HPA Growth Fund Overview

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A $250,000,000 Investment Fund. Units offered at $10,000 per unit to qualified investors.
HPA Growth Fund
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This presentation is being presented solely for your information, is subject to change and speaks only as of the date hereof. This presentation and comments made by management do not constitute an offer to sell or the solicitation of an offer to invest in HPA Growth Fund. This presentation is not complete and is only a summary of the more detailed information included elsewhere, including in HPA Growth Fund’s Private Placement Memorandum (PPM). No representation or warranty, expressed or implied is made and no reliance should be placed on the accuracy, fairness or completeness of the information presented. HPA, its affiliates, advisers and representatives accept no liability whatsoever for any losses arising from any information contained in this presentation.
The statements in this presentation, as well as statements made by management, which are not historical facts, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and HPA intends such “forward-looking statements” to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding FFO, FAD, income and other financial projections and assumptions; future business strategies; and the ability to accelerate dividend growth. These statements are made as of the date hereof, are not guarantees of future performance and are subject to known and unknown risks, uncertainties, assumptions and other factors — many of which are out of HPA’s control and difficult to forecast — that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. These risks and uncertainties include but are not limited to: the risk that HPA may not be able to achieve the objectives of HPA Growth Fund, asset sales, or master leases within expected time-frames or at all; competition for tenants and operators; availability of suitable properties to acquire at favorable prices and the competition for the acquisition and financing of those properties; HPA's ability to negotiate the same or better terms with new tenants or operators if existing leases are not renewed or HPA exercises its right to replace an existing tenant or operator upon default; the risks associated with HPA's investments in joint ventures and unconsolidated entities; the risk that HPA may not be able to achieve the benefits of investments within expected time frames or at all, or within expected cost projections; changes in global, national and local economic conditions; changes in the credit ratings on United States (“U.S.”) government debt securities or default or delay in payment by the U.S. of its obligations; or HPA's ability to manage its indebtedness level and changes in the terms of such indebtedness. HPA assumes no, and hereby disclaims any, obligation to update any of the foregoing or any other forward-looking statements as a result of new information or new or future developments, except as otherwise required by law.
This presentation also includes market and industry data that HPA has obtained from market research, publicly available information and industry publications. The accuracy and completeness of such information are not guaranteed. The market and industry data is often based on industry surveys and preparers’ experience in the industry. Similarly, although HPA believes that the surveys and market research that others have performed are reliable, HPA has not independently verified this information.
This presentation contains certain supplemental non-GAAP financial measures. While HPA believes that non-GAAP financial measures are helpful in evaluating its operating performance, the use of non-GAAP financial measures in this presentation should not be considered in isolation from, or as an alternative for, a measure of financial or operating performance as defined by GAAP. You are cautioned that there are inherent limitations associated with the use of each of these supplemental non-GAAP financial measures as an analytical tool. Additionally, HPA's computation of non-GAAP financial measures may not be comparable to those reported by others.
Forward-Looking Statements
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With the evolution in healthcare to population health management and the trend from acute care to ambulatory care, the market demand for medical property management, brokerage and development is growing rapidly. Most notably:
With constrained capital and shrinking reimbursement, hospitals are increasingly seeking ways to monetize non-core assets, and fund building acquisitions and improvements.
Hospital systems are often trying to de-lever to shed debt, create liquidity and exit in scale.
Limited availability of debt and equity capital results in substantially less competition.
New supply of Medical Office Buildings (MOB’s) in on-campus medical real estate remains at near- record lows.
Economic fundamentals are strong for these recession proof assets.
HPA Growth Fund capitalizes on the opportunities of a rapidly evolving healthcare industry and mission-critical Medical Office Buildings (MOB’s). The US healthcare sector comprises almost 18% of the United State’s GDP, and HPA’s immersion in healthcare real estate combined with superb expertise and unique relationships allow us to be agile and nimbly execute our investment strategy in a way that is unmatched in the industry. This, combined with HPA’s deep knowledge and partners in superior markets, assets with strong triple-net leases all combine to de-risk and provide highly attractive stable returns intended to reward HPA’s investors.
INTRODUCTION
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WE ARE
WE HAVE
Unique expertise and extensive healthcare relationships throughout North America
Uniquely positioned within healthcare to capture proprietary deal flow
Multiple channels and opportunities to achieve growth across the capital stack and within assets themselves
A collaborative of powerful relationships with excellent liquidity and ability to add value to acquisition targets
The ability to scale for our investors. The largest healthcare REITS acquired more than$100 billion over the last 10 years, but still own less than 15% of the market.
Healthcare Property Advisor (HPA) is a real estate operating company with 30 years’ experience in managing all types of healthcare assets. HPA is majority owned by multiple health systems across the United States. The structure provides a unique competitive advantage to scale assets and revenues quickly as member systems chose to monetize assets.
A recession-resistant real estate category, providing steady, long-term cash flows, rent stability and predictable occupancy patterns
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We create value through acquisition, management, improvement and development of medical office buildings (MOB’s) and outpatient facilities
Each of our acquired buildings is a strategic asset to the related hospital, housing mission-critical clinical programs
We create asset-class investments in a recession-resistant category, providing steady, long-term cash flows, rent stability and predictable occupancy patterns
Our long-standing relationships in the industry and proven success in the medical market segment with prominent health systems have built HPA’s reputation and market position
HPA Growth Fund is a national platform and extensive relationships focused on major markets, strong operating fundamentals, and leveraging unique deal flow capabilities
Tremendously efficient, integrated property, asset management, and deal sourcing capabilities
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HPA
Growth
Fund
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$6 Billion in medical construction on and
offsite hospital campuses
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Offers strong anchor partners: institutional anchor investors and a traditional partnership structure
Members have collectively invested in equity commitments
Return allocation
LPs receive a targeted 11+% prioritized return; then
GP receives “catch up”; then
Split 80% LP, 20% GP
Provisions for early exits
Total value of healthcare real estate in the US exceeds $1 trillion, 14% of which is owned by a fragmented REIT industry.
