United Healthcare Adds 280 Clinics, 35 Urgent-Care Centers With $4.9B Acquisition

U.S. health insurer UnitedHealth Group Inc. will buy DaVita Inc.’s physician group in a cash transaction for approximately $4.9B.
DaVita Medical Group has approximately 280 clinics, 35 urgent-care centers and six outpatient surgery centers that operate in California, Washington and Florida. The acquisition will expand UnitedHealth’s healthcare services platform throughout the U.S., allowing it to compete as a larger player in the medical services industry, the Wall Street Journal reports.
UnitedHealth’s health-services arm, Optum, has been actively working to build a larger roster of clinics and medical centers; in January it acquired Surgical Care Affiliates Inc. for $2.3B, adding around 200 medical centers to its portfolio.
The takeover comes at a time of financial distress for DaVita, which recorded a net loss of $214M in Q3. The company will use the proceeds from the UnitedHealth transaction to pay off debt and for stock buybacks, among other purposes.
The pending transaction falls on the same week as CVS Health Corp.’s $69B Aetna Inc. buyout. The deal will solidify it as the second-largest company in the country in terms of revenue. CVS plans to leverage its retail footprint to create one-stop-shop healthcare clinics across the U.S. With a portfolio of 9,700 retail pharmacies and 1,100 walk-in medical clinics, called MinuteClinic, CVS is the largest retail pharmacy chain and retail clinic operator in the country.
The UnitedHealth Group deal is expected to close in 2018.
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Miami Jewish Health System Pushes Vast Expansion

Miami Jewish Health Systems is moving ahead with its major expansion plans and has earned preliminary approval from city commissioners.
Phase I is set to begin next year and include construction of a cutting-edge memory care facility to be called Empathicare Village, a substantial addition to the medical campus in Miami’s Little Haiti neighborhood.
The health system has been operating from 5200 NE Second Ave. since the 1940s, and the updated master plan is for the next 30 years and beyond.
The city commission recently voted favorably on four items tied to the expansion, including a street closure, land use changes, zoning changes, and an amended development agreement with the City of Miami.
The street closure was approved, and the other three items passed on a first reading with a final vote yet to come.
The first item allows the health system to close part of Northeast First Avenue (Northeast Miami Place) and Northeast 52nd Terrace within the Miami Jewish Health Systems’ properties, and seven easements also within the medical campus site.
Outgoing Commissioner Frank Carollo got a promise from the health system to hire a good portion of employees from Miami, for both temporary construction jobs and long-term staff positions.
Some of those details are to be fine-tuned before the final votes.
The expansion plan is to unfold in several phases, and Mr. Carollo said he wanted to make sure there are requirements to hire local residents for each phase and to have a third party regularly audit those employment numbers and report compliance to the city.
Commission Chairman Keon Hardemon noted that Miami Jewish Health Systems is proud of providing long-term jobs to locals.

“I’ve seen it. Thank you for that,” said Mr. Hardemon, whose District Five includes Little Haiti.

In a letter about the expansion, attorney Iris Escarra on behalf of the health system speaks of the impact of jobs the redevelopment will bring to the community.
The increase in capacity will allow the health system “to provide more jobs, and to better serve the community through new programs and more room for patients.”
She said an economic study shows the average development construction phase employment will be for about 1,174 employees, and the project management is expected to employ eight people for ongoing oversight of the site and marketing during the development phase.
The expansion will also lead to an increase in recurring jobs totaling 170 employees throughout the multiple-phase project.

“Development jobs will range from construction to truck transportation and marketing research, and operation jobs will include hotel and hospital workers,” Ms. Escarra wrote.

The health system’s expansion plans are included in a requested Special Area Plan.
The city’s zoning code, Miami 21, says the purpose of a Special Area Plan is to allow parcels of 9 abutting acres or more to be master planned to allow greater integration of public improvements and infrastructure, and “greater flexibility so as to result in higher or specialized quality building and Streetscape design.”
The medical campus of about 20 acres provides 24-hour-a-day services for its patients, including on-site hospital and ambulatory health clinic, specialized centers for biofeedback, mental health, rehabilitation, and memory centers, and assisted living facilities.
Miami Jewish Health Systems currently provides 104 assisted living facilities with the proposed addition of 99 beds, for a total of 203 assisted living facility beds.
The nonprofit senior health care provider has hired c.c. hodgson architectural group to design the new master plan for its property, border by Northeast 53rd Street, Northeast Second Avenue, Northeast 50th Terrace, Northeast Miami Place, Northeast 52nd Street and North Miami Avenue.
The architectural firm specializes in wellness-based design services.
The overall master plan shows the construction of 11 buildings and facilities, improvements to more than a half dozen existing structures, and demolition of five buildings and one pavilion.
A significant aspect of the master plan is consolidating parking into new multi-level garages, freeing old surface parking lots for new buildings and expanded open space.
In her letter, Ms. Escarra says the proposed Special Area Plan will enable the health provider to expand its impact on the community by providing the Empathicare Village, an institute to promote research, and lodging for visiting researchers and families.
The Empathicare Village includes a 142,708-square-foot, three-story facility and a 135,576-square-foot, three-story garage accented by murals from local artists.
Ms. Escarra wrote that the Special Area Plan was designed to:
• Promoting a neighborhood/campus for short- and long-term patients and their families.
• In addition to on-site green space provided for residents, patients and families, provides more than an acre of civic space for the public.
• Introduce the Empathicare Village, along the western portion of the campus, to meet the needs of an aging community.
• Revitalize the neighborhood through design and innovation, along with providing needed support for the community’s healthcare needs.
• Utilize sustainable technology and strategic initiatives and concepts.
The complete build-out of the master plan is to include a hotel and conference center.
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Hedge Fund Led By ‘World’s Most Feared Investor’ Buys Stake In South Florida Medical Company

