Investor Demand For Medical Office Buildings Has Gone Global

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Demand for medical office properties is so strong, even foreign investors alien to the American healthcare system are shopping for them

“Investors from Singapore and Australia are shifting capital to the U.S. to invest in medical real estate,” CBRE Vice Chairman Lee Asher said during Bisnow’s Atlanta State of Healthcare event last week.

But as they come, Asher said he is spending more time educating foreign investors on the ins and outs of the American healthcare system.

“The foreign capital, it takes them about two years to understand how healthcare works in the U.S.,” Asher said. “There’s plenty of new capital, but the key is they need domestic operating players.”

Asher was among medical real estate experts at the event who discussed a wide range of topics affecting the industry, from the surge of new medical office construction and the merger mania occurring within the healthcare industry to the effects of the possible dismantling of Georgia’s certificate of need system.

Of course, foreign players are only a portion of the investors seeking stakes in medical office real estate. But increasing revenues, merger and acquisition activity and overall health system growth has been attracting investors from Asia, Europe, the Middle East and even Africa and Latin America, Modern Healthcare recently reported.

According to a 2019 Marcus & Millichap report, medical office sales had their largest growth in transaction velocity, at 13%, since 2015, nearly double the rate compared to other commercial property investments.

“Hospital-affiliated facilities and outpatient surgery centers with long leases and annual rent increases are most desirable, with initial returns ranging in the mid-5% to 7% span,” Marcus & Millichap officials said in the report.

Part of medical office’s attraction is its stability. Panelists said during the Great Recession, those investments largely remained untouched by the overall real estate malaise. Investors today see the sector as one of the best to weather economic downturns, especially as baby boomers age and require more healthcare.

“Also, many of the tenants — especially tenants with lots of medical equipment, like imaging groups or cancer treatment centers — book long leases and rarely, if ever, undergo the headaches of a relocation,” MB Real Estate Services Senior Vice President Brian Burks said.

Ackerman & Co. President Kris Miller said when his firm first started to develop medical office campuses more than two decades ago, it required a significant amount of personal capital and hard work to find investors. Today, the story is completely different.

“We all know racetracks make money, but it’s hard to find a banker who is going to finance one, and that was true with medical office,” Miller said. “There are just so many people who want to buy this right now. We can sell every medical office asset we stabilize, and we can sell that asset 10 times at roughly the same price.”

“Construction costs are complicating the growth of physicians and hospital groups. Even with developers willing to capitalize and build new medical facilities for tenants, the groups still need to have the financial wherewithal to handle the higher rents,” HealthAmerica Realty Group CEO Tommy Tift said. “That is probably our biggest challenge, and also that will be physicians’ … biggest challenge.”

 

Source: Bisnow

Helping Kids Or Building Empires? Why Children’s Hospitals Are Popping Up In Dallas Suburbs

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When it comes to children’s health, can you have too much of a good thing?

That’s worth asking after two leading health systems announced they’re building big children’s facilities in Prosper, near the Dallas North Tollway and U.S. Highway 380. The two projects, about 35 miles north of downtown Dallas, are just 3 miles apart.

Cook Children’s of Fort Worth plans to build a hospital in Prosper, just 3 miles from an even larger project planned by Children’s Health of Dallas.  (PHOTO CREDIT: Cook Children’s Health)

Cook Children’s, whose flagship hospital is in downtown Fort Worth, unveiled plans for a hospital on April 25, hours after Children’s Health in Dallas announced plans for a new campus on 72 acres.

While the additions would greatly increase the offerings in specialized pediatric care, that’s just the half of it. About 8 miles to the south in Frisco, Texas Scottish Rite Hospital for Children opened in October. Not far away, there’s Children’s Medical Center Plano, which opened in 2008.

With the two latest expansions, there would be four children’s facilities within 8 miles of Frisco City Hall. For some context, the entire Dallas metro region had four children’s hospitals for years: Cook’s in Fort Worth and three in Dallas: Children’s, Scottish Rite and Medical City Children’s.

Will this new competition help reduce health care costs in North Texas, which are among the highest in the country? Or will it drive up spending because hospital companies must recoup their investments one way or another? And what does it say about the priorities of two respected nonprofits devoted to improving the health of kids?

Each system has billions in assets, hundreds of millions in cash and strong profit margins at its flagship hospitals. What they’re doing is following the money — and the families with good insurance coverage.

“The economics are driving this, not health care public policy,” said Britt Berrett, a former hospital administrator who teaches health care management at the University of Texas at Dallas.

The companies are also tracking population growth. From 2016 to 2018, Frisco added over 20,000 residents, a 14% increase, according to a report by Moody’s Investors Service. Frisco’s property tax collections, a reflection of the area’s rising wealth, grew 24% over the same period, far faster than in Dallas and Fort Worth.

