Monetizing Healthcare Real Estate

Investing in real estate in the medical space remains somewhat unusual for private equity firms, which have tended to focus on acquisitions of healthcare companies.

Some private equity funds have invested in long-term care and acute care, but it’s “relatively new ground for private equity to go into the [real estate] industry,” says DeVon Wiens, a CPA and national practice leader at Moss Adams LLP.

Moss Adams, a public accounting and business consulting firm, will advise on the buy-sell side of a healthcare investment, helping clients get a fair deal. Or the firm will critique a business office—of either a physician or laboratory—and look at the efficiency of how claims are processed, cash is collected, or coding is done. It has another group on the business strategy side that deals strictly with changes wrought by the Affordable Care Act (ACA).

Wiens primarily provides assurance services to clients at Moss Adams, but also gets involved on the transaction side. “I’m not an investment banker, but I know enough when it’s time to bring an investment banker in,” he says.

Moss Adams recently worked with several clients who obtained real estate financing from a healthcare real estate investment trust (REIT) that provides healthcare and hospital operators access to capital for facility improvements, technology upgrades, staff additions, and new construction through the long-term lease of its real estate assets. Wiens says Moss Adams got involved with that REIT because the firm has a significant number of for-profit hospital clients based in Southern California, out of which he personally works on four.

Moss Adams worked with several PE-backed hospital deals where an exit was wanted. Moss Adams’ first transaction of this type was when the REIT was brought in to help a private equity firm exit a long-term acute care hospital system (LTAC) in 2009 when an IPO was no longer an option. The REIT acquired the private equity firm’s interest in the LTAC for a 49 percent stake in the LTAC operation, while the LTAC’s management acquired the remaining 51 percent. In this case, the REIT and the LTAC entered into a sales and leaseback transaction to finance the real estate portion of the deal.

This transaction allowed the hospital operator to recapitalize the operation and then lease the property back from the REIT. In these sale-leaseback situations, Wiens says he has an idea of what the advantage to for the real estate investor is: “They’re diversifying their portfolio. So it’s not just real estate. The REIT has an interest in the operations of the lessee, so they have a rate of return on another kind of investment.”

In these cases, the REIT has essentially become a private equity fund in some respects, Wiens adds, taking part of its cash and investing in operations instead of just real estate. He recounts one particular hospital system that went to a REIT rather than to a private equity firm, to avoid 100 percent of its stock being acquired and the PE firm bringing in its own management. The REIT allowed management to continue in place after the transaction closed.

Many middle-market private equity firms have shied away from hospital ventures due to the capital needed to purchase the underlying real estate. Instead, they will bring in a REIT as a partner, to own the real estate and invest in the hospital’s operating company. “That’s what I see going on here,” Wiens says. “There’s a little bit of a subtle change in the last 24 months as to how capital markets are working in the space.”

Some tax-exempt inner-city hospitals have been struggling to stay afloat, as they serve patients who tend to need more care and may be uninsured or underinsured. Many of these hospital organizations have the real estate surrounding the hospital for medical office space and ancillary services. As government-sponsored reimbursement programs continue to reduce returns, these organizations are in need of opportunities to increase cash flows. That surrounding real estate is one source, but most of these organizations don’t know how to monetize the properties and extract their value.

“Many of these hospitals are prime real estate that turns into something other than a hospital,” Wiens says. He gives examples of hospital properties transforming for use as specialty hospitals or other healthcare services, and even housing or churches.

“REITs are not healthcare companies,” he says. “They’re not unlike a private equity fund, raising capital and reinvesting in real estate and healthcare operations.”

Elsewhere in the healthcare transactions space, Wiens sees a lot of interest from the private equity sector in specialized areas such as services connected to the long-term care industry, laboratories, pharmaceuticals, and psychiatric services. One area that he calls a “total disaster” is home healthcare, primarily because of the restructuring of reimbursement for Medicare-related services as part of the ACA.

“You’re going to see a lot of consolidation in home healthcare,” Wiens says. “Rates are going down. It used to be very lucrative, but now everybody’s retrenching. A lot of those companies are really hurting, since in many markets, rates for Medicare-related services have decreased over 40 percent.” he says. Smaller, locally owned homecare businesses will have a difficult time surviving and many will be looking to sell to larger companies that are able to bring large-scale efficiencies that are needed to succeed under the new, lower reimbursement rates, he adds.

Wiens also says that PE investment in healthcare will continue to evolve as care delivery models change with reimbursement. “There will always be opportunities for the well-informed investor willing to work closely with the right management team.”

This content is sponsored by Moss Adams LLP