The power of 2 (portfolios)

OHIO SYSTEM’S, DEVELOPER’S MOBs SELL FOR $100 MILLION

 

By John Mugford

 

As this edition was about to go to press, Healthcare Real Estate Insights^™ learned of the closing of a major medical office portfolio in Ohio.

And even though the sale of 11 medical office buildings (MOBs) for $100 million is always big news here at HREI^™, there’s an underlying story about how the portfolio came together.

The basic news is this: Chicago-based Lillibridge in recent days closed on the acquisition of the 11 properties with about 600,000 square feet of space on five hospital campuses of Columbus, Ohio-based OhioHealth; the system has a total of eight member hospitals, seven affiliated hospitals and scores of outpatient facilities.

The properties involved in the sale have a combined occupancy rate of more than 93 percent and the cap rate was an estimated 6.9 percent. OhioHealth retained the land underneath the MOBs through ground leases. There are also two additional OhioHealth MOBs that Lillibridge is expected to close on near the end of 2007 for about $21 million. At press time, a Lillibridge official said the company was not ready to talk about the deal, adding the company was “putting something together.”

While details about the individual properties were not available, the MOBs are in the following locations: On the campuses of Riverside Methodist Hospital, Grant Medical Center and Doctors Hospital in Columbus; on the campus of Grady Memorial Hospital in Delaware, Ohio, and in Dublin, Ohio, where OhioHealth is building a new $130 million hospital, Dublin Methodist, which is set to open in January 2008.

Rest of the story

As noted earlier, while the basic information about the transaction is plenty interesting to those in the industry, it is not the whole story.

The portfolio, in fact, is actually a combination of eight buildings with about 380,000 square feet that were owned by OhioHealth and three buildings with about 210,000 square feet that were owned by The Daimler Group Inc., a Columbus-based development firm. Daimler has developed more than 170 commercial projects since its founding in 1983.

“We really think that by combining the two portfolios a premium was created that otherwise wouldn’t have been created if the portfolios were sold separately,” says Philip “P.J.” Camp of New York-based Shattuck Hammond Partners LLC, which marketed the properties. “There are several reasons why combining the properties created more value.

“First of all, with all of the capital looking for healthcare real estate these days, having a bigger portfolio is more attractive to potential buyers.

“Second, by combining the properties it created a better overall portfolio. The Daimler properties are newer buildings with higher rental rates, while the OhioHealth properties, which are still high-quality buildings, are a bit older. But that doesn’t mean that the OhioHealth buildings didn’t add plenty of value to the portfolio. In fact, they provide and even closer relationship with this high-quality, forward-thinking health system, which is what buyers are usually looking for.

“Third, combining the portfolios definitely provides some added operational efficiencies.”

OhioHealth had been considering monetizing MOBs for nearly seven years. That’s when the system’s senior vice president and chief financial officer (CFO), Mike Louge, first talked to Mr. Camp about such a sale.

“But Mike and the OhioHealth officers were willing to wait to get maximum value out of the buildings,” Mr. Camp says.

“When we first talked to them, values for healthcare properties were just starting to rise, and we talked about how they would probably increase even more in the future. They did decide to wait and the result is that the value was about 50 percent higher than it was six years ago. OhioHealth timed it beautifully.”

Time was right

In 2005, OhioHealth officials told Mr. Camp and Shattuck Hammond Partners that they believed the time was right to sell. In addition to looking to take capital out of the buildings, OhioHealth wanted to create an opportunity for its physicians to invest in MOBs – an opportunity that Lillibridge has agreed to provide, Mr. Camp says.

“By giving physicians a chance to invest in the real estate, OhioHealth is giving its doctors something they want, which is a way to add to their incomes at a time when doctors say regulations and other factors are cutting into their bottom lines,” says Mr. Camp. “It also is a way for OhioHealth to have its doctors more wedded to, more invested in, the system. By owning a part of the real estate, a doctor is less likely to move to another system.”

When OhioHealth informed Mr. Camp in 2005 that it was ready to begin the process of monetizing MOBs, another real estate analysis was performed. It was during that analysis that Shattuck Hammond learned of the Daimler MOBs, which the developer owned, with ground leases, on the OhioHealth campuses.

Shattuck Hammond determined that that adding the newer Daimler properties to the overall portfolio would create added value. When it approached OhioHealth and Daimler about the idea, both entities were initially intrigued and, at the same time, apprehensive.

“They just wanted to make sure there were no negatives about combining the portfolios,” Mr. Camp says.

Eventually both OhioHealth and Daimler concluded that combining the buildings could indeed maximize the value.

The portfolio was first made available through a bidding process in late July. Firms were invited to bid on the combined portfolio, or each of the portfolios separately, according to Mr. Camp. While Mr. Camp did not divulge the other bids, he says combining the two portfolios did indeed increase the value.

“As it turned out, the bidders were not willing to pay an equivalent amount for just one of the portfolios as they were willing to pay for each of the portfolios when they were combined,” he says.

“Interest was very high in the portfolio and we received offers from many excellent groups with strong qualifications – it was a difficult decision for OhioHealth to make,” Mr. Camp adds. “It definitely comes down to the fact that while price is very important today, health systems also want to have a relationship with a company they trust, a company they believe knows healthcare and has the right qualifications, and a company that they feel comfortable with.” q