ProMed is indeed pro-medical

DIVISION OF ISRAELI FIRM LOOKS TO BUILD LARGE U.S. PORTFOLIO

By John Mugford

The latest announcement from ProMed Properties Inc. involves a significant healthcare acquisition: the $113 purchase of an 18-story, 435,500 square foot medical office and research building on the campus of the Science Center in the University City District of Philadelphia.

But if company officials can execute their intended strategy, this won’t be the last time ProMed’s name will appear on the pages of Healthcare Real Estate Insights^™.

That’s because the North Miami Beach, Fla.-based ProMed, a wholly owned division of the $9 billion Israel-based real estate giant GazitGlobe, plans to acquire a very large healthcare real estate portfolio in the United States. In fact, ProMed President Roni Soffer says the company anticipates eventually accumulating up to $2 billion worth of healthcare properties in the next two years or so, most likely in the eastern part of the country.

“We think there are plenty of opportunities in medical office and medical research,” says Mr. Soffer. “Unlike some of the pension funds and institutional investors acquiring medical properties, we are a long-term owner that plans to hold onto our properties for a long time. Because of our philosophy, we are going to be patient in our approach; we’re going to be selective and look for properties with high barriers to entry, such as facilities on the campuses of leading health systems and institutions.”

Mr. Soffer continues: “We’re building relationships, we’re building a management team and building a company. We think the CEOs and presidents of health systems appreciate firms like ours that provide good management and do not have quick exit strategies.”

Improving the yield

As for the latest acquisition, ProMed acquired the Philadelphia tower through a bidding process, according to Mr. Soffer. The seller was New York-based Urban America LP, an investment firm that acquired the 1970s building for $80 million in the early 2000s when it was vacant. Urban America was represented by the Philadelphia office of CB Richard Ellis Group Inc. (NYSE: CBG).

The acquisition was financed by ProMed Properties through a non-recourse loan of $85 million, as well as existing cash.

Privately held real estate investment and development firm Wexford Science + Technology, a wholly owned subsidiary of Baltimore-based Wexford Equities LLC, had completed a renovation of the property in 1999.

ProMed paid more than $250 per square foot for the building at 3535 Market St. The facility is currently 98 percent occupied with three major tenants: Children’s Hospital of Philadelphia (CHOP), the University of Pennsylvania and the University of Pennsylvania Health System.

Mr. Soffer notes that the tenants have high credit ratings, as CHOP and the University of Pennsylvania received ratings of AA and Aa2, respectively, by rating agencies Standard & Poor’s (S&P) and Moody’s. The University of Pennsylvania Health System has an A rating from S&P and an A1 rating from Moody’s.

The cap rate at the time of the sale, according to Mr. Soffer, was 7 percent, based on the current occupancy and rental rates. But ProMed believes it can increase its return to as much as 15 percent as lease renewals come due.

“The leases are older and the rents are definitely below market rate,” Mr. Soffer says. “And the building is in an area, the University City District, where there is great demand for space. Vacancy in the area is about 1 percent and there is a scarcity of available real estate.”

ProMed is so “pro” on the Science Center and University City District area that Mr. Soffer says the firm could eventually acquire an additional 100,000 square feet to 200,000 square feet of space there.

According to the Science Center’s Web site (www.sciencecenter.org), the 17-acre Philadelphia campus has 14 buildings with a total of 1.7 million square feet of space. The master plan calls for expanding the campus to 19 buildings with a total of 3.5 million square feet.

Building a portfolio

The acquisition is ProMed’s second in the U.S. medical office and medical research arena. In February 2006, it closed on an $87.5 million acquisition of the 252,000 square foot Hackensack (N.J.) University Medical Plaza, which is attached to Hackensack University Medical Center. That MOB is master leased by the 683-bed hospital, which also retains the land beneath the facility.

(For more information on that transaction, please see “New Jersey MOB fetches $87.5 million” in the April 2006 issue of HREI^™.)

That means that ProMed’s medical office and medical research portfolio now has a total of 687,500 square feet and two parking garages – both are in Hackensack – with 1,700 spaces.

“Our philosophy is that we’re looking to acquire medical office buildings and medical research buildings that are on the campuses of, or close to, major hospitals and universities that are the dominant, or major, players in a market,” Mr. Soffer says. “And we want to achieve concentrations in key regional markets.

“We think of the University district of Philadelphia is similar to what the Cambridge area in Massachusetts was like several years ago. But this area has universities and hospitals – it’s a combination of medical, education and life science. We feel comfortable in the market.”

As it looks to expand its medical portfolio, ProMed and Gazit Group USA will consider acquiring firms with existing portfolios, Mr. Soffer says.

“Gazit Group has done plenty of M&As in the past in other areas of commercial real estate, including several in Canada,” Mr. Soffer says. “So we are familiar and comfortable with taking that route, and there are opportunities to do this with the right kind of operators and owners in medical real estate.”

Gazit Group USA owns and operates 85 supermarket-anchored shopping centers in Florida and 40 or so such centers in Georgia.

In building its medical portfolio, ProMed could embark on developments as well. Mr. Soffer says the company is likely to accumulate its portfolio through acquiring 85 percent to 90 percent of its eventual properties while developing the rest.

In addition to its medical office and research portfolio, Gazit Group USA’s overall healthcare holdings includes 1,230 units of existing senior housing and 480 units under development. The senior housing portion of the business operates under the name of Royal Senior Care; the communities are known as Royal Gardens Senior Living. Most of the communities are in the Southeast and include both independent and assisted living facilities.

The goal for Royal Senior Care is to invest up to $300 million to add up to 3,000 units to the portfolio over the next two years, according to the company’s promotional materials.

“I think our company is much like Windrose when it was starting its move into medical office,” says Mr. Soffer, referring to Windrose Medical Properties Trust, which was founded in March 2002 and went public in mid-August of that year. The healthcare real estate investment trust (REIT) was acquired in December 2006 by Toledo, Ohio-based Health Care REIT (NYSE: HCN).

“The Windrose officers had had earlier experience with senior living and made a very successful move into medical office,” he says. q