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HPA
Growth
Fund
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institutional M&A.
*
Growing and Sustained Demand
Source: CMS.gov, US Centers for Disease Control and Prevention, US Census Bureau, AHA Hospital Statistics, BLS.gov, Henry J. Kaiser Family Foundation
Annual Physician Office Visits & Healthcare Costs by Age
The aging population and increased
utilization are expected to drive higher
volumes of outpatient visits.
<45
45-64
>65
$2,700
Annual
Cost
visits
6.9
$5,500
Annual
Cost
$9,800
Annual
Cost
85 88 91 94 97 00 03 06 09 12
700
500
300
100
Growing and Sustained Demand
Employment Change Since 2009
Source: Dixon Hughes Goodman, AHA Annual Survey data for Community hospitals, Avanza Healthcare Strategies
2009 2010 2011 2012 2013 2014 2015
30%
20%
10%
0%
-10%
Practices Owned by Physicians
Practices Owned by Hospitals
To reduce costs, hospitals are aligning with physicians and shifting more procedures to outpatient settings. HPA’s portfolio is positioned to benefit from these structural changes.
Inpatient vs. Outpatient
Hospitals’ Gross Revenue
growing demand.
value and lowers risk.
Occupancy* 89.2% 87.4%
Demand > Supply
Supply > Demand
Credit worthy single tenant in location with few replacement tenants.
Intrinsic Real Estate Value
Duration: lease term (finite)
MOB Dierentiation
A highly attractive growth outlook of strong triple-net leases, combined with proprietary deal-flow, accretive acquisitions and refinancing tailwinds.
Beyond market dynamics, asset and portfolio value
is a function of asset-specific attribute, including:
On/off campus
Hospital strength
Tenant mix
Building size
Building condition/functionality
Our unique position and relationships with numerous reputable hospital systems leverages the ability for
transactional access across 23 states and growing
*
Proprietary deal flow
Portfolio company relationships
Leverage relationships and proprietary deal flow to make opportunistic buys of MOB’s
Focus on markets and assets in which our group has particular knowledge and expertise
*
Growth Strategies
HPA is focused on maintaining a strong internal growth profile, supplemented by disciplined and selective developments, and the advantageous support from the Innovation Institute’s Enterprise Development Group.
98% of base revenue growth is driven by 4 key components:
Contractual Increases
HPA
Growth
Fund
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James McGrade is a specialist in the medical real estate industry and handles an array of services including development, management and brokerage. A licensed broker since 1986, he has been involved in the development, acquisition, disposition, construction management and leasing of prominent healthcare projects. James’ involvement also includes tenant and owner representation on numerous lease and sale transactions. He has a BS in Business Administration with an emphasis in Finance and Real Estate from California Polytechnic University, Pomona, current Chairman of the City of Brea Planning Commission and a Rotarian. His community and civic involvement includes being a board member of St. Jude Memorial Foundation as well as vice chair of various hospital fundraising committees.
+ James McGrade
General Partner
Leadership
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Thuy Turner has been working as a real estate professional for over 15 years, and as a licensed broker since 1998, overseeing portfolios of over seven million square feet. She has extensive real estate experience managing office, medical, and retail facilities. Thuy brings a diversity of expertise to HPA Realty, Inc. through her previous tenures with Arden Realty, Equity Office and Schnitzer Northwest. She has a BA in Economics from the University of California, Irvine and a MBA in Business Administration from California State Fullerton.
+ Thuy Turner
Leadership
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Michael G. McKinnon focuses his practice on corporate and securities law, with an emphasis on mergers and acquisitions, joint ventures, and equity and debt financings in the health care and life sciences industries. Michael has assisted clients in acquiring or investing in medical device companies, home infusion providers, diagnostic imaging providers, medical groups, physician practices, surgery centers, PPO networks, diabetic supply businesses, clinical trial companies and urgent care centers. In addition, Michael serves as outside general counsel for a variety of health care and life sciences companies, including medical device firms and large health systems.
Michael has been a partner at multiple global law firms. He has also served as In-House Counsel for Apria Healthcare and InSight Health Services Corp., with primary responsibility for the companies’ acquisitions, joint ventures and securities matters.
+ Mike McKinnon
Leadership
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Troy has been practicing as a certified public accountant for nearly 25 years in Southern California. After graduating with a Bachelors of Science in Accounting (cum laude) from Brigham Young University in 1986, Troy became a CPA in 1989. Troy has operated his own accounting firm since becoming a CPA. Income tax work is the primary focus of Troy’s firm, although his firm also offers bookkeeping and payroll services. Troy specializes in guiding the small entrepreneur through the maze of government filings. Additionally, he consults with his clients on a wide variety of matters ranging from setting up a company to selecting a company pension; from income tax planning to strategic planning.
+ Troy K. Smith
Leadership
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Mr. Montalvo is St. Joseph Health’s senior executive responsible for Finance, Physician Operations, Information Technology, Medical Informatics, Human Resources, Network Development & Contracting, Mergers/Acquisitions, and Treasury. In addition, he oversees physician operations and population health activities though St. Joseph Heritage Healthcare (SJHH), a medical practice foundation with over 500 physicians. Mr. Montalvo has served SJH at the system level for fourteen years, most recently as the Executive Vice President for the Southern California Region of St. Joseph Health. During his tenure as the regional executive, a regional operating and governance structure was developed and the region grew significantly through acquisition and affiliation.
Mr. Montalvo has more than twenty five years’ experience in health care finance and operations with a proven record of delivering strategic direction, operations improvement, growth, improvement identification and plan implementation, expanding levels of leadership and board management. Mr. Montalvo serves as a Board Member for the University of San Diego, a member on the advisory board of Santé Health Ventures, a venture capital fund, Chairman of DaTu Health, a technology firm focused on user engagement within healthcare, and a member on various health system/hospital or charitable Boards and Foundations.
