Cover Story: Who are the largest owners of healthcare real estate?

Revista has compiled a list of the top 50, and the answers might surprise you

By John B. Mugford

Who are the largest individual owners of healthcare real estate (HRE) assets in the United States?

As you pondered the question, the first organizations that popped into your mind might have been the largest publicly traded healthcare real estate investment trusts (REITs), which have been aggressively acquiring medical offices buildings (MOBs), senior living facilities and other HRE assets in recent years. And, yes, the largest healthcare REITs can indeed be found near the top of the list.

Yet the largest single owner of HRE assets – and 41 of the top 50 – are not REITs. They are hospitals and healthcare systems, according to an exclusive new report from data firm Revista.

That jibes with what the REITs having been telling us for years: Although the healthcare industry is rapidly consolidating, it remains highly fragmented business – as is the ownership of the associated real estate. According to a recent estimate from Ventas Inc. (NYSE: VTR), one of the largest public healthcare REITs, HRE is a $1 trillion market, but public REITs own only about 12 percent to 15 percent of the real estate. That means 85 percent to 88 percent of the properties remain in the hands of other owners and investors, including the providers themselves.

But that $1 trillion number is just an estimate. In a step toward trying to determine the real size of the market, Revista recently compiled a list of the nation’s top 50 HRE owners, and agreed to give an exclusive first glimpse of the data to Healthcare Real Estate Insights™ and its readers. Here are a few highlights.

Kaiser is king

Knowing that most of the largest owners of HRE are hospitals and health systems, it will probably come as little that surprise that Kaiser Permanente tops the list. Kaiser is the nation’s third largest not-for-profit health system, and a dominant health insurance and care provider with 9.5 million members and scores of locations in the West, Mid-Atlantic, Colorado and Georgia.

The massive system, in fact, has 38 hospitals, 618 medical office buildings (MOBs) and a proclivity to own as much of its real estate as possible. And it certainly owns plenty: about $26.84 billion worth of what Revista calls total property assets, i.e., buildings and improvements, land, and projects under construction, at of the close of 2013.

All of the nation’s five largest not-for-profit health systems – Ascension Health, CHE-Trinity Health, Adventist Health System, Kaiser and Dignity Health – are in the top 16, according to Revista, as are the largest for-profits: Hospital Corporation of America (NYSE: HCA), Tenet Healthcare Corp. (NYSE: THC) and Community Health Systems (NYSE: CYH).

In fact, all of the top 16 property owners are health systems, except for the “big three” public healthcare REITs: Toledo, Ohio-based Health Care REIT (NYSE: HCN), Ventas and HCP Inc. (NYSE: HCP).

Health Care REIT’s holdings totaled $20.63 billion at the end of 2013, second only to Kaiser. Ventas trailed closely with $18.46 billion in third place. And HCP was sixth, with a bit more than $12.6 billion in property assets.

A new source of data

As noted above, these rankings are part of a list compiled by Annapolis, Md.-based Revista, a new research firm putting together a variety of detailed reports concerning the HRE sector. Among its products is a comprehensive, property-level database of virtually every medical property in the country. It lists each property’s location, size, owner, health system affiliation and proximity to a hospital.

Other reports from Revista, both annual and quarterly, are to include historical statistics on inventory growth, projected new deliveries as well as details on specific construction projects and sales transactions.

Such reports will not only be national in scope but also be broken out by regions and metropolitan markets, according to Revista principals and founders Elisa Infante Freeman, Mike Hargrave and Hilda Flower Martin. Having previously worked in research for the National Investment Center (NIC) for the Seniors Housing & Care Industry, which provides a variety of comprehensive data for those involved in the seniors housing sector, the principals are now setting out to provide the same type of information for the healthcare real estate (HRE) sector.

Revista gathered and compiled the information for the list, mostly from tax reports, in collaboration with Armand Mastantuono, relationship manager with Surface Logic, a facilities performance consulting firm. The list is based on 2013 data.

“As part of our ongoing process of providing detailed information about and sizing up the healthcare real estate sector, we find that it’s important to know who the major owners are,” says Mr. Hargrave. “Other real estate sectors, such as the hotel, residential, retail, office, and seniors housing sectors have this kind of information readily available. But it wasn’t available in healthcare real estate before.”

