More thoughts from Bob Rosenthal

UPON RETIREMENT, HE SHARES INSIGHT ABOUT THE INDUSTRY, HIS COMPANY

By John Mugford

 

After having been involved in healthcare development in one form or another for nearly 50 years, Bob Rosenthal certainly has plenty of insights into the business. In addition to our main feature story on Mr. Rosenthal (please see “Retiring after all these years” on page 9), here are some of his answers to a few questions concerning the industry and the company he started in 1988, Pacific Medical Buildings.

HREI^™: Pacific Medical Buildings has remained true to its model of asking your pool of investors to invest in projects. It seems that quite a few other developers are looking for institutional investors – or such investors are approaching them – about partnering on projects.

 

Rosenthal: There are quite a few doing that, yes. We’re not convinced that’s the way to go because most of them have short-term horizons … they need to demonstrate to their pension funds, or whoever, that they are making money. The way to do that is to make sales. We try to stay away from that.

HREI^™: But you have had some institutional involvement?

Rosenthal: On a couple of projects, yes. That took place when we were growing really fast and thought we would be unable to raise the equity in our traditional way, so we looked to an institutional partner – LaSalle Investment Management. As it turns out, we would have been able to raise the money anyway, but we were a little nervous because that year we had to raise $50 million.

HREI^™: Have you had physician investors in all of your projects over the years?

Rosenthal: We’ve always invited them to participate and for years a lot of them did. But back in the late ‘90s it fell off because doctors were running scared; tax changes occurred and doctors’ reimbursements were being really squeezed. In the past three or four years doctors are participating again because they learned to adjust to the system and they see this as a good investment. And, they realize it makes for a more stable building because it is filled with doctors who are not going to go anywhere. They think of it as their building.

HREI^™: What about hospitals – have they been investors?

Rosenthal: Hospitals have always been capital short, but recently we’ve had a couple of hospitals invest in buildings. We’ve always paid them a ground rent and now if the hospital wants to have an investment in the building instead of receiving ground rent for 55 years, we’ll take the present value of that stream of lease payments and make one payment right at the beginning and they get a big chunk of money up front. A couple of hospitals just recently decided to take that money and invest it in the project. In the last project, the hospital system put in $3 million dollars.

HREI^™: Does Pacific Medical Buildings have any plans to become a seller?

Rosenthal:  We keep our eyes open, but our investment goal is long-term – that’s what our investors like and want. Sometimes we will refinance a building because rates are lower and it produces some cash. When we give it to our investors they get mad at us.  They don’t want the money – they want us to reinvest it.

HREI^™: Tell us a little more about your private investors?

Rosenthal: We have about 70 of them and they can all participate in every project if they like. They are very loyal and passive – they don’t interfere. They get their distribution check every quarter and they are very happy.

HREI^™: Talk about the company today and how things have changed over the years.

Rosenthal: We’re still basically a small company – 85 or so people. Thirty-five are in property management. We have some sub-offices: a nine-person office in Phoenix and a 12-person office in Los Angeles, three people in Las Vegas, and three in Reno. Historically we built two projects a year averaging 75,000 square feet or so per building. But as an example of our growth, right now we have five projects under construction and we have a huge backlog of about $400 million in development that we haven’t quite started, but will start yet this year.

HREI^™: Have the projects themselves changed over the years?

Rosenthal: They are much larger. Today they average about 125,000 square feet. The projects are also much more complex because we have a lot of hospital tenancy in our buildings with very complicated things like ambulatory surgery centers, linear accelerators, MRIs, lots of sophisticated imaging equipment, etc.

HREI^™: Is that because hospitals are trying to reduce costs within the acute-care facility itself?

Rosenthal: That’s exactly why. Often we find that the regulatory environment has become very, very difficult, particularly on the West Coast. We only deal in six western states, so I don’t know how things are in the rest of the country, although I do talk to some peers and find that things are much more difficult out here.

HREI^™: Can you elaborate?

Rosenthal: Sure. The smallest little city in the middle of a megalopolis like Los Angeles County often have these onerous bureaucratic details that are really excessive … big cities like San Francisco and Los Angeles have an easier to understand procedure and a fairly regulated process. Smaller cities with a lot of growth haven’t staffed up to meet that growth and they tend to be more arbitrary. We just finished a project in Mission Viejo (Calif.); it’s a 140,000 square foot building at Orange County Regional Medical Center. We started that building more than six years ago and just opened it (in March).

HREI^™: Overall, is there more demand for MOBs these days? And are you seeing demand for more off-campus projects?

Rosenthal: There really is, and we’re definitely seeing another type of building now – that off-campus, hospital-anchored building. Most hospitals are located in mature neighborhoods, but the growth is occurring on the outskirts of fast-growing cities like Phoenix and Las Vegas. Patients can be several miles away from the huge hospitals and those patients are generally viable – they have good jobs and insurance, so hospitals are reaching out to them with satellite buildings. These buildings are kind of like hospitals without beds; they have surgery centers, imaging, etc.  We’re trying to market these buildings as a product with off-campus locations with the stability of the hospital. 

HREI^™: How does the project’s financing work?

Rosenthal: The hospital signs anywhere from a 15- to 25-year lease for the ground floor with all of the services in these developer-owned buildings. The buildings are more capital intensive because we have to buy the land – after the hospital tells us where they want their satellites to be and the demographic they want to meet.  Then they sign a long-term lease.

HREI^™: As you phase out of the company, have your long-time clients and contacts come to trust the people now in charge at Pacific Medical Buildings?

Rosenthal: Absolutely. They’ve all wished me well and are very comfortable with our people. Some of the long-time clients are still free to contact me. I’ll get down to a couple days a week in the next couple months, but will participate in the company for the next three years. It’s going to continue to be very successful because it’s back to being a company that knows what’s important. q