+ Darrin Montalvo
Leadership
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Barry Didato is Chief Investment Officer of The Innovation Institute; a unique accelerator supplying capital, expertise, and partners to amplify the power and impact of human ingenuity and goodwill to save lives and alleviate human suffering worldwide. The Institute is structured and capitalized to serve members, and support innovators to grow and become a positive force to meet the needs of a rapidly changing global healthcare industry. Barry’s background and experience in investments, mergers & acquisitions (M&A), startups, and global business perspective enable him to assist The Institute in reaching its highest potential in terms of volume of ideas and inventions, as well as mission, impact, value, and access to care for vulnerable populations globally.
Barry has over 25 years of experience in due diligence, investments and M&A leadership, and previously served for 14 years as Director of Strategic Investment for the Saudi Royal Family, and their various holding companies. Within that role, Barry headed up global investments, due diligence, mergers and acquisitions, strategic partnerships, cross-border business rollouts and supporting start-ups and building social currency on six continents.
Barry holds degrees in Environmental Design & Regional Planning (BA), and a Master’s Degree in Real Estate focusing on entrepreneurial management, finance and design thinking to accelerate innovation from Harvard University Graduate School of Design in conjunction with Harvard Business School.
+ Barry Didato
Advisory HPA
Leadership
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Mr. John Gavan serves as the President of KPFF Consulting Engineers, Inc. Mr. Gavan joined KPFF in 1988, and has worked in the field of engineering for 30 years. His areas of expertise include base isolation and seismic design, and as President of KPFF, Mr. Gavan leads an organization centered on the ability to meet challenges and solve clients’ problems. KPFF has a culture where thinking “outside the box” is a norm, and is on the leading edge of new practices, technology, and project delivery methods. Mr. Gavan's approach and experience with the engineering industry closely follows the key latest developments in Sustainable Design, and Building Information Management (BIM). Mr. Gavan holds a M.S. and B.S. in Civil Engineering from University of California at Los Angeles.
+ John Gavan
Mr. Watkins’ area of expertise is real estate and contract law. He assists clients in commercial and residential developments, lease negotiations, community association documentation, construction contracts, construction loans and permanent financing, security instruments, loan arrangements and workouts.
Mr. Watkins is an active member of the State Bar of California. He is a former two-term Chair of the Orange County Bar Association (OCBA) Real Estate Law Section, served as an OCBA director, and is a former delegate to the State Bar Conference of Delegates. Mr. Watkins is a former member of the Building Industry Association and is active with the Newport Beach Chamber of Commerce where he has served as its Chairman of the Board and currently serves on the Chamber’s Executive Committee and numerous Committees and Councils.
Mr. Watkins is the former Vice Chair of the State Bar Real Property Law Section Executive Committee and the former Managing Editor of the California Closing Practices Handbook. He is a regular speaker on panels sponsored by the Continuing Education of the Bar, the State Bar and local bar associations. Mr. Watkins received his undergraduate degree (B.A.), M.B.A. and law degree (J.D.) from the University of Southern California.
+ Paul K. Watkins
Leadership
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John D. Penner is a Senior Managing Director for Valbridge Property Advisors and has been in the real estate and banking fields for over 30 years. Valbridge Property Advisors is the third largest appraisal firm in the United States, with 67 offices nationwide. He has completed assignments in many areas of the United States, including working in development and problem loans at the headquarters of Home Savings of America, the largest Savings and Loan institution in the U.S. at the time. Mr. Penner holds an MAI designation from the Appraisal Institute and has a Bachelor of Science Degree in Finance and Investments from San Diego State University. He is a licensed Real Estate Broker, a member of the Urban Land Institute (ULI) and holds a Certificate in Real Estate Development from the ULI.
John's work consists of valuation and counseling for investment & development analysis, workout consultation, portfolio analysis, market studies, reviews, business plans, court testimony and litigation support. Clients include a combination of financial lending institutions, investors, developers, legal and government.
+ John Penner
Leadership
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Our dedicated acquisitions team can provide expertise in all aspects of real estate, including entitlement, architecture, engineering, energy efficiency, real estate law, tax law, compliance and more.
Our financial modeling and predictive analytics team utilizes research data from a range of industry experts to develop reliable financial models. The strong relationships we have built with mortgage banking firms allow us to expedite the acquisition and disposition process quickly and efficiently.
Development Capabilities
We have completed over $6 billion in medical construction and have the capabilities to fund, construct, own and operate medical and healthcare office buildings. Our unique ownership structure provides us with sources of capital through The Innovation Institute model, and project opportunities in five regions and 29 states across the country.
Brokerage Services
We provide services in landlord and tenant representation, commercial and medical real estate brokerage, valuation and compliance related documentation. This is often under exclusive agreement as owner and tenant representative.
Property Management
HPA provides effective property management across a number of areas:
Our efficient management approach adds significant value for property owners by driving down costs and increasing asset values
Our incredible personnel further our values-based approach. We administer customer satisfaction surveys and improvement plans, provide structured in-house training programs, and have superior talent recruitment capabilities.
We provide financial analysis and “fair market” surveys to ensure we comply with regulatory audit processes.
We undertake engineering audits to recommend building equipment efficiency enhancements.
Our fully integrated accounting software programs deliver real-time data.
We provide complete leasing services.
We engage on-site engineering staff to operate our managed facilities.
Property Tax & Special Assessment Audits/Appeals
As part of an encompassing service, HPA provides an analysis of each property’s taxes and special assessment values. Upon its individual audit, we work with the owners for any necessary appeals and reassessments.
Lease Administration
We provide due diligence and fact gathering, lease renewals and abstracting, and various administration services.
