TENNESSEE ORTHOPAEDIC SOCIETYChallenges & Opportunities with Medical Real Estate

S e p t e m b e r 2 7, 2 0 1 4

DISCUSSION AGENDA

• RTG INTRODUCTION

• TODAY’S HEALTHCARE INDUSTRY

• TRADITIONAL REAL ESTATE OWNERSHIP MODELS

• DISCUSSION OF REAL ESTATE INVESTMENT TRUSTS (REIT’S)

• HEALTHCARE REAL ESTATE MARKETPLACE

• CASE STUDIES

• TAKEAWAYS

• Healthcare Real Estate Advisory Firm that combines Industry Knowledge and Expertise

• Affiliate Company of Pershing Yoakley & Associates

• Independent and Objective Advice

• ADVISORY

• OPERATIONS

• CAPITAL PROJECTS

• Serving Health Systems and Physicians

RTG INTRODUCTION

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Disclaimers: Please be careful associating general market conditions and assumptions with your individual real estate assets. Generally speaking, real estate is still very much a “localized” asset class.

Consult your accountant, attorney or real estate advisor for information on local market conditions and advice on real estate ownership decisions.

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TODAY’S HEALTHCARE INDUSTRY

• Payment Reform is Transitioning to Value-Based Care System

• Continued Shift from Inpatient to Outpatient Setting

• Industry Consolidation / Competitive Pressures

• M&A Activity

• Hospital / Physician Alignment

• Increasing Capital Demands for Providers

• EMR / Technology

• Medical Equipment

• Physician Recruitment & Retention

• Increased Regulatory Scrutiny

Source: The Advisory Board Company

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AUDIENCE SURVEY

Regarding your Practice’s Real Estate:

• More than five (5) practitioners in your practice?

• Own v. Lease?

• Multiple locations?

• ASC investment (real estate)?

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TRADITIONAL REAL ESTATE OWNERSHIP MODELS

Physician tenants and/or a third-party owner create a new company or LLC to jointly own a medical office building, ambulatory surgery center, etc.

Physician tenants own the suites they occupy in a medical office building; condominium association owns common elements.

Direct Ownership

Physician tenants wholly own a medical office building. Generally best suited for a single-tenant building.

Physicians lease from a third-party owner, such as:• Hospital

• Developer

• Private Investor

• REIT

Condominium Ownership

Joint Venture or Partnership OwnershipThird-Party Owner

Physician Tenants

Third-Party Ownership

Physicians

Owner-Occupant Single Tenant

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Third-PartyPhysicians

Physician-Owned Condominium

MOB and Common Elements

REAL ESTATE INVESTMENT TRUSTS

What is a REIT?

• Institutional Investor - Industry has grown to sixteen (16) public and non-traded REITs

• Healthcare focus - many REITs invest in medical office buildings and other healthcare real estate assets

• Generally two categories:

• Equity (90%)

• Debt

• Three corporate structures:

• Publicly traded

• Publicly registered, not traded

• Private

• Generally seek long-term relationships

• Extremely competitive with acquisition capital

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HEALTHCARE REAL ESTATE MARKETPLACE

$-

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Billions $ Volume

Year

# Transactions 87 122 245 289 462 693 654 547 249 380 396 722 797

Source: Real Capital Analytics

Historical MOB Sales Volume

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• Over 700 Transactions

• $6.75 Billion in Sales Volume

• Average Cap Rate of 7.50%

Source: Pulse on the Market: Healthcare Transaction Report, Stan Johnson Company, May 2014.

Acute (18)

ASC (27)

Dialysis (34)

MOB Single Tenant (173)

MOB Multi Tenant (430)

Specialty Hospital (22)

6%10% 3%

2%

22%57%

HEALTHCARE REAL ESTATE MARKETPLACE

Transactions by Asset Type (18 Month Period: December 2012 - May 2014)

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Pricing Indicators

4.0%4.5%5.0%5.5%6.0%6.5%7.0%7.5%8.0%8.5%9.0%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Avg. Cap Rate

$-

$50

$100

$150

$200

$250

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Avg. PSF

HEALTHCARE REAL ESTATE MARKETPLACE

Source: Real Capital Analytics

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Today’s Financing Environment

HEALTHCARE REAL ESTATE MARKETPLACE

Multi-Tenant Investment Property

Refinance Existing

Single-Tenant Owner-Occupied

New Construction

Single-Tenant Owner-Occupied

Refinance Existing

Interest Rate 3.95% 4.0% 4.20%

Initial Term 5 Year 7 Year 10 Year

Amortization Period 20 Year 25 Year 25 Year

Loan-to-Value 75% 85% 85%

Guarantees (Recourse) Typically Required Construction Only Negotiable

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*All information based on recent RTG project experience. Each project is unique; a number of variables will impact project-specific financing terms.

Typical Investment Criteria

• CREDIT - Risk Mitigation

• Stability - Established Tenant

• Lease Structure - Term & Rate

• Building Location and Quality

HEALTHCARE REAL ESTATE MARKETPLACE

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CASE STUDY: ARLINGTON ORTHOPEDIC ASSOCIATES

• 21 Physician Practice

• 2 MOB’s (49,660 SF)

• 100% Occupied, Single-Tenant

• 12 Year Lease

Source: Healthcare Real Estate Insights

Primary Location: 37,100 SF Satellite Location: 12,560 SF

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CASE STUDY: HARBIN CLINIC

• 145 Physician Multi-Specialty Practice

• 7 MOB’s (330,000 SF)

• 100% Occupied, Single-Tenant

• 15 Year Lease

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TAKEAWAYSKey Considerations when Evaluating Real Estate Ownership Alternatives

Know Your “Story”

• Current real estate scenario(s) - Is there a precedent?

• Does practice ownership mean real estate ownership?

• Timing considerations - Physician Demographic / Career Horizon

Understand Strategies and Objectives for your Medical Practice

• If you have multiple locations, which are Core / Strategic location(s)?

• Are there potential Consolidation or Expansion Opportunities?

• Flexibility and Control Considerations

Balancing the Economic Risks and Rewards

• Capital Investment (Initial and On-going)

• Alternate Investments / Opportunity Cost

• Potential Income Stream

• Operational Cost Containment

• Ownership Costs vs. Rent Expenses

• Tax Strategies

• Future Liquidity / Illiquidity

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C O R P O R AT E O F F I C E - K N O X V I L L EO n e C h e r o k e e M i l l s , 2 2 2 0 S u t h e r l a n d A v e n u e

K n o x v i l l e , Te n n e s s e e 3 7 9 1 9 | 8 6 5 . 5 2 1 . 0 6 3 0

AT L A N TA1 1 0 0 J o h n s o n F e r r y R o a d , B u i l d i n g 1 - S u i t e 4 0 0

A t l a n t a , G e o r g i a 3 0 3 4 2 | 4 0 4 . 4 7 7. 3 0 0 9

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