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Unprecedented Growth Projected In Outpatient Care In The Next 10 Years

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The U.S. population is projected to grow by 22.5 million people, or just shy of 7%, between 2020 and 2030.

Remarkably, three-quarters of the population growth, or 17 million people, is in the 65 years or older cohort. Nearly 4 of 5 healthcare expenditure dollars is spent by this older group. With the aging population increasing from 17% of the U.S. population in 2020 to 21% of the U.S. population in 2030, medical encounters will be on a rapid rise.

Forecasted growth in patient care volumes between 2020 and 2030, however, show divergent trends between inpatient and outpatient utilization. Inpatient admissions are expected to decline in absolute number from 34.9 million stays to 34.6 stays, or a drop of 0.9% in this 10-year period.

Outpatient care stands in sharp contrast with estimated growth of more than 20%, representing an added 540 million annual outpatient visits over the 10 year period. In 2030, outpatient encounters are expected to top more than 3.2 billion serving the expected U.S. population of 355 million individuals in 2030, or 9 visits per individual a year.

The trend towards outpatient care and away from hospital stays is a decades-long shift. Today, more than 50% of health system revenue comes from outpatient visits, a radical change from hospital-centric care to patient-centric care. In the past 20 years, inpatient admissions per 1,000 population dropped from 120 to 103, a reduction of 14%. During the same time, outpatient visits per capita grew 26%.

Advances in technology and medicine have enabled care to grow and thrive outside the acute care facility, a trend that has been accompanied by better healthcare outcomes, lower mortality and greater patient safety. Outpatient care has fueled the growth of medical office buildings, both on campus and in the community, supporting the shift to the “patient-centric” mode of healthcare delivery.

The pandemic in 2020 and 2021 put a spotlight on the jeopardy with delivery of U.S. outpatient care in an acute care setting. Thus, the healthcare crisis accelerated the trends in increased care in locations such as urgent care centers, ambulatory surgery centers and other outpatient medical buildings. At the same time, telehealth exploded in use during the pandemic given the obstacles to safe visits at the height of the crisis. Telehealth visits grew from 1% of outpatient encounters pre-pandemic to 12.5% at the peak in April 2020 to 6% today with widely varying utilization by medical specialties.

The aging and growing U.S. population and the overarching trend towards outpatient care is strongly supportive of increased demand for healthcare real estate and for the growing clinical intensity and value of medical office buildings of the future. Quality buildings occupied by major healthcare providers serving patients with greater and more acute services means durable, long-term occupancy with growth in revenue that can support the operating costs associated with occupancy. Medical real estate is expected to grow and perform in the same resilient manner in the future which will be positive for the owners of the properties.

Recent Activity – New Listing – Investment Sale

Central Illinois MOB Portfolio – 321,355 s.f. – Decatur and Peoria, IL
Closed – Debt Placement

Hoag Health Center – MOBs & Urgent Care – 159,235 s.f. – Irvine, CA
Closed – Debt Placement

114 Pacifica Court – 110,392 s.f. – Irvine, CA
Closed – Investment Sale

Brookfield Commons – 91,186 s.f. – Richmond, VA
Closed – Investment Sale

Omega Medical Center – 77,511 s.f. – Rockville, MD
Closed – Equity Placement

Thomas Park Investments – 55,608 s.f. – Haverhill, MA
Closed – Debt Placement

Oakwood Medical Park – 36,419 s.f. – Round Rock, TX
Closed – Investment Sale

Fertility Centers of Illinois – 30,264 s.f. – Glenview, IL

 

Source: HREI

Medical Properties Trust To Invest $950 Million In Behavioral Health Platform

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Medical Properties Trust, Inc. (the “Company” or “MPT”) recently announced that it has entered into definitive agreements to acquire 18 inpatient behavioral health hospital facilities and an interest in the operations of Springstone, LLC (“Springstone”) from Welsh, Carson, Anderson & Stowe (“WCAS”) for total consideration of $950 million.

Springstone, based in Louisville, Kentucky, is a leading provider of behavioral health services in the United States distinguished by its purpose-built, inpatient facilities in carefully selected markets and care delivery across the full behavioral care acuity spectrum.

The hospitals, along with additional facilities that Springstone expects to develop and acquire, are expected to be master leased pursuant to terms that are anticipated to provide a GAAP-basis yield exceeding 9.0% and lease payment coverage of approximately 1.75x in the near-term. The lease is expected to include an initial 20-year term with CPI-based annual rent escalators subject to a 2% floor.