HPA Expertise Supporting The Fund
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Address:
Brea
Brea, CA 92821
La Palma, CA 90623
PURCHASED 1,280.1366
PURCHASED 1,333.3211
THIS OFFERING*
*BASED ON AN AGGREGATE OFFERING AMOUNTS OF $250,000,000 AT A PER UNIT PURCHASE PRICE OF $10,000
HEALTHCARE PROPERTY ADVISORS, LLC
MOB 1 (SOLE ASSET)
MH MOB NO. 2, LLC (SPECIAL PURPOSE ENTITY)
MOB 2 (SOLE ASSET)
MOB 3 (SOLE ASSET)
MOB 6 (SOLE ASSET)
(LIMITED PARTNER)
THIS OFFERING*
*BASED ON AN AGGREGATE OFFERING AMOUNTS OF $250,000,000 AT A PER UNIT PURCHASE PRICE OF $10,000
HEALTHCARE
(SPECIAL PURPOSE ENTITY)
(PARTNERSHIP)
Ini/al$Raise$&$Property$Acquisi/on Capital'Raised 125,000,000'''''''''''''' 75,000,000'''''''''''''''' 50,000,000'''''''''''''''' 2'''''''''''''''''''''''''''' 2'''''''''''''''''''''''''''' Plus:'Prior'Period'Ending'Balance' 2'''''''''''''''''''''''''''' 25,000,000'''''''''''''''' 37,500,000'''''''''''''''' 37,500,000'''''''''''''''' 12,500,000'''''''''''''''' Purchased'Property (400,000,000)'''''''''''' (250,000,000)'''''''''''' (200,000,000)'''''''''''' (100,000,000)'''''''''''' (50,000,000)'''''''''''''' Debt'Acquired 300,000,000'''''''''''''' 187,500,000'''''''''''''' 150,000,000'''''''''''''' 75,000,000'''''''''''''''' 37,500,000'''''''''''''''' Ending'Balance 25,000,000'''''''''''''''' 37,500,000'''''''''''''''' 37,500,000'''''''''''''''' 12,500,000'''''''''''''''' 2''''''''''''''''''''''''''''
Less:%Ini)al%Contribu)on 125,000,000%%%%%%%%%%%%%% 200,000,000%%%%%%%%%%%%%% 250,000,000%%%%%%%%%%%%%% 247,500,000%%%%%%%%%%%%%% 245,000,000%%%%%%%%%%%%%% 242,500,000%%%%%%%%%%%%%% Net,%Allocable%Value 17,481,727%%%%%%%%%%%%%%%% 53,043,590%%%%%%%%%%%%%%%% 99,824,916%%%%%%%%%%%%%%%% 175,039,392%%%%%%%%%%%%%% 240,167,989%%%%%%%%%%%%%% 292,250,800%%%%%%%%%%%%%%
Equity%Split: General$Partner
20%%Profit%Split 20% 3,496,345%%%%%%%%%%%%%%%%%% 10,608,718%%%%%%%%%%%%%%%% 19,964,983%%%%%%%%%%%%%%%% 35,007,878%%%%%%%%%%%%%%%% 48,033,598%%%%%%%%%%%%%%%% 58,450,160%%%%%%%%%%%%%%%% Less:%Special%Distribu)ons G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% Equity%Alloca)on%General%Partner 3,496,345%%%%%%%%%%%%%%%%%% 10,608,718%%%%%%%%%%%%%%%% 19,964,983%%%%%%%%%%%%%%%% 35,007,878%%%%%%%%%%%%%%%% 48,033,598%%%%%%%%%%%%%%%% 58,450,160%%%%%%%%%%%%%%%%
Limited$Partners 80%%Profit%Split 80% 13,985,382%%%%%%%%%%%%%%%% 42,434,872%%%%%%%%%%%%%%%% 79,859,933%%%%%%%%%%%%%%%% 140,031,514%%%%%%%%%%%%%% 192,134,391%%%%%%%%%%%%%% 233,800,640%%%%%%%%%%%%%% Adjustment%for%GP%Special%Distribu)ons G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% Equity%Alloca)on%Limited%Partners 13,985,382%%%%%%%%%%%%%%%% 42,434,872%%%%%%%%%%%%%%%% 79,859,933%%%%%%%%%%%%%%%% 140,031,514%%%%%%%%%%%%%% 192,134,391%%%%%%%%%%%%%% 233,800,640%%%%%%%%%%%%%%
LP%Units%Outstanding G%%%%%%%%%%%%%%%%%%%%%%%%%%%% 12,500%%%%%%%%%%%%%%%%%%%%%%% 20,000%%%%%%%%%%%%%%%%%%%%%%% 25,000%%%%%%%%%%%%%%%%%%%%%%% 24,750%%%%%%%%%%%%%%%%%%%%%%% 24,500%%%%%%%%%%%%%%%%%%%%%%% %%Units%Sold 12,500%%%%%%%%%%%%%%%%%%%%%%% 7,500%%%%%%%%%%%%%%%%%%%%%%%%% 5,000%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% %%Units%Redeemed G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% G%%%%%%%%%%%%%%%%%%%%%%%%%%%% 250%%%%%%%%%%%%%%%%%%%%%%%%%%%% 250%%%%%%%%%%%%%%%%%%%%%%%%%%%% 250%%%%%%%%%%%%%%%%%%%%%%%%%%%% Total%Units%Outstanding% 12,500%%%%%%%%%%%%%%%%%%%%%%% 20,000%%%%%%%%%%%%%%%%%%%%%%% 25,000%%%%%%%%%%%%%%%%%%%%%%% 24,750%%%%%%%%%%%%%%%%%%%%%%% 24,500%%%%%%%%%%%%%%%%%%%%%%% 24,250%%%%%%%%%%%%%%%%%%%%%%% Value%Apprecia)on%per%LP%Unit $1,118.83 $2,121.74 $3,194.40 $5,657.84 $7,842.22 $9,641.26 Plus:%Ini)al%Contribu)on%per%unit $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00 Total$Value$per$Unit $11,118.83 $12,121.74 $13,194.40 $15,657.84 $17,842.22 $19,641.26
Return%Calcula6ons: Ini)al%Contribu)on 10,000$%%%%%%%%%%%%%%%%%%%%%%%%%%% YearGoverGYear 11.19% 9.02% 8.85% 18.67% 13.95% 10.08% Compound%Annual%Growth 21.22% 14.87% 16.12% 15.57% 14.45% IRR%($10,000%contribu)on,%2025%Return) 10.96%
Debt%Rate 4.25%
Management%Fee 2.0% 8,500,000%%%%%%%%%%%%%%%%%% 8,475,988%%%%%%%%%%%%%%%%%% 11,230,925%%%%%%%%%%%%%%%% 16,249,621%%%%%%%%%%%%%%%% 19,743,747%%%%%%%%%%%%%%%% 21,774,675%%%%%%%%%%%%%%%% 425,000,000%%%%%%%%%%%%%% 422,598,844%%%%%%%%%%%%%% 700,493,694%%%%%%%%%%%%%% 924,468,373%%%%%%%%%%%%%% 1,049,906,278%%%%%%%%%%% 1,127,561,226%%%%%%%%%%%
