Healthcare: Economy affects value of hospital medical office

Mark Alexander for news-press.com

Hospitals often view their medical office building (MOB) investments differently than doctors that own their medical facilities.

Doctors can build equity owning MOBs during their career, with an expectation to cash out equity near retirement by either selling to a practice partner based on a market appraisal, or by structuring a sale/leaseback transaction with an investor to create a higher net present value of the MOB asset.

Hospitals typically have more complex issues to assess. Most have an investment portfolio consisting primarily of equities. Some hospitals consider MOBs to be part of their investment portfolio. Other health care systems do not, and view their MOBs strictly from an accounting standpoint as an operating asset. A hospital system typically owns buildings they occupy with other owned MOBs rented to doctors and other health care providers.

Owner-Occupied MOBs: Hospital-occupied medical office buildings are good candidates for sale/leaseback transactions to monetize value in cases where the hospital has limited access to capital for property improvements, expansion or to free up cash to fund operations. However, it is not always necessary for health care providers to monetize owner/occupied MOBs if they have strong credit with good access to capital at reasonable rates.

Tenant-occupied MOBs: Hospital-owned, tenant occupied MOBs have recently become a higher priority to sell for several reasons. MOBs are investments that tie up hospital capital that could more effectively be utilized on more strategic investments. Vacant MOB spaces provide zero-to-negative returns on this capital. Due to soft office market conditions across the U.S., many hospitals have increased vacancies with the opportunity cost of this capital tied up in their MOBs.

The estimated value of MOB holdings is added to the health care provider’s investment portfolio, which hospitals use to analyze “MOB holdings percentage” of total investment. When the ratio of “MOB Holdings” as a percentage of total portfolio assets increases, portfolio risk also increases from an investment perspective due to the lack of geographic and industry diversification inherent in MOBs. This is especially true if patient volumes decrease as is the case currently in many markets. There are significant concerns today when effects of our uncertain economic conditions combine with uncertainty posed by health care reform. Special attention to safe diversification of the hospital’s overall investment portfolio is warranted.

Sale/leaseback of select hospital occupied buildings and/or straight sales of tenant occupied buildings can provide that asset diversification and improve the cash positions at a time when cash can be utilized to take advantage of more strategic opportunities.

An example of this strategy can be seen in the transaction where Carle Foundation Hospital sold its 92,000-square-foot MOB in Bloomington, Ill., for $24.25 million or $264 per square foot at an 8.5 percent cap rate, according to Robert Tonkinson, former CFO of the Carle Foundation based in Urbana, Ill.

[news-press.com]

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