CHICAGO-Ventas Inc. president Ray Lewis tells GlobeSt.com’s Robert Carr that getting further into the growing medical office property business is attractive for a number of reasons. The health care REIT plans to boost its MOB exposure to more than 300 properties through the roughly $765 million takeover of Charlotte-based Cogdell Spencer Inc., it was announced Tuesday.
Lewis says MOBs are where the baby boomer generation, turning 65 this year, will be getting its first access to health care. There’s also supply constraints, as the buildings need to be near or on shrinking health care campuses, he says.
“Most medical office buildings are currently owned by hospitals,” Lewis says. “We see a trend where hospitals monetize real estate in order to redeploy capital into operational costs. A company like Ventas has the ability to own and manage this real estate. We can sit in front of the hospital CEO and provide a one-stop shop.”
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Ventas will take over 72 properties and 44 additional management contracts in 15 states, though Cogdell’s design-build business will be sold to an affiliate of Milwaukee-based Lubar & Co. In the deal, Ventas will acquire 68 medical office buildings that are 92% occupied on average, as well as two properties that need to be leased and two that are in development, a total of 4.2 million square feet. Ventas will also take over Cogdell’s management contracts on 44 properties, a total of about two million square feet. The deal boosts Ventas’ MOB portfolio from 11% to 15% NOI.
Lewis says Ventas’ own MOB properties are also about 92%, showing the strength of this asset class. “We see very stable and growing cash flows, with annual rent increases of 2% to 3%, a very good investment vehicle for cash-flow orientated investors such as a REIT,” he says.
The MOBs are mostly located in the Southeast, with the bulk of the assets in North Carolina and South Carolina, though the portfolio includes properties in California, New York, Indianapolis, Minnesota, Washington, Virginia and Pennsylvania.
Ventas will pay $4.25 per Cogdell share, about 8% higher than the company’s closing price on Dec. 23. Cogdell’s stock price at noon today was at about $4.26 per share. Cogdell preferred stockholders will receive $25 per share. The purchase price is expected to be between $760 million and $770 million, including debt.
According to a Ventas statement, the deal values Cogdell’s properties at a low- to mid-7% NOI yield, or slightly more than $200 per square foot. The Ventas deal still has to be approved by Cogdell shareholders. However, many attorney firms announced Tuesday that they are ready to represent investors to fight the deal, as the stock price was as high as $6.71 per share in March.
Cogdell has had its number coming for some time, however. The company’s stock price hit its peak of $22.68 in October 2006, but started a steep fall in September 2008, hitting its lowest point of $3.75 in May 2009, in part, some analysts believe, due to the acquisition of the MOB design-build and development business Erdman in 2008.
During the past two Cogdell quarterly conference calls, analysts have been asking Raymond Braun, hired as CEO in September 2010, how the firm would deal with losses due to the Erdman purchase. Braun continued to stoically predict improvement for the Erdman design-build business, even as analysts pointed out how different the business was from owning and managing the property, and how it was hemorrhaging money for the firm.
Tuesday, Braun announced his agreement to sell the Erdman business to Lubar, a private equity firm affiliated with David Lubar, a move that will take place before the Ventas sale. David Lubar previously held an equity stake in Erdman before it was sold to Cogdell in 2008. The transaction will include all assets and liabilities of the Erdman business, including about $11 million in projected net working capital. The agreement allows a solicitation for proposals from other firms over a 45-day period.
Braun said in a statement that the Ventas deal provides immediate, full and fair value to shareholders. “In reaching this decision to sell, the (Board of Directors) carefully considered our prospects to raise capital in support of our growth strategy,” he said. A spokeswoman for the company tells GlobeSt.com that she cannot comment further.
Ventas said its cash acquisition of Cogdell is expected to be financed through “the assumption of existing Cogdell mortgage debt and other borrowing,” according to the statement. The deal should close by the second quarter of 2012.
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