2009 MOB CONFERENCE Executive Summary 

Gauging the Health of Healthcare Systems: A CFO Roundtable

Chick Boyle, Controller, Universal Health And CFO, Universal Health Realty Income Trust; Robert H. Lux, Vice President & CFO, Temple University Health System; James Foley, CFO, Shore Memorial Hospital; Moderator: Gordon Soderlund, Senior Vice President, Strategic Relationships, The DASCO Companies, LLC

• There are a number of threats to a hospital’s operating performance that CFOs anticipate over the next three years.  Uncompensated care and under-reimbursements are having a greater negative impact on operating margins than bad debt.  Increasing unemployment rates and COBRA premium costs are the primary drivers behind this trend.  Consumers are also postponing both elective and required medical procedures, thereby driving down patient revenues.  An increasing shortage of primary care physicians is placing heavy demands on hospital emergency departments across the country, resulting in more costly medical care and potentially higher incidences of medical errors.  And, of course, the unsettled direction of healthcare reform is creating an additional layer of uncertainty in long-range planning efforts.
• Hospital CFOs have a heightened interest in examining alternative sources of capital, caused by the volatility of the credit markets and the instability of lenders during this severe economic recession.   As CFOs seek debt capital in the market, the banking community is generally unwilling to better match the inherent business risk of the hospital borrower with the interest rates they are requiring on debt transactions.  CFOs are pursuing alternative strategies such as monetization of non-core real estate and technology assets and third party development solutions along with establishing business relationships with non-bank lenders.
• Hundreds of capital projects are being suspended by hospitals nationwide .  The depth and breadth of the recession, the direction of healthcare reform, the lack of capital and the weight of investment losses have all caused hospital boards and senior management to delay, defer or eliminate a broad range of capital projects ranging from new bed towers and technology projects to medical office buildings and the rollout of new healthcare delivery strategies.

CMS Reimbursements: What’s The Prognosis?

John Van Santen, Senior Vice President, Wellspring Partners; Leslie Norwalk, Strategic Counsel, Epstein Becker & Green, P.C., and former Acting Administrator for the Centers for Medicare and Medicaid Services; David G. Willie, Chief Financial Officer, Southwest Washington Medical Center; Moderator:
Danny Prosky, Executive Vice President, Healthcare Real Estate, Grubb & Ellis Realty Investors

• Expect significant changes to reimbursement as part of overall healthcare reform.  There is potential for reimbursements to decrease but that will likely be offset by fewer uninsured and therefore less uncollectible billing.
•  Government reimbursement plays a major role in hospital investment and services decisions which will impact real estate down the road.
• Reimbursement pressure has been at the forefront of healthcare delivery for almost 20 years and providers have learned to adapt. They will have to continue to do so as the pressure is likely to increase in the near term.

Second Opinions: The Health of the Capital Markets Redux

Al Pontius, Senior Vice President / Managing Director, National Office and Industrial Properties Group; Malcolm Sina, President, The DASCO Companies, LLC; Jim Moloney, Managing Director and Head of Real Estate, Cain Brothers & Company, LLC; Jeff Cooper, Executive Managing Director, Savills, LLC
Moderator: Jonathan Winer, Executive Vice President, Seavest, Inc

• There is good reason to believe that healthcare reform will increase the need for medical office buildings and related facilities. However, in the shorter term the uncertainty around reform and the general economy has slowed leasing and construction activity.
• Capitalization rates have increased 100 to 200 basis points. However, actual sales activity is low due to a disconnect between buyer and seller expectations.
• The medical office business has been resistant to the economic downturn. Hospitals and physicians are stable tenants and demand for services, while down to a minor degree, has remained stable throughout the downturn.
• Hospitals continue to be challenged raising capital and are now more open to monetization and working with developers on medical office projects. This is likely to continue into the future.

Vital Signs: Trends in Healthcare Roundtable

Andrew Majka, President and Chief Operating Officer, Kaufman, Hall & Associates; David Whelan, President, Stroudwater Associates; Warren L. Lyons, Director, Operations Support, Temple University Health System; Moderator: Gordon Soderlund, Senior Vice President of Strategic Relationships, The DASCO Companies, LLC

