Transactions (April 2007)

Ohio medical mall fetches $47 million



By John Mugford

The hard work and efforts of a former day trader who acquired and then redeveloped a former hospital in Dayton, Ohio, into a massive medical mall appear to have paid off.

In recent weeks, Norm Schwab and some investors involved with RNS Equities, sold the 630,000 square foot Elizabeth Place medical mall for $46.7 million, or $75 per square foot. The buyer is Newport Beach, Calif.-based Delamore Properties, a private real estate investment firm, which also provided ownership stakes to physicians, referred to in a press release as Elizabeth Place Medical Doctors.

After acquiring the shuttered, former St. Elizabeth’s Hospital for about $3.3 million in 2002, Mr. Schwab and some associates began a redevelopment and repositioning that has led to an occupancy rate of more than 80 percent, with several large anchor tenants. The current occupancy represents a significant improvement from just a year or so earlier, when Mr. Schwab first decided to put Elizabeth Place on the sale block and the occupancy had crept up to more than 70 percent.

“Because of the critical mass Mr. Schwab and the property manager, Patsy Boatwright, created by signing the large anchor tenants, the property has continued to sign more deals,” says Jim Kornick, a senior director with national brokerage firm Marcus & Millichap, which marketed the property. “We expect the property to be filled, or be close to being filled, by the end of the year.”

Also marketing the property were Marcus & Millichap’s Gerald Burg, Scott Przybyla and Marc Sommer. Mark Mimms of the Fresno, Calif., office of Sperry Van Ness handled the deal for the buyer.

Paul Habeeb, general partner for Delamore Properties, noted in a news release that his company believes doctor-owned medical facilities are the “wave of the future.”

“What we like about Elizabeth Place is that the doctor-owners are not only in control of their practices but they can also provide cost-efficient, high-quality medical services to their patients within a campus environment and hospital style amenities not found in traditional medical buildings,” he stated.

“Elizabeth Place is the model for future trends in medical buildings. Campus environments that provide a whole range of outpatient services from ambulatory surgery centers and diagnostic imaging facilities to urgent care facilities within in a very cost-competitive environment.”

In an interview, Mr. Habeeb said Elizabeth Place is the firm’s first medical real estate acquisition.

“We like medical, and if the right opportunity comes along we’d certainly consider other properties,” he explains. He did not disclose the cap rate for the sale.

Included in the tenant mix at Elizabeth Place are several large tenants: A long-term acute-care hospital (LTAC) operated by Louisville, Ky.-based Kindred Healthcare; Dayton Rehabilitation Institute; the 26-bed, four-operating room, physician-owned Medical Center at Elizabeth Place; Riverview Health Institute, a bariatric hospital; and Wright State University’s Boonshoft School of Medicine. Shadow anchors include Dayton Heart Hospital and Dayton Nursing Home.

“There’s still plenty of opportunity for the buyer to add more value,” says Mr. Kornick, noting that some of the initial tenants were signed to low lease rates and relatively short terms. The 26-acre property, which is close to the 865-bed Miami Valley Hospital, also includes 7 acres of developable land.

The road to selling the property included a major bump, Mr. Kornick notes. At one point, after the initial bidding, the seller entered an agreement with a potential buyer that tried to re-trade it. The deal fell through for several reasons. In the meantime, folks at Delamore Properties had developed a relationship with Mr. Schwab, who eventually agreed to sell to the California investment firm.

“Not only did Mr. Schwab create value in this project, but the people in Dayton are very pleased with what he’s done with the property,” says Mr. Kornick. “He created a medical mall that employs more than 2,000 people, brought in tenants from outside the area that might not have otherwise located in Dayton, and he redeveloped a shuttered hospital that many people thought could not be redeveloped.”


HealthSouth to sell

surgery division

for $945 million

BIRMINGHAM, Ala. – HealthSouth Corp. (NYSE: HLS) of Birmingham recently announced that it is selling its surgery division to buyout firm Texas Pacific Group (also known as TPG Group). The price tag for the division, which is composed of 139 outpatient surgery centers in 35 states, is $945 million. HealthSouth said the new company is expected to be based in Birmingham and would be led by executives leaving HealthSouth. The deal is expected to close in late summer or early fall.

The sale would be the latest move in a corporate recovery effort that dates back about four years. The trouble began in 2003, when HealthSouth became embroiled 2003 corporate accounting scandal in which a lawsuit alleged that the company, under the direction of senior managers, attempted to falsify financial documents in order to meet or exceed Wall Street expectations. While HealthSouth denied any wrongdoing, it agreed in early 2006 to a settlement in the amount of $445 million cash, common stock and warrants.

The company says it is now concentrating on its core business of inpatient rehabilitation and plans to use the proceeds from the sale to pay down debt. HealthSouth CEO Jay Grinney said in a prepare statement that the sale marks a “major milestone in the strategic repositioning” of the company. HealthSouth sold its outpatient rehabilitation business earlier this year to Pennsylvania-based Select Medical for $245 million.

According to reports, Mike Snow, HealthSouth’s chief operating officer, and Joe Clark, president of the surgery division, are leaving HealthSouth to join the new company.

Texas Pacific, also called TPG, is a major buyout firm, as it raised $16 billion for transactions in 2006. It has invested in companies such as Burger King, Continental Airlines and retailer J Crew. It also participated in the 2006, $1.3 billion buyout of software maker Intergraph Corp., based in Huntsville, Ala.



Northern Milwaukee

systems consider


MILWAUKEE – A pending merger of two hospital systems could end up forming an entity that would likely dominate the northern and northwestern areas of Greater Milwaukee, Wis. The two systems, Columbia St. Mary’s and Froedtert & Community Health, recently reached a tentative agreement to combine their operations. The result would be a system with five hospitals, more than 11,000 employees and annual revenue exceeding $1.4 billion.

