Healthcare is a fast-paced business subject to multiple forces of change. Here are some notes on the latest developments in the markets for ASC real estate and strategic partners.
Selling ASC real estate
Question: What's new in selling ASC real estate?
JV: What is new is that many physicians who own their ASC/MOB real estate don't realize how much value their real estate represents. These physicians have significant capital locked up in real estate that could be deployed in much higher yielding investments. Take for example, a group of surgeons who developed an ASC/MOB for $3 million 10 years ago, with $2 million in borrowed money. Now the ASC and their practices are successful and paying market rate rents and half of the debt is paid off. The rent they are paying makes their real estate worth $6 million, but appreciating only at the rate of 2 percent to 3 percent a year. So after selling and leasing back the real estate (with no increase in rent) and paying off the loan the physicians have $5 million to invest in much higher yielding and more liquid investments.
Q: How has the sale of ASC real estate changed over the past decade?
JV: Up until a few years ago there were not many buyers for ASC real estate. The companies interested in investing in commercial real estate did not realize how profitable, stable and growth-oriented surgery centers are. This has now changed, and there are many buyers now interested in buying and leasing back ASC/MOB real estate. And as interest rates have remained low the prices offered have gone up. This is because with a low cost of capital the buyers can offer higher prices and still generate a good return on their invested capital. With more buyers than sellers, there is significant competition to acquire good quality ASC/MOB real estate and the prices offered are the highest we have ever seen.
Q: What buyers are interested in ASC real estate acquisition today?
JV: There are a growing number of private investors and real estate investment companies that realize what great businesses ASCs have proven to be and these buyers are offering very high prices to acquire ASC/MOB real estate. In almost every situation now each ASC/MOB property offered for sale attracts multiple offers within 30 days of being offered for sale and at higher prices than seen in decades.
Q: Are there any potential pitfalls to avoid in today's ASC real estate market?
JV: Just as with choosing a strategic partner for a surgery or endoscopy center, physicians who want to sell their ASC/MOB real estate will have concerns over who they are selling and the terms of the sale. Common questions to avoid pitfalls are:
• What will be the rent and terms of a leaseback arrangement? • What personal guarantees will be required, if any? • How can we avoid giving any personal guarantees? • How much will the sales commission be? • How can I check out the reputation of the buyer? • If I get multiple offers at nearly the same price, how do I determine which buyer will be best for me? • How will the property be marketed, and to whom? How can we defer capital gains taxes on the profits?
ASC Strategic Partnering
Question: What's new in selling an interest in an ASC to a strategic partner?
Jonathan Vick: ASC management company and local hospital interest in investing in surgery and endoscopy centers has never been higher. After 15 years of management companies investing in ASCs and making significant profits by helping the centers grow and become more profitable, local hospitals are now showing a heightened interