Medical Office Landscape Shifts With Health Care M&As

In its most recent national medical office report, Marcus & Millichap revealed that there’s an increased demand in off-campus medical office and a rise in mergers and acquisitions is changing the landscape of healthcare systems and care delivery. Medical office property sales velocity across the entire U.S. increased 5 percent over the past year.

A key point of the report forecasts that medical office properties will sustain a positive outlook in 2019 as strong employment and aging demographics align with favorable sector trends that will boost performance.

“Demographic trends and mergers and acquisitions are accelerating demand for medical office as firms desire more modern spaces and baby boomers retire at a rate of roughly 10,000 per day,” Al Pontius, Marcus & Millichap’s senior vice president and national director of specialty divisions, told Commercial Property Executive. “Cheap financing via low-interest rates makes cutting costs a quick way to grow profits and revenues,” he added.

Acquisitions and mergers are on the rise, Pontius explained, due to regulation and cost control among insurers and providers as well as innovation at the biotech, biopharma, medical device and pharmaceutical firms.

Naturally, baby boomers are a key driver of overall demand and, as this segment continues to increase year after year, Pontius noted it will create the need for more medical office space and the services they provide. Another factor in the need for space is an increase in enrollment in medical school over the past 10 years, which means the requirement for services will grow and the need for medical office space will grow nationwide.

DEVELOPMENT STATUS

Construction activity for 2019 has experienced somewhat of a broad slowdown, with concentrations in sunny, retirement-oriented states such as Texas, Florida, Arizona and California. “Building facilities remain extremely modern, with locations on and off campus as service areas expand to more suburban settings,” Pontius said. “While development had been increasing over the past few years, the completions remain well below the peak of the last cycle and we will see deliveries that is much lower in the year ahead.”

The report revealed that vacancy remains broadly higher in markets seeing the most construction as developer excitement has slightly exceeded the considerable demand that currently exists, particularly in the Southwest U.S. Marcus & Millichap also highlighted that institutional investors and REITs are focused on high-quality medical office buildings that are fully occupied near major hospitals or in medical corridors.

“Other locations where development is more expensive—NorCal, NYC—or the markets are less ‘sexy,’ such as Midwestern cities, remain much tighter than the overall market. Demand is highest in the Southwest and Southern United States, where retirees are rapidly moving to,” according to Pontius.

There’s been a lot going on around the healthcare industry. Earlier this month, Healthcare Realty Trust expanded its portfolio with the acquisition of two medical office properties totaling 158,338 square feet in the Washington, D.C. suburb of Fairfax, Va., for $46 million. Also this month, Catalyst Capital acquired a medical office building that serves as a U.S. Department of Veterans Affairs outpatient clinic in Lowell, Mass., for $11.4 million.

 

Source: CPE

/by

Memorial Healthcare System Buys Property For $15 Million

The Memorial Healthcare System acquired the site of its new children’s health facility in Wellington for $14.75 million.

Wellington Office Parc LLC, managed by Leon Ojalvo of Liberty Base and Alan Benenson of MAS Development, sold the 30,000-square-foot building at 3377 N. State Road 7 to the hospital system, which is part of the South Broward Hospital District. The Joe DiMaggio Children’s Health facility was completed on the 3.5-acre site in February.

The center includes advanced imaging equipment, outpatient surgery rooms, and rehabilitation services, including sports injury rehabilitation. It focuses on six pediatric specialties: endocrinology, pulmonology, otolaryngology, orthopedics, general surgery, and neurology.

This facility is part of Memorial Healthcare System’s strategy of bringing advanced care, including ambulatory surgery, to patients who don’t live near its hospitals.

 

Source: SFBJ

/by

What’s Ahead For WellCare Workforce, Real Estate After $17 Billion Acquisition By Centene

At least two of WellCare Health Plans’ 12,000 employees know they will have jobs after the Tampa-based managed healthcare provider is acquired by Centene Corp.

Ken Burdick, WellCare’s CEO, and Drew Asher, executive vice president and chief financial officer, are expected to join the senior management team at Centene after the deal closes, likely in the first half of 2020.

Neither Burdick nor Asher has yet signed a contract with Centene, but that process is underway, said Michael Neidorff, Centene’s chairman and CEO, speaking on a conference call with analysts and investors.

“The additions of Ken and Drew are very positive,” Neidorff said. “We have talked with them about specific positions that will give them some increased scale and growth over what they’ve been doing. It will be very beneficial to Centene and the combined companies, but in fairness to all the employees in both companies, I’m not going to say anything more than that because it will just create an issue that over time will become very clear and positive for everyone.”

