Transactions (March 2007)

Montecito, ING launch JV with MOB buys

TWO FIRMS NOT KNOWN FOR MEDICAL REAL ESTATE INVEST MORE THAN $90 MILLION

By John Mugford

Montecito Medical Investment Co. (MMIC) of Jacksonville, Fla., recently announced that it has entered a joint venture with New York-based ING Clarion Partners to acquire medical office buildings (MOBs) throughout the country.

To kick off the partnership, the firms announced that they have teamed up to acquire their first portfolio: four MOB properties with a total of 466,000 square feet of space. The sales price was more than $90 million.

The four properties are: El Dorado Senior Services Building in Tucson, Ariz.; Vero Beach Medical Suites in Vero Beach, Fla.; Gwinnett Medical Office in Lawrenceville, Ga.; and Knoll I and II, which are off-campus MOBs in Columbia, Md.

Montecito Medical was founded in 2005 as the healthcare property acquisition subsidiary of Montecito Property Co. LLC, one of the country’s largest residential condominium conversion firms.

Montecito Medical entered the healthcare real estate market in early 2006 when it acquired a 14-property portfolio of MOBs from Florida-based Greenfield Group. In that acquisition, Montecito partnered with real estate investment bank Buchanan Street Partners, based in Newport Beach, Calif.

In a recent press release from Montecito, the company notes that it plans to build a “significant” portfolio with ING Clarion through acquisitions, investments, and new development. With the most recent acquisition, Montecito’s portfolio now tops 1 million square feet.

“Ours is a long-term strategy,” said Montecito Medical CEO Chip Conk in a press release. “We will be in key markets throughout North America acquiring well-located, cash-flow stable properties with strong growth potential.”

New York-based Broad Street Advisors LLC acted as an advisor to Montecito in forming the joint venture.

ING Clarion Partners provides private market real estate investment management services to institutional investors. The firm manages about $32 billion in commercial and residential assets, primarily in the multi-family, office, industrial and retail sectors. ING Clarion Partners manages its assets through separate accounts and co-mingled strategies. Property management affiliate ING Clarion Realty Services operates from about 50 regional and branch offices across the nation.

The investment management  firm was established in 1982 and became part of Netherland’s ING Groep NV (NYSE: ING) in 1998.

Boston Archdiocese

to sell hospital system

to Ascension Health

BOSTON – St. Louis-based Ascension Health recently signed a non-binding letter of intent to acquire Caritas Christi Health Care, a six-hospital system owned by the Archdiocese of Boston.

Ascension, the country’s largest Catholic healthcare system with 70 acute-care hospitals, reported net income of $803 million on revenue of $11.4 billion for the fiscal year that ended in September 2005.

The deal is expected to close in July of this year, according to the parties involved.

In a prepared statement, Cardinal Sean O’Malley, the archbishop of Boston, said the archdiocese was pleased to sell the system to a Catholic organization with plenty of financial strength. The archdiocese had announced several months earlier that it was evaluating its ownership of Caritas Christi, which has struggled financially. The system reported net income of $33 million on revenue of $1.17 billion for the fiscal year ended Sept. 30, 2005. The system had lost $14.3 million a year earlier.

For the Archdiocese of Boston, selling Caritas Christi would end nearly a century in the hospital business, as it has owned and operated St. Elizabeth’s Medical Center in Brighton, Mass., for nearly 100 years. St. Elizabeth’s is a teaching affiliate of Tufts University School of Medicine

The archdiocese formed its system in 1985 and it now includes six hospitals with a total of 12,000 employees. Observers say Caritas Christi was one of the last small, independent systems in the country to be owned by a Catholic archdiocese.

The transaction might not be the last that Ascension has to announce in coming months, as it was reportedly in talks to become the 50 percent owner of Via Christi Health System, a four-hospital Catholic system based in Wichita, Kansas. It was also in talks to acquire Eastern Health System, a three-hospital system in Birmingham, Ala., where Ascension owns St. Vincent’s Hospital.

Triad Hospitals going

private in sale

totaling $6.4 billion

PLANO, Texas – Triad Hospitals Inc. (NYSE: TRI) of Plano, Texas, announced in early February that it had entered a definitive merger agreement with affiliates of CCMP Capital Advisors (a JPMorgan Chase & Co. spin-off) and GS (Goldman Sachs) Capital Partners. The transaction is valued at about $6.4 billion, including about $1.7 billion of debt.

