Patient Growth

Three years ago, G&L; Realty Corp. was shaken. The small real estate investment trust, which specializes in buying and building medical office buildings and senior-care facilities, was reeling from the twin impacts of the Northridge earthquake and massive reorganization in the health-care field.

Although the medical industry is still obsessed with cutting costs, a rebounding economy and a surge in outpatient procedures has the company back on track and poised for rapid expansion. It is in the process of buying 10 medical buildings and has another under construction in Aliso Viejo.

“In the next few years, I want G&L; to be a billion-dollar company,� said Chief Executive Daniel M. Gottlieb.

That’s an ambitious goal for G&L--even; with $250 million in assets, it is still one of the country’s smaller REITs. The company owns just 24 medical buildings and nursing homes, mostly one- and two-story buildings in Southern California and New Jersey.

But Gottlieb’s quest is not unrealistic, executives and analysts say, considering the growing demand for health-care services from America’s growing elderly population.

“About 50% of the medical care you will need in your lifetime will happen in the last two years of your life,� Gottlieb said. Most of these ailments, he said, are likely to be treated in the least expensive way possible: at small outpatient facilities like the ones his company owns, rather than at hospitals.

Gottlieb and other analysts predict medical office buildings may soon be in short supply as health-care firms absorb more of the facilities than are being built.

“The big office REITs just aren’t looking at medical office buildings,� said Craig Silvers of investment banking firm Sutro & Co., which handled one of G&L;’s preferred stock offerings. “And the larger [health-care] players don’t want smaller buildings.�

Gottlieb, a former attorney, and G&L; co-Chairman Steven D. Lebowitz, a developer, discovered this niche when they began buying and building medical office buildings in Beverly Hills in the 1980s.

“[Other] developers didn’t understand medical. They avoided it because it was more expensive and harder to prelease,� Gottlieb said. As the market tightened, rents spiraled at G&L;’s buildings in Beverly Hills. During the next decade, G&L; continued to buy and develop buildings in Los Angeles and the San Fernando Valley as rents rose and demand outpaced supply.

It seemed like a sure thing, even when the Southern California real estate market started sputtering in the early 1990s. The company launched its initial public offering in December 1993, raising $84 million from its sale of 4.6 million shares.

But less than a year later, the bottom dropped out as the company was hit with a series of setbacks. The 1994 Northridge earthquake damaged many of its buildings. That same year, a hospital next to one of its medical office buildings closed its doors. Variable interest rates began climbing, and tenant physicians began bailing out of the company’s properties during a wave of managed-care-induced consolidation.

“Instead of six doctors with six waiting rooms, we now had one group with one waiting room, one X-ray machine--and all their records were stored on a computer in Kansas,� Gottlieb said.

With occupancy and rents falling, the firm’s funds from operations, a key measure of a REIT’s performance, plunged to 35 cents a share.

To boost earnings, the company started making short-term “bridge� loans to cash-starved developers. These loans, which generated returns of 15% to 20%, boosted the company’s interest income from $194,000 in 1994 to $870,000 the following year, pulling the company out of its slump and catching the eye of Japan-based lender Nomura Securities Co.

Nomura and G&L; began a joint lending program for nonprofit companies seeking to buy assisted-living facilities or nursing homes in preparation for an IPO, and to firms that were in the process of floating government bonds.

It was a profitable combination until last year when competition heated up from major banks willing to offer lower rates. Now the company has turned most of its attention back to acquisition and development in the region it knows best.

The company started in Southern California, buying a vacant 185-bed hospital and two adjoining medical office buildings in Tustin from a bankrupt hospital operator for $4.5 million.

A year later, G&L; leased the hospital to Pacific Health Corp., a Long Beach-based hospital operator, which set up a much smaller acute-care facility, a wing devoted to drug rehabilitation and a small nursing home. A “health-care mall,� Gottlieb calls it.

Spurred by the success of this project and a few other hospital conversions around the country, Gottlieb said, his company is now looking for other failed hospitals to recycle.

“It’s an opportunity to help the medical community, create jobs and create a nice profit for the company,� he said.

To ensure the success of these medical malls, he plans on putting an assisted-living or nursing home facility near each of them to help supply the surgery centers and medical office buildings with patients.

It may sound sad or cynical, Gottlieb said, but he estimates that every 100-bed nursing home contributes $2 million to a hospital’s bottom line each year.

G&L; has also agreed to purchase medical buildings in San Pedro and Valencia that contain additional land for development, as well as properties in New Jersey.

And it is building its first new development in more than a decade: a 33,000-square-foot building in Aliso Viejo, which it has leased to Hoag Memorial Hospital Presbyterian of Newport Beach.

On Tuesday, the company’s stock, which debuted at $18.25 a share, fell 25 cents to close at $20.63 on the New York Stock Exchange.

Although the company’s stock price could dip if its deals aren’t completed, analyst Silvers thinks G&L; is a good buy, given its higher-than-average dividend yield and lower price-to-earnings multiple. “I think they have the potential for rapid growth,� Silvers said. “With the right investments, this stock could run to $30 without a problem.