• As the economy takes its toll on hospital financial performance, mergers and consolidations in industry are trending away from weak hospitals being acquired by strong hospitals and toward the strong combining with the strong.  Investment grade hospitals are merging with other investment grade hospitals, providing scale to their growth strategies; leveraging fixed costs; and creating negotiating advantages over payers once healthcare reform is refined.
• Every hospital is addressing the issue of physician employment.  There is a growing trend to employing specialists, but not necessarily primary care physicians.  The benefits include a more secure income flow for physicians; improved delivery of seamless care between providers; more certain revenue projections; quicker acceptance by physicians of the use of an electronic medical record system; and better financial alignment between physicians and hospitals.  Bundled payments, which will likely become the standard reimbursement model to drive more efficient healthcare services, will force hospital and physician to align treatment decisions and pre-determine reimbursements among them.
• The current Administration is pressing for a greater influence of technology in healthcare, knowing that it can improve the coordination of care, patient safety and lengths of stay. Though electronic medical records can create a portable medical history for patients and drive efficiencies in healthcare delivery, the hardware and software costs are significant.  Additional costs are also inherent in the general lack of standardization; the significant and ongoing system upgrades, system support and maintenance.  With razor thin operating margins already threatened, hospitals must consider rationing capital which will surely slow the progress of adoption.

The Doctors Are In: New Physician Integration Models

Luke Peterson, Principal, Kurt Salmon & Associates; Andrew McGill, Vice President of Business Development, Memorial Healthcare System; Jeff Hatfield, Vice President, Development, The Graham Group; Moderator: Neil J. Carolan, Chief Physician Development Officer, Carondelet Health Network

• An unprecedented shift is occurring in the structure of hospital/physician relationships.   We’re moving rapidly from a competitive environment of physicians and hospitals to collaboration, out of both fear and increased opportunities.  This impacts the buildings and facilities utilized on all fronts: infrastructure, scalability and ownership model. Buildings must now be flexibly developed and structured in terms of ownership and management to accommodate for this.
• Collaboration comes in increasing specialty employment: what do we need to do to employ specialty positions, driven by the cardiovascular sector.  Once very independent and competing practices are finding themselves at the altar of the hospital.  Also, tighter alignment of the cooperative private practice model is needed.  Lines of anti-kickback and STARK can get complicated, but there’s increasing pressure to think about how hospitals work with physicians in a loyalty/alignment model. Physicians are looking for the quality and consistency of working with single hospital as opposed to spreading out across two to three hospitals. Cross-referrals are more important and require better information systems to do so in a single system. Hospitals, in turn, are providing more management services than before.
• Where previously developers usually serve three different clients when designing a hospital  (hospitals, physicians, and patients), hospital employed physician models allow them to serve a “mega-customer” of hospital and physicians and serve patients as the second group.  The advantage to this mega-customer is that developers only have to work with one group for leases, making the process more streamlined.  Occasionally, there are “disconnects” between the physicians and hospital administration, related to timing of occupancy, clinical needs, and costs associated with technology, TIs, and the like.

Reengineering the Hub and Spoke Model for Ambulatory Strategy

Bill Wilkison, Vice President, Ambulatory Care & Ancillary Services, Pinnacle Health System; Joann Magnatta, Senior Vice President of Facilities & Design, Main Line Health; Helen Wilmot,VP, Ambulatory Care, Stanford Hospital; Moderator: Mervyn Alphonso, Managing Director, NexCore Group

• Pinnacle Health Services sought two strategic objectives regarding services and their off-campus facilities: First to provide range of quality healthcare services through strategically placed facilities in their primary service area based on market demand. Second, the system wanted to allocate resources for growth and strengthen identified services lines within the market place.  Geographically expanding outpatient imaging as a service line was essential as it is a high profit-margin service area. 
• When Stanford Hospital sought to expand, its medical campus had never been previously split up and there was a lot of staff push-back. But now, after four months of the facility being open, the staff are more than happy.  Technology, video and phone conference calling and other technology helps bridge the cross-campus divide between doctors and administrators. Design highlights help patients understand where they are and that they are connected to the Stanford Hospital main campus.  Dress code and scripts also help the patient feel acclimatized and not cast off to an ancillary facility.
• Main Line Health, which is associated with the Jefferson University Hospital System, has developed and has further plans to develop off-campus medical facilities that are part of a multi-use site including: residential, retail, hotel, and outpatient facilities, as well as physician office space.  About 30% of the space is dedicated to outpatient services and the rest are physician offices. 

Clinics vs. Mobs: Changing Paradigms in Healthcare Delivery

Laca Wong Hammond, Vice President, Shattuck Hammond Partners; William C. Ward, System Vice President-Real Estate and Facilities, Ochsner Healthcare; Steven M. Altschuler, MD, President and CEO, Children’s Hospital – Philadelphia; David G. Willie, Chief Financial Officer, Southwest Washington Medical Center; Moderator: P. J. Camp, Managing Director, Shattuck Hammond Partners

• Executives from Children’s Hospital of Philadelphia, Ochsner Health System and Southwest Washington Medical Center highlighted each organization’s use of the clinic model and the differentiating characteristics of clinics as opposed to the traditional medical office outpatient facility.  The clinic facilities of these leading organizations ranged from 5,000 sf family practice facilities to 100,000+ sf multi-specialty, day surgery centers.
• These executives also shared how their organizations increasingly utilize clinics to drive hospital volume, and noted that outpatient treatment would exceed volume of inpatient care in several years’ time, stressing the importance of location and recruiting the right physicians for the community.
• Shattuck Hammond also provided examples of financing clinics and considerations by investors and lenders when underwriting this asset type.