The merger would continue a recent trend toward consolidation in the Milwaukee area. In addition, the new entity would form a credible competitor to the area’s dominant provider, Milwaukee-based Aurora Health Care.

Officials with Columbia St. Mary’s and Froedtert & Community Health say the consolidation would provide the systems with more efficiencies, which could slow the rise of healthcare costs by combining clinical services and avoiding duplication of services and future capital investments. In addition, a merger would give the new system more clout when negotiating contracts with health insurance providers. Critics say past studies indicate that consolidations between systems in close proximity actually result in higher costs.

In the meantime, Aurora is considering building a new hospital in Columbia St. Mary’s backyard, in Mequon, if it is successful in acquiring a large and local medical practice, Advanced Healthcare. Advanced practices primarily at hospitals owned by Columbia St. Mary’s and Froedtert & Community Health. The medical practice’s board was planning to meet in coming weeks to consider Aurora’s offer; its stockholders would then consider the offer this coming summer. Both Columbia St. Mary’s and the Froedtert systems have also offered to acquire Advanced Healthcare – something they also are likely to consider as a combined system.

Should the systems consolidate, Froedtert & Community Health and Columbia St. Mary’s would own Froedtert Hospital, an academic medical center affiliated with the Medical College of Wisconsin, and hospitals in Milwaukee, Mequon and Menomonee Falls. The entity would also own half of the Orthopaedic Hospital of Wisconsin in the Milwaukee suburb of Glendale. In addition, Columbia St. Mary’s is currently building a $417 million hospital on the north side of the metro to replace its two existing hospitals in Milwaukee.



Montecito continues

buying toward goal:

5 million square feet

COLUMBIA, Md. – Santa Barbara, Calif.-based Montecito Medical Investment Co., a privately held firm that acquires and develops medical real estate, recently announced its acquisition of two medical office buildings (MOBs) in Columbia, Md. The acquisitions are part of the company’s ongoing effort to acquire 5 million square feet of medical properties in the next year.

The buildings, Knoll I and Knoll II, have a total of 155,000 square feet of space and were acquired for an estimated $25 million. The property, which is adjacent to U.S. Highway 29, includes 19 acres of undeveloped land that is zoned to allow other development opportunities, according to a release from Montecito Medical.

The acquisition is Montecito’s 19th medical property purchase in the last year or so and was made through a joint venture with ING Clarion Partners. Since it was announced in early March, the joint venture has acquired $90 million in medical real estate.

With competition fierce among entities looking to invest in healthcare properties, officials with Montecito and ING Clarion Partners say they believe the market is poised for even more growth as a result of the aging of the Baby Boom population and the need for more healthcare services. They also note that hospitals are offering more outpatient care and technology-based services in standalone facilities.

Triple Net acquires

three-building portfolio

in Scottsdale, Ariz.

SANTA ANA, Calif. – Triple Net Properties LLC of Santa Ana recently acquired a three-building medical office portfolio in Scottsdale, Ariz., on behalf of tenant-in-common (TIC) investors. The acquisition of the 154,000 square foot North Scottsdale Medical portfolio closed at the end of March for an undisclosed price.

Two of the buildings are adjacent to the 343-bed Scottsdale Healthcare Shea Hospital campus in Scottsdale while the third building is located on the opposite side of the hospital campus. The buildings are located near the Highway 101 Loop and are 93 percent occupied, according to a press release from Triple Net.

The seller was a collection of limited liability corporations that were represented by Kevin Shannon of the local CB Richard Ellis office. Wachovia Bank provided the financing, which was arranged by Kirk Danley and Eric Tupler of CBRE Melody.

For the Record

JK Investment Properties Inc. of San Diego recently acquired the Range Vista Pro Building, an MOB in Westminster, and an additional acre of land from seller Charles Bayer Jr. for $5.25 million. The 27,145-square foot MOB was 100 occupied at the time of the sale. The buyer intends to do some renovations in the existing MOB and plans to build a second building on the vacant land. Brad Lyons, Chris Bodnar and Chad Brue of CB Richard Ellis represented both sides… Rapid City, S.D.-based Regional Health Inc. recently acquired 70 acres for a potential future medical facility near Exit 17 of U.S. Interstate 90. Regional Health has 40 medical facilities, including five hospitals, in western South Dakota, Wyoming and Nebraska. The acquired land is part of the $500 million Elkhorn Ridge planned development, a project of Denver-based Propp RealtySt. Vincent Medical Office Building in downtown Cleveland was recently acquired by an affiliate of Dallas-based Cirrus Group. The 58,000 square foot MOB sold for $5.6 million; the seller was Cleveland-based Christopher Associates, a partnership led by Lee Howley that developed the building in 1984. Dallas-based Staubach Co.’s Cleveland office represented Christopher Associates in the sale…  Lexington Realty Trust (NYSE: LXP), a New York-based real estate investment trust (REIT), recently acquired a 52,000 square foot MOB in downtown Boston for $20 million. The 10-story building is leased to Harvard Vanguard Medical Associates; the lease expires in 2012. Officials with the New York REIT say the acquisition is part of the company’s effort to enhance its position in major metropolitan areas. The seller was JER Partners, an investment arm of McLean, Va.-based J.E. Robert Cos…. Rockville, Md.-based Washington Real Estate Investment Trust (NYSE: WRE), a REIT, recently acquired a Class A MOB for $50 million in northwest Washington, D.C. The 110,000 square foot building, called 2440 M Street, is 96 percent occupied. It includes a three-story parking structure. Washington REIT expects to achieve a first-year, unleveraged yield of 6.0 percent on a cash basis and 6.5 percent on a GAAP basis. With the acquisition, the firm’s portfolio now contains 14 medical properties. q

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