Life Sciences: Why the Medtronic deal was a good fit for RCS

Here’s what prompted Real Capital Solutions to make its first life sciences acquisition

By Murray W. Wolf

As BREI reported last week, Real Capital Solutions (RCS), a Louisville, Colo.-based real estate investment and management firm, recently made its largest-ever acquisition: the $188 million purchase of the newly completed, two-building, 404,149 square foot Medtronic plc (NYSE: MDT) campus in Lafayette, about 12 miles east of Boulder, Colo.

The single-tenant, net-leased (STNL) asset includes two connected five-story buildings at 200 and 250 Medtronic Drive, on 42 acres near the intersection of U.S. Highway 287 and Northwest Parkway, at the southernmost edge of Lafayette. Medtronic has a 20-year lease on the build-to-suit facilities.

According to newly available RevistaLab data, the 183,900 square foot 200 building sold for about $83.7 million and the 229,100 square foot 250 building sold for about $104.3 million. (The square footages on the RevistaLab database vary slightly from what was announced.) The sale price works out to $455 per square foot (PSF).

The seller of the real estate was Ryan Lafayette LLC, a partnership associated with the developer, Minneapolis-based Ryan Companies US Inc. The sale included the land and buildings.

Although the Medtronic Lafayette Campus was RCS’s first life sciences real estate (LSRE) investment, it might not be its last. To learn more about RCS and its investment strategy, BREI spoke with Adam Abeln, chief acquisitions officer.

‘Adapting to market conditions’

Although many LSRE professionals might not be familiar with RCS, the firm has achieved near-legendary status in commercial real estate (CRE) circles for its track record of anticipating CRE market trends and adapting its strategies accordingly.

“We’ve been in business for about 40 years,” Mr. Abeln tells BREI. “Our principal of the company is Marcel Arsenault (the firm’s chairman, CEO and founder). He finds a majority of our acquisitions, and we’ve always been known (for) adapting to market conditions – getting in and out of sectors. And, going back to (before) the Great Financial Crisis, in late 2005 and 2006, Marcel called the market downturn. And we ended up selling about 80 percent of our portfolio, and then getting into single-tenant, net-lease (STNL)” properties, including those leased by Walgreens (Nasdaq: WBA), CVS Health Corp. (NYSE: CVS) and Walmart Inc. (NYSE: WMT).

“The thesis for those investments was: Things are going to get pretty bad,” he explains. “Marcel wasn’t projecting things were going to get as bad as what they did get. But when looking at Walgreens, the thing that he really liked about them is the prescription side of the business.”

Mr. Arsenault reasoned that even if consumers needed to cut costs, they probably wouldn’t give up their prescriptions, Mr. Abeln says, “and so we went into the bunker and really rode out the downturn through being in these triple-net deals. So they were coupon-clippers for us, created some income for us – not too exciting, though.

“And then, Marcel sold 80 percent of this portfolio, too. So in late ‘08, early 2009, at that time, Marcel had about $100 million in cash, and so we started selling the Walgreens and then redeploying that capital into value-add, opportunistic deals.

“And so we first focused on the markets where there (was) a lot of (residential) overbuilding… So we focused on markets such as Florida, Arizona, California, and we started working with developers and lenders acquiring… busted condo deals, working with debt developers on unfinished projects, and we did that from really ‘09 through ‘12.

“And then we switched strategies and started buying value-add apartment buildings, and we got into apartment development. And at one point, we had 4,000 to 5,000 units. And then we also expanded our business into value-add office, industrial and retail.

“And then 2019 hit,” Mr. Abeln continues, “and we just weren’t feeling as good with the overall economy and with what was available in the market from an acquisition standpoint, almost in every sector. So on the office, retail and industrial side, we thought that pricing was getting frothy. You know, apartments, we thought that there was a lot of overbuilding, and so we were kind of thinking as a company, “What can we do to stabilize our portfolio and bring in a little bit more diversification?’

“And the idea was, well, let’s get back into single-tenant net-lease because if there’s a pullback within the market, that’d be a good place to be. And so we started acquiring office buildings. That was a build-to-suit for McKesson, Siemens, Amazon, industrial buildings, and built the business. We really expanded and did about $1.3 billion in acquisitions over the last couple of years, just within that space. And then it ended up being a pretty good place to be, once COVID hit and uncertainty, and even in today’s market…

Why the Medtronic deal?

“What attracted us to this Medtronic deal was just the long-term lease, 20 years, the credit of Medtronic, being in that healthcare space. Usually that’s more immune to downturns than other categories…

“So our strategy now is. ‘Let’s continue to be safe,’ and then, over the next couple of years, we believe there are going to be some pretty good opportunities within those sectors that we were in previously. So office, apartments, retail. We’re starting to find some pretty good retail deals in the market right now. We just closed another large acquisition with some partners in California about a month ago; it was about a $160 million deal.

