Health System Financial Strength Fortifies Medical Office Acquisitions

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Health systems are on track to buy $1 billion of their leased medical office buildings in 2020 between closed and announced transactions – a trend we’ve coined as “reverse monetization.”

Despite the pandemic-related operating losses sustained by hospitals in 2020, health system liquidity remains high due to CARES Act funding and abundant access to capital. In fact, 2020 will be the third year in the past five during which MOB buybacks will exceed $1 billion, representing nearly 10% of all MOB trades. Buybacks typically occur when hospitals take advantage of purchase options embedded in leases or exercise contractual rights of first refusal. However, certain buybacks are happening today with no contractual rights.

The popularity of MOB buybacks and ownership is fueled, in part, by the cash savings opportunity they create. During the pandemic, health systems are highly focused on reducing cash expense. MOB buybacks can eliminate rent payments and help cash occupancy costs. Health systems may also be able to avoid property taxes for qualifying properties – sometimes saving $3-4 per square foot. Even in the face of record high pricing for MOBs in 2020, health systems have been willing to pay top dollar – matching the most competitive real estate investors – in recognition of the significant bottom line advantage presented by buybacks.

Where does the money come from to pay for buybacks? Hospitals’ cash reserves were fortified by the CARES Act, which bridged the initial loss of patient volumes and revenue. Today, most providers report that they are back to 90-95% of pre-COVID volumes, if not more, thanks to the reinstatement of elective procedures. Though operating cash flow has been significantly impaired in 2020, days cash on hand was less affected due to other sources of liquidity and the strong performance of investment portfolios for the not-for-profit health systems.

Municipal bond issuance accelerated in 2020, increasing by 25%. Not-for-profit issuers enjoyed record low interest rates, which created cash interest savings for refunding bonds as well as new issuance. Thanks to nominal rates consistent with the direct cost of borrowing, many health systems have found structured finance products appealing to finance real estate, including credit tenant lease financing and synthetic leases.

The headiest days of monetization date to 2016, when a record $1.4 billion of MOB sales by health systems occurred. Cash generated by sales of outpatient buildings, whether on or off campus, was used to reinforce liquidity, provide access to capital for high growth systems, transfer capital responsibility for buildings to a third party and manage regulatory compliance with physician tenants.

Today, healthcare providers own 65% of MOB inventory nationally, down from 75% ten years ago, driven by the advent of new off campus outpatient clinics. Investor demand for medical office is at an all-time high, accelerated by the defensive qualities of the asset class and its proven durable performance. Investors can’t get enough MOB and now find themselves vying for investment alongside the tenants. Health systems face a happy decision – whether to buy or lease – with capital markets supporting them well, whichever choice they make.

You can more about extracting capital from healthcare real estate in JLL: A 360 View of Healthcare Real Estate Monetization. Plus, view Jll’s 2020 Healthcare Real Estate Outlook

Recent 2020 activity

  • Closed – Investment Sale – Midwest Medical Office Portfolio, 439,000 s.f. – Indiana, Illinois & Missouri
  • Closed – Investment Sale & Debt Placement – Greenpark II – 80,098 s.f. – Houston, TX
  • Closed – Investment Sale – M.D. Medical Tower – 68,285 s.f. – Midwest City, OK
  • Closed – Investment Sale – Lovelace Medical Center – 69,539 s.f. – Albuquerque, NM
  • Closed – Debt Placement – Peachtree Orthopedics – 60,578 s.f. – Cummings, GA
  • Closed – Debt Placement – San Juan Medical Center – 42,970 s.f. – San Juan Capistrano, CA
  • Closed – Debt Placement – Milwaukee Nobis – 20,383 s.f. – Milwaukee, WI

 

Source: HREI

Welltower Recaps $550M Medical Office Portfolio Through Joint Venture With Wafra

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Welltower has recapitalized a medical office portfolio through a $550 million joint venture with global alternative investment platform Wafra.

Wafra now owns a 80% stake in the 24-asset portfolio, which is located in Texas, Florida, Minnesota, the Carolinas, Tennessee, California, Pennsylvania and Washington, among other states. The REIT is retaining a 20% interest in the portfolio, which is 97% affiliated with health systems. Welltower will also continue serving as asset manager and operator for the properties.

“The two companies may partner on other deals,” said Russell Valdez, Wafra’s chief investment officer. “We look forward to expanding our footprint together in these growing sectors with the shared goal of further collaboration on healthcare and other real estate opportunities.”

There is a case to be made that medical office assets will flourish as the pandemic passes. Cushman & Wakefield argues that the same drivers that fueled medical offices before the pandemic—namely demographics—will continue to support the sector’s growth. It also notes that healthcare spending is projected to increase by $1.9 trillion in the US alone between 2020 and 2027, per the Centers for Medicare and Medicaid Services.

 

Source: GlobeSt.

The Pandemic’s Impact On Health Care Design: Smaller, Flexible Spaces With Great Adaptability

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The pandemic rocked U.S. health care facilities in 2020, leaving them with falling revenue from moneymaking surgeries and ordinary care as physicians and nurses shifted their attention toward patients infected with the coronavirus.

But the real change will come three to four years from now, when the impact of new designs implemented on existing and new healthcare facilities are deployed based on what architects and physicians have learned over the past nine months.

“Health care clients are already shifting their focus and asking for smaller footprints and more space flexibility along with additional isolated, negative air pressure rooms,” said Architect and EYP principal Miranda Morgan, while speaking at Bisnow‘s ‘The Future of DFW Healthcare’ webinar. “The smaller footprints are just more efficient and lean. We are still providing everything that is needed, and we are still doing big huge patient towers. But instead of big luxury, patient rooms, clients are asking us to be closer to code and to get what you need in that space and provide the patient with a good experience, but don’t go overboard.”

A large focus of future design will be on keeping healthy and sick patients separate rather than feeding everyone through the same access points and maneuvering the same hallways. Luxurious common areas have lost some favor as health care systems shift toward making sure more rooms are available to isolate emergency care and hospital inpatients while also better managing various points of access to segregate healthy and sick populations on-site.

“We are examining the way patients flow through the facilities,” said Dwain Thiele, UT Southwestern Medical Centersenior associate dean. “Some of the most challenging are imaging facilities or places that previously did not have a large amount of space, hallways or waiting rooms. It is something we will be looking at in the future.”

“What we have seen through the pandemic from a needs standpoint is more access points for people to be seen and to have access whether through telehealth or smaller, faster clinics where people can get in and out,” Transwestern National Managing Director of Healthcare John Huff said. “I guess we realize we don’t all want to sit in a huge long waiting room for an hour.”

In the future, waiting rooms very well could be a thing of the past, with that square footage allocated to more isolated treatment rooms, health care experts said.

“Other trends here to stay include the ongoing push for more outpatient care centers and ambulatory facilities that can take care of non-life-threatening illnesses while hospitals are hit with pandemics,” Huff said.

“Technology also will play a significant role in reshaping the future of health care, with telemedicine, or remote health care visits, allowing hospitals to keep healthier patients away from pandemic-stricken areas,” Methodist Health System Chief Operating Officer Pamela Stoyanoffsaid. “I would say prior to COVID, we probably saw about 1% of visits in the outpatient setting with telehealth. In April and May, when we saw the first surge, we were probably up to 80% to 90% of our visits. When some of the restrictions lifted, telehealth usage dropped back down to 15%, but it’s expected to have a place in the future of health care services. It is now a massive part of what we do, and it is here to stay.”

 

Source: Bisnow