Santa Ana-based Grubb & Ellis Co. is looking to raise more than $3 billion to buy healthcare-related real estate through a new fund.
The real estate brokerage and investor this month announced plans to launch Grubb & Ellis Healthcare REIT II Inc., a real estate investment trust that is raising money from investors but won’t trade on a stock exchange.
A registration statement was filed March 19 with the Securities and Exchange Commission.
The fund, which will be run out of Santa Ana, plans to pool money from individual investors to buy medical office buildings and other healthcare properties across the U.S.
It’ll be the third real estate investment fund that Grubb & Ellis has launched in the past three years.
Another healthcare-focused REIT has raised about $857 million through February. A fund that targets apartments has raised about $150 million through the end of 2008.
Both were launched by NNN Realty Ad-visors Inc., the real estate investment company that acquired then Chicago-based Grubb & Ellis in late 2007 and kept the better known Grubb name.
How well the new healthcare offering does in its fundraising in a down market remains to be seen.
Medical buildings are one of the few commercial real estate property types to have largely held their value in the past year, company officials said, even as their national vacancy has grown to 6.9% in 2000 to 11.5% today, according to market tracker CoStar Group Inc.
People “still get sick in a slowing economy,” said Scott Peters, chief executive of Grubb & Ellis’ first healthcare fund, in a letter to investors.
The latest healthcare fund needs to raise a minimum of $2 million before making any deals. Non-traded REITs typically take at least six months to raise enough cash to begin buying buildings.
Jeffrey Hanson, executive vice president of Grubb & Ellis’ investment programs, will serve as chief executive of the REIT, according to SEC filings.
Peters, who remained chief executive of the first healthcare fund after stepping down from the chief executive role of parent company Grubb & Ellis last July, won’t play a role in the latest offering.
Many Differences
That’s just one of the many differences between the two healthcare offerings.
The first healthcare investment program under the Grubb & Ellis name is looking to distance itself from the parent company.
The company plans to change its name to Healthcare Trust of America Inc. The company’s corporate office also is being moved to Scottsdale, according to SEC filings.
In addition, Healthcare Trust, which buys hospitals, medical office buildings that house doctors, assisted living facilities and nursing homes, is reorganizing its corporate structure to self-management, led by Peters.
Grubb & Ellis would no longer be the sole provider of asset management, property management services and investor relations services to Healthcare Trust, among other changes, the company said.
Healthcare Trust to date has paid about $26.8 million in acquisition fees, $6.3 million in asset management fees, $2.2 million in property management fees, and $1.1 million in leasing fees, with Grubb & Ellis getting a good portion of that money.
The move to self-management should help it cut some of those costs, the company said in SEC filings.
The first healthcare REIT has bought more than 40 properties in deals worth more than $1 billion. Local deals include a $25.7 million deal last June for a 104,000-square-foot building in Cypress that serves as the regional headquarters for Minnesota-based UnitedHealth Group Inc.
The first healthcare offering was designed to raise as much as $2 billion but appears unlikely to reach that size. It’s expected to stop fundraising by this September, around the same time the second healthcare fund should be kicking off.
Raising Money
Non-traded REITs have become one of the best ways for Grubb & Ellis and other real estate investment companies to raise money from individual investors of late.
Tenant-in-common deals, once the largest source of business for NNN Realty’s Triple Net Properties division, have seen a sharp decline in business industrywide in the past year, with several sponsors falling into financial hardship.
Investors in non-traded REITs typically hold their shares until the company’s investments are sold and the proceeds are liquidated. The new fund expects that could happen within about five years of its first acquisition, depending on the overall real estate market.
The value of non-traded REIT programs for investors has been questioned.
Because shares are sold through independent brokers, commissions often are higher than they would be with publicly traded REITs, where shares are bought on the open market. That hurts the returns investors see, according to analysts from Newport Beach-based Green Street Advisors Inc.
About 13.4% of the proceeds from the new Grubb & Ellis offering are earmarked for fees and expenses, with the rest being used to buy buildings, the company’s registration statement said.
The fee structure of the non-traded REITs hasn’t stopped investors from lining up to buy into new deals.
Non-traded REITs raised more than $9.5 billion during 2008, according to Shrewsbury, N.J.-based Robert A. Stanger & Co., an investment banking company that follows the sector.
OC has become a haven for these types of deals of late.
Local non-traded REITs in the works include offerings from Irvine-based Shopoff Group, Ladera Ranch-based Strategic Storage Trust Inc., Newport Beach-based KBS Realty Advisors and Irvine’s Thompson National Properties LLC, which is run by Grubb & Ellis’s former chairman, Tony Thompson.
