Deals between hospital operating companies and real estate investment trusts (REITs) are expected to multiply as more providers realize it's time to cash in on their bloated real estate portfolios.
Cost-intensive acute-care hospitals are just one piece of the entire continuum of care that health systems need to control. But as demand shifts, providers are determining which pieces of the system they need to own outright, and where they could monetize their real estate.
REITs too are banking on a continuing strong demand for healthcare services, as more people gain insurance and the population ages.
“What's new is that we're now seeing two REITs buying into the operations side,” said Mindy Berman, a healthcare practice lead in the capital markets group of JLL, an investment management firm specializing in real estate. “There's been an increasing amount of competition to own hospital facilities.”
Capella Healthcare, a privately-held, Franklin, Tenn.-based hospital operating chain, earlier this week said it will be sold to a real estate investment trust in a $900 million deal. Medical Properties Trust, which focuses exclusively on acute-care facilities, will own Capella's real estate, while operations of its 11 hospitals will be jointly owned and managed by the REIT and the chain's senior management.
Private-equity firm GTCR has owned Capella since its founding in 2005.
“Capella chose MPT because we believe they have a differentiating strategy in acute care,” said Capella CEO Michael Wiechart. “REITs can access the capital markets very efficiently. As a capital partner, they do the heavy-lifting for us.”
Medical Properties Trust, for instance, can provide financing for further acquisitions. In addition, Capella is in the midst of a $26 million project at National Park Medical Center in Hot Springs National Park, Ark., which will expand its cardiovascular and emergency department services. At Capital Medical Center in Olympia, Wash., Capella is investing $16 million in an operating room expansion.
The Capella transaction is the second this year in which a REIT purchased a hospital operating company and separated the real estate from its operations. Ventas in April forged a $1.75 billion deal to acquire Ardent Health Services from its private-equity owner, Welsh, Carson, Anderson & Stowe.
Similar to the Capella deal, Ardent's current management and other investors will own the hospital operations, with Ventas retaining a 9.9% stake.
Medical Properties Trust in May also purchased two former Ascension hospitals in the Kansas City metropolitan area, St. Joseph Medical Center and St. Mary's Medical Center, which are currently leased and managed by Prime Healthcare Services.
As more care moves to the outpatient setting, hospitals are often operating with unused capacity in their acute-care wings. A good portion of their assets, meanwhile, are tied up in their facilities and real estate—sprawling complexes, often in attractive downtown locations.
“The question for them is, how much do they have to own, compared to lease,” said Craig Acosta, director of the facility and capital assets practice at consulting firm Kurt Salmon. “The thinking is that, in 10 years, healthcare will look very different.”
Under a value-based reimbursement model, health systems need to develop outpatient and ambulatory care facilities—often in outlying communities away from the main medical center. Leasing outpatient and post-acute-care space provides a lower-risk, lower-cost point of entry into those types of services.
In some cases, hospitals have chosen to partner with real estate developers on ambulatory care centers, with the developer owning the real estate and the hospital holding the lease, Acosta added.
Health systems, many of which operate with thin margins, have been trying to reinvent their business at a time when they also need to invest in other expensive areas such as physician recruitment and information technology. Separating the clinical side from the real estate side gives them more flexibility. “They can use their capital in other ways,” Acosta said.
“It becomes very aligned with this risk-based contracting model,” said Patrick Pilch, managing director and national leader of the BDO Center for Healthcare Excellence & Innovation.
Until recently, REITs were unable to profit from healthcare-facility operations; they could only generate income by leasing the real estate. But the REIT Investment Diversification and Empowerment Act of 2007 provided the legal mechanism for REITs to participate in the business side of healthcare.
Senior housing has been the most prevalent example of the shift, but larger healthcare REITs seeking to diversify their assets see hospitals as another, independent revenue stream.
“They are all subject to different forces that drive the business,” Berman said.
While the senior housing market is driven by the larger economy—for instance, seniors' ability to sell their former homes—hospitals' finances tend to be tied more closely to reimbursement, Berman said.
REITs also see hospitals as a good investment.
“The health system industry has been consolidating, and the expectation is that it'll continue to consolidate,” Berman said. “In some sense, the REITs are betting on consolidation.”