The Company expects to initially fund the total cash consideration using cash on hand and borrowings under its revolving credit facility and additional financing arrangements, which may include issuances of debt and equity securities, placement of new secured loans on the acquired real estate, or a combination thereof. The sources of financing actually used will depend upon a variety of factors, including market conditions. The transactions are expected to close during the second half of 2021, subject to customary closing conditions, including certain regulatory approvals.

“The Springstone investments give MPT a major presence in the rapidly expanding United States behavioral health care market, which has been underserved in our society despite importance on the same level as acute and post-acute care hospitals,” said Edward K. Aldag, Jr., MPT’s Chairman, President, and CEO. “MPT’s acquisition of the 18 purpose-built inpatient facilities, much like our recent investment in the Priory portfolio in the United Kingdom, appropriately targets the highest level of acuity within the behavioral care continuum, and we believe that our investment in the operating company will result in additional attractive real estate opportunities.”

MPT anticipates that Springstone will continue to be operated by the same senior management team that has created this distinct portfolio of entirely de novo, purpose-built inpatient and outpatient behavioral health facilities in carefully selected markets. It is expected that these highly experienced individuals, led by Executive Chairman Bill Wilcox, CEO Phil Spencer and CFO Greg Miller, will co-invest alongside MPT in the operating company and be responsible for the day-to-day operations of Springstone, which will be essentially unchanged going forward.

“We’re so appreciative of the job the management team did to build this business. We started this company from scratch 10 years ago and are incredibly proud to have built over 50 facilities, created more than 4,000 jobs, and treated tens of thousands of patients with the highest quality care,” said Brian T. Regan, Head of Healthcare and Partner at WCAS. “It was important to us that the management team has the opportunity to be part of Springstone’s ownership and to continue leading the company and its employees to the next phases of growth.”

Philip Spencer, Springstone’s CEO, added, “Over the past decade, Springstone has helped tens of thousands who struggle with mental health and addiction challenges, thanks to the support of Welsh, Carson, Anderson & Stowe and the dedication of our team of compassionate professionals. We look forward to working with MPT to expand our behavioral healthcare model to serve even more communities.”

Benefits of Transaction

Expected to Achieve Immediate Accretion. The strong cash and GAAP returns related to the sale-leaseback transaction and an accretive cash return on MPT’s investments in the operating company, along with MPT’s attractive cost of capital, are expected to result at closing in immediate improvement in per share net income and funds from operations.

Projected to Create an Unmatched Competitive Advantage in Accelerating United States Behavioral Health Care Market. Springstone provides a full continuum of behavioral care including inpatient, partial hospitalization, and intensive outpatient programs and has targeted diversified geographies with positive demographic trends and a commercial-heavy payor mix. These factors, along with its scale and the purpose-built nature of its facilities, differentiate Springstone from competing operators.

The COVID-19 pandemic has accelerated growth in demand for mental health services in the U.S., evidenced by improving Springstone operations throughout 2020. Like in the U.K., the U.S. government and payors alike acknowledge the need for incremental funding for behavioral health care. Multiple Avenues for Growth Including Development and Expansion Projects. Increasing demand for behavioral health services is expected to continue to generate additional attractive development and expansion projects not underwritten in this transaction.

Improved Portfolio Diversification. MPT’s largest individual property investment now represents only 2.6% of pro forma total gross assets. The consummation of the Springstone transaction is subject to customary closing conditions, including applicable regulatory approvals and the finalization of agreements with current management. MPT cannot give assurances that the transactions will be successfully consummated as described above or at all. Barclays and Guggenheim Securities, LLC acted as financial advisors to MPT.

About Medical Properties Trust, Inc.

Medical Properties Trust, Inc. is a self-advised real estate investment trust formed in 2003 to acquire and develop net-leased hospital facilities. From its inception in Birmingham, Alabama, the Company has grown to become one of the world’s largest owners of hospitals with 442 facilities and roughly 45,000 licensed beds in nine countries and across four continents on a pro forma basis. MPT’s financing model facilitates acquisitions and recapitalizations and allows operators of hospitals to unlock the value of their real estate assets to fund facility improvements, technology upgrades and other investments in operations. For more information (including additional details related to the Springstone investment as part of an updated investor presentation), visit the Company’s website at www.medicalpropertiestrust.com.

