The role of real estate in healthcare transactions is often not as closely analyzed as it could be, says Brian Jenkins, senior vice president in the medical real estate division at Savills, a global real estate services firm. Mr. Jenkins says buyers and sellers in hospital transactions should consider the following three points when evaluating real estate's impact in M&A activity.
1. Real estate is often a leading driver of a hospital's value. It’s not uncommon to find 40-60 percent of the assets on a hospital system’s balance sheets are real estate. Additionally, these assets are carried at book value. Thus, it's critical that buyers accurately assess the fair market value of these assets when performing due diligence around a potential deal.
"In the past decade, hospital systems have increasingly expanded outpatient medical care, both on-campus and in retail-like locations away from the hospital campus, such as outpatient centers, stand alone ERs and medical office buildings," says Mr. Jenkins. In many cases, hospitals own the facilities themselves.
2. Selling off real estate could self-finance the transaction. "M&A decision-making must involve an analysis of what to keep and what to sell, because those future sell-offs can allow for a method of self-financing of the merger transaction," says Mr. Jenkins. "Buyers should analyze the real estate portfolio of the hospital for sale and identify assets with good potential for monetization."
Most often, sellers are interested in selling off ancillary, non-core facilities to buyers such as real estate investment trusts and private equity funds. Acute-care facilities are typically not good candidates to monetize, adds Mr. Jenkins, although such transactions are occurring in some markets.
3. Healthcare real estate pricing is currently very attractive. REITs currently have access to large amounts of capital at relatively low rates, and the market for medical real estate is highly competitive. Medical real estate performed well during the recession relative to other real estate assets, leading real estate investors flocking toward it. Together, these factors create very favorable pricing for entities looking to sell medical real estate compared to its historic baseline, says Mr. Jenkins.
To illustrate how high medical real estate is priced at the moment consider the following. Hospital merger deals are currently trading at 5-9 times EBITDA, while medical office real estate is trading at multiples of 13-16 times. "There is an arbitrage opportunity in an M&A transaction because the sum of the parts (via the non-core real estate) is worth more than the whole," says Mr. Jenkins.
Brian Jenkins has two decades of real estate and healthcare experience, and previously served as equity investment officer of medical real estate for the National Electrical Benefit Fund. He has acted as primary development partner on more than 250,000 square feet of outpatient medical office projects. Before that, Mr. Jenkins was a healthcare attorney at McGuire Woods, participating in hospital M&A transactions. Learn more about Savills.
1. Real estate is often a leading driver of a hospital's value. It’s not uncommon to find 40-60 percent of the assets on a hospital system’s balance sheets are real estate. Additionally, these assets are carried at book value. Thus, it's critical that buyers accurately assess the fair market value of these assets when performing due diligence around a potential deal.
"In the past decade, hospital systems have increasingly expanded outpatient medical care, both on-campus and in retail-like locations away from the hospital campus, such as outpatient centers, stand alone ERs and medical office buildings," says Mr. Jenkins. In many cases, hospitals own the facilities themselves.
2. Selling off real estate could self-finance the transaction. "M&A decision-making must involve an analysis of what to keep and what to sell, because those future sell-offs can allow for a method of self-financing of the merger transaction," says Mr. Jenkins. "Buyers should analyze the real estate portfolio of the hospital for sale and identify assets with good potential for monetization."
Most often, sellers are interested in selling off ancillary, non-core facilities to buyers such as real estate investment trusts and private equity funds. Acute-care facilities are typically not good candidates to monetize, adds Mr. Jenkins, although such transactions are occurring in some markets.
3. Healthcare real estate pricing is currently very attractive. REITs currently have access to large amounts of capital at relatively low rates, and the market for medical real estate is highly competitive. Medical real estate performed well during the recession relative to other real estate assets, leading real estate investors flocking toward it. Together, these factors create very favorable pricing for entities looking to sell medical real estate compared to its historic baseline, says Mr. Jenkins.
To illustrate how high medical real estate is priced at the moment consider the following. Hospital merger deals are currently trading at 5-9 times EBITDA, while medical office real estate is trading at multiples of 13-16 times. "There is an arbitrage opportunity in an M&A transaction because the sum of the parts (via the non-core real estate) is worth more than the whole," says Mr. Jenkins.
Brian Jenkins has two decades of real estate and healthcare experience, and previously served as equity investment officer of medical real estate for the National Electrical Benefit Fund. He has acted as primary development partner on more than 250,000 square feet of outpatient medical office projects. Before that, Mr. Jenkins was a healthcare attorney at McGuire Woods, participating in hospital M&A transactions. Learn more about Savills.