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2010 MOB CONFERENCE Executive Summary
BOMA International’s 2010 Medical Office Buildings and Healthcare Facilities
Presented by Ventas Healthcare Properties
Executive Summary Recordings of each session from the conference are available here.
General Sessions
Provider Strategies Track
Capital Markets Track
Leasing & Management Track
General Sessions
Stress Tests: A CFO Roundtable
- The existing shift of healthcare delivery from an inpatient to an outpatient environment will likely be accelerated by the recent health insurance reform legislation. Insurance coverage will be expanded to include over 32 million Americans. Medicare reimbursements will be cut dramatically over the next 10 years.
- Healthcare providers need to find more cost effective venues to deliver care and earn a margin. These events will require more outpatient facilities, but estimates of 60 to 70 million more square feet are grossly exaggerated.
- Hospitals continue to face a number of significant uncertainties, forcing them to delay a broad range of capital projects. A continuing high unemployment rate is increasing their bad debt and charity care. A sluggish economy that may be trending toward a double-dip recession is forcing consumers to defer elective procedures. States struggle with increasing budget deficits, thereby delaying payment of Medicaid reimbursements.
- A hospital’s tax exempt status is being threatened as cash strapped local, county and state governments seek alternative sources of tax revenue. Healthcare insurance legislation, passed in March, adds complexities and uncertainties to the market as rules need to be written and implemented. Meanwhile, the threat of political opposition, revisions and potential repeal may erupt, depending on the results of the mid-term elections in November.
Speakers: Jim Doyle, CFO, Elmhurst Memorial Healthcare; Chick Boyle, Controller, Universal Health and CFO, Universal Health Realty Income Trust; Moderator: Gordon Soderlund, Senior Vice President, Strategic Relationships, The DASCO Companies, LLC
Capital Markets 2010: A Building Year
- Throughout 2009, the capital markets were on life support, but by year end, the prognosis for transactions and restored health looked better. Bankers and analysts shared their assessments of 2009 and offered their perspectives on what lies ahead for market activity among buyers, investors and lenders. They shared insights into where property pricing and transaction activity may be headed and whether public or private firms may be most likely to thrive in the current market.
- What we currently know about MOB/healthcare facility real estate for 2010 is that it’s been operating fundamentally better than general office and healthcare reform has been seen as positive for hospitals/physicians increasing investor interest. Additionally, the REIT cost of capital below MOB cap rates has created room for cap rates to fall and public market capital costs are lower than the private market.
- Healthcare real estate is being valued higher than healthcare operating companies and more healthcare real estate is coming to the public markets (a lot of skilled nursing real estate, more hospital real estate, and probably more MOBs).
- What we don’t know is how Healthcare Reform will change delivery systems or if hospital systems will step up privatization efforts to deal with reform /Capital Market changes. Additionally, we don’t know whether integrated or joint venture approaches by HCREITs on MOBs will prevail or when capital costs will rise.
- The panel’s view of the future is that visibility of healthcare real estate in public markets will continue to grow and HCREITs will be major investors in 2010. MOB cap rates are coming down, so it’s a good time to take advantage of public/private arbitrage. Outpatient, skilled nursing and hospital assets will also get increased attention.
Speakers: Jerry Doctrow, Managing Director, Stifel, Nicolaus & Company, Inc.; Jeffrey H. Cooper, Executive Managing Director, Savills LLC; Jim Moloney, Managing Director & Head of Real Estate, Cain Brothers & Company, LLC; Alan Pontius, Managing Director, Healthcare Real Estate Group, Marcus & Millichap; P.J. Camp, Managing Director, Shattuck Hammond Partners; Moderator: Jonathan Winer, Executive Vice President, Seavest Inc.