As a result of the transaction, publicly traded Triad would become a privately owned healthcare system.

Triad agreed to be acquired for $50.25 per share, 16 percent above its closing stock price in early February. The buyers, which are affiliates of CCMP Capital Advisors and GS Capital Partners, will assume $1.7 billion in debt.

In a press release, Triad Chairman and CEO James D. Shelton called the agreed-upon price “a very, very healthy premium to our shareholders.” He added that Triad’s doctors, nurses and patients should see no changes as a result of the sale.

Triad’s stock had slumped since mid-2005. Then, in December 2006, the largest shareholder, hedge fund TPG-Axon Capital Management LP, which held about 9 percent of the stock, said the hospital company had “remarkably poor financial analysis and controls” and had failed to state how it would improve its financial performance.

Triad was spun off from Nashville, Tenn.-based HCA Inc. in 1999 and grew by acquiring smaller hospital operators, mostly in smaller cities in the West and Southwest. Today, it operates 53 hospitals and 13 outpatient surgery centers with nearly 10,000 beds.

The private equity groups valued Triad because of its relatively low amount of debt, plenty of real estate holdings, and has not made significant efforts to control its costs, according to an analyst with CRT Capital Group., said the private-equity groups valued Triad because it has relatively light debt, strong real estate holdings and hasn’t made much of an effort to control costs.

Some observers say Triad’s privatization could be part of a trend, as HCA recently went private in a massive deal and several other publicly owned hospital systems could follow suit.

Attorney general OKs

Paradise Valley sale

near San Diego

NATIONAL CITY, Calif. – The $30 million sale of not-for-profit Paradise Valley Hospital in National City, Calif., to for-profit Prime Healthcare Services Inc. of Victorville, Calif., was recently given the go ahead by California Attorney General Jerry Brown. The seller is Roseville, Calif.-based Adventist Health.

 

In approving the transaction, the attorney general, however, placed more than a dozen conditions on the transaction involving the money-losing hospital near San Diego.

For example, Prime Healthcare is required to keep 301-bed Paradise Valley facility open until at least 2012. The hospital also must continue to serve Medicare and Medicaid patients, must spend at least $2.5 million on charity care and $1.2 million on community services annually, and is required to invest at least $5 million in capital improvements. In addition, Adventist Health agreed to contribute $3 million to a local charitable foundation to fund healthcare programs.

The transaction had its critics, as several community groups and a group of doctors and investors wanted Paradise Valley to remain a not-for-profit hospital. The doctors and investors, in fact, formed a group, called the Paradise Preservation Group, that submitted a competing bid for the hospital.

Prime Healthcare is a physician-owned system that operates seven other hospitals in Southern California. Adventist had twice rejected bids from the Paradise Preservation Group.

Baptist in Tennessee

hires consultant

as it looks for buyer

KNOXVILLE, Tenn. – As Baptist Health System of East Tennessee, based in Knoxville, Tenn., continues to look for buyer or capital partner, it has hired Chicago-based Wellspring Partners Ltd. to handle the day-to-day operations of its four hospitals. Wellspring is charged with reviewing each hospital’s in terms of physicians and employees, according to Baptist officials.

The system continues to discuss potential acquisitions, or other strategic options, with not-for-profit and for-profit organizations, according to Baptist.

Back in October, Baptist’s CEO, CFO and senior vice president of business development left the system. At that time, Baptist had a deal in place to form an 80-20 joint venture with Plano, Texas-based Triad Hospitals Inc. (NYSE: TRI). Triad had indicated it would pay $180 million for its 80 percent share in the system.

The deal, however, fell through in November. According to Triad, Baptist wanted the deal to progress more quickly than Triad planned. Since that time, Triad announced a leveraged buyout worth $6.4 billion in cash and debt assumed – the deal is pending shareholder and regulatory approvals.

Rents rise in L.A.

as demand for

MOB space soars

LOS ANGELES – Lease rates in MOBs have increased a whopping 40 percent in the Los Angeles area during the past five years, according to a recent report by Los Angeles-based Ramsey-Schilling Commercial Real Estate Services.

