Colorado Real Estate Journal - June 15, 2016
Catholic Health Initiatives is selling 3.1 million square feet of medical office space across 10 states in what will be the largest deal of its kind ever recorded. CBRE Group Inc. just closed the first part of the transaction, which involved 26 properties, including three in Colorado. Milwaukee-based Physicians Realty Trust paid $324 million for the assets and expects to complete the acquisition in multiple phases by year-end. The portfolio is valued at approximately $700 million, making it the largest health system monetization of medical office buildings on record, according to Real Capital Analytics. Historical data also confirms it will be the largest MOB portfolio ever to trade outside of a merger or acquisition, CBRE said. Chris Bodnar and Lee Asher, executive vice presidents and cofounders of CBRE’s U.S. Healthcare Capital Markets Group, handled the transaction for CHI with Tim Lorman, alliance director of CBRE’s Healthcare Services Group. “Like many health systems, Catholic Health Initiatives is taking advantage of favorable market conditions to unlock the capital they have invested in these properties,” said Bodnar. “This monetization of assets will strengthen operations and enhance the care they provide to the communities they serve.” “This initiative is part of an overarching strategy by Catholic Health Initiatives to obtain maximum value from their owned and leased real estate assets while creating a partnership with a reputable investor,” added Asher. “Physicians Realty Trust plans to own the properties for the long term, infusing significant capital into the portfolio while providing first-class management services to CHI and their physicians.” Catholic Health is leasing back approximately 80 percent of the portfolio, with the rest leased to third parties, according to CBRE. According to Bodnar, monetization of real estate is among many options health systems are considering to enhance their margins and operate more efficiently. “For a lot of health systems, the one thing that gets looked at very closely by the rating agencies is their liquidity. By freeing up equity that is tied up in real estate, it will enhance that equity position by the hospitals and make them, from a financial standpoint, more favorable to the rating agencies,” he said. “The second thing I think is looked at is where else could this money be utilized? Since the Affordable Care Act went into law and was fully implemented in 2014, hospitals are operating at lower margins. They’re not getting the same (Medicaid and Medicare) reimbursements that they once were, and they are trying to enhance their patient base, they’re trying to enhance their services to the community, and that costs money. So the question becomes, ‘Does it make sense to keep money tied into bricks and mortar or does it make sense to redistribute that equity into services to expand their network and capture a greater market share?’” In addition, while “a lot of health systems have great real estate teams and are well organized,” real estate owners may operate buildings more efficiently since that is the business they’re in, he said. Given merger and acquisition activity between hospitals and physician groups over the last few years, Bodnar anticipates seeing increased monetization of health system real estate. “Because of that type of activity and health systems trying to force ways to become more efficient and create more cash on their balance sheets, I think it will continue to be something that is looked at,” Bodnar said. Colorado properties included in the first tranche of the Catholic Health Initiatives portfolio were: • Dacono Neighborhood Health, 3101 Summit View Drive, Dacono. The 10,800-sf ambulatory surgery center opened in 2014. • Peak One Surgery Center, 350 Peak One Drive, Frisco. The center opened in 2005 and includes three operating rooms for a variety of procedures, including general surgery, gastroenterology, gynecology, ophthalmology and more. • Thornton Neighborhood Health Center, 4075 E. 128th Ave., Thornton, a 10,700-sf building that offers family medicine, women’s health, radiology, and health and wellness services. It was completed in 2014. Catholic Health Initiatives is one of the nation’s largest health systems, with 105 hospitals in 19 states, along with inpatient and outpatient facilities, nursing colleges and home health agencies. Physicians Realty Trust is a publicly traded health care real estate investment trust that acquires, owns and manages health care properties leased to physicians, hospitals and health care delivery systems and providers, according to its website.