Assessing Healthcare Outcomes: A Roundtable on Industry Trends
- Among the top 10 healthcare trends are these:
- Industry-wide, intense efforts to reduce healthcare costs
- Major structural adjustments from healthcare reform legislation
- Physicians and providers scrambling to adopt healthcare IT
- Greater emphasis on Medicare fraud and abuse recovery
- Technology and telecom sectors becoming leading players in healthcare
- There are presently about 6,000 ambulatory surgery centers (ASC) nationally. Many of them are smaller, independently owned and operated facilities. Because reform legislation has significantly changed the reimbursement game, expect up to 2,000 of these ASCs to become financially threatened, creating higher vacancies and delinquencies for landlords. As for physician-owned hospitals, the death knell occurred when the legislation was signed. De novo hospitals, as well as expansions of existing hospitals, will be outlawed effective in 2011. Experts anticipate consolidations with larger hospital operators or conversions to not-for-profit status as ways to survive.
- Strategies to lower costs are forcing dynamic changes in the hospital-physician relationship. Physicians are increasingly opting out of being entrepreneurs in favor of employment due to market uncertainties and a continuing steady decrease in Medicare and Medicaid reimbursements. Bundled payments and physician integration models are being piloted to drive down costs. These trends toward more integration and tighter centralization of services will affect the future occupancy and growth of outpatient facilities
Speakers: Scott Becker, Partner, McGuire Woods; Steven Berger, President, Healthcare Insights; Randy Fuller, Director of Thought Leadership, Healthcare Financial Management Association; Monica Bowman, Managing Director of Physician Services, Vanguard Health Systems; Moderator: Gordon Soderlund, Senior Vice President, Strategic Relationships, The DASCO Companies, LLC
Healthcare Reform: What's the Prognosis?
- This distinguished panel of experts discussed effects of the proposed healthcare reform legislation, a topic that has dominated the headlines. They brought some clarity to reimbursement issues and attempted to lay out what the future may hold for both providers as well as owners of healthcare real estate.
- The major components of reform legislation include insurance reforms, mandates, subsidies, exchanges, Medicaid, financing, and delivery system reforms. Reform will drive growth in individual and Medicaid markets and have significant impact on individual claims costs.
- Access for the Uninsured consists of five categories: young invincibles, poor, uninsurable, qualifies for assistance, and undocumented aliens. Medicaid requirements will change by including childless adults, increasing income thresholds, providing subsidies for non-Medicaid eligible, and creating state insurance exchanges.
- The new reform penalizes individuals who do not sign up for coverage and imposes a penalty on individuals who remain uninsured even though they can afford health insurance—if coverage costs less than 8 percent of their income.
- One major reason for the new healthcare reform legislation is cost – 23% of all Medicare Beneficiaries have 5 or more chronic conditions, see 12 or more physicians a year, take 50 or more prescriptions a year and cost 68% of the Medicare budget.
Speakers: Robert Kolodgy, Senior Vice President and Chief Financial Officer, Blue Cross and Blue Shield Association; Leslie Norwalk, Strategic Counsel, Epstein Becker & Green, P.C., and former Acting Administrator for the Centers for Medicare & Medicaid Services; Robert Christie, Vice President of Governmental and Legislative Relations, Northwestern Memorial Healthcare; Moderator: Debra Cafaro, Chairman, CEO, & President, Ventas, Inc.
Provider Strategies Track
Structuring Patient-Centered Care In MOBs
- Studies have documented that patient-centered inpatient care really does impact the bottom line. Shorter average lengths of stay, lower cost per case, and higher patient satisfaction scores, which ultimately capture those quality measurements, are the outcome.
- Planetree’s model of care consists of taking a very holistic approach to medicine, looking at the whole mind, body, and spirit experience, and addressing the external environment, and how that plays a part in the healing process. Planetree’s healing environments are patient-centered, staff supportive, family friendly, stress reducing, and safe.
- Alegent Health worked in conjunction with Planetree to design Lakeside Hospital to maximize the patient experience. The building was designed around patient convenience. Amenities include patient friendly way finding (large and visible signs, color coded for “emergency” guidance) and valet parking, which is always available and free of charge to all patients and their visitors.
- Aurora Health Care tried to maximize the patient experience in their MOBs by designing around patient convenience. With their new designs they aimed to relieve stress, provide refuge, reduce background noise, offer some positive distractions, convey caring, communicate respect, symbolize competence, minimize the impression of crowding, facilitate way-finding, and accommodate families, in order to provide the best care possible.