Redemp)ons%@%1% 1.0% 250%%%%%%%%%%%%%%%%%%%%%%%%%%%% 250%%%%%%%%%%%%%%%%%%%%%%%%%%%% 250%%%%%%%%%%%%%%%%%%%%%%%%%%%% Redemp)on%price NA $11,118.83 $12,121.74 $13,194.40 $15,657.84 $17,842.22 cash%outlay $3,298,599.33 $3,914,459.74 $4,460,555.01
THE OFFERING The Portfolio consists of four medical office buildings on the St.
Joseph Health Mission Hospital Campus in the affluent
community of Mission Viejo, California. The Portfolio totals
262,429 rentable square feet and is 100% master leased through
August 31, 2019 by St. Joseph Health System which features an
investment grade ‘A1’ rating by Moody’s and a ‘AA-’ rating by
Fitch. Both rating agencies cite the health system’s strength with
$5 billion in annual operating revenues and the recent consolidation
of the cash-rich Hoag Memorial Hospital into the St. Joseph Health
System. The mission critical real estate on the landlocked 552-bed
hospital campus provides an incoming investor a unique opportunity
to strike a new partnership with one of the most coveted hospital
systems in Orange County.
Absolute NNN Master Lease
Positive Physician Employment Trends
Mission Medical Office Portfolio ADDRESSES:
27800 Medical Center Road (Buildings 1, 2, and 3)
26732 Crown Valley Parkway (Medical Office Tower, Building 6)
PORTFOLIO SIZE: 262,429 RSF
MASTER LEASED %: 100%
MASTER LEASE EXPIRATION:
August 31, 2019
N O I B E G I N N I N G 8 / 2 0 1 4 :
$8,713,918
A N N U A L I N C R E A S E S :
INVESTMENT HIGHLIGHTS
Investment Grade Credit Master Lease
St. Joseph Health System (SJHS) master leases the entire Portfolio and currently
maintains an investment grade credit rating of ‘A1’ by Moody’s and ‘AA-’ by Fitch
Ratings. Moody’s cites the health system’s strength with over $5 billion in annual
proforma operating revenues and locations within three regions of the country
(Northern California, Southern California, and Western Texas). The positive outlook
SJHS Obligated Group for the issuance of bonds) - and with the investment in other
resources that have the goal of diversifying revenues - balance sheet, debt and
operating measures will further improve, positioning SJHS for an upgrade.
Rare Fee-Simple On-Campus Portfolio
Today, one-third of all hospital patients in south Orange County come to the Mission
are owned fee-simple, without use-restrictions, a rare occurrence for on-campus
Maintaining control of the uses at the medical buildings under a master lease will
continue to be strategically important to the hospital in order to protect competing
uses and to protect the system’s Roman Catholic traditions throughout its campus.
Highly Coveted Orange County Location
Orange County is one of the nation’s most coveted real estate markets. The
foundation for its healthy economic environment which currently features a low
5.8% unemployment rate. Within 3-miles of the subject properties, the average
household income exceeds $130,000 per year and 95% of the population has
healthcare insurance. These demographics are the envy of hospitals around the
long-term demand for occupancy in the medical buildings. The campus is also
situated adjacent to one of the premier retail centers in the region – The Shops at
Mission Viejo – featuring 150 stores and restaurants including Nordstrom, Macy’s,
H&M, Tesla Motors, Apple and Microsoft.
Absolute NNN Master Lease
The buildings are master leased on an absolute triple net basis, eliminating
expense exposure for the landlord and providing a predictable income stream
to an investor. All expenses are paid for directly by tenant with the exception
of earthquake insurance and minimal property management duties. This is a
market, the two organizations are now collaborating to develop population
health strategies throughout the Orange County market. Fitch Ratings believes
which could allow it to drive transformational changes relative to healthcare
reform.
Positive Physician Employment Trends
As provider reimbursements via Medicare and Medicaid shrink (and will continue
to do so as part of the Patient Protection and Affordable Care Act), primary care
physicians and specialists will continue to contemplate selling their practice to
the hospital. According to Managed Care Magazine, “the majority, if not 85%
to 90%, of all physician groups will be integrated into some type of system. The
kind of practice of independent medicine we once knew is dead.” As St. Joseph
Health System employs more doctors through their St. Joseph Mission Heritage
Medical Group in an effort to better control costs, it is expected to increase
demand by the hospital for more space in the Portfolio.
