TENNESSEE ORTHOPAEDIC SOCIETYChallenges & Opportunities with Medical Real Estate
S e p t e m b e r 2 7, 2 0 1 4
DISCUSSION AGENDA
• RTG INTRODUCTION
• TODAY’S HEALTHCARE INDUSTRY
• TRADITIONAL REAL ESTATE OWNERSHIP MODELS
• DISCUSSION OF REAL ESTATE INVESTMENT TRUSTS (REIT’S)
• HEALTHCARE REAL ESTATE MARKETPLACE
• CASE STUDIES
• TAKEAWAYS
• Healthcare Real Estate Advisory Firm that combines Industry Knowledge and Expertise
• Affiliate Company of Pershing Yoakley & Associates
• Independent and Objective Advice
• ADVISORY
• OPERATIONS
• CAPITAL PROJECTS
• Serving Health Systems and Physicians
RTG INTRODUCTION
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Disclaimers: Please be careful associating general market conditions and assumptions with your individual real estate assets. Generally speaking, real estate is still very much a “localized” asset class.
Consult your accountant, attorney or real estate advisor for information on local market conditions and advice on real estate ownership decisions.
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TODAY’S HEALTHCARE INDUSTRY
• Payment Reform is Transitioning to Value-Based Care System
• Continued Shift from Inpatient to Outpatient Setting
• Industry Consolidation / Competitive Pressures
• M&A Activity
• Hospital / Physician Alignment
• Increasing Capital Demands for Providers
• EMR / Technology
• Medical Equipment
• Physician Recruitment & Retention
• Increased Regulatory Scrutiny
Source: The Advisory Board Company
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AUDIENCE SURVEY
Regarding your Practice’s Real Estate:
• More than five (5) practitioners in your practice?
• Own v. Lease?
• Multiple locations?
• ASC investment (real estate)?
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TRADITIONAL REAL ESTATE OWNERSHIP MODELS
Physician tenants and/or a third-party owner create a new company or LLC to jointly own a medical office building, ambulatory surgery center, etc.
Physician tenants own the suites they occupy in a medical office building; condominium association owns common elements.
Direct Ownership
Physician tenants wholly own a medical office building. Generally best suited for a single-tenant building.
Physicians lease from a third-party owner, such as:• Hospital
• Developer
• Private Investor
• REIT
Condominium Ownership
Joint Venture or Partnership OwnershipThird-Party Owner
Physician Tenants
Third-Party Ownership
Physicians
Owner-Occupant Single Tenant
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Third-PartyPhysicians
Physician-Owned Condominium
MOB and Common Elements
REAL ESTATE INVESTMENT TRUSTS
What is a REIT?
• Institutional Investor - Industry has grown to sixteen (16) public and non-traded REITs
• Healthcare focus - many REITs invest in medical office buildings and other healthcare real estate assets
• Generally two categories:
• Equity (90%)
• Debt
• Three corporate structures:
• Publicly traded
• Publicly registered, not traded
• Private
• Generally seek long-term relationships
• Extremely competitive with acquisition capital
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HEALTHCARE REAL ESTATE MARKETPLACE
$-
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Billions $ Volume
Year
# Transactions 87 122 245 289 462 693 654 547 249 380 396 722 797
Source: Real Capital Analytics
Historical MOB Sales Volume
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• Over 700 Transactions
• $6.75 Billion in Sales Volume
• Average Cap Rate of 7.50%
Source: Pulse on the Market: Healthcare Transaction Report, Stan Johnson Company, May 2014.
Acute (18)
ASC (27)
Dialysis (34)
MOB Single Tenant (173)
MOB Multi Tenant (430)
Specialty Hospital (22)
6%10% 3%
2%
22%57%
HEALTHCARE REAL ESTATE MARKETPLACE
Transactions by Asset Type (18 Month Period: December 2012 - May 2014)
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Pricing Indicators
4.0%4.5%5.0%5.5%6.0%6.5%7.0%7.5%8.0%8.5%9.0%
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Avg. Cap Rate
$-
$50
$100
$150
$200
$250
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Avg. PSF
HEALTHCARE REAL ESTATE MARKETPLACE
Source: Real Capital Analytics
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Today’s Financing Environment
HEALTHCARE REAL ESTATE MARKETPLACE
Multi-Tenant Investment Property
Refinance Existing
Single-Tenant Owner-Occupied
New Construction
Single-Tenant Owner-Occupied
Refinance Existing
Interest Rate 3.95% 4.0% 4.20%
Initial Term 5 Year 7 Year 10 Year
Amortization Period 20 Year 25 Year 25 Year
Loan-to-Value 75% 85% 85%
Guarantees (Recourse) Typically Required Construction Only Negotiable
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*All information based on recent RTG project experience. Each project is unique; a number of variables will impact project-specific financing terms.
Typical Investment Criteria
• CREDIT - Risk Mitigation
• Stability - Established Tenant
• Lease Structure - Term & Rate
• Building Location and Quality
HEALTHCARE REAL ESTATE MARKETPLACE
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CASE STUDY: ARLINGTON ORTHOPEDIC ASSOCIATES
• 21 Physician Practice
• 2 MOB’s (49,660 SF)
• 100% Occupied, Single-Tenant
• 12 Year Lease
Source: Healthcare Real Estate Insights
Primary Location: 37,100 SF Satellite Location: 12,560 SF
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CASE STUDY: HARBIN CLINIC
• 145 Physician Multi-Specialty Practice
• 7 MOB’s (330,000 SF)
• 100% Occupied, Single-Tenant
• 15 Year Lease
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TAKEAWAYSKey Considerations when Evaluating Real Estate Ownership Alternatives
Know Your “Story”
• Current real estate scenario(s) - Is there a precedent?
• Does practice ownership mean real estate ownership?
• Timing considerations - Physician Demographic / Career Horizon
Understand Strategies and Objectives for your Medical Practice
• If you have multiple locations, which are Core / Strategic location(s)?
• Are there potential Consolidation or Expansion Opportunities?
• Flexibility and Control Considerations
Balancing the Economic Risks and Rewards
• Capital Investment (Initial and On-going)
• Alternate Investments / Opportunity Cost
• Potential Income Stream
• Operational Cost Containment
• Ownership Costs vs. Rent Expenses
• Tax Strategies
• Future Liquidity / Illiquidity
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