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Cover Story: Third-party capital has its uses

Panel at 2018 BOMA MOB conference discusses what the ‘new era’ of partners can provide

By John B. Mugford

The recent BOMA MOB conference panel on third-party capital partners included (from left to right), moderator Andy Dow of Winstead, Courtney Hanfland of CHI, Deeni Taylor of Physicians Realty Trust, Joe Euphrat of CleanFund Commercial and Lance Mendiola of Christus Health. (HREI photo)

Let’s all face it, a majority of the country’s health systems are not going to be selling, or monetizing, all of their medical office buildings (MOBs) to third-party investors anytime soon.

Yet, during an era when most hospital systems are trying to conserve every dollar of revenue and invest their precious capital into service lines and endeavors with strong returns, it is becomingly increasingly important for them to develop relationships with third-party capital partners, including those that invest in healthcare real estate (HRE) facilities.

“There are only so many dollars (a health system has to) spend,” said Courtney Hanfland, system director of real estate transactions with Englewood, Colo.-based Catholic Health Initiatives (CHI). “Do you put those dollars into patient care? Technology? Development? Third-party partnerships are important so that you can stretch those dollars, deal with compliance and other issues, and stay competitive.”

Ms. Hanfland was part of a panel discussion titled “A New Era of Third-Party Capital Partnerships” during the 2018 BOMA International MOB + HRE Conference, held May 9-11 in Houston.

Her remarks came after the panel’s moderator, T. Andrew “Andy” Dow, an attorney and chair of the Healthcare Real Capital Group with Dallas-based Winstead PC, opened the discussion by asking: “Capital constraints and other issues have made third-party partnerships more important than ever. Why do you think these relationships are important?”

Health systems do not necessarily have to sell all – or even a large portion – of their non-core assets to take advantage of what third-party capital partners can provide, the panelists said.

Rather, systems can turn to third-party capital providers in a more limited way, such as selling a few specific assets to receive an infusion of capital, or to right-size their portfolios of owned and leased properties. Providers can also selectively receive capital from, or form joint venture (JV) partnerships with, third parties to develop new outpatient projects, or to borrow capital for any number of endeavors instead of going to the bond markets. And it’s not always about money, either. Experienced HRE professionals can also offer advice and counsel, such as by helping systems to better understand and comply with various laws and policies concerning tenants.

“It’s important that we use every tool in our toolbox and understand where we spend those limited dollars,” said Lance Mendiola, VP of facilities management and construction with San Antonio-based Christus Health.

Finding the ‘right’ partner

Ms. Hanfland noted that health systems need to look for the “right” partner these days, not just the largest or most capitalized.

“Sometimes it might make more sense to choose a local firm because maybe a project is too small for a large national firm,” Ms. Hanfland said. “We also determine if a potential partner will use our template and if their culture will fit with ours. We also view the long-term nature of their real estate holdings, research their portfolios – when they’ve sold and how long they’ve held the properties. We want to know if they understand our business, the challenges we face, and the fact that revenues are going down and rents are going up. And we want to know if they’re familiar with the healthcare real estate space and have longevity with the space.”

For example, she said that when CHI agreed to sell 50 MOBs in eight states to Milwaukee-based Physicians Realty Trust (NYSE: DOC) for about $700 million in 2016,

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