Thinking like a real-estate investor
While Baptist Memorial Health Care owns the land that its 49-bed rehabilitation hospital sits on in Germantown, Tenn., it rents the facility from commercial real estate developer Duke Realty Corp.
Duke paid $33 million to construct the building, freeing up capital for Baptist to spend on equipment, physicians and other investments aimed at improving care. To cut overhead even further, Baptist operates the hospital in a joint venture with post-acute care provider Kindred Healthcare.
Health systems have typically owned assets like physician office buildings and will rent out space to doctors. That’s meant taking on the full risk for any vacancies and the cost of maintenance and upgrades.
“We’ve learned there was a better way,” said Jason Little, CEO of Memphis, Tenn.-based Baptist Memorial. “It’s evolved where we weren’t just paying a real estate company to collect the rent and do the maintenance, but we were partnering in a joint venture to form an arrangement that best allocated our capital and fit our strengths.”
Systems should recognize real estate as a distinct cost center that can provide savings on par with drugs, products, suppliers and even professional fees, said Jim Hayden, executive managing director of CBRE Healthcare, which recently published a white paper on the topic. “Most of the C-suite level healthcare executives I talk to say they could do a better job at opti- mizing their real estate portfolio.”
The healthcare real estate market consists of an estimated $1.5 trillion in assets, and health systems own $1 trillion of that. Real estate occupancy accounts for 8% to 12% of hospital costs. Notably, inpatient facilities represent 43% of all healthcare real estate in the U.S., while outpatient facilities— many of which are hospital-affiliated—make up 27%. Thirty-four of the top 50 owners of healthcare real estate are health systems, which collectively own $227 billion—much more than all healthcare real estate investment trusts combined.
Outsourcing management of a property can reduce facility costs by 10% to 12%, while the provider can gain real estate expertise and enhance the property’s value and operating performance, according to the CBRE white paper.
Systems can also sell the facility to an investor and lease back the space, or set aside part of the building for commercial development. For example, Parkland Health & Hospital System in Dallas recently sold its hospital campus for $83 million. A developer plans to turn the property into offices, shops, a hotel and apartments.
Hayden likened the transition to the financial services industry. Twenty-five years ago, most banks owned their branches. But as the industry consolidated, bank executives realized that they were better off leveraging their positions as major tenants and redeploying capital into technology, he said.
Trends to watch include real estate investment trusts’ investing patterns. REITs have pulled out of skilled-nursing facilities, while investment in medical office space and other outpatient facilities, private-pay senior housing and life sciences are becoming increasingly competitive because they are seemingly less susceptible to changes in government reimbursement and regulations.
One example is Ventas’ $1.75 billion investment in Ardent Health Services’ real estate and hospital operations and its 9.9% stake in the company itself. A health system can also form its own REIT, in which it could retain significant ownership through its charitable foundation.
A shared-risk model also ensures that the building is managed, maintained and staffed adequately to ensure there is a return on investment, Little said. Those types of partnerships also help on the administrative side as the industry adapts to new regulations, he said.
“When we look at day-to-day maintenance, financing and operations of our buildings in a more holistic way, we find real economies of scale,” Little said.