Elliott Management, a $34 billion hedge fund, has acquired a 7 percent stake in Mednax and intends to engage company leaders regarding “strategic options.”
In August, Bloomberg published an article called “Elliott Management head Paul Singer the ‘World’s Most Feared Investor.’” The article said Singer’s activist investor strategy led to the ousting of Arconic Inc.’s CEO and a battle with fellow billionaire Warren Buffett over the takeover of Oncor Electric. He was also in the headlines for battling Argentina’s government over its debt limits.
Now Singer has turned his attention to Sunrise-based Mednax (NYSE: MD), which owns medical practice groups across the country and several health care technology and billing firms.
On Nov. 16, New York-based Elliott Management and its affiliates disclosed that they obtained a 7 percent stake in Mednax worth about $84.9 million.

“The reporting persons believe that the securities of the issuer are undervalued and seek to engage in a constructive dialogue with the issuer’s management and board of directors regarding strategic options and operational opportunities to maximize shareholder value,” Elliott Management stated in the SEC filing. “The reporting persons believe that there is substantial upside from the issuer’s unaffected share price level of $43.37 per share, the closing price of the issuer’s shares on November 3, 2017, the last trading day prior to the reporting persons’ increased share accumulation.”

Upon disclosure of the news, Mednax shares jumped $6.11, or 13.9 percent, to $51.76 Thursday.
Mednax officials couldn’t immediately be reached for comment.
CFRA Research equity analyst Danny Yang kept a “hold” on Mednax shares and said a partial or full sale of the company appears possible and would be a positive for shareholders. However, Thursday’s gain in stock value was “purely speculative.”
Mednax is greatly impacted by the future of the Affordable Care Act, especially the Medicaid expansion that provides more coverage to the children’s health services offered at its pediatrics division.
Source: SFBJ
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Medical Office Buildings Expected To Remain Resilient, Despite Changes In Payment Policies

Transformation is the major theme driving the business of healthcare delivery in the United States, so it is not surprising that the medical office building (MOB) sector is also seeing fundamental changes. In one foundational shift, the Centers for Medicare and Medicaid Services (CMS) reduced physician reimbursements for certain outpatient services delivered in off-campus hospital facilities.
In a November 2 announcement, the CMS explained, medical practices that perform certain outpatient services in off-campus hospital settings will receive 20 percent less in reimbursements. The move was part of an ongoing shift in the way reimbursements for such services are funded under Section 603 of the Bipartisan Budget Act of 2015.

“CMS believes that this adjustment will provide a more level playing field for competition between hospitals and physician practices by promoting greater payment alignment,” according to a statement from the agency.

That decision is not likely to impact demand for MOBs, experts say. Health care providers are still looking to provide patient services in outpatient facilities as one strategy to stabilize their margins, says Chris Bodnar, executive vice president of the investment properties division at real estate services firm CBRE and a co-lead of the CBRE healthcare capital markets group.

“Either way, health care systems will continue to drive outpatient services,” Bodnar says. “It is a more cost-effective way to deliver services for the hospital and the patient.”

The vacancy rate at MOBs decreased by a modest 10 basis points per quarter between the first quarter of 2010 and the first quarter of 2017, according to the 2017 U.S. Medical Office and Health Care Report from CBRE. Overall, the vacancy rate averaged 8.0 percent in the first quarter of this year, a nearly 300 basis points decline from the first quarter of 2010. Also, in 22 of the 29 quarters before CBRE issued its report, the research firm found that absorption had exceeded the addition of new space.
That consistent decline in vacancy is characteristic of the MOB sector, and has insulated it from the volatility that can be so disruptive to other sectors. But that steadiness also has a flipside, which is flat rent growth. CBRE found that overall asking rents for medical properties it tracks have only moved between $22 and $23 per sq. ft.
MOB tenants tend to set down roots and remain in the same space for long periods of time, mainly to stay close to their patient bases and supporting services, according to CBRE. Also, given the amount of mergers and acquisitions among healthcare groups in recent years, smaller medical office spaces designed for individual and small practices have become obsolete. Larger medical associations require more space, according to Bodnar.

