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Unlocking Value from Healthcare Real Estate, Part 2

arrow upIn the second part of our look at health system real estate we’ll look at some additional trends health systems are facing.  Moody’s Investor Services maintains a stable outlook on the nonprofit and public healthcare sector based on expected cash flow growth and patient volume moderation.  Unlocking cash from real estate is an attractive vehicle to provide the requisite growth capital health systems require to be competitive.

While health systems focus on the delivery of care to patients, physician integration, IT infrastructure, cost management, and M&A opportunities, very little attention has historically been given to health system’s real estate holdings, which typically comprise 40 to 50 percent of their total assets.  Declining margins and liquidity will be one of the primary drivers that rating agencies will analyze when underwriting overall health system credit. As such, health systems should evaluate the benefits of monetizing non-strategic real estate assets.

We see a number of market driving trends that will continue through 2017 and further into 2018.

  • Health systems are facing uncertainty and unknown revenue streams as we move into 2017. The government is the majority payer in the industry, and it is unknown what changes will occur to the Affordable Care Act under the Trump administration.
  • Outpatient and ambulatory care are occurring outside of the four walls of the hospital, meaning your core hospital asset is less important than your ambulatory care network to consumers.
  • Hospitals compete for market share by developing or acquiring a service where the people are. By following people with a better payer mix, health systems will be engaged in some high growth areas and good communities. The trend to provide cancer care, imaging, and other specialized care in the suburbs is hot, although the start-up cost is high for health systems.
  • Divestiture of core real estate asset (acute care hospital) is an emerging trend, modeled after real estate monetization strategies in hospitality, retail, and senior housing. Separating hospital operations from real estate provides flexibility for service deployment in trending areas and reduces risk associated with aging infrastructure.
  • Free-standing emergency departments are a hot real estate trend especially in Texas and Colorado. The strategy is to acquire the patient through the ED services and then keep them within the network.

Health systems should be active and continuously engaged in evaluating the strategic options related to their real estate portfolio including monetizing non-strategic assets through acquisition, disposition and debt & equity recapitalization strategies; strategic capital planning (including monetization of non-core real estate); and having a development plan for growth.  Our approach guides health care organizations through a financial evaluation to set the operating strategy which translates into a bottoms-up expectation for organizations that we work with.  This approach, coupled with establishing the right management infrastructure needed to control variation, results in a consistent and sustainable strategy for achieving performance improvements, operating efficiencies, and cost savings.

To see Part 1, click here.

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