Speakers: Cindy Alloway, Chief Operating Officer, Alegent Health, Lakeside Hospital; Kim Nelson Montague, AIA, NCARB, Director of Design Consultation Services, Planetree; Rebecca Flink, Vice President, Facilities Development, Aurora Health Care; Moderator: Will Roberson, Vice President, Health Care REIT, Inc.
Emerging Facilities Solutions to Meet Evolving Patient Needs
- Carolinas Health Care has pioneered two new facility strategies to meet patient care needs and market demand: a mobile hospital that can be deployed into any community and a new free-standing emergency department, located 10 miles from the 120-licensed bed, acute care hospital.
- Their CMC Steele Creek: Healthcare Pavilion provides hospital-level emergency care with a full service, 24-hour emergency department, but the costs are significantly less than cost of working on a hospital campus. Patients appreciate the convenience of a nearby free-standing emergency department. The components of the facility include an attached MOB, physician practices, advanced diagnostic imaging, laboratory services, retail pharmacy, patient experience area, and a community room.
- The fundamental design concept behind their Med-1 Project, which is a “mobile hospital,” borrows from the full-sized tractor-trailer car hauler used for NASCAR and involves the use of two fifty-three foot tractor trailers - one a patient care facility and one a support unit for equipment and supplies.
- The mobile hospital has many uses and benefits: mobilize to the incident site to provide high-level triage and initial treatment; provide medical support for mass casualties that overwhelm the capability of local facilities in the case of a natural/man-made disaster or mass casualty incident; provide medical augmentation during surge capacity; offer sustained medical care to support damaged hospital infrastructure or renovations; improve access to healthcare in rural settings; and offer stand-by coverage to support public events.
Speakers: Mary Beth Kuzmanovich, Vice President, Facilities Management Group, Carolinas HealthCare System; Tom Blackwell, MD, Medical Director, Center for Pre-Hospital Medicine, Carolinas HealthCare System; Chris Hummer, President, CMC Pineville, Carolinas HealthCare System
Rural Docs: Strategies for Providing Healthcare in Rural Markets
- As healthcare becomes more ambulatory, healthcare systems are devising new strategies for delivering care in ever widening markets. But providing care in rural markets remains a challenge. This session offered case studies of rural healthcare, spotlighting how cost-effective facilities can be developed.
- There are many variations and definitions of Rural Healthcare, as “rural” can mean the smallest critical access hospital serving a few thousand people, to the largest critical access hospitals serving up to 40,000 people depending on where it’s located.
- Some MOB opportunities in rural areas include reimbursement of Medicare costs and potential for good financial strength due to cost coverage. One of the challenges is competing with urban areas for physicians.
- Some trends in Rural Healthcare include continued growth in outpatient services, integration of services (employed primary care physicians and more contracted specialists); construction growth over the last decade in facility renovations, expansion and facility replacements; expansion of newer lower cost technology; and enhanced governmental reimbursement.
- The future is bright for rural healthcare with economic forces, healthcare reform, and increased demand for services. Access to healthcare for rural Americans has become a priority, so there are new opportunities for innovative and creative models. Rural markets could become the new frontier of facility development
Speakers: Rodney Triplett, Network Executive, Alegent Health Care; Scott Walters, President, Walters & Associates, LLC; James Young, Principle, Align Healthcare; Moderator: Jeff Hatfield, CPM, RPA, Vice President-Development, The Graham Group
Wired: Implementing EMRs in MOBs
- Electronic Medical Records (EMRs) promise to generate efficiencies in healthcare, but implementing them is no easy task, especially in MOBs. From the technology infrastructure to support them, to the ongoing costs of upgrades, to the data security challenges, EMR implementation can be incredibly costly.
- One of the advantages that the integrated EMR brings to the table is the same advantage that the Internet or any business operation brings: it becomes a virtual event. So, physical location is less dependent, less critical, because physical proximity to the “mother ship” is less critical. EMRs are going to facilitate putting healthcare out where it is needed.
- EMRs also allow for practicing medicine on the basis of knowledge rather than the basis of a guess, which had been happening previously, and it’s allowing all healthcare systems to stand closer to the target of practicing a universal quality of medicine wherever a patient accesses that care.
- In the past 11 years, the Cleveland Clinic has incorporated one integrated record model. No matter where a patient might be, whether it is in one of their facilities in Florida, Las Vegas, Toronto, or Abu Dhabi, they will know who the patient is and the history of that patient, and will be able to communicate that to the appropriate providing physicians.
Speakers: Peter Volas, Director of Real Estate, The Cleveland Clinic; Adam Fogelman, Senior IT Executive, The Cleveland Clinic; Dr. Ned Wagner, Jr., M.D., Medical Director of Informatics, North Shore University Health System; Stephen Buckeridge, Senior Vice President, Development, Health Care REIT, Inc.
Capital Markets Track
A Balanced Equity Diet: How MOB Do Investors Count the Calories?
- This session explored how these four different capital sources are looking at medical office investment opportunities in today’s market: publicly traded healthcare REITs, non-traded healthcare REITs, private equity medical office investors, and foreign capital.
- In 2010, we had a 47% increase in transaction volume for medical office in the first quarter over the first quarter of 2009, and cap rates just edged up a little bit to 8.1%. Even though transaction volume has gone down, that number represents US medical office sales volume as a percentage of all office sales volume, and historically that number has always been right around 2%. But starting around December of 2007, it has gone from 2% up to almost 10%. That increase is most likely attributed to investors’ preference for stability in the volatile market.
- With the recent passage of healthcare reform, we do not know exactly what will happen in the next few years, but we know we are not going to have a nationalized single-payer system and we are not going to have an expansion of Medicare.
- General economic conditions have improved and we are seeing more development projects that are getting restarted or being reconsidered and certainly more monetizations to create more liquid balance sheets.
- There are a few things that are going to define what happens over the next 6 to 12 or 18 months. On the healthcare system side, the dynamic of increasing numbers of health systems acquiring physician groups and bringing them on staff is bringing healthcare back to campus. It may be in an off-campus setting but it is going to be more hospital-centered in the delivery system so that will most likely impact hospital planning and it’s going to be a factor in defining the next 12 to 18 months.
Speakers: Danny Prosky, President & Chief Operating Officer, Grubb & Ellis Healthcare REIT II, Inc.; Doug Ray, President & Chief Operating Officer, Seavest Inc.; David Hegarty, President, Chief Operating Officer, Senior Housing Properties Trust; Philip Martin, Senior Vice President, Investments, Golub & Co.; Moderator: Chris Bodnar, Vice President, CB Richard Ellis, Healthcare Capital Markets Group
Strengthening Pulse: Opening Up the Debt Markets
- A year ago, lending was constrained, even for good deals. But the debt markets have opened up, and lenders are competing for deals. While the terms are still conservative, lenders are eager to underwrite MOB transactions.
- Projects that were in the planning stages in lateral 2008 and early 2009 did not happen in 2009, but in early 2010. With capital so constrained, hospitals were nervous about capital expansion projects, so they held off on doing any planning and the developer market was at a standstill for six to nine months. The lifecycle of a medical office building is very, very long, so we are seeing the results of that now and there are just not a lot of new development projects coming to market, or at least we have not seen this.
- Interest rates will probably remain stable for the next 12 to 18 months, but there will most likely be a big spike 24 to 36 months out from now. If you’re borrowing today you should try to lock up longer-term debt because you will probably not want to be refinancing a deal in 4 or 5 years. We will probably be shocked at how high the rates are then.
- The prognosis for the return of the CMBS market is very optimistic. We are going to see a significant uptick in actual loans getting transacted at CMBS.
Speakers: Brent Tharp, Senior Vice President, GE Healthcare Financial Services; Melissa Farrell, Managing Director, Prudential Mortgage Capital; Eric Smith, Senior Vice President, Healthcare Banking, Regions Financial Corporation; Brien Wloch, Executive Director, CMBS, JP Morgan Chase; Moderator: Dave Hendrickson, Managing Director, Jones Lang LaSalle Real Estate Investment Banking
Monetization Strategy: More Than a Capital Infusion
- The monetization panel highlighted three recent transactions.
