Monday, June 17, 2013, 6:15 PM

Hospitals and Healthcare Systems Continue to Monetize Real Estate Assets

Here's a good article from HealthLeaders Media about this ...

A Cash-Raising Healthcare Real Estate Strategy

Rene Letourneau, for HealthLeaders Media

Some enterprising hospitals and health systems are reevaluating their real estate strategies and selling medical office buildings as a way of accessing capital.
Hospitals have many competing priorities for where to spend their capital dollars: building renovations, construction projects, healthcare IT initiatives, equipment upgrades, and physician alignment strategies, just to name a few. While there is no lack of opportunity to spend the money, raising it is another story.

Some enterprising hospitals and health systems are reevaluating their real estate strategies and selling medical office buildings as a way of accessing capital.

On April 4, Truman Medical Centers in Kansas City, MO announced that it will sell four buildings, which currently house medical and administrative personnel, to neighboring Children's Mercy Hospitals and Clinics.

The 380-bed TMC system reached the decision to sell its buildings during the course of discussions with Children's Mercy about growth strategies, says Mitzi Cardenas, TMC's senior vice president of strategy, business development, and performance integration and its CIO.

"Children's needed the space, and we were looking to renovate a building on our campus for a call center. We are selling them four buildings over a 26-month period, and the capital will be used for that project," says Cardenas.

In addition to the building renovation, TMC will use the proceeds from the sale to consolidate its IT and call center staff into one building, and any remaining funds will be used toward the potential consolidation of its outpatient surgery services. The amount of the sale has not been disclosed.

"It is a win-win for both of us," Cardenas says of the sale. "It solved some immediate capital needs that we had and the space needs that Children's had… This was good timing on both sides. We are excited by the opportunities it provides both of us."

While Cardenas says TMC does not have plans to sell other buildings as part of its long-term capital strategy, she adds, "You can never say never."

Hospitals more often sell medical office buildings to healthcare real estate investment trusts (REIT) rather than to directly to another hospital. In this arrangement, the seller typically leases some of the space back from the REIT so that the physician practices housed within can remain in place.

In 2008, Charlotte, N.C.-based Carolinas HealthCare System, an integrated system with 7,460 licensed beds and an annual budget exceeding $7.7 billion, sold several buildings to Healthcare Realty Trust, a Nashville-based REIT.

"We went through a process that involved all the stakeholders and carefully selected which properties to monetize," says Greg Gombar, Carolina's executive vice president and CFO. "… [We] monetized 15 medical office buildings in a tough real estate market, providing over $160 million."

"The capital raised was not specifically assigned, but went to fund the overall capital budget," he added, noting that some of the money went toward IT initiatives and building renovation projects.
Carolinas HealthCare does not have immediate plans to sell more buildings to generate capital, due in part, to the proposal for a new lease accounting standard issued by the Financial Accounting Standards Board and the International Accounting Standards Board in mid-May.

If it stands, the new rule would require businesses to declare leased properties as assets and liabilities on their balance sheets. The boards are accepting comments through Sept 13, and will likely issue a final rule in 2014, if they decide to proceed with the accounting changes.

"We have put on hold our strategy of monetizing future properties as we evaluate the new proposed lease accounting rules and determine if there are any other structures that get us to the same place as did [this] monetization," Gombar says.

Jeff Calk, a partner at Nashville-based law firm Waller, says hospitals are smart to look at selling office buildings as a way of accessing capital.

"They could do something better with that money than let it sit in real estate… It's a good chunk of change that they could reinvest in their business," he says. "They can use that money to pay debt or invest in one of their core businesses. They take the money out of a low-yield asset to invest in a higher-yielding asset."

The biggest downside to selling a medical office building is the loss of control over the structure, which is a concern for many hospitals when their outpatient physician practices remain in place as tenants, Calk says.

"A lot of hospitals are nervous that the third-party investor won't be as sensitive as they are to the needs of the physicians renting the space. For example, if the power goes out, the new owner might not rush to fix the problem… Once you sell a building, you don't have the control that you once had."

Calk says hospitals can assuage this fear by cautiously selecting the buyer and designing a contract that lets them retain some power over the building.

"Obviously, prior to selling its medical office buildings, a hospital has to get comfortable with the fact that it is entrusting the care of its physician tenants to the new owner of the MOBs," he says. "The hospital system interviews and vets its chosen buyer very carefully and picks a buyer that it feels will be the best real estate partner—not just the buyer offering the best and highest price."
"Hospital systems [also] attempt to impose a variety of restrictions on the new owner that the hospital believes will cultivate or maintain a tenant-friendly environment… such as a cap on the rate at which rent can escalate in the building or a requirement that the building owner only use a specific approved lease form that is tenant-friendly and approved by hospital," Calk adds, noting that restrictions that benefit referring physician tenants should be imposed only when they are in compliance with government regulations.

Despite these concerns, Calk believes hospitals should take a hard look at their real estate holdings to identify buildings for potential sale.

"At the hospitals that are being very well run, folks are really using their capital wisely, including their real estate," he says.

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Blogger Samantha Jones said...

Thanks for sharing. When your focus is on asset health, your focus is on early identification and elimination of the defect.

September 6, 2013 at 12:45 PM  
Anonymous Medisoft said...

Very interesting view about healthcare systems. Thanks for sharing this information.

September 16, 2013 at 12:05 AM  

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