According to Ramsey-Schilling, average MOB rents have climbed to $5 net per square foot in some West Los Angeles markets and $4 net in other areas of the metro area.

The real estate firm says the rising rates are attributed to growing demand and little new construction. While vacancy rates remain in the 10 percent range for general offices in Greater Los Angeles, the vacancy rate in MOBs is hovering around 5 percent. In West Los Angeles, the vacancy rate for MOBs is a staggering 2 percent.

At the same time that rents have risen, cap rates have fallen to below 6 percent, according to the real estate firm.

West Penn refinancing

debt from 9 percent

to below 5 percent

PITTSBURGH – West Penn Allegheny Health System in Pittsburgh is in the midst of planning for a $700 million refinancing of the speculative-grade debt it took on in 1998. That was when the system was formed from the remains of the bankruptcy of the Allegheny Health Education, Research Foundation.

The transaction is designed to take advantage of West Penn’s financial turnaround and the current market conditions, according to the healthcare division of Citigroup, the senior manager of the deal. Citigroup officials anticipate the existing 9 percent debt will be refinanced to below 5 percent.

As of press time, the deal structure was in the midst of being finalized, with the ratings being determined in coming weeks. New York-based Shattuck Hammond Partners is the financial adviser on the transaction.

For the Record

NTS Realty Holdings Limited Partnership (AMEX: NLP) of Louisville, Ky., has sold its Springs Medical Office Center and Springs Office Center, both in Louisville, to MRI Springs Portfolio LLC, an unaffiliated Delaware limited liability company. NTS received $28.9 million in connection with the sale. NTS said it intends to use the proceeds from the sale to repay a portion of its debt with National City Bank and to purchase properties in a manner that would qualify as a Section 1031 exchange under the Internal Revenue Code…  Carolinas HealthCare System of Charlotte, N.C., recently entered an agreement to acquire 365-bed NorthEast Medical Center in Concord, N.C. NorthEast is a not-for-profit hospital with 26 outpatient facilities. The deal, which does not involve cash, is expected to close by June. NorthEast officials say the hospital has growth plans and needed a strong financial partner to embark on such plans in a timely manner… Piedmont Healthcare of Atlanta recently announced that it has completed the purchase of Newnan Hospital, in Newnan, Ga. The hospital is being renamed Piedmont Newnan Hospital. As part of the deal, Piedmont will provide initial capital investments to support existing services and will pursue state approval to build a new hospital complex. It will also repay the $43 million of bond debt of the 271-bed Newnan Hospital… Medical Properties Trust Inc. (NYSE: MPW) of Birmingham, Ala., recently announced that it has completed about $62 million worth of new healthcare real estate investments. It also announced that it was expecting to complete an additional $29 million in investments by mid-March. The investments are an extension and expansion of Medical Property Trust’s financing of two hospitals operated by affiliates of Victorville, Calif.-based Prime Healthcare Services Inc. Prime relinquished its right to repurchase the hospitals until March 2017. The investments are being financed by the sale of 12 million shares of MPW common stock… Triple Net Properties LLC of Santa Ana, Calif., recently acquired The Gallery Professional Building in St. Paul, Minn. The eight-story medical office has more than 100,000 square feet of rentable space and was 68 percent occupied at the time of the transaction; a 660-space underground parking facility is owned and operated by the city of St. Paul. The MOB is located in St. Paul’s downtown and is connected via a skyway to St. Joseph’s Hospital, which is in the midst of planning for an $80 million expansion that will include a 90-room patient tower. The seller was the Port Authority of St. Paul, which was represented by Jim McCaffrey of Colliers Turley Martin Tucker. Triple Net is a wholly-owned subsidiary of NNN Realty Advisors Inc.… MedCath Corp. (Nasdaq: MDTH) of Charlotte, N.C., recently agreed to sell its majority interest in the Heart Hospital of Lafayette (La.) to a group of local physicians and investors. Prior to the transaction, the physicians and investors owned 49 percent of the 32-bed heart hospital, which includes two operating suites, two catheterization labs, and an 11-bed emergency department. Following the transaction, the investors will own 100 percent of the hospital. Terms of the transaction were not disclosed. MedCath owns interests in and operates 10 hospitals with a total of 635 licensed beds in nine states. It also manages cardiovascular programs at several hospitals and diagnostic facilities in several states. q