- The Deaconess Clinic Portfolio transaction involved the sale of real estate owned by physicians and leased by the hospital in a reversal of the more typical landlord-tenant roles.
- The Carle Foundation transaction began as a more traditional portfolio monetization transaction however evolved in complexity due to a competing health system’s acquisition of the clinic practice tenant at one of the four properties. This change in the tenancy altered the deal profile and required a bifurcation of the portfolio into two transactions with separate and distinct buyers.
- The Nationwide Health Properties and Pacific Medical Buildings transaction, the largest MOB transaction ever executed, presented both buyer and seller perspectives in a multi-year deal involving a REIT and a developer, during which the economy suffered a global financial crisis resulting in a need to restructure the transaction mid-course.
Speakers: Eric J. Weyer, O.D., The Vision Care Center; Shane Seitz, Vice President, Investments, Nationwide Health Properties, Inc.; Robert Tonkinson, Chief Financial Officer, The Carle Foundation; Mark Toothacre, President-Pacific Medical Buildings, PMB Real Estate Services; Jay Miele, First Vice President, Shattuck Hammond Partners ; Moderator: P.J. Camp, Managing Director, Shattuck Hammond Partners
On the Road to Recovery: Diagnosing Development
- This panel of diverse perspectives from around the medical office development sector discussed wide ranging topics from the health of development to what deals are happening and what relationships are being leveraged.
- After a dismal 2011, the market for new projects is experiencing a tremendous influx of new capital. 2010 may have started slow, but the markets are softening and the pent-up demand is showing with much interest in projects and an increase of joint-venturing with local groups who have local relationships with hospitals, but who don’t have either the capital or the expertise themselves.
- Green development is rising and the costs are lower than expected with significant payback.
- Movement toward ambulatory network strategies is moving to the forefront as hospitals need to position themselves for the impact of healthcare reform.
- Currently hospitals think healthcare focus will stay at the path of acute response, but they think it’s going to shift to health and wellness for the long-term eventually.
Speakers: Mike O'Keefe, Partner, Navigant Consulting; Malcolm Sina, President & CEO, The DASCO Companies, LLC; Joanne Ranft, Director Corporate Real Estate, Mount Carmel Health System; Jason Sturman, Vice President, Duke Realty Corporation; Moderator: Shane Seitz, Vice President of Investments, Nationwide Health Properties
Leasing & Management Track
Physician Assistance: An Rx for Workouts
- With medical costs for the average family rising, health insurance coverage gaps and elective procedures being postponed indefinitely, the financial pressure patients feel eventually begins to squeeze physicians. And in-turn the hospitals and the MOB landlords feel the effects.
- Rescuing a drowning physician tenant can prove risky for your business both financially and legally. Creating an individualized workout, not a one-size-fits-all scenario, that takes into account the situation (temporary or not), financial structure and guarantee from the tenant (sole practitioner or LLC), and who owns the space (hospital-owned or not) is essential for maintaining the best possible balance between your legal responsibilities and your fiscal health.
- Legally, notice of default must occur and landlords must comply with the particular provisions of the lease, which should contain a paragraph dealing with “notice”. Practically, talking to the tenants will frequently provide an indication if one is in trouble. Financially, there is almost always a workaround, unless the tenant files bankruptcy.
Speakers: Charles Fendrich, Executive Vice President, Lillibridge; Walter Neilsen, Partner, Waller Lansden, Dortch & Davis, LLP; Julie Wilson, Senior Vice President, Director of Asset Management, Healthcare Realty Trust; Moderator: Joi B. Taylor, RPA, General Manager, Lillibridge
Transplants: Redeveloping Retail Space for Healthcare Use
- Retail locations provide high visibility, parking, traffic flow, convenience, and the access that medical users often seek, making them ideal for redevelopment into medical space. With retail rates dropping and vacancies rising, what more could a medical developer ask for?
- At Catholic Healthcare West, two factors are driving the use of retail and repositioned assets: ambulatory care and physician alignment. Pushing lower acuity services like imaging and outpatient surgery away from the hospital and into a lower cost setting, but also pushing these services out into the community, into the suburbs, into the x-suburbs, to make it convenient for the patients is essential. Ultimately, physicians need to be where the people are, not in a hospital far from their patients’ homes and daily activities.