“There is rental growth being driven in newer facilities to accommodate the way healthcare is being delivered in today’s market,” he says.

Liquidity continues to flow in from newer investors, and cap rates are still falling. By the second quarter of 2017, cap rates for off-campus properties averaged 6.3 percent, barely distinguishable from the 6.1 percent cap rates on on-campus, or hospital, properties, according to data from Revista, a medical real estate research firm headquartered in Arnold, Md.

“A lot of people are looking to jump in on new opportunities. That is driving down cap rates,” says Hilda F. Martin, principal of Revista. “Investors want the deals that have not been announced.”

As motivated investors, particularly private equity firms, build the relationships that give them the inside track on attractive deals and step up efforts to make more acquisitions, they are moving into the sector with the backing of commercial banks. One lender in the sector, BMO Financial Group, is increasing its participation and doing so in a more organized way, according to Imran Javaid, managing director of BMO Harris Healthcare Real Estate Finance.

“Hospital systems realize that they cannot be at the hospitals and have the patients come to them,” says Javaid. “That is what’s driving the development of these buildings. They are going out to where people live and work.”

According to Revista, about 20.8 million sq. ft. of MOB space should be delivered to the market in 2017. The amount of completed projects has increased steadily, but incrementally, every year since 2014. Experts expect that to continue in the near term, and not just because the aging population will likely result in higher numbers of patients using the facilities in the years to come. Very little of any space in the sector is speculative, according to Javaid.

“We are not seeing speculative development,” Javaid says. “Absorption has outpaced new supply for a long time.”

Source: NREI
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An Atypical Strategy For Aging Medical Office Buildings

With the day-to-day stress of making a medical office building run, a very basic, crucial consideration might be slipping by, unnoticed: what to do with the aging building? Neglecting wear and tear could mean even a successful property will see its returns diminish. It might be time to consider the sale-leaseback writes Transwestern SVP of healthcare real estate Brent Barnes in this EXCLUSIVE commentary for GlobeSt.com.
The views expressed are the author’s own.
Hospital administrators are often vexed by the older medical office buildings (MOBs) they own, unsure how to address the properties’ increasingly outdated appearance, perhaps exacerbated by deferred maintenance. Were the structures in pristine condition, the owner would most likely have already monetized the assets through a partial or full sale-leaseback, a transaction type that grew popular in healthcare real estate over the past decade.
In a sale-leaseback, an outside landlord purchases the property and leases it back to the seller. This generates sale proceeds for the seller while the buyer gains a fully occupied building with a rental income stream guaranteed for the duration of the lease. MOB sale-leasebacks have averaged a 7.0 percent capitalization rate for the new landlord, or a 7.0 percent annual rate of return on the acquisition price.
Sale-leaseback buyers prefer buildings that can command market rents with little up-front investment beyond the acquisition price. Cosmetic flaws such as outdated lobbies, restrooms and corridors, a lack of modern technological infrastructure and similar drawbacks can impede a landlord’s ability to demand market rents. Correcting these problems would increase the owner’s cost and diminish overall returns.
This seems to limit the options for hospital systems with older, owned buildings requiring renovation, and further delay will compound the problem. Healthcare providers know that patients – especially those in the millennial generation – expect to receive treatment in attractive buildings with bright, welcoming interiors. At some point, failure to renovate will drive patients and tenants to competing providers that offer more modern facilities.

Let’s Make a Deal

The hospital owner in this position has a viable option to retrofit the building and monetize the asset through a sale-leaseback. Here’s how:

Plan upgrades.

Design a realistic renovation that will put the building on par with competing properties, able to attract tenants and charge market rent. Then prepare a detailed cost estimate and timeline for the work. A healthcare real estate advisor can assemble and direct a team to complete this process, working with an architect, building contractor and other experts.

Price to sell.

Rather than setting an asking price at the market’s current capitalization rate of approximately 7.0 percent, structure a transaction in which the buyer purchases at an 8 percent cap and require the buyer to invest that money into the needed capital improvements. For example, an owner might drop a building’s asking price from $30 million to $25 million. That $5 million margin will enable the buyer to make the required asset upgrades and still achieve a healthy overall return.

Structure and close the deal.

After marketing the offering as a package contingent on the renovation and capital improvement plan and selecting a buyer, be sure to include language in the transaction documents binding the new owner to complete the improvements according to schedule. For example, the buyer may commit to upgrade restrooms and corridors within 24 months and renovate the lobby the following year.
Including a detailed renovation plan in the offering and selecting a capable buyer to execute the improvements can turn a tired MOB into a modern, patient-centric care center that helps both the hospital system and the new landlord meet their objectives.
Source: GlobeSt.
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