Centene (NYSE: CNC), a St. Louis-based Fortune 100 health insurer, said early Wednesday it would pay $17.3 billion in cash and stock to buy WellCare (NYSE: WCG), one of the largest publicly held companies headquartered in the Tampa Bay area. The deal is worth $305.39 a share for WellCare stockholders, a 32 percent premium over Tuesday’s closing price of $231.27 a share.

The combined company will be a leader in government-sponsored healthcare programs, including Medicare, Medicaid and the health insurance marketplace. It will have about 22 million members across all 50 states, with estimated 2019 combined revenue of about $97 billion and earnings before taxes, interest, depreciation and amortization of about $5 billion. It will be headquartered in St. Louis, with “substantial” operations in Florida, Centene said.

By the second year, the deal is expected to produce about $500 million in annual net cost synergies, a term often used by businesses to describe cost-cutting measures such as combining similar operations or systems, or job layoffs.

WellCare, with $20.4 billion in 2018 revenue, is one of the largest employers in the Tampa Bay area, with about 4,500 local employees. In February, the company said it expected to hire more than 1,000 new workers across Florida.

“I welcome the fact that WellCare has the strength in its employees that it does,” Neidorff said. “I have told everybody that will ever listen that I am not concerned about having opportunities for good people. I’m concerned about having enough good people for the opportunities. When you have a company that’s growing at the rate we are, we want to ensure that people are growing with us and we have those kinds of opportunities.”

WellCare has a major real estate footprint locally. The company has a 380,000-square-foot campus on 71 acres at 8725 Henderson Road, made up of five buildings, a cafeteria, fitness amenities, and covered parking and walkways, connected by scenic wildlife preserves. It also has three satellite offices in Tampa. One year ago, it renewed the lease for its local properties through 2030.

“Upon close, Centene is committed to maintaining a substantial presence in the Tampa Bay area. WellCare will operate in a business as usual capacity,” a spokesperson for WellCare told the St. Pete Catalyst.

A critical part of the decision to agree to the deal was similar corporate cultures, Burdick said on the conference call.

“Both organizations are oriented toward a strong local presence. Both organizations think about a holistic approach to members with integrated solutions, and great respect and appreciation for everybody in the organization at all levels. So in those three areas there was great alignment of the culture, which makes us excited about what we can do as a combination,” Burdick said.

There’s been a lot of speculation about succession at Centene, and analysts wondered if Burdick, who is 60 years old, would be a candidate to succeed Neidorff, 76. Neidorff, who recently extended his employment contract by five years, said the Centene board has been developing several potential successors. “I expect when I’m ready to hang up the spurs, they’ll have a choice of two or three people,” Neidorff said.

The deal was announced amid debates over health care policy at the national level, ranging from some Democrats’ calls for Medicare for all to a continued push by the Trump administration to repeal the Affordable Care Act.

On the conference call, Neidorff said he expected the judicial system to eventually uphold the ACA, and that Medicare for all, with a price tag ranging from $28 trillion to $38 trillion over 10 years, is unaffordable.

“This is a great transaction. It puts two great companies together in a very meaningful way serving a lot of audiences that you can never do enough to serve,” Neidorff said. “This really will prove to be a very successful and serious transaction.”

 

Source:  Catalyst

/by

New Baptist Health Medical Center Coming To Plantation

 

Baptist Health South Florida has broken ground on a new wellness and medical center in Plantation that officials say will create 230 new jobs.

The 100,000-square-foot center, at 1228 S. Pine Island Road, north of Interstate 595, will offer primary care, diagnostic imaging, urgent care, multi-specialty surgery, medical oncology, physical therapy and a spine care clinic.

Broward County property records show that Baptist Health paid $4.2 million for the 258,251-square-foot property in October 2017.

“The new facility is part of Baptist Health’s mission to bring high-quality compassionate care to our South Florida community,” company spokeswoman Georgi M. Pipkin said in an emailed statement.

Pipkin declined to reveal a budget for the project, saying the information is “proprietary.” Completion is estimated in November 2020, she said.

Baptist Health South Florida is a not-for-profit, faith-based network with hospitals and medical centers throughout South Florida, including in Miami-Dade, Monroe, Palm Beach and Broward counties.

The company runs urgent care centers in Weston and Sunrise, medical plazas in Davie and Pembroke Pines, an orthopedics and sports clinic in Davie and a sleep center in Pembroke Pines, according to its website.

