CREJ - Healthcare Properties - July 2017
Sale-leasebacks, transactions in which business owners sell and then lease back real estate assets, have been growing rapidly in the health care sector. Performing a sale-leaseback allows companies to free up equity from real estate assets, raise capital to reduce debt, invest in core business and strengthen balance sheets. These types of transactions are customary practice in many commercial real estate industries and specialties, including health care. The benefits of sale-leasebacks: • Reinvest in the company. • Retire debt. • Improve credit rating. • Increase productivity. • Get a better return on capital investment. Health care. Costs, related to operating a medical practice or health care facility, continue to increase while physicians continue to be apprehensive of what the Affordable Care Act will mean to their future. As a result, they seek other means to influence their future and this includes their commercial real estate investment. Physicians, or health care systems, may consider owning ambulatory surgical centers or medical office buildings to provide the flexibility, efficiency and income they sought to impact their future. They may look at owning independently, with a team of physicians or as a joint venture with an investor to purchase land and develop a medical office building, or buy an existing asset. The reality of managing a property, in addition to a health care practice, can present challenges. One option to help manage these challenges is to sell the asset and lease it back, a sale-leaseback. By performing a sale-leaseback, the physician group can sell the property and lease back its space at the same rate it has been paying. Then the physician group can use the proceeds for other investments with higher returns. Investor interest. The relatively high performance and steady cash flows of MOBs have made them a much sought-after property type for institutional investors and real estate investment trusts. Many are seeking an entry point into the Colorado health care real estate market and seek off-market sale-leaseback properties. Physician-owned buildings are attractive to investors for three reasons: They traditionally have strong financials, the rents are higher and the leases are long-term. The average cap rate for an MOB purchase in the United States is 6.7 percent. Colorado is hovering around the same cap rate. ASC real estate is considered less risky than other investments because the properties are anchored by medical tenants and thus are worth a premium price. Medical facilities with long leases are trading at historically low cap rates and thus significantly increasing value. Risk vs. reward. During sale-leaseback transactions, buyers and sellers must balance risk-reward factors when making such decisions. The physician’s risk lies in a lace of analyzing the entire package and not fully understanding how it impacts their business strategy. When utilizing a real estate team that specializes in health care real estate, three factors should be considered: 1) Will the influx of the sales profit outweigh the rental payments? 2) What is the new lease term and does it match the business strategy? 3) What is the estimated future value profit compared to the factors considered in the first two questions? If successfully analyzed, the rewards gained from executing these transactions are great, as described above, as benefits. The ability for physicians to reinvest into their core business not only alleviates the challenges of managing a property in tandem with a health care practice but also enables practice growth and positive future planning. Several successful sale-leaseback transactions that have happened in Colorado include a record-breaking single-tenant, medical office, sale-leaseback that occurred in 2015. A 56,349-square-foot MOB, the Urology Center of Colorado, sold for $623.79 per sf. The elevated value was due to many factors, including a strong tenant, fantastic location, long-term lease and high rents. Additionally, Englewood-based health system Catholic Health Initiatives sold 52 medical office buildings, totaling more than 3.1 million sf, to Physicians Realty Trust for $725 million. At the time, the buildings were nearly 95 percent leased with the remaining lease term averaging 8.6 years. Sale-leaseback transactions can be complex and multifaceted commercial real estate transactions. For this reason, it is strongly recommended that physicians hire a team that specializes in health care real estate. This team should include a commercial real estate broker, an attorney and a certified public accountant. Understanding all risks and benefits associated with the structure of both the sale and leaseback allow both parties to carefully determine if this is the right strategy for their future.