Think­ing like a real-es­tate in­vestor

Modern Healthcare - - Finance - By Alex Kacik

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.

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