- A 5000-6000 square foot primary care clinic and urgent care center was needed in downtown Santa Cruz where building new was not an option and the existing office stock had unsuitable parking. The ideal retail space was actually former home to a well-known hamburger place; it sat at a T intersection with a 7:1 parking ratio. The entire project was up and functioning within one year.
- A 10,000-15,000sqft requirement in downtown Glendale, California came to be at an old movie theatre. Once again visibility, parking, and a pre-existing building large enough to accommodate a clinic were the deciding factors in its success.
- One Hundred Oaks Mall in collaboration with Vanderbilt took over an old mall to create 430,000 sqft worth of clinics and added 2000 additional person traffic per day to the site. Working with retailers and a functioning movie theatre required careful negotiating of parking and traffic flow.
Speakers: Phillip Valdivia, Manager, Catholic Health West Real Estate Services; Anthony Ruggeri, President, ATR & Associates; Jeffrey Green, Owner & Proprietor, Jeff Green Partners; Frank Mihalopoulos, Principle & Founder, Corinth Properties; Moderator: Mike Noto, Senior Vice President, Health Care REIT, Inc.
Get Trim: Leveraging Lean Principles for Healthcare Real Estate
- The concept of lean is taking the form of a small revolution in certain hospital systems. Hospitals can now use feedback survey data to transform their processes and make them more efficient for the administrators, doctors, and patients.
- If you can’t measure something and you cannot quantify your impact, it is really going to be hard to have any kind of change that is effective in the long term. Always thinking “Does this action create value?” Activity Based Management looks at the different costs that are associated with each step in a given procedures and ultimately leads up to Lean and no waste—really trying to get rid of the things that aren’t value-added in the process.
- For property management operations, processes such as budgeting were able to be streamlined by first finding where many of the mistakes were being made, then returning to the source of the problem to double-check and explain. This high level of scrutiny at the initial budget created subsequent versions with fewer mistakes.
- Establishing a quantifiable end result, a process for achieving that, a metric for measuring success and making sure to broadcast those together to employees is essential. For example, visiting tenants on a regular basis is key to tenant satisfaction. To achieve the result of high tenant satisfaction, setting a goal of having every tenant visited by an onsite employee at least once a week was one metric put into place. A report is issued and analyzed every week and if someone has fallen off this habit, they receive a personal email from their supervisor.
Speakers: Michael Graves, Facilities Director, Southwest Washington Health System; Kimberly Petty, Founder and Principal, ExperiaHealth; Claude Hooton, President, PMB Real Estate Services, Inc.
Different Owners, Same Team: A Winning Approach for On-Campus MOBS
- HCP, Inc. and HealthOne, Inc, set rental rates based on well-researched comps and stick to them and hold monthly operating meetings. A set rental rate establishes a reliable system for tenants to understand the market and the price they are getting and maintains consistency across tenants also helps keep the peace for both landlord and tenant and between tenants.
- Monthly joint meetings first help everyone to understand what type of tenants the campus is looking for based on the goals of the hospital system and the campus’s current needs and future wants. If a competing hospital will be emerging into the market in the near future, consider current tenants whose leases must be extended to maintain tenancy.
- Understanding the referral program on campus is also important. Physicians with a healthy referral base will stay, so finding a tenant whose practice is needed and will garner referrals from the campus, then they will not be seeing the real estate as much as the pool of physicians willing to refer. Creating camaraderie among physicians tenants to open these doors is also important.
Speakers: Ross Goyer, General Manager, Lillibridge HealthCare Services; Paul Clendenen, System Director Real Estate and Facility Planning, St. Vincent Health; Dave Narey, Vice President, General Manager, Jones Lang LaSalle Americas, Inc; Tracy Rogers, Vice President and Chief Operating Officer, Alexian Brothers Hospital Network; Jim Croy, Vice President, HCP, Inc.; Kevin Kucera, Director of Real Estate, HealthOne; Moderator: Marilyn Kangas, RPA, Portfolio Manager, Lillibridge
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