Not Building New?…Strategies For Existing Outpatient Facilities

Peter Volas, Director of Real Estate, The Cleveland Clinic; Mike Doiel, Principal, HDR; Tommy W. Tift, President/CEO, HealthAmerica Realty Group; Moderator: Rick Ferraro, Wellspring Partners

• While financing constraints and increased development risk have resulted in construction being initiated on fewer new outpatient facilities, hospitals have been busy positioning for the market to come back with pre-construction activities, market analysis, and cost engineering.
• Strategies for existing space have focused on tenant retention and rehabbing of space. Maintaining agreements to condense this occupancy of existing tenants both to reduce their occupancy costs and create space for additional serve lines, loosens standards on tenant types, which allows complimentary services to be added.
• As competitive pressures continue, use of available capital is being optimized by expansion of existing facilities and increased leasing versus investing in new construction.  

Deal Diagnosis: Equity Perspective

Brian Mutchler, Portfolio Manager, Harrison Street Real Estate Capital, LLC; Doug Ray, President and Chief Operating Officer, Seavest, Inc.; Dave Boitano, Senior Vice President & Senior Investment Officer, Nationwide Health Properties, Inc.; PJ Camp, Managing Director, Shattuck Hammond Partners; Clint Hinds, Senior Vice President, Kennedy Associates Real Estate Counsel, LP; Moderator: Jeff Piehl, Director of Senior Housing/Healthcare Industry Group, Cushman & Wakefield

• Equity is available, but at a higher cost than in the last several years.
• The bottleneck in financing medical office buildings is happening from the lender/debt side.  Equity is ready to move forward given the tighter underwriting standards.
• There’s also a continuation of new Equity players entering the sector as medical office buildings, have strengthened their position as a core holding.

Deal Diagnosis: The Lenders’ Perspective

Eric Smith, Senior Vice President, Healthcare Banking, Regions Financial Corporation; Timothy J. Cobb, Senior Director - Capital Markets, Healthcare Real Estate, Heavenrich and Company, Inc.
Jack Dudick, Senior Vice President, Lillibridge; Moderator: Brent Tharp, Senior Vice President, GE Healthcare Financial Services

• Credit markets are still locked up.  CMBS is virtually nonexistent - it may come back, but it will be in a completely different form from the past.  Very few lenders are actually making loans right now. A borrower's best lender right now is their existing lender. Panelists advised talking to current lenders about extending credit well in advance of current loan maturities. 
• The bid/ask gap is preventing sales transactions from occurring, except in distressed situations.  Refinancing is more common than sales right now. 
• Medical office continues to be a favorable transaction type, though the overall lack of capital in the market is impacting medical office as well. Lenders and investors prefer it over other property types due to healthcare sector dynamics, and stability of cash flows.  In the same vein, lease-up and value-add deals will get very little traction right now, because lenders only want stabilized transactions. 
• Construction loans are hard to come by, and construction lenders are requiring a level of pre-leasing that will cover all the debt, including the take-out financing, before the first construction dollar is funded.

Market Opportunities? Getting Healthy Returns for Distressed Assets

Eric Fischer, Principal, Trammell Crow Company; John Mark Ramsey, Ceo, Servant Healthcare Investments; Al Pontius, Senior Vice President/Managing Director, National Offi ce and Industrial Properties Group, Marcus & Millichap; Moderator: Jim Kornick, Managing Director of Investment Services, NorthMarq Capital Investment Services

• So far, there have been few distressed assets that have been available to the market, but for a trickle in hardest hit markets such as Phoenix.
• Al Pontius of Marcus & Millichap reported that medical office operating performance is beginning to decline with absorption slowing, vacancies climbing and rental rates flattening. Vacancy rates nationally hit 11.6% at the end of the second quarter. However, this is only 100-bp higher than a year earlier. General office, by contrast, was at 15.2%, a 240-bp increase over the same period.
• Panelists noted that some spec medical office buildings  should not have been built and there are assets that are overleveraged. These assets will become REO or will be sold under duress. However, the investors who are best suited to take advantage of the opportunities this distress will create are likely to be local entrepreneurial investors, not the specialized medical office developers and investors who were in attendance at the conference.
• Some of the best opportunities may come from “stressed owners”, including healthcare systems which are compelled to sell strong assets to generate cash. This may present buying opportunities.

