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Monetizing Healthcare Non-Core Real Estate Assets & Key Considerations

Monetizing Healthcare Non-Core Real Estate Assets & Key Considerations

Generating capital is a challenge for most healthcare organizations in today’s medical environment. There are so many necessary initiatives that cost significant amounts of money that it’s difficult to determine which should take priority. Programs can entail large capital construction plans to highly sophisticated medical technologies. Due to the diverse strategies being implemented to grow or maintain market share, many healthcare organizations have determined that monetizing their non-core real estate assets is an effective way to generate funding to accomplish long-term objectives surrounding their core purpose - enhancing patient care.

According to Omni Realty Group, there are four primary reasons why healthcare organizations are monetizing their non-core real estate assets:
  • Need for capital to support core investments

Selling non-core real estate assets such as medical office buildings and outpatient facilities can provide a substantial infusion of cash, providing an institution the opportunity to re-invest its capital into essential construction, renovations, and expansions of core real estate, IT and medical equipment upgrades, and mergers and acquisitions, all of which can position them for growth.

  • Focus on strategic growth

For some institutions, investing capital in the recruitment and retention of talented physicians and researchers, and clinical expansions results in growing their market share.

  • Need to strengthen balance sheet

Having improved liquidity can enhance an institution’s credit rating.

  • Reduce legal and regulatory exposure

By reducing the number of landlord-tenant relationships, an organization can mitigate potential legal risks and internal political issues, and have less exposure to regulations and codes.

Beyond the above, monetizing non-core assets can simply increase cash flow, decrease debt, and apply management resources to more critical operations.

While there are many pros to monetizing assets, there are some healthcare organizations that are actually doing the opposite and are buying back properties due to the low interest rates, and wanting better access to needed capital and more diverse sources of monies. One such organization is Northwell Health in New York City. During a healthcare conference held earlier this year in New York City, Philip Silverman, Senior Vice President & Chief Physical Assets Officer for Northwell Health (formerly known as North Shore-Long Island Jewish Health System) shared some of the Institution's strategies. He explained the organization currently spends $125M/year in rent, and they have a strategy for changing that number. Less than one third of the system’s assets, which are 21 hospitals and over 5M SF, were owned or long-term controlled in 2012. Today, that number is approximately 70% and growing, demonstrating that Northwell is positioning itself for long-term ownership of valuable real estate. Northwell isn’t alone in its strategies as many of the region’s progressive healthcare systems are doing the same and are purchasing more of their properties, which can generate significant savings and added revenue that can then be reinvested in advancing their medical, research, treatment, and teaching facilities.

How does a healthcare organization determine which is a better option?

JLL, a commercial real estate services firm, says decisions should be made on a property-by-property basis and three major considerations are:

  • Facility use

The duration of the organization’s need for a particular facility, the investment of capital already in the property, the capital that will be needed to maintain it, and the property’s flexibility in usage and purpose.

  • Capital strategy

Order of priorities among technological advancements for both business operations and medical operations; other existing and proposed facilities and necessary capital expenditures; and talent management (attracting physicians and researchers, etc.).

  • Sources of capital

There are many traditional and innovative financing options available to healthcare organizations whether they are buying, selling, or leasing real estate. Progressive hospitals have savvy finance executives who understand multi-pronged strategies as they relate to generating and leveraging capital, and approaches should be diverse to achieve the most beneficial long-term results.

Prominent healthcare organizations are adept at navigating the real estate asset waters because they take a proactive approach to the market and ensure that their financial resources are being utilized in the most effective manner to grow and/or retain their market share. They may see monetizing their assets as highly advantageous to their long-term strategies and they may not. Regardless of where they stand, they can be assured that, should they decide to sell some of their non-core real estate assets, public and private real estate investment trusts (REITS), private equity groups, insurance, and pension funds are actively seeking healthcare real estate assets to add to their portfolios.

In closing (and just for grins), let’s take a look at the largest healthcare real estate owners in the U.S. from a year and a half ago (the latest data that is available).

Sources: JLL, Omni Realty Group, Revista