Hospitals and health systems never seem to have enough capital - especially with the new initiatives and mandates driven by healthcare reform and other industry changes. Yet some providers seem to be overlooking one of their most favorable, easiest-to-access capital sources: their real estate.
By monetizing "non-core" real estate assets like medical office buildings (MOBs) and other outpatient facilities, providers can reap significant benefits.
The Time Is Right
From a real estate perspective, the medical office sector traditionally performs well, even during recessions. Most analysts are predicting that it will continue to grow in popularity with investors in the years ahead because of the Patient Protection and Affordable Care Act and the resulting influx of 30 to 35 million more insured patients. In addition, even more MOBs and outpatient facilities will be needed for the aging 65+ population, which consumes three times the medical services of younger people and which is expected to grow by 54 million people in the next decade.
MOBs also are attractive to third-party real estate investors because they offer advantages over traditional office buildings, including higher occupancies, lower tenant turnover and longer-term leases. While medical office space has long been considered a stable investment with predictable yields, health reform and demographic trends are making this sector even more attractive to investors.
MOBs also are growing in popularity with providers, particularly those in off-campus locations, because they are less expensive to operate than inpatient facilities and they enable providers to be more competitive, providing improved, convenient consumer access to healthcare and growing their market share. Consumers are flocking to MOBs in their neighborhoods because there's no need for a long commute or the need to navigate a large medical center campus in an unfamiliar community, which can be stressful for patients.
Why Sell?
Most healthcare executives say that they expect to plan their real estate more strategically than in the past. Industry challenges are compelling more providers to treat their real estate as a vital component of their business strategies. As a result, many are considering sales of their MOBs, even if they have access to other sources of low-cost capital.
By monetizing non-core assets, providers can access additional low-cost, low-risk capital to be used for accountable care organization requirements, electronic medical records systems, upgrades to inpatient facility infrastructure and other important needs. Plus, they know that fewer facilities mean lower operating costs and improved efficiency.
This market has never been better for sellers. MOB prices are at an all-time high and sellers can realize high multiples on revenue. In some areas of the country, the market is so hot, that some borderline buildings (based on age, tenancy or location) are marketable now even though they may not have been in the past and may not be in the future.
Many hospital executives also understand they lack the internal resources to adequately develop, own, manage and lease their facilities. They don't want to negotiate leases and handle other tenant issues that might jeopardize relationships with their physician-tenants.
They also don't want to deal with Stark and anti-kickback laws. Those laws against self-referrals are being enforced more strictly than ever and are resulting in massive fines for issues such as providing space under an expired lease and leasing space below fair market value. Finally, they believe that managing real estate distracts them from their core mission of providing quality patient care.
The Ideal Buyers
When selecting a potential real estate buyer, providers should consider several important characteristics. In the current tightened credit environment, financial institutions are carefully scrutinizing buyers' and sellers' financial situations. Health providers would do well to perform due diligence on prospective buyers to ensure they have little or no debt and are, ideally, able to pay cash up front.
Also, is the buyer in a position to close in a timely manner and handle complex transactions, if necessary? Does the buyer have professional experience managing healthcare properties, negotiating leases and ensuring compliance with Stark and anti-kickback statutes? Most importantly, does the buyer have a track record of working well with physician tenants?
By thinking strategically about their real estate and monetizing some of these assets, providers can capitalize on investors' interest in healthcare and consumers' preference for these conveniently located facilities, as well as favorable demographics.
But most importantly, they can reap the financial, operational and legal benefits of delegating real estate development, financing, leasing and management to qualified third-party experts.