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December 19, 2011

Small-Hospital Mergers A Signal That Crisis Is Upon Us

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If you’re wondering how healthy an industry is, look at how many smaller players are selling out. And if the smaller players are bailing like rats from the proverbial ship, consider that industry to be in crisis. That’s my theory, anyway. Read on and see if you agree.

You know, when I watched Community Health Systems and HCA and Tenet doing their little dances on the catwalk a few years ago, tendering offers and buying up sinking ships, I thought hey, that’s what big chains do. Didn’t register much.

One year ago, when I watched VC firm Cerberus Capital Management pick up Boston’s Caritas Christi chain, I saw signs of hospital desperation. After all, VC firms don’t sink their money into companies that offer a small, predictable return;  in this case, they acquired financially distressed properties with a very substantial upside.

So, what of this year?  Merger mania continues $7.3 billion of total healthcare-related M&A this year. (For more background, check out this hospital M&A list from business information provider Hoover’s. It’s been a wild year, and next year is likely to keep up the pace.

I’m not really surprised by the merger mess, and I doubt you are either. After all, hospitals have been running at minimal or even negative margins for many years, and now that health reform is breathing down everyone’s necks the pressure is climbing. The question is what this means for the industry.

Consider that one John Reiboldt of investment bank Coker Capital Advisers called the single stand-alone hospital a “concept of the past” at this year’s HIMSS event. Even if he’s wrong — or ahead of himself — the folks in his industry  are clearly poised to strike. And they’ll be making offers beleaguered single- and small-chain hospitals can’t refuse, capice?

December 5, 2011

Why Not Sell Those Medical Office Buildings?

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Back when the U.S. financial crisis was at its height, hospitals were searching desperately for assets which could keep them above water. And there was one type of asset which largely held its ground.  Though most other investments tanked, medical office buildings were a lone bright spot.

In 2008 and 2009, hospitals began unloading their MOBs, selling them to investors and leasing them back in an effort to keep the ground under their doctors’ feet. Commercial real estate players — notably real estate investment trusts — were only too happy to participate in these deals, as MOB properties had a rep for being nearly recession-proof.

By mid-2010 or so, MOB fever calmed down. But now, with the hospital industry’s health improving, it may be heating up again. If your hospital owns Class A medical office space occupied by affiliated doctors, you’re likely to get courted by real estate investors in the next few quarters.  (That’s my prediction, not some real estate exec’s, but the signs are there and MOB buyout momentum is growing again.

After all, consider the trends. Demand for medical office space is growing, boosted by rents hovering at about 5 percent below pre-recession levels, according to commercial real estate research firm CoStar Realty Information. Also, hospitals continue to need more space to house the practices they acquire, which will absorb any left-over vacancies and raise the value of the properties investors already own.

Not only that, there are long-term forces which are likely to keep demand high for MOBs. Commercial RE investors expect the coming growth in demand for outpatient services — which should hit 22 percent by 2019, according to McKinsey Global — to generate strong returns for medical property owners.

So, what does this mean for you?  Well, if you didn’t sell your MOBs a few years ago, you may have another chance. Bear in mind that investors are more interested in signing MOB deals with big chains like Tenet or HCA, as aggregating properties makes more sense than negotiating one deal at a time. But you’ve still got a special asset there.

Bottom line, if you have new (or newly-upgraded) medical office properties on your campus, consider whether they’d be more valuable as a lease-based tax deduction.  My guess is that you’ll be able to redeploy the cash more effectively in other areas of your operations — such as, say, building up your EMR.  And hey, you’re not really in the real estate business anyway, are you?

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