Catholic Healthcare West Deal Is Nearly Done: Pacific Locks Up $120 Million+ MOB Portfolio
(Reprinted from Healthcare Real Estate Insights, November 2003)
By Murray W. Wolf
Call it “Survivor: San Francisco.” Pacific Medical Buildings outwitted, outplayed and outlasted a field of nearly 40 potential bidders to emerge as the sole survivor in a competition for the right to acquire a 22-property medical office building (MOB) portfolio from San Francisco-based Catholic Healthcare West (CHW).
The San Diego, California-based medical real estate firm closed on the first 10 buildings October 31 and expects to close on the remaining dozen by the end of this year.
The total value of the deal is more than $120 million, according to Jeffrey Land, vice president of corporate real estate for CHW.
“Essentially, we sold the entire portfolio,” Mr. Land says.
The portfolio includes slightly more than 1 million square feet, according to Robert A. Rosenthal, president and managing partner of Pacific Medical Buildings. The MOBs are located on CHW campuses in California, Nevada and Arizona. The overall occupancy rate for the buildings is in the 92 percent to 93 percent range, he says.
During an interview late last month, a weary sounding Mr. Rosenthal – he blamed his raspy voice on poor air quality caused by the wildfires that were plaguing the San Diego area at the time, not the rigors of the CHW deal – recounted the details of one of the year’s biggest medical real estate transactions.
In April, CHW distributed a request for proposals (RFP) to nearly 40 firms that it considered to be viable candidates to own and manage the properties. CHW received 17 complete RFP responses, narrowed the list to six candidates, interviewed those six and chose three finalists: Pacific Medical Buildings, Lillibridge Health Trust of Chicago and Dallas-based Trammell Crow Co.
Mr. Land says the CHW team spent “a lot of time with the three finalists.” James M. Maloney of the New York investment bank Cain Brothers & Co. LLC advised CHW.
“We’re looking for people who want to have a long-term ownership position in medical office buildings,” Mr. Land explains, not an organization that was looking for a short-term investment it could spin for a quick profit.
The tribe has spoken
Pacific was officially selected May 22, Mr. Rosenthal says. So, why did it take more than five months to close on just the first part of the deal?
The size of portfolio required lengthy, multi-site due diligence, Mr. Rosenthal explains, including studies of Americans with Disabilities Act (ADA) compliance, mechanicals, possible asbestos, roofing and other issues. Extensive legal documents needed to be developed, and Pacific had to raise equity and secure debt financing.
Pacific and its investors are providing $31 million in equity, with the balance of the purchase price coming in the form of a loan from Morgan Stanley Mortgage Capital. Mr. Land said CHW wanted a true partner that would be involved for the long haul. The system also wanted a deal that would enable it to maintain a degree of control over the properties to ensure that tenants adhered to the beliefs of the Roman Catholic Church.
“Pacific Medical Buildings was really the most flexible in trying to meet those needs,” Mr. Land says. “All of the sales are subject to land leases,” he continues. “We are not selling any land at all.” Tenants are also limited to physicians who have been admitted to practice medicine in CHW hospitals.
Cash will be reinvested
For its part, CHW plans to plow the cash from the sale back into its system, retrofitting older inpatient facilities and acquiring new technology, Mr. Land says.
“For us, it’s about the opportunity to take non-core assets and convert them to medical care,” he explains. “We don’t need to own medical office buildings, in my opinion.” Mr. Land says he is “enthusiastic” about closing on the remaining properties.
Pacific had a previous relationship with CHW that made the deal especially attractive, Mr. Rosenthal says. The firm has owned several buildings on CHW campuses for at least 11 years, he says. The developer also has one joint venture MOB under construction on a CHW campus in San Gabriel, California, and three more are being developed in Stockton and Bakersfield, California, and Gilbert, Arizona.
The portfolio also made sense geographically, Mr. Rosenthal says. California, Nevada and Arizona are three of the six Western states where Pacific does business. The others are Oregon, Washington and Hawaii.
The firm already has offices in several of the markets in which the MOBs are located. But, it has hired 16 new employees and opened new regional management offices in Northridge (Los Angeles), California and Phoenix to service the acquired buildings. “It’s a big thing for us,” Mr. Rosenthal says. An affiliate of Pacific, PMB Real Estate Services, will provide property management and administrative services. Pacific plans to invest about $3.5 million in capital improvements to the buildings, he says, including improvements to corridors and common areas, and the installation of high-speed, fiber-optic communication lines.
Is a sequel possible?
Mr. Rosenthal says he and his colleagues have heard rumors that other large MOB portfolios are being assembled for sale in the West. “We’re anxiously looking for those,” he says. “Our management team is looking for additional medical office portfolios of similar size,” confirms Jeffrey Rush, chairman of Pacific Medical Buildings.
For more information, please Contact Us or call 800.472.1005