The Top 50, along with Revista’s first batch of national property data, will be officially released Nov. 19-20 in Chicago at the firm’s National Launch & Executive Forum. In addition to the official releases of exclusive data and reports compiled by Revista, the event will also include numerous general sessions and roundtable discussions featuring executives from a variety of firms involved in HRE.

Revista’s principals say their information is being compiled at a crucial time in healthcare, an era when hospitals, health systems and physician practices face more pressure than ever to deliver high-quality, efficient, cost-effective healthcare services. Facilities, the principals say, play a crucial role in achieving those goals and Revista’s data could help raise the profile and importance of real estate in the healthcare sector.

As far as the Revista principals have determined, the healthcare industry’s decision-makers have been hindered by a lack of comprehensive national data concerning medical real estate.

“As we put out information along these lines we’re sure that one important thing we will do is raise awareness that real estate is a very important aspect of the healthcare sector and an important part of the balance sheet,” Mr. Hargrave says. “So if we can help raise the profile of real estate and its importance to the healthcare sector, we think that can be very positive for everyone.”

Ms. Infante Freeman adds that part of Revista’s mission entails providing data about real estate to the many hospitals and health systems that could not otherwise afford to pay for it. Many of Revista’s reports are free to those who sign up at www.revistamed.com.

“Even smaller systems need this type of information, and a big part of why we are doing this is for them,” she says.

Compiling a list of the Top 50 list can also lead to a better understanding of how large the healthcare real estate sector is, Mr. Hargrave notes. As noted earlier, while many HRE professionals have estimated that there is about $1 trillion worth of medical real estate in the country, no one knows for sure. As Revista continues to conduct research in the sector and put together various reports, it is likely to get a handle on that once elusive total.

The Top 50 list focuses on three main holders of real estate: REITs, such as Health Care REIT, Ventas and HCP; not-for-profit owner-operators, such as Kaiser, Ascension and other health systems; and for-profit owner-operators, such as HCA and CHS.

(Although Revista’s list includes the top 50 owners of real estate, we are including just the top 25 owners in the chart included with this article. To obtain the full top 50 list, please visit www.revistamed.com.)

Here’s a look at some highlights from Revista’s Top 50:

■ The top 50 entities on the list own about $280.2 billion worth of property. Of that, 73 percent is owned by the 41 health systems on the list while and 27 percent is owned by nine REITs in the Top 50.

■ The top 10 owners hold 53 percent of the assets that are included in the holdings of the top 50.

■ The top 10 entities on the list are composed of five not-for-profit health systems, three REITs, and two for-profit health systems.

It should be noted that the list includes health systems and REITs that own MOBs and variations of them, as well as acute care and other types of hospitals. But the list does not include entities that solely own seniors housing properties.

As a result, seniors housing properties, as well as any other types of non-healthcare properties, are included in the total assets of some of the entities in the Top 50. That’s because companies such as Health Care REIT, Ventas and some of the others listed own other property types.

Wow! Health systems own a lot

If there’s something about the Top 50 list that “jumps out at” Daniel Klein, Health Care REIT’s senior VP – Medical Facilities Group, it’s that the health systems “sure do own a lot of real estate.” Health Care REIT and another healthcare-focused REIT, Scottsdale, Ariz.-based Healthcare Trust of America (NYSE: HTA), are among the founding sponsors of Revista.

“We talk about it a lot at our company and with others in the sector – the fact that the health systems still own a large majority of the country’s healthcare real estate, at about 80 percent – but it sure is something when you see it in black and white,” says Mr. Klein. “Kaiser and Ascension and HCA are the big three, with more than $11 billion in property assets each, and then there are a bunch of them that own in that $3 billion to $8 billion range of property assets. I really think that list will continue to change as there will be more consolidation in the sector.”

And of course, seeing how much the health systems actually do own in “black and white” would lead any good, aggressive REIT executive to ask: “How can we acquire that real estate, or at least a portion of it?” Right?

Mr. Klein, after getting a chuckle out of the question, responded that, “Yes, of course that’s what we’re thinking.”

And while some health systems maintain that they prefer to own rather than rent facilities, Mr. Klein believes the tide could change, and perhaps is changing, because of healthcare reform and the new ways in which the systems have to go about their business. Not only must they continue to grow and attract new patients, but they must be as cost-efficient as possible.