“So we still remain very active within the marketplace, but we’re constantly shifting strategies…”

Asked what interests RCS about the LSRE space, Mr. Abeln replies, “You go back about two years ago with the pandemic, or I guess it’s three years now, and there’s just so much money flowing into the life science sector. And the thing that we always had, which was challenging, is finding the right tenant. Because within the life science sector, you look at the tenant pool and it’s a lot of startups. And it’s backed by PE (private equity) firms… and that just didn’t (fit) our profile back then.

“So when we can find kind of a life science deal where we have Medtronic in there with strong credit, you know, it made a lot of sense for us from an acquisition standpoint…”

He adds, “We’ve looked at some (LSRE acquisition opportunities) in the past, but some of the projects that we’ve looked at just haven’t checked all the boxes for us. So this is our first life science acquisition….

“And what’s nice about this deal is we’ve done about … four or five deals with Ryan Companies. They’re great developers. And we know we’re not going to have any problems with the building… This property is 10 minutes away from our headquarters in Louisville, and so it really makes it nice from that standpoint, just monitoring it. But there’s not a whole lot for us to do with this deal, just given that we have Medtronic for 20 years and it’s a triple-net lease.”

Possible future expansion

Noting that the Medtronic Lafayette Campus site plan allows for the potential addition of a third building, BREI asked about those plans.

“We’ve had discussions with Medtronic,” Mr. Abeln says. But, he said, there is “nothing within their lease obligation to build that third building. I don’t think there’s an interest right now to move forward with that construction.” But he said that could change in the coming years.

He notes that RCS typically buys only the buildings, and doesn’t usually also buy the land, as it did in this instance.

“And this one was a little unique in that there was a pad site available for another, you know, 75,000 to 200,000 feet,” he says. “And we like that about having Medtronic in there, too, because in some cases companies like Medtronic… they can outgrow their space. Here, they can continue to develop if they need to.”

Asked if RCS has more acquisitions in the works, Mr. Abeln replied, “We’re certainly looking out there, and we have a couple of other deals that we have another contract, which we plan on closing – not to the size of Medtronic, but you’ll probably hear about those deals in the next 30 to 60 days.”

Although he said those pending acquisitions are STNL deals in other sectors, not LSRE deals, he said the firm remains open to those opportunities. And it does have some potential healthcare real estate deals in the works.

“We’re in discussions with Ryan Companies, actually, on a couple other deals in the medical office space. They’re still a little premature right now, but I’m hoping we can come to terms on those and do a couple additional deals with them,” he said.

The firm’s broader strategy

As noted, RCS is not dedicated to the LSRE sector and has a long history of changing strategies to suit market conditions.

“It’s nice to have expertise within one sector,” Mr. Abeln said, “but we’ve been around for so many years and been doing this for so long, you know, you move from one segment to the other. It’s not really too much different from an apartment deal to a commercial deal to a single-tenant net-leased project.

“But what we want to do as a company is continue to be disciplined and make sure that we’re achieving the returns for Marcel and our investors. And if you pick one sector like apartments, you may do quite well for a couple of years where you’re achieving 20 percent-plus returns. And then as you know more and more investment funds come into the market, those returns erode because there’s more competition. And so, you know, those groups are stuck to one strategy and their returns go from 20 percent to 10 percent, and then if there’s any sort of hiccup within the market, that 10 can go to zero or less pretty quick…

“And we’ve got a lot of dry powder on hand,” Mr. Abeln said. “So right now we have about $400 million in cash, and from a (diversification) standpoint … we sold a lot of the workout deals, just by stabilizing them and executing the business plan. And then, you know, I would say STNL deals make up about half of our portfolio, so we have a tremendous amount of income coming into the company on a monthly basis that are able to not only service the debt that we take on, but can still pay out as dividends to the investors.

“So… we’re always constantly learning, and we think we have everything figured out, but what’s fun about our business is there’s always more to learn and ways to change our business plans to how the market evolves…

“And then we have, you know, a really good shop, and the one thing that kind of sets us apart is the group’s highly analytical. And so, we just have pages and pages of models that we go through on it, and … if the deal doesn’t make sense, we’re not going to do it…

“So we’re starting to see some of those distressed opportunities, especially within the office space, and multi-tenant office. But, we kind of believe it’s still a little bit too early, just given the outlook and so forth. But I think we’re going to be pretty big buyers within that category, probably three years out from now.”