John Thomas, executive vice president of medical facilities at Healthcare REIT, discusses how the sale of medical properties can help finance capital spending for hospitals and health systems.
Q: Why are hospitals interested in selling off their properties in return for capital? Do you think this is a growing trend?
John Thomas: Generally, non-profit hospitals needing capital would access it through the tax-exempt market and philanthropy, but we’re finding more and more are comfortable selling, then leasing back, outpatient facilities instead, as an alternative to the tax-exempt market. There is value locked up in those buildings that may not necessarily be serving a purpose for the hospital. Last year, the market was depressed, so fewer hospitals were interested, but as the market rebounds, more health systems realize selling medical office buildings and other outpatient facilities can unlock a lot of capital.
This is a more popular option for struggling hospitals with difficulties accessing the bond market. However, even strong hospitals that are able to access tax-exempt markets at relatively low interest rates are beginning to realize that they can sell these buildings and move the money into investments that offer a higher rate of return [than the illiquid real estate investment].
Q: For hospitals looking to develop new facilities, how would they benefit from an arrangement with a developer, such as Healthcare REIT, as opposed to issuing bonds?
JT: Leasing allows the hospital to direct money toward its mission. Money used to construct buildings can be used to pay physicians, nurses and other providers and to invest in new technologies. On an apples-to-apples comparison, a CFO might think that if they can access capital on the bond market for, say, 5 percent, and a lease is 8 percent, then it’s better to go with the 5 percent bond. They don’t take into consideration that if a building was leased, the base capital required to construct the facility never has to be paid back. Instead, the hospital keeps that money and can invest it in reserves that have a higher rate of return than the property, which, in the end, creates more money for the hospital’s mission.
Q: How important is it that hospitals invest in capital improvements now? Could they wait until the market further improves?
JT: More and more hospitals are looking at alternative sources of capital and not waiting. Health reform is now complete, and no one really understands its true implications yet. One truism is that there is a growing shortage of doctors. Hospitals that do something to capture physicians and keep them are better off than [those that are] waiting and then watching competitors make capital investments that draw physicians away.
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