Long considered to be stable investments immune to recession, hospitals and other healthcare facilities are now feeling the effects of a cash-strapped economy as decreased charitable contributions are forcing non-profit hospitals to pare back and seek new financing sources, according to Jones Lang LaSalle’s 2009 Healthcare Real Estate Financing Outlook.
The firm’s healthcare and real estate finance experts cite a combination of falling revenue margins nearing break-even and severely restricted access to capital as having significant effects on the operating performance of healthcare facilities across the sector. For the first time, non-profit health providers are following the footsteps of for-profit health systems and seeking to leverage the value of owned real estate as a competitive source of capital.
“Throughout 2009, healthcare providers will be focusing inward—controlling expenses and enhancing revenue through creative real estate avenues,” said Poe Corn, Executive Vice President in Jones Lang LaSalle’s Capital Markets Healthcare practice. “There is little doubt that 2009 will be a year of very limited investment transactions in the healthcare sector, though those that do occur will take place as joint ventures, or as large non-profits acquire smaller, regional hospitals or providers execute sale-leasebacks to raise capital.”
Jones Lang LaSalle’s Healthcare Real Estate Financing Outlook predicts one of the trends that will influence the healthcare sector in the coming years is the adoption of sale-leasebacks by non-profit hospitals as they leverage medical office buildings and core real estate holdings such as acute and sub-acute hospitals as a source of capital. This trend began in the for-profit sector, but will gain traction in the non-profit sector due to a dramatic decline in charitable donations (20-30 percent decline in the last year). The drop in charitable donations, combined with the fact that many providers are edging ever closer to their bond capacities, will force many providers to search for new and creative ways of increasing their liquidity.
For example, a regional hospital in Wisconsin is currently bringing to market six medical office buildings totaling approximately 500,000 square feet. Those buildings will be sold with a long-term master lease with the hospital occupying 100 percent of the property. Another Midwest faith-based non-profit system had eight medical office buildings on the market, but removed the assets from consideration to obtain greater interest and better pricing in the future. Carolinas Health System of North Carolina also sold 15 medical office buildings at the end of fourth quarter 2008 generating $162 million from the sale of those facilities to Healthcare Realty Trust, a large healthcare REIT. Some hospitals are also buying equipment by folding the cost into the life of a lease, thereby further reducing the high costs of equipment purchases through an amortized payment schedule.”
“Rising unemployment and a jump in the number of uninsured Americans is having a direct impact on the bottom line of many not-for-profits, creating a ‘perfect storm’ of higher debt and lower liquidity,” said Mr. Corn. “The long-term survivors of this capital crunch will be those that maintain their credit ratings, and restrict their debt to equity ratio.”
The constriction of the credit markets has caused many healthcare entities to search elsewhere for liquidity, another trend noted in the Healthcare Real Estate Financing Outlook. More and more hospitals are reporting an increased reliance on alternative financing vehicles including third-party ownership with operating leases, capital leases for facilities outside of the acute setting and physician joint venture partnerships.
Added Corn, “We predict more and more hospitals will begin focusing on outpatient facilities where the cost of preventative care is lower, and the cost to the hospital for leasing or developing such facilities can be less than one-half the cost of having these services within an acute setting.”
Jones Lang LaSalle also expects healthcare systems to pursue equipment purchases by executing sale-leasebacks where it is possible to amortize the rental fees on to the life of the lease.
“That deal structure is a way for cash-strapped providers to address new and increased equipment needs while minimizing their debt carry,” said Corn.
Jones Lang LaSalle Capital Markets is composed of a broad range of real estate investment debt and equity specialists, and corporate finance experts, working on all property types and in all the major national markets on behalf of major institutional and local investors and developers, as well as corporations. The firm's Capital Markets professionals are highly skilled at pinpointing and tailoring the right capital solutions for each of these client's needs. The Investment Sales teams assist investors in developing and executing asset recapitalization strategies for office, industrial, retail, multifamily, healthcare and seniors housing product. The firm’s Real Estate Investment Banking experts raise debt and joint venture equity for investors and developers, and provide derivatives structuring and loan sale advisory services. The Corporate Capital Markets professionals help corporations develop and execute strategies that bridge their occupancy, capital deployment and financial reporting objectives for their facility portfolios. The Development and Asset Strategy team specializes in the sale of non-income-producing properties in their various forms from vacant buildings to raw land to entitled parcels and partially completed subdivisions. The firm's Value Recovery Services assist clients affected by the current financial crisis by creating value while managing risks through evaluating operational and occupancy needs, assisting with challenged assets and liabilities on their balance sheets, providing receivership services, asset management, raising capital through sales-leasebacks and providing leasing and recapitalization strategies for distressed assets. In the past two years, the firm’s Capital Markets team handled $117 billion of transaction volume.