Monetization Strategies for Healthcare Systems

Nicholas Bonrepos, Vice President of Real Estate Development, Tenet Healthcare Corporation; John Mcguire, Executive Vice President – Corporate Finance, St. Anthony’s Medical Center; Mary Beth Kuzmanovich, Vice President, Facilities Management Group, Carolinas HealthCare System; Moderator: Scott Evans, Managing Director, Cain Brothers & Company, LLC

• Panelists advised that hospitals planning to monetize their assets should identify, up front,  their decision makers. Carolinas Healthcare System created an executive team anchored by their Chief Financial Officer and Chief Operating Officer, and included representatives from legal and representatives from real estate. This strategy improves the internal decision-making process, to allow the parties to come to a resolution more efficiently. The buyer market isn’t going to be patient for very long.
• It is extremely helpful to get a third party, outside advisor involved in the sales process.  This person brings their resources, as well as a level of credibility and neutrality to the table. And they can help to keep the process on track.
• The documents included in the RFP are critical to making the actual transaction more streamlined. Work very carefully on the front end to decide what documents should be included.  For example, the ground lease, the memorandum of the ground lease, and the space lease in the RFP can be provided up front, and each bidder can be required  to identify, in their proposal, where they would have objections. Having this information up front benefits during the legal process. The hospital team can look back at those documents and can choose not to negotiate something the bidder did not identify on the front end.

Getting Healthy NOI by Controlling Operating Expenses

John Poulos, Managing Director, CB Richard Ellis Healthcare Services Group and Claude Hooton, President, PMB Real Estate Services

• Target the big cost categories, (utilities, repairs/maintenance, janitorial) and then utilize relevant strategies to address opportunities.
• Use a systematic approach to reducing the specific costs in each area: benchmark costs; highlight variances +/- 25%; analyze, summarize and improve; recognize performance as part of the management team’s compensation; and use technology to achieve breakthroughs.
• Put emphasis on maintaining the relationships with your physician tenants as costs increase. Don’t over communicate and realize that reducing costs is a partnership.
• Bring in your senior property management team sooner rather than later to meet with tenants if they are unhappy with expense increases.

Converting Leases: From Modified Gross to NNN

Michael Zerman, Partner, Zuber and Taillieu, LLP; Chris Rooney, Vice President of Asset Management, Grubb & Ellis Realty Investors; Jim Croy, Vice President, HCP, Inc.; and Shelley Strong, Vice President of Asset Management, The DASCO Companies, LLC

• Landlord objectives, such as protection against NOI erosion, and tenant objectives, such as controlling operating costs without sacrificing maintenance standards, can be brought into alignment through a building-wide net lease program.
• Advantages include lower broker commissions (due to lower base rent), shared participation in management decisions, and tenant’s ability to show lower fixed-cost rental obligations on its balance sheet.
• Landlords can maintain appropriate controls over building systems, utilities and janitorial service through careful lease drafting.
• Additional advantages of net leases include ease of accounting and administration, leaving less room for unintentional violations of STARK and Anti-Kickback rules.

Physician Stimulus: What to Do When Doctors Need Help

Drew Cressman, Asset Manager, HCP, Inc.; Scott Kuklish, Executive Vice President, PM Realty Group; Walter Neilsen, Partner, Waller Lansden Dortch & Davis, LLP; Michael O. Browning Jr, VP Research & Development, Montecito Research & Analytics

• When physicians request assistance through a lease restructure, building ownership/management should be sure to ask a lot of questions in order to understand and confirm the present situation as well as the future prospects for the practice.
• Keep in mind that nothing is off the table – the tenant has opened the door to restructure any lease terms including rent, expenses, deposits, guaranties, terms, improvements or the suite itself.
• Remember that any final agreement should make business sense for both parties involved.

Better Bedside Manner: Improving Customer Service for Physician Tenants

Mark Johnson, Senior Vice President, The DASCO Companies, LLC and Steven E. Clabough, Vice President, Lillibridge

• Tenant satisfaction studies have demonstrated that property management has a greater impact on tenant satisfaction than property features.
• To build loyalty with tenants, property managers should communicate proactively with tenants. One way to do this is to stop by tenants suites on a fairly regular basis to see how things are going. Surveys indicate that proactive communication with tenants leads to lease renewal 75% of the time. In the absence of frequent communication, renewal rates drop to 50%.
• Tenant complaints are actually a good thing. It’s an opportunity to satisfy an unsatisfied customer by being quick to respond, listening attentively and working proactively to address the problem or explaining why the problem cannot be addressed. If you ignore complaints or are constantly slow to respond, then your tenants stop complaining, which isn’t a good thing, because it means they’ve given up.