that represent our dividend yield.”

The non-traded REIT initially approved an annual distribution rate of 6.5 percent and later raised it to 7.25 percent.

A non-traded REIT

NNN Healthcare/Office REIT is sponsored by Triple Net Properties LLC, which in turn is a subsidiary of NNN Realty Advisors Inc., a national commercial real estate firm. As noted, Triple Net and its affiliates manage more than 32.5 million square feet of real estate, and the company also offers programs that allow investors to participate in tax-deferred real estate exchanges. The healthcare REIT has four officers but all are employees of NNN Realty Advisors Inc.

In late 2005, Triple Net decided to expand on its two office REITs — which it has since liquidated — by launching both a healthcare REIT and an apartment REIT, Mr. Prosky says. He joined the company in early 2006 following 14 years in the medical real estate business, most recently in acquisitions for Long Beach, Calif.-based Health Care Property Investors Inc. (NYSE:HCP).

“We think non-traded REITs will continue to be successful,” says Scott Peters, CEO of NNN Healthcare/Office REIT. “In the last 12 to 18 months, four or five non-traded REITs have had exit strategies and we think the REIT will be valuable to shareholders.”

Triple Net entered the healthcare market for the “standard demographic reasons,” Mr. Prosky says. Healthcare represents 16 percent of the gross domestic product in the United States, and an aging and growing population suggests that figure will rise in coming years and decades.

“Healthcare also is a more stable class of real estate and is less reliant on the overall health of the economy,” Mr. Prosky says. “It can’t really be outsourced overseas. You can outsource a little, but 90 percent of healthcare has to be done here in the United States.”

The strategy

Moving forward, NNN Realty Advisors will acquire healthcare properties in some cases and then sell them to NNN Healthcare/Office REIT as the REIT raises capital.

The Indiana deals were handled in this manner, according to the officers. As of early March, the REIT had raised about $8.2 million from a maximum offering of $2 billion. The latter figure translates into about $4.5 billion to $5 billion worth of real estate, Mr. Prosky says.

He anticipates a liquidity window of five to seven years, in line with industry standards.

Mr. Prosky says he prefers to acquire new properties worth at least $20 million, although the REIT’s first purchases fell below that mark. An affiliation with a top-ranked healthcare provider or hospital system is crucial, he says.

“If you are affiliated with a high-quality hospital building, you will do well in the long term,” he says. “I would rather have a Class B building on a Class A campus than a Class A building on a B or C campus.”

The REIT is preparing to purchase two other buildings. One is the 105,400 square foot Gallery Professional Center in St. Paul, Minn., which is 69 percent leased and already owned by NNN Realty Advisors. The second is Lenox Park Building G, a 98,600 square foot Memphis office building that is master-leased to Pfizer Inc. (NYSE: PFE). Two MOBs in Georgia also are in the pipeline.

Most of the REIT’s acquisitions will be clinical buildings, including MOBs, surgery centers, hospitals and assisted living facilities, but Mr. Prosky says he is willing to consider buildings such as Pfizer offices if the financial profile fits with NNN’s strategy. q

Jessica Griffith is a business writer specializing in commercial real estate.

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