Real estate monetization redux
| The monetization of medical real estate is a financial and operational strategy that enjoyed increased acceptance among hospital and health system executives during the past decade. It is a technique that enables providers to redeploy capital from non-core assets, particularly medical office buildings (MOBs) into strategic investments such as information technology systems; service line expansions; or additional inpatient capacity. Importantly, it has also allowed health systems to focus management time and attention on their core business, eliminate the tension of being landlord to referring physicians and avoid the cash drain of having to make recurring maintenance and capital expenditures. But what portends for the next decade amidst the economic uncertainty of a post healthcare reform era? Medicare and Medicaid reimbursement rates are expected to decline and patient volumes increase as medical coverage is extended to the approximately 32 million Americans who are currently uninsured. In addition, we anticipate demographic shifts with an expansion of the over 50 age group; historically the largest consumers of healthcare services. While the tax-exempt market has reopened; capital access issues remain including the more than $30 billion in letters of credit supporting floating rate hospital bonds that will come due in the next 3 years. As a result of these looming changes, there has never been a better time to revisit a monetization strategy and its range of financial, strategic and operational benefits. For example, capital can be reinvested into smaller more widely distributed ambulatory care facilities to help health systems extend their market presence and reach while treating more patients in the lowest cost setting. Investments in the information technology required to support integrated systems of care can be funded by proceeds from real estate divestitures. Monetizations will also generate cash that can be used to shore up balance sheets by enhancing days-cash-on-hand metrics or funding defined benefit pension obligations. As rating agencies begin to differentiate between wealth and the true liquidity needed to immunize floating rate debt risk, many health systems may elect to enhance their cash levels. Real estate is the first or second largest assets on most health system balance sheet. To be sure, monetizing non-core assets is not always the answer. However, hospitals and health systems should begin by thoroughly inventorying their real estate assets for size, location, quality and economic impact. In addition they should assess the enterprise wide risks of the entire real estate portfolio and then overlay those findings with their institutional missions and strategies. In light of the dramatic industry changes described above, we believe that it is inevitable that more and more hospitals and health systems will revisit and embrace monetization strategies during the coming decade.
| Tags: Medical real estate, |
