Capital markets: Multi-asset class portfolio finance

It’s a part of the HRE market that presents a unique financing challenge

By Erik Tellefson

Healthcare portfolio acquisitions were a large part of the medical office building (MOB) landscape in 2016 and this trend is projected to continue in 2017. In particular, multi-asset class healthcare portfolios will be part of the healthcare real estate (HRE) market. But these portfolios present a unique financing challenge, as they may contain medical office space, dialysis centers, rehab facilities, hospitals and many other types of HRE.

Multi-asset class healthcare portfolios offer diversity by spreading risk amongst the different asset classes, in addition to the typical portfolio diversifications that can include geography, health system, hospital affiliation and tenancy. Additionally, some of the individual asset classes included can be relatively difficult to finance or make less sense to acquire on a one-off basis.

A multi-asset class healthcare portfolio can potentially contain:

MOBs. MOBs are the most prevalent asset class in medical property portfolios and are usually relatively straightforward. They can typically be underwritten as real estate, are recognized as a stable asset class, and are frequently financed as single assets.

Dialysis centers. These specialized properties are often smaller in size. They are used for dialysis and sometimes include nephrology physician offices. The properties typically maintain contract rents from larger dialysis companies and are often too small on an individual basis to be financed as single assets.

Inpatient rehab facilities (IRFs). IRF tenancy is frequently a joint venture between a nationwide operator and a physician group or hospital. Their EBITDAR-to-lease cover is usually a strong indication of their viability, in conjunction with any lease controls or guarantees. IRFs are sometimes financed on a one-off basis; however most lenders typically prefer a spread of risk in a portfolio.

Long-term acute care hospitals (LTACHs). LTACHs have a similar tenancy structure to IRFs. However, they are significantly more acute in usage and are primarily driven both by their operations and significant regulation. EBITDAR-to-lease cover is a good indication of viability along with lease controls and guarantees, and metrics around the regulatory aspects of LTACHs. Similar to IRFs, this asset class is rarely financed on a standalone basis.

Hospitals. Hospitals often require a different type of financing and can be financed alone or in a portfolio. Physician-owned hospitals especially are more often seen as a single-asset mortgage-type financing. These assets have very specific needs and are operations-driven with multiple metrics to underwrite.

Other. Neuro facilities, behavioral health facilities, addiction treatment facilities and other types of HRE can be also be included in portfolios. The viability of these as single assets often depends on the lender.

From an underwriting, structuring and sizing perspective, multi-asset healthcare portfolios preferably include a significant portion of medical office real estate. Portfolios that do not include MOBs can also find financing, depending on the asset mix. Lenders will typically underwrite each asset individually, and as a portfolio, and weigh the leverage and pricing across the asset classes.

Bringing together a diverse set of asset classes can make it easier to finance more difficult individual assets in a portfolio setting than it would be alone. But in order for these types of complex portfolios to be successfully financed, it is important to use a lender that knows the healthcare landscape and can use their resources and experience to build a flexible financing solution to fit each unique scenario.

Erik Tellefson is Managing Director with Capital One Healthcare and leads medical office and medical property lending. He has 18 years of experience in commercial real estate finance, including 13 years focused on healthcare, and works with clients to finance acquisitions, refinance existing debt, support working capital needs and fund growth initiatives. 

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