 

Source: HREI

Healthcare Real Estate Well-Positioned For Continued Growth In Post-COVID World

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The COVID-19 health crisis had a greater impact on demand for commercial real estate than the Great Recession, as mandatory quarantines, social distancing, shutdowns, supply chain disruptions, unemployment and an erosion of consumer confidence brought the industry to its knees in 2020 and through the first quarter 2021.

One bright spot in the troubled commercial real estate sector has been healthcare real estate.  While office visits for elective procedures plummeted, critical care, particularly off-campus, saw a surge as a result of the pandemic, balancing any weaknesses in the sector.

The U.S. Medical Office (MOB) vacancy rate was 8.6% as of Q4 2020, up from 7.8% at the end of 2019. In comparison, the overall office sector vacancy rate was 13.2% as of Q4 2020, sales volumes have held up extremely well, and real estate investors remain very bullish on the sector.

“The healthcare sector continues to play a dominant role in the US economy and has displayed year-on-year growth for many decades,” notes Martin Freeman, CEO of OrbVest, a global real estate company that invests in US income producing medical commercial real estate.  “From an economic and political perspective, the new Biden administration is strongly in favor of expanding healthcare services and benefits and we remain bullish on the sector going forward.”

Expectations for continued outperformance in the healthcare real estate sector is buoyed by some of the following fundamentals.

1. Structural Growth In Medical Office Demand Will Include, But Not Be Limited To Telehealth

Investors in healthcare real estate have to consider the impact of health-driven changes, economic-driven changes, and strategic-driven changes. Telehealth will be a great driver of healthcare real estate growth and be complementary rather than competitive. Take telehealth giant Teladoc’s merger with chronic disease manager Livongo, for example.

Social distancing, whether popular or not, will be a growth driver for structural and spatial improvements in medical office buildings, as consumers and staff will require modifications to feel safe.  Economically, capital preservation will impact real estate, and strategically, workforce deployment could be impacted. There could be some short-term disruption as we figure out how to take what worked with the “old normal” and integrate with the “new normal.” We should not be surprised to see limited capacities, rent relief or deferment, headcount reductions based on deferred procedures, and more.

However, long-term, as the sector will inevitably adapt and adjust, and healthcare real estate should have solid long-term growth potential because of shifting consumer needs and evolving demographics.

Medical Office Demand(Source: JLL)

2. Increased Real Estate Demand From The Segmentation Of Wellness And Acute Care Locations

“We are seeing a measurable shift from the hospital as the center of American healthcare,” explains Freeman, “this trend is likely to continue and accelerate in future years.”

This is another tailwind for healthcare real estate partially driven by demographics. The need for preventive and personalized care among millennials and seniors was already reshaping healthcare real estate long before the pandemic. We already discussed how America’s aging demographics appear to directly correlate with increased real estate demand for health services. Providers also understand that both millennials and seniors value preventive and personalized care. They know that these cohorts want to focus on leading a long and healthy life for themselves and their families. Plus, seniors now have access to less expensive and convenient care, while young working millennial parents have access to quicker and specialized care for their children. This has been working too well for it not to increase.

However, this trend is not exclusive to demographic shifts. Many of these triggers are due to rising hospital volume and how complicated they can be to navigate. Convenient access coupled with lifestyle integration look like a key driver. Hospitals will likely focus on higher acuity in-patient care over the long-term, opening up a need for additional real estate dedicated to lower-acuity, lower-cost facilities in more convenient and easily accessible locations in population centers.

Plus, with a brighter spotlight being shone on preexisting conditions, wellness and preventive care needs have never been higher. From a real estate standpoint, future outperformance will likely involve a combination of the following.

• Increased efficiency of outpatient facilities.

This can be considered a “medical home” model. This can include grouping primary care and specialty care in consolidated locations accompanying services such as imaging, pharmacy, and laboratories. This would also potentially require larger buildings with more giant footprints. The most significant providers have increasingly adopted this model already.

• The rise of “MedTail”

Retail and health real estate both share many commonalities, such as the need for high traffic, visibility, neighborhood proximity, and parking access. Shopping center availability and affordability are on the rise, and healthcare tenants may jump at the opportunity to increasingly relocate within retail centers.

This has given rise to a new segment of commercial real estate- “MedTail.” Retail locations with integrated healthcare options, such as drugstores are becoming increasingly prevalent.

According to healthcare real estate firm HBRE, small towns and suburban areas that once had little access to local medical facilities are seeing more options such as the CVS minute clinic or Kroger’s Little Clinic. Plus, urgent care centers have been popping up in retail strip malls as another offering to suburban residents.