But Frisco, Plano and the surrounding area have many hospitals already, including recent additions such as Baylor, Scott and White’s sports therapy center and Texas Health Frisco. Last year, Medical City Plano started a $107 million patient tower with 90 beds.

So what to think about putting four children’s facilities in such a concentrated area?

“We call it saturation,” said Berrett, a past president of Texas Health Presbyterian Hospital Dallas. “Beware the medical industrial complex.”

Executives at both Children’s Health and Cook Children’s were not available to talk about such issues, according to the companies’ spokeswomen.

“Unfortunately, schedules did not align to arrange an interview for your story,” wrote Children’s Health in an email. The company included a statement about “serving patients in the fast-growing area around Prosper and our mission to make life better for children.”

That’s a noble mission, to be sure, but it’s still fair to ask whether the new investment is more about protecting market share from Cook Children’s, which is clearly reaching beyond its usual customers. Neither company would disclose how much it plans to spend. Children’s Health wouldn’t even confirm it’s building another hospital on the site, although its rendering appears to have a big one.

Texas does not require a “certificate of need” to add hospitals or nursing home beds. It lets the market decide, which means booming, affluent areas get more attention and investment.

In an email, a Cook Children’s spokeswoman said the administrators “best fit to speak about this” were out of town. She requested questions in writing — and some answers were less than direct.

So are we building too many children’s facilities in the area?

“We see a growing and unmet need plus a lack of coordinated care for the children in this important service area, which Cook Children’s will accommodate through its expansion plans,” wrote Nancy Cychol, chief of hospital services.

Will there be enough demand to recruit specialists, such as pediatric heart surgeons, and to develop true centers of excellence?

“Cook Children’s is very thoughtful in evaluating all relevant market information to determine where to locate services and the scope of services offered,” Cychol wrote.

Children’s Health and Cook are nearly the same size. Both have over 7,500 employees, and reported over $1.7 billion in 2018 revenue and over $3 billion in assets, including gifts from donors.

One big difference: Children’s in Dallas had twice the share of Medicaid patients, whose payments for care tend to be much lower than customers with private health insurance.

Cook’s operating income was nearly $139 million last year, 63% higher than Children’s, according to the companies’ annual financial filings.

“Most children’s hospitals have great leverage with insurers because they almost always have to be included in  employers’ network of providers. They offer expensive specialized care that isn’t available elsewhere, and they can get a premium for primary care,” said industry analyst Allan Baumgarten. “The big buildup near Prosper raises several questions and the most important is: “Who’s gonna pay for this new capacity?” In states that require regulatory approval for new hospitals, some proposals were rejected with the support of employers that feared they would have to cover much of the bill.”

How would Cook’s respond if local players — worried about rising health prices — pushed back on its plan?

“We don’t believe employers or insurance companies would ever object to competition in the marketplace,”  wrote Cook’s Cychol, “especially if the competition drives better value, better quality and convenient, coordinated care.”

Presumably, that’s at any price.

 

Source: Dallas News

Capital Partnerships Are All The Rage In Healthcare Real Estate

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In the early days of the medical office building (MOB) sector, companies that had started to focus exclusively on developing, acquiring and managing such facilities often relied on a network of high net worth individuals, friends and family included, to invest in their projects.

In today’s growing, highly capitalized and sophisticated healthcare real estate (HRE) market, where capital often needs to be deployed quickly and at the lowest cost possible, that type of so-called “country club” capital stack can still work for certain firms and on certain projects.

However, a growing number of growth-oriented companies focused exclusively on HRE facilities, including MOBs, are turning to and aligning with large, deep-pocketed institutional capital partners and fund managers to invest in their developments and acquisitions.

A good example is Anchor Health Properties, a more than three-decades old HRE developer that, beginning with a new management team in 2015-16, embarked on a growth strategy based on expanding three verticals in order to offer wider array of services for its clients, including health systems: management, leasing and investments.

“These all play well off of each other and contribute to the growth of the other verticals,” said James Schmid, Anchor’s chief investment officer. “When we were starting to grow those three verticals, I would say we had modest means to build our platform, and so in order to do a large volume of transactions we knew we had to bring in institutional partners to be able to chase more investments and bring more flexibility, including being able to close quickly on deals, in order to work with best-in-class operators.”

Mr. Schmid, who helps run Anchor with CEO Ben Ochs, made his comments during a panel session at last week’s BOMA International Medical Office Building + Healthcare Real Estate Conference in Minneapolis. The panel, moderated by John Nero of Hammond Hanlon Camp (H2C), was titled: “Investor Strategies: Aligning with Capital Providers.”

He, as well as the other panelists, noted that large, institutional capital partners who want to own MOBs need to be willing to make investments that can start at prices in the $15 million range.

 

Source: HREI