“When you look at the economic pressures that will continue to mount for the systems for years to come, it just makes sense that a good place for them to look for capital is their real estate,” he says. “I would expect that over time the healthcare real estate sector will morph into what happened years ago in the hotel industry, when third-party owners such as REITs own so many of the properties themselves. In that sector, there’s a comfortable division between the operators and the property ownership, and that just hasn’t taken hold yet in healthcare.”

This could even be the case, he says, despite the fact that the hospitals and health systems have access to “inexpensive money,” he says.

“But we’re talking to some of the systems, the ones we think are pretty astute on this issue, and they are saying, ‘We don’t care if we can borrow in the 3 percent range and the REITs are in the 6 percent range because we can take that 6 percent and invest in physician practices, or equipment or services, that can earn us as much as 20 percent.’ ”

“That’s obviously a better investment for them,” Mr. Klein adds, “and so is taking that money and using it on some other type of initiative that can reduce costs by a big factor. So, it becomes an opportunity-cost argument, and some systems are accepting this while others are not.”

Beyond what the numbers say

As Mr. Hargrave of Revista notes, interpreting data is the best way for users of such data to learn from it. And Revista’s Top 50 list, while it tells plenty on the surface, also has plenty to say beyond the numbers.

For example, as Mr. Hargrave notes, the healthcare systems are generating many more new construction projects than the REITs.

As the Top 50 list indicates, the top REIT owners had $506 million worth of construction projects in progress at the end of 2013, which, in a metric known as “construction versus inventory,” represents only 0.7 percent of their total property assets of $73.54 billion.

On the other hand, the top health systems on the list, all 41 of them, had a total of $16.8 billion worth of projects underway, which in terms of construction versus inventory is about 8.1 percent of their total property assets.

“So as a group they are leading the sector in construction, or at least in this top 50 list,” Mr. Hargrave says. “They are the drivers of growth from a construction perspective whereas the REITs – as one could certainly predict – prefer to grow through making acquisitions of cash-flowing properties.”

Even so, the health systems are growing through mergers and acquisitions (M&A) as well. For example, Tenet Healthcare grew its total property assets by 65.3 percent from 2012 to 2103. It just so happens that in 2013 the for-profit, publicly traded healthcare system completed its acquisition of Vanguard Health Systems Inc., which certainly added to its real estate portfolio.

As Mr. Hargrave notes, the health systems in the top 50 grew their property assets, in aggregate, by 9.2 percent from 2012 to 2013. The REITs grew their property assets in that time frame by 15.5 percent.

In particular, Health Care REIT grew the size of its total property assets by a healthy 31.9 percent from 2012 to 2103. It didn’t come close, however, to experiencing as much growth as Irvine, Calif.-based Griffin-American Healthcare REIT II, an unlisted REIT that grew its total property assets by a whopping 127.1 percent over the course of the year, ending 2013 with $2.6 billion worth of total property assets.

While the largest real estate owners in the country certainly would never admit that topping the list is their main objective, it will be fun for observers to follow the ebbs and flows of Revista’s Top 50 list over the years.

Certainly, the owners near the top of the list will not change dramatically from year to year. But then again, who knows?

For example, Griffin-American Healthcare REIT II is the eight largest REIT owner and the 34th largest owner overall on the current Top 50. But the REIT will not be included in Revista’s Top 50 list in 2015, as it is in the process of being acquired by Northstar Realty Finance Corp. (NYSE: NRF), which could very well make the next list.

“It will be interesting to watch the list from year to year and to have this first year as a benchmark to make comparisons in the future,” says Mr. Mastantuono of Surface Logic. Next year’s Top 50 will likely come out earlier in the year, perhaps late spring or early summer, he notes.

In addition, both Ventas and Health Care REIT have been making large acquisitions of late, including deals expected to close in the near future. Those two could be jockeying for position at the top of the Top 50 for years to come.

“There’s never been a comprehensive comparison like this before,” says Mr. Hargrave. “And while it is fun information for a lot of us, it’s important for a sector such as healthcare real estate to have something like this because it is a large, important sector, and therefore it’s important for the owners themselves to have a benchmark like this.” 

Revista provides healthcare property and industry data, market reports and other resources, and hosts educational networking events, including its upcoming National Launch & Executive Forum Nov. 19-20 in Chicago. For more information on Revista data and events, please visit www.revistamed.com.