Tether Advisors also performed a study and found that “nearly 80 percent of private equity, commercial real estate and retail healthcare respondents believe medtail investment will increase in the coming year and that COVID-19 bolstered the sector’s outlook.”

• Maximize revenue opportunities on a single site

Operators can maximize multiple revenue streams, such as promoting flexibility for different care delivery types at other times. Providers are also more willing to outsource facilities and project management services in strategic partnerships to ensure that they obtain the highest possible value from their real estate.

This could also create a significant real estate opening due to adjustments hospitals will have to make. COVID-19 increased the need for higher-acuity space within hospitals and pushed lower-acuity and administrative uses into alternative locations. This altered the functional mix of hospitals and heightened a public perception that hospitals are for very sick people. Many short- and long-term approaches affecting medical real estate should be seen here.

Hospitals will inevitably have to optimize their existing real estate and reduce the potential for contamination by modifying existing spaces and consolidating. They will also have to embrace higher-acuity care while managing contagion risk- even once the pandemic becomes more manageable.  Future success for hospitals will also involve embracing the shift to higher-acuity care and easing safety concerns within hospital facilities.

3. Medical Office Investments Are A Source Of Stability Pre-Pandemic, Mid-Pandemic, And Post-Pandemic

The numbers don’t lie. Medical office buildings (MOBs) are loved by passive investors because of long-term leases, stable occupancy, consistent income streams, and tenant quality. This asset class has many tailwinds blowing in its favor for both the short-term and long-term.

First and foremost, these properties greatly benefited from all of the aid in the multiple stimulus packages and the trillions dedicated to helping small businesses. Think of all the independent physicians and small practices that have benefited from the PPP loans. While many tenants struggled to pay rent, most of these medical tenants were absolutely fine. Loans from the federal government required hospitals to maintain staffing levels and continue to pay rent on their buildings, and as a result relatively few organizations had trouble making rent. In fact, in the worst part of the pandemic, medical office space owners collected rent from tenants in the high 90 percent range. As a result of the relatively low amount of rent deferrals, there’s a strong long-term outlook for healthcare real estate.

Consider MOB fundamentals and occupancy rates too. Across approximately 1.5 billion square feet in the United States, MOB occupancy has been remarkably stable. Between the financial crisis and now, MOB occupancy has fluctuated between 91.4 percent and 92.6 percent. Compare that to the average occupancy rate for offices in the U.S. in that same period- roughly 82.1 percent to 85.8 percent.

Medical Office Building OccupancyOr maybe you want to consider tenant retention. Because of the high investment in infrastructure required by medical tenants and barriers to entry such as regulations needed for surgery centers and imaging, MOBs on average report an average retention rate in the high 80 percent range, significantly surpassing typical commercial office retention.

Plus, despite all of the economic headwinds and the downturn in commercial real estate, new outpatient medical space construction has remained consistently stable at around 17 to 20 million square feet a year, roughly 1.8 percent of inventory nationally, and well below the national average of 2.1 percent for commercial office.

There is also virtually no speculative medical office development either, with most developers and lenders alike demanding pre-leasing of 50 percent to launch new construction.

Look at how medical rent growths have grown too. Nationally, the average medical office net rents steadily rose from $18.28 per square foot in 2012 to $21.51 in early 2020. This is a stable 1.5 percent year-over-year gain and 31.8 percent peak-to-trough return from the low of $16.32 in the fourth quarter of 2008.

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Key Takeaway for Investors

Can healthcare real estate weather the commercial market’s downturn?  The answer is a resounding yes.

“The current challenges faced by the global economy, and the potentially aggressive rebound in business sentiment in the US, creates an ideal opportunity for companies like OrbVest to assist investors from around the world to invest directly into medical real estate in the US and grow their wealth consistently and sustainably,” says Freeman.

Healthcare is changing, our demographics are aging, and if this past year showed us anything, it’s that an adaptable and forward-thinking health system is vital to a functional society. We will see numerous shifts in healthcare real estate and MOBs in the short-term and long-term. But the bottom line is that if you look at the fundamentals, you really cannot find a better long-term investment than healthcare real estate for stable income streams, quality tenants, long-term leases, and high occupancy rates.

If you look at investor activity since the financial crisis, this supports the sector’s fundamentals. This is a durable asset class, changing with the times, and a property type that will experience growth far into the future. If you are looking for passive income in real estate, healthcare commercial real estate offers an extraordinary investment opportunity.

 

Source: NuWire Investors