 

Source: SunSentinel

/by

The Outlook For Outpatient Could Mean Outrageous Returns

 

The hospital’s monopoly on healthcare is coming to an end. These large institutions aren’t going anywhere, of course, but every year, more and more people receive treatment in medical office buildings (MOBs), retail centers and other off-campus facilities. And real estate investors have taken notice.

The drivers for this shift to off-campus healthcare are numerous. Mergers among health providers have changed how physicians interact with patients, as have emerging technologies that make it easier and cheaper to decentralize medicine.

But the biggest stimulus is access. For all its complexity, healthcare is still a consumer-facing business, and the consumers want convenience. This is why medical providers seek to place offices in neighborhoods and suburban areas, closer to where people live and where they work.

“What our hospital CEOs are telling us is that there is a general move away from inpatient toward outpatient care, not just for financial reasons, but also for the convenience of the patient,” said John Abuja, senior director at Marcus & Millichap.

New, single-tenant MOBs remain attractive to both private and institutional buyers, according to a recent Marcus & Millichap report. If a property has the backing of major medical providers or hospital systems, leases trade at a premium, with first-year returns in the high-5 to low-6 percent range on average.

Developing a medical office asset off-campus can lead to higher rents as the high-quality submarkets where service providers want to set up shop have higher underlying base rents in general. Also, there is a trend toward more opulent build-outs that the end users seem to desire.

“The rise in rent can in part be attributed to the additional cost and sophistication and demand now for higher levels of service and patient comfort,” said Abuja. “Some of these facilities have wider hallways, larger exam rooms and really they have Class A finishes. Ironically, a lot of that is being driven now by the patient, more so than even the physician.”

Though MOBs are attractive to investors and are therefore under development at a rapid pace, there are opportunities in retail locations as well. The types of medical uses that a community shopping center or even a power center can support create some limitations, but there are prospects for suitable location/use matchups.

“Retail locations are going to find it very difficult to attract certain healthcare tenants because of the need for backup generators or surgical suite amenities,” Abuja said. “That said, there are a lot of non-invasive, MRI imaging and other tenants that are a great fit for a storefront location.”

However, locating a medical use in a retail environment will put the property into competition with other asset classes. The premier locations where they want to be are also where everyone else wants to be—a situation that can lead to higher development costs.

“If a developer is building into a retail center where they are in competition with other retail rents, then the cost of being there is higher because they’re competing with other retail tenants for the same location,” Abuja said. “Some of the retail rents, especially restaurants, far exceed what you typically pay on an office space.”

According to Abuja, while a $65 per square foot buildout cost years ago was relatively standard, now it could be upwards of $150 per square foot to redevelop a retail location for a medical office use. However, if and when the fit is right, getting closer to the end user can justify these additional costs.

Erected in the mid-1970s and with a gross leasable area of more than 164,000 square feet, The Oak Mill Mall in Niles, Illinois was always a hybrid. It’s anchored by a Jewel-Osco grocery store and has the look of a large strip mall from the outside, though it actually has everything that a ‘70s-era mall would have: two levels, storefronts within an enclosed space and even an indoor water fountain.

As retail tenants began to move out, however, the property rebranded as “Oak Mill Plaza” and began targeting healthcare providers. Now, approximately half of the retail tenants are medical purveyors of one stripe or another, including pediatrics, oncology, dentistry and a travel clinic.

This location is a deviation from the norm, however. Most retail centers max out at one or two healthcare tenants, typically in an outlot location. And for the financial backers, the real money is in MOBs.

There are strong consumer forces pulling medical office properties away from institutional campuses and out to Main Street. However, there are strong forces keeping MOBs in orbit around a hospital as well.

“There is comfort to investors knowing that they are on or near a hospital campus where supply characteristics are insured. If I had to make a choice between an on-campus or an off-campus building, I would still rather be on campus or tangent to campus just because the doctors are already there,” Abuja said. “It’s not ‘build it and they will come.’ They’re already there. That’s why most investors, if they could choose, would still rather be on campus or near campus with an MOB.”

According to the Marcus & Millichap report, many physicians are bringing buildings to market in order to cash in on increased equity; properties tenanted by a private physician typically trade 100 basis points above those leased by major medical groups.

Sale-leaseback opportunities with private physician groups often require personal guarantees of leases, so investors should be mindful of lease terms as many buyers prefer to have major hospital system or healthcare group backing as they lead to longer lease guarantees.

As investors seek stabilized, multi-tenant medical office properties in primary and secondary markets, the yield spreads between on-campus and off-campus assets have compressed. In today’s market, private investors and institutions alike expect similar returns regardless of an assets’ proximity to an established hospital.

 

Source:  RE Journals

/by