An interesting opportunity is emerging in the midst of the equities market chaos in China, the U.S., and elsewhere.
As the healthcare industry evolves, spurred by the Affordable Care Act (ACA) and its emphasis on making health care more accessible, efficient, and patient-centric, so do the opportunities in health care real estate, especially for those with an inside track to identify investment opportunities. Independent private physicians continue to merge and evolve relationships with larger health care providers and to take full advantage of co-location efficiencies that offer benefits for health systems, physician practices and consumers.
Underlying all of these shifts is a perpetual and ever-increasing need for health care systems to contain cost. One of the best ways that health care systems are seeking to reduce debt and improve operations is to de-lever and untangle their balance sheets by making better use of their finances that are being earmarked for real estate assets, and the reallocation of some of that capital toward a more strategic use of the delivery of care. These trends set the stage for well-positioned groups such as Healthcare Property Advisors (HPA), The Innovation Institute, and their investors to target highly attractive returns on investment in a dynamic and growing asset class: medical office buildings (MOBs).
Investor demand for MOBs is soaring.
In just the first half of 2015, MOB transaction volumes were $11.7b, more than all of 2014. In its 2015 MOB outlook report, Colliers International predicted that these strong growth trends should continue into the foreseeable future, driven by industry, technology, and demographic trends that will likely persist for 25+ years. Medical Construction & Design's most recent Construction Report identified a pipeline of $86.7b in medical real estate construction. Investors are attracted to the stable returns offered by this unique asset class. MOB's embody recession-proof tenancy potential and strong multi-year triple net master leases backed by bond-graded health systems. It's a win/win for all parties.
One avenue that accredited investors can use to capitalize on the MOB market is the HPA Growth Fund, affiliated with The Innovation Institute, which is structured exclusively around mission-critical MOBs acquired via their proprietary pipeline of vetted deal flow. The Fund's action plan addresses deficiencies in the market, offering investors an inside track that leverages unique relationships and access within the healthcare industry. The Fund's investment philosophy is to "optimize risk-adjusted returns by investing in all aspects of the capital structure and matching investment to strategic value." To further amplify returns, investors in the Fund can take advantage of the power of IRS 1031 exchanges that allow the general partner to roll over gains into new acquisitions and defer taxes, thus yielding a very attractive and stable return on their investment.
The HPA Growth Fund, and its unique ability to source opportunities in the MOB market, is backed by the Innovation Institute's portfolio of healthcare service companies. The Fund is managed by HPA, a specialty firm uniquely capable of acquiring and managing MOBs for the Fund. The Fund, which is capped at USD $1 billion, already invested its initial assets of approximately $140 million (including investments from The Innovation Institute and other institutional investors), in four top-tier MOBs in Mission Viejo, California. HPA, The Institute and their institutional partners are slated to grow this portfolio as the Fund welcomes additional investors, partners, and real estate opportunities. For all the talk of pain being experienced within health care today, HPA's novel approach shows investors that change can be good!
About the authors:
Barry Didato is Chief Investment Officer of The Innovation Institute, an organization of 450+ professionals structured to support healthcare innovators and health systems to grow and become a positive force to meet the needs of a rapidly changing global healthcare industry. He can be reached via barry.didato@ii4change.com.
Ben Kempenich joined The Innovation Institute in 2016. He is a recent MBA graduate of UC Irvine's Paul Merage School of Business. Ben has six years of experience in the financial services industry with expertise in equity research, bank operations, investments, and business development. He can be reached via benkemp@uci.edu.
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