Special Report: Ray Braun on HRT/Windrose (September 2007)

This deal had hair on it – in good way



By Murray W. Wolf and John Mugford


How can a keynote speaker hold the attention of an information-overloaded audience on the final day of a three-day conference? By providing an inside look at the strategy behind one of the year’s major deals – peppered with enough humorous comments, many about lawyers – to keep the luncheon crowd from dozing off before the dessert is served.

That was the approach taken by Raymond W. “Ray” Braun, president of Toledo, Ohio-based Health Care REIT Inc. (NYSE: HCN), during his presentation at the “2007 Medical Office Building and Healthcare Facilities Seminar” held July 18-20 in New York. The three-day event was sponsored by BOMA International.

The title of Mr. Braun’s presentation was “HCN Acquisition of WRS: A Story About a Lumber Salesman, a Speaker Manufacturer and a Bunch of Lawyers.”

The “WRS” alluded to in the title of the presentation is Windrose Medical Properties Trust, a healthcare real estate investment trust (REIT) acquired by HCN for $1 billion on Dec. 20. (For more information on the acquisition, please see “Winds of change at HCN” on the front page of the September 2006 issue of Healthcare Real Estate Insights.)

As he launched into his presentation, Mr. Braun explained that had been asked to focus on the strategic rationale for the merger.

“For people to understand a little bit about us and our philosophy of doing business, we’re very much a relationship-oriented company,” Mr. Braun said. “Our programs are relationship-investing in nature. We like to do business with people we trust and respect, and we like to continually adapt our business model to the changing operating environment. And I think the Windrose transaction is a good example.

“So today I’m going to tell you the story about a lumber salesman, a speaker manufacturer and a bunch of lawyers who got together to make this company.”

Health Care REIT has had four investment strategies since the firm was launched in 1970, Mr. Braun explained:

■ a captive REIT (1970 to 1984)

■ a specialty finance company (1985 to 1992)

■ a capital partner (1993 to 2005) and

■ a strategic real estate partner (2006 to present)

Captive REIT

Starting with the firm’s era as a captive REIT, founded in 1970, Mr. Braun showed the BOMA MOB Seminar audience a slide picturing the two founders: Fritz Wolfe and Bruce Thompson.

“Based on the pictures, most of you can probably tell about how long ago they were taken,” he said.

Noting that Mr. Thompson sported a goatee in the photo, Mr. Braun joked: “What’s interesting is Bruce had very fashionable face hair back in 1970 – and it would have been very fashionable again today.”

Mr. Wolfe graduated from Harvard Business School (HBS) and joined his family lumber business – something that was a bit unusual for HBS graduates in those days, Mr. Braun said. Mr. Wolfe was responsible for growing the lumber business.

But at about that time, Mr. Braun said, Congress passed Medicare and Medicaid legislation, which included provisions for reimbursement of nursing home care. Mr. Wolfe concluded that nursing home operators would be building more facilities, which meant he could sell more lumber.

However, because there weren’t many large nursing home operators at that time, Mr. Wolfe formed his own company called Health Care and Retirement Corp. of America (HCR) – which later become HCN. The company grew at a steady pace, Mr. Braun says, but not fast enough for Mr. Wolfe’s liking.

The firm’s growth was restricted by limited access to capital. Every time the firm did a project, Mr. Wolfe had to find local investors and work with local bankers – a very time-consuming process.

“So Fritz had another very bright idea,” Mr. Braun said. He began researching the REIT legislation that had been passed by Congress in 1960 and concluded that he could form a REIT to raise the capital necessary for a more rapid expansion.

Mr. Wolfe contacted his college roommate, Bruce Thompson, a Wall Street lawyer who was setting up mutual funds, and convinced him to help him to set up the REIT.

“And that’s how we were born back in 1970,” Mr. Braun said.

The next stages

The company grew from 1970 to about 1984, when it had about $100 million in investments and access to “cheaper” capital, according to Mr. Braun. That’s when the firm decided to become a specialty finance company.

“At that time, healthcare was considered very specialized – people were afraid of the reimbursement, so it was niche,” Mr. Braun said. “And the owners wanted to take advantage of that.”

When HCN reached about $290 million in assets in the early 1990s, George Chapman, who was corporate counsel for the company, moved over to the business side, according to Mr. Braun. Mr. Chapman helped lead the company into its capital partner stage.

“We … had been looking at the assisted living industry, and we liked the model,” Mr. Braun said. “So we developed a strategy that we called the capital partner strategy, and we found local operators throughout the United States that we thought provided quality care in their local markets. And we developed a plan to help them run (the facilities while) we provided all of their real estate capital as well as their working capital.”

An example of such an approach was HCN’s partnership with Irving, Texas-based Signature Senior Living, which, according to Mr. Braun, “has a number of properties in and around Dallas, and had a $6 million prototype facility that we could capitalize on.”

“So we gave them a line of credit, which involved capital financing … (and) helped them grow,” Mr. Braun continued.

Using this capital partners approach, Health Care REIT grew to about 480 senior projects nationwide.

Meeting the Freds

During that period, Health Care REIT developed a relationship with Fred Klipsch and Fred Farrar of a company called National Guest Homes. Mr. Klipsch, who was the CEO, was also the president and owner of world-renowned audio speaker maker, Klipsch Audio Technologies. Mr. Farrar was National Guest Homes’ chief financial officer (CFO).

In the mid-1990s, the two firms began collaborating on projects, with Mr. Klipsch financing an initial assisted living project in Hoover, Ala. In 2002, Messrs. Klipsch and Farrar had formed a privately held real estate investment trust (REIT) called Windrose Properties Trust, which concentrated on the acquisition and ownership of MOBs.

“We continued to build our portfolio up to about 2005, when we had about 2.9 million square feet and … (our portfolio) was leaning heavily towards seniors housing care at that time,” Mr. Braun said.

In 2005, Health Care REIT was busy figuring out what direction it wanted to take to continue growing.

“One of the things we observed was that there seemed to be reduced opportunities in the senior housing and senior care markets,” Mr. Braun said. “And the reason for that was simple: assisted living cap rates were becoming very aggressive, too aggressive for our liking. We did not see much of an opportunity to continue to grow through assisted living. The other thing is that nursing home stock averages were 30 years old, and we had a business model that put 15-year leases on our assets.”

It was a model the company wanted to change, he said.

“The other thing is that baby boomers were starting to mature – and they’re going to have medical needs and housing preferences,” Mr. Braun noted. “We looked at the market and saw that it was about an $800 billion market in senior housing and medical real estate … and we felt we needed to expand in two directions.”

The idea was to move into senior living campuses and medical facilities that offered more acute-care services, such as MOBs and specialty hospitals.

“And we noticed the trend that’s been talked about at this conference for a total care setting and the need to modernize facilities to attract baby boomers to those facilities,” he added. “So we thought that would be a good strategy to focus on those two areas. We also decided to offer capital at that point in time and to be able to provide development and property management services. We thought that allowed us to be more proactive in our investments, rather than simply being a capital partner.”

Merging with the Freds

That meant that Health Care REIT was planning to go head-to-head with its long-time friends, Messrs. Klipsch and Farrar at Windrose.

“So we took a trip to Indianapolis and sat down with Fred Klipsch and Fred Farrar and said, ‘Guys, we’ve just finished up our board meetings and we’re going to be changing our investment strategy and … we’re going to be going head to head with you as a competitor. Wouldn’t it make sense that since we’ve known each other for so long that we combine our platform and move forward together?’”

After a period of time, Messrs. Klipsch and Farrar decided that “gee, maybe that does make sense. We would end up with a company that had expertise in senior housing as well as investment real estate, and the capital markets would love it because we’d have a larger and more diverse portfolio. So the transaction seemed to make a lot of sense.”

After negotiating the deal, Mr. Braun said HCN agreed to pay “roughly a billion dollars for the company, and we got 92 facilities, most of them medical office buildings, around 3.6 million square feet of space and roughly 650 tenants.”

The acquisition meant that Windrose became a division of HCN called Windrose Medical Properties.

“That was a whole new thing for us because we had 480 buildings and 65 tenants, and now we had many more tenants than we had buildings, so we really needed property management,” Mr. Braun continued.

The relationship with Windrose and Messrs. Klipsch and Farrar led to another relationship that helped grow the business, Mr. Braun said.

Relationships pay off

Years earlier, Messrs. Klipsch and Farrar had developed a relationship with Palm Beach Gardens, Fla.-based Rendina Cos. In fact, Windrose had acquired a number of MOBs from Rendina, a prolific MOB developer that managed its own facilities through its own property management firm, Paramount Real Estate Services.

“We approached Rendina about other assets that might be available for purchase, and they decided to sell us 17 medical office buildings … for about $288 million,” Mr. Braun said.

With the transaction, HCN acquired about 900,000 square feet of medical office space as well as Paramount. (For more information on that transaction, please see “Windrose to buy MOBs” on Page 1 of the January 2007 edition of HREI.)

“Today, we’re up to about 1.3 billion square feet of medical office space,” Mr. Braun noted. “But even more importantly for us we got another lawyer, Mike Noto, who heads up the Paramount team … He was a wonderful catch for us.”

Mr. Braun concluded: “So where do we sit today? We’re at about $4.6 billion (investment balance) and are still executing on our same investment strategy. We expect the left side of this pie chart (MOBs, independent living and CCRCs, assisted living, and specialty care facilities) to see the most significant growth.”

Even so, with cap rates down around 6 percent for MOBs, Health Care REIT plans to rely on its relationship-driven investment approach to growing the portfolio.

“It’s the approach we’ve used in senior housing and we’re applying it to the medical arena,” Mr. Braun said.  “We’ve developed a (strategic partner program) where we work with regional developers and regional hospital systems and other providers to joint venture projects and acquisitions …  ensure capital partners and to the extent its needed we can provide development, property management, asset management and investment management.

“So that’s the end of the story, that’s where we are today.” q

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