Assest Hightlights
Diverse Tenancy
St. Joseph Health System directly occupies 84% of the Portfolio square footage,
with the remainder of the space leased to private physician practices, a
laboratory, and pharmacy. The Property’s tenants are comprised of a wide variety
of healthcare specialties, including orthopedic surgery, neurology, oncology,
plastic surgery, radiology, urology, gastroenterology, podiatry, otolaryngology,
internal medicine, pediatrics, family medicine and obstetrics and gynecology.
within the buildings.
“Recession Resistant” Property Category
property category in an article by National Real Estate Investor magazine.
on predictable occupancy patterns. Doctors typically sign long-term leases and
have renewal rates upwards of 90%.” All of this adds up to steady long-term
property.
ADDRESS: 27800 Medical Center Drive, Building 1, Mission Viejo, CA
BUILDING SIZE: 42,400 RSF
PARKING:
The hospital campus has paved surface parking and shared parking structures for 1,722 total spaces equating to a parking ratio of 6.00 spaces per 1,000 square feet of net rentable area.
FOUNDATION/STRUCTURE: Poured concrete slab, steel frame
EXTERIOR WALLS: the front and rear elevations. Side elevations are constructed of concrete masonry units (CMU) with textured stucco with a
HEATING & COOLING (HVAC): 14 roof-mounted HVAC units manufactured by York and Carrier, with cooling capacities varying for 5- to 7-1/2 ton.
ROOF: Flat / rubber membrane
ELECTRICAL: 1,000-amp, 120/208-volts, 3-phase, 4-wire
PLUMBING: Copper piping, separately metered
ELEVATORS: 2 passenger duplex hydraulic elevators with a 2,000 to 2,500 pound capacity.
INTERIORS: paneling and wallpaper walls with acoustic ceiling panels;
FIRE SAFETY/SPRINKLER:
PARKING:
HEATING & COOLING (HVAC): 21 roof-mounted HVAC units manufactured by York and Carrier, with cooling capacities varying for 5- to 7-1/2 ton.
ELEVATORS: 2 passenger duplex hydraulic elevators with a 2,500 to 3,500 pounds capacity.
PARKING:
HEATING & COOLING (HVAC):
Two rooftop-mounted self contained 60-ton air-handling units manufactured by McQuay, two 5-ton package units manufactured by York, and one 7 1/2-ton package unit manufactured by Carrier. Heating for Building 3 is provided by an original 1,275,000 Btu/hr Ajax water boiler and circulating pumps.
ELEVATORS: 2 passenger simplex hydraulic elevators with a 2,500 pound capacity
ADDRESS: 26732 Crown Valley Parkway, Mission Viejo, CA
ZONING: CF, Community Facility
PARKING: The hospital campus has paved surface parking and shared parking structures for 1,722 total spaces equating to a parking ratio of 6.00 spaces per 1,000 square feet of net rentable area.
FOUNDATION/ STRUCTURE:
EXTERIOR WALLS: Assembled and glazed on site based on vertical mullions and supported by anchors
HEATING & COOLING (HVAC):
Two-pipe water-source heat-pump system serving Floor 1, that encompasses one rooftop- mounted Baltimore Air Coil (BAC) 120-ton cooling tower, and circulating pumps. Floor 1 is provided with ceiling plenum-mounted water-source heat-pump units varying in size from 2 to 5 tons. Floors 2 through 5 are provided with 50-ton condenser-water cooled
cooled by two 100-ton rooftop-mounted BAC cooling towers, and circulating pumps.
ELEVATORS: 3 elevators - elevators 1 and 2 are duplex passengers with capacities of 2,500 pounds. Elevator 3 is a passenger and service elevator with a capacity of 3,500 pounds.
INTERIORS:
Brick tile pavers surrounding commercial-grade carpet in the main lobby. Walls are painted gypsum and fabric wall covering, with a brick tile base. Ceilings are covered with
carpet with rubber base, painted gypsum and vinyl wall covering, and ribbed suspended
FIRE SAFETY/ SPRINKLER:
LOCATION OVERVIEW
Hospital campus in Mission Viejo, California, considered one of the largest
master-planned communities ever built under a single project in the United
in Southern California with an average household income of $130,547 within a
3-mile radius.
Located two blocks from Interstate 5, the Mission Hospital campus has easy ingress
and egress for patients within a large service area. Ample parking is provided on
the campus as part of a reciprocal easement agreement with two large parking
garages and several surface lots. In addition, the area is serviced by the Laguna
Niguel/Mission Viejo Metrolink Station, providing patients and physicians from
the greater Orange County metro area easy access to the hospital.
Just to the south of the Mission Hospital campus is The Shops at Mission Viejo, a
1.2 million square foot upscale retail mall (operated by Simon Property Group,
a global leader in the retail industry), and Saddleback College, a community
college with an estimated 26,000 students and 1,200 faculty and staff.
NATIONAL HEALTH CARE OVERVIEW
With the implementation of the federal Affordable Care Act (ACA), several
of the national healthcare reform legislation is to increase access, quality and
affordability of healthcare for 46 million uninsured Americans. As access to
healthcare increases, the demand for clinical services should correspondingly
It is estimated that an addition of approximately 8,000 primary care physicians
will be needed to care for the newly insured. Based on the current U.S. average
of 1,780 square feet per primary care doctor, this addition would generate
National Real Estate Investor).
In addition, increasing the health insurance coverage rate from today’s rate of
84 percent to 95 percent will require an additional 21.4 million square feet of
feet per insured individual (source: National Real Estate Investor).
While there remain many unknowns regarding the outcome of the health care
reform, it is expected to generate increased demand for medical professionals
CALIFORNIA HEALTH CARE OVERVIEW
Signed into law in March of 2010, the federal Patient Protection and Affordable
Care Act (the ‘ACA’) will transform the way Californians obtain and pay for
health insurance. Estimates are that once the law is fully implemented, 94%
of the state’s population will be covered by a health plan, through either an
employer, a new health insurance exchange market, or expansions to public
required in 2014. The State’s exchange, Covered California, offers affordable,
quality health insurance coverage to the State’s residents from 13 private
insurance companies, and in return the State will receive billions of federal
dollars to fund the costs required to enact the reforms, including supplemental
funding for Medicaid and Medi-Cal. As of the end of 2013, more than 500,000
California residents had enrolled in health insurance coverage through Covered
California, and California residents accounted for 22% of the total 2.2 million
exchange enrollees nationwide (source: U.S. Department of Health And Human
Services).
insurance exchange. Consumers with pre-existing health conditions who lack
insurance through an employer and can’t get affordable coverage on their own
will now be covered by all insurance providers. The expanded coverage gives
much-needed help to 396,000 Californians who have pre-existing conditions
and who have been denied coverage by insurance companies. California is
eligible for $761 million in federal dollars to insure these “uninsurable” people.
In addition, young adults between 18 to 34 years of age are the least likely to
be insured, and one-third of California young adults in that age group were
uninsured prior to 2014. Under the new law, they will be able to remain covered
under their parents’ health plans until age 26.
Finally, another piece of the federal reform targets small businesses struggling
their workers, less than half of small businesses can afford to. Small businesses
now can take advantage of tax credits up to 35 percent of premiums, and in
2014, they are eligible to use the state-run health exchange to take advantage
of group rates and a choice of insurers.
NATIONAL AND REGIONAL HEALTH CARE OVERVIEW
MASTER LEASE ABSTRACT
TENANT: Mission Hospital Regional Medical Center, a
LEASE COMMENCEMENT: September 1, 1994
LEASE EXPIRATION: August 31, 2019
TERM: 25 Years
LEASE EXTENSION OPTIONS:
Tenant has two 5-year options remaining, effective September 2019 and September 2024, at fair market value with annual rent escalations of either the greater of CPI or 3% annually thereafter (8% annual cap on increase).
MAINTENANCE AND REPAIRS:
Tenant agrees to maintain the Premises, including structural and nonstructural portions thereof, exterior walls, roof, windows, doors, utilities, including without limitation, plumbing, heating, air conditioning, electrical, telecommunication and elevators, and all equipment relating to all of the foregoing, it being the intent of the parties that this Lease is a fully net Lease with Tenant responsible for, and directly paying the cost of, maintaining the Premises and repairing and replacing all elements and components thereof and equipment relating thereto.
RESTRICTED USES:
laboratories, pharmacies and outpatient clinics) and related retail commercial/restaurant uses.
FINANCIAL ANALYSIS :: SUMMARY OF FINANCIAL ASSUMPTIONS
GLOBAL VACANT SPACE LEASING SECOND GENERATION LEASING
Tower MOB's 1, 2 & 3 Analysis Period Occupancy and Absorption Retention Ratio 80% 80%
Commencement Date August 1, 2014 Projected Vacant at 8/1/14 0 SF End Date July 31, 2024 Currently Vacant as of 5/1/14 0 SF Financial Terms Term 10 Years Percentage Vacant at 5/1/14 0.00% 2014 Monthly Market Rent $2.45 PSF $2.10 PSF
Absorption Period - Rent Adjustment 3.00% Annually 3.00% Annually Area Measures Absorption Period Start Date - Lease Term 7 Years 7 Years
Building Square Feet (NRSF) 287,029 SF First Absorption Occurs On - Expense Reimbursement Type NNN NNN Last Absorption Occurs On -
Growth Rates Tenanting Costs Consumer Price Index (CPI) 3.00% Financial Terms Rent Abatements Other Income Growth Rate 3.00% 2014 Monthly Market Rent - New 0 Month(s) 0 Month(s) Operating Expenses 3.00% Rent Adjustment - Renewal 0 Month(s) 0 Month(s) Real Estate Taxes 2.00% Lease Term - Weighted Average 0.00 Month(s) 0.00 Month(s) Market Rent Growth Expense Reimbursement Type -
CY 2015 - 3.00% Rent Abatements - Tenant Improvements ($/NRSF) CY 2016 - 3.00% Tenant Improvements ($/NRSF) - New $35.00 PSF $35.00 PSF CY 2017 - 3.00% Commissions - Renewal $10.00 PSF $10.00 PSF CY 2018 - 3.00% Weighted Average $15.00 PSF $15.00 PSF CY 2019 - 3.00% EXPENSES CY 2020 - 3.00% Commissions [6] CY 2021 - 3.00% Operating Expense Source 2014 Budget [3] New 6.00% 6.00% CY 2022 - 3.00% Renewal 3.00% 3.00% CY 2023 - 3.00% Management Fee None [4] Weighted Average 3.60% 3.60%
CY 2024+ - 3.00% Real Estate Taxes Reassessed No [5] Downtime
General Vacancy Loss 0.00% [1] New 9 Month(s) 9 Month(s) Weighted Average 2 Month(s) 2 Month(s)
Capital Reserves (CY 2014 Value) $0.00 PSF [2]
Notes: All market rent rates are stated on calendar-year basis. [1] General Vacancy Loss factor includes losses attributable to projected lease-up, rollover downtime, and fixturing downtime.
All tenants are subject to this loss factor. [2] Master Lease is responsible for capital items. [3] Majority of expenses are paid directly by tenant and are exlcuded from this analysis. [4] Analysis assumes a $54,000 /yr Management Fee upon existing lease expiration. [5] Currently Real Esatate Taxes are paid directly. Analysis assumes Taxes are paid by Landlord and reimbursed 100% by tenant. It is the responsibility of the investor to reassess taxes in accordance with the projected purchase price. [6] Leasing Commissions are calculated by applying 100% of the rates shown above for lease years 1-5, and 50% of the above rates for lease years 6 and beyond.
FINANCIAL ANALYSIS :: CASH FLOW PROJECTIONS
Fiscal Year Ending - July 31 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Physica l Occupancy 100.00% 100.00% 100.00% 100.00% 100.00% 83.33% 100.00% 100.00% 100.00% 100.00% 100.00%
O verall Economic Occupancy [1] 100.00% 100.00% 100.00% 100.00% 100.00% 85.32% 100.00% 100.00% 100.00% 100.00% 100.00%
Weighted Average Market Rent $2.32 $2.39 $2.46 $2.53 $2.61 $2.69 $2.77 $2.85 $2.93 $3.02 $3.11
Weighted Average In Place Rent [2] $2.59 $2.67 $2.75 $2.83 $2.92 $2.67 $2.70 $2.78 $2.86 $2.95 $3.04
Total O perating Expenses PSF Per Year $4.24 $4.33 $4.43 $4.52 $4.62 $4.90 $5.01 $5.12 $5.23 $5.34 $5.45
[3] FY 2015
Gross Potential Rent $2.59 $8,922,952 $9,190,641 $9,466,360 $9,750,352 $10,042,861 $9,170,604 $9,293,590 $9,572,398 $9,859,569 $10,155,358 $10,460,017 Absorption & Turnover Vacancy 0.00 0 0 0 0 0 (1,514,849) 0 0 0 0 0
Total Scheduled Base Rent 2.59 8,922,952 9,190,641 9,466,360 9,750,352 10,042,861 7,655,755 9,293,590 9,572,398 9,859,569 10,155,358 10,460,017
Expense Reimbursements 0.29 1,008,421 1,028,586 1,049,152 1,070,132 1,091,530 1,147,223 1,439,217 1,469,411 1,500,286 1,531,856 1,564,136
TOTAL GROSS REVENUE 2.88 9,931,373 10,219,227 10,515,512 10,820,484 11,134,391 8,802,978 10,732,807 11,041,809 11,359,855 11,687,214 12,024,153 General Vacancy Loss 0.00 0 0 0 0 0 0 0 0 0 0 0
EFFECTIVE GROSS REVENUE 2.88 9,931,373 10,219,227 10,515,512 10,820,484 11,134,391 8,802,978 10,732,807 11,041,809 11,359,855 11,687,214 12,024,153
OPERATING EXPENSES INS-Property Insurance (0.06) (206,493) (212,688) (219,069) (225,641) (232,410) (239,383) (246,564) (253,961) (261,580) (269,427) (277,510) INS-Liability Insurance (0.00) (2,540) (2,616) (2,694) (2,775) (2,858) (2,944) (3,033) (3,123) (3,217) (3,314) (3,413) MGT-Management Fee 0.00 0 0 0 0 0 (49,500) (54,000) (54,000) (54,000) (54,000) (54,000) Real Estate Taxes (0.29) (1,008,422) (1,028,586) (1,049,153) (1,070,132) (1,091,530) (1,113,356) (1,135,619) (1,158,327) (1,181,489) (1,205,115) (1,229,213)
TOTAL OPERATING EXPENSES (0.35) (1,217,455) (1,243,890) (1,270,916) (1,298,548) (1,326,798) (1,405,183) (1,439,216) (1,469,411) (1,500,286) (1,531,856) (1,564,136)
NET OPERATING INCOME 2. 53 8, 713, 918 8, 975, 337 9, 244, 596 9, 521, 936 9, 807, 593 7, 397, 795 9, 293, 591 9, 572, 398 9, 859, 569 10, 155, 358 10, 460, 017
CAPITAL COSTS Tenant Improvements 0.00 0 0 0 0 0 (4,991,179) 0 0 0 0 0 Leasing Commissions 0.00 0 0 0 0 0 (2,122,199) 0 0 0 0 0
TOTAL CAPITAL COSTS 0.00 0 0 0 0 0 (7,113,378) 0 0 0 0 0
OPERATING CASH FLOW $2. 53 $8, 713, 918 $8, 975, 337 $9, 244, 596 $9, 521, 936 $9, 807, 593 $284, 417 $9, 293, 591 $9, 572, 398 $9, 859, 569 $10, 155, 358 $10, 460, 017
[1] This figure takes into account vacancy/credit loss, absorption vacancy, turnover vacancy, and base rent abatements. [2] This figure does not include any amount related to expense reimbursements. Only Scheduled Base Rent and Fixed/CPI Increases are included in this calculation, which is based on the weighted-average physical occupancy during each fiscal year. [3] Based on 287,029 square feet.
FINANCIAL ANALYSIS :: IN-PLACE AND PROJECTED NOI SUMMARY
In- Place NOI Pro Forma NOI Aug- 14 to Jul- 15 $ PSF Aug- 14 to Jul- 15 $ PSF
Size of Improvement
Total Scheduled Base Rent 8,922,952 31.09 8,922,952 31.09 Expense Reimbursements 1,008,421 3.51 1,008,421 3.51
TOTAL GROSS REVENUE 9,931,373 [1] 34.60 9,931,373 34.60 General Vacancy Loss 0 0.00 0 0.00
EFFECTIVE GROSS REVENUE 9,931,373 34.60 9,931,373 34.60 OPERATING EXPENSES
INS-Property Insurance (206,493) (0.72) (206,493) (0.72) INS-Liability Insurance (2,540) (0.01) (2,540) (0.01) Real Estate Taxes (1,008,422) (3.51) (1,008,422) (3.51)
TOTAL OPERATING EXPENSES (1,217,455) (4.24) (1,217,455) (4.24) NET OPERATING INCOME $8,713,918 $30.36 $8,713,918 $30.36
In- Place Occupancy (At Start of Analysis With No Vacant Lease- Up) 100.00% 100.00%
Average Occupancy (Includes Vacant Lease- Up and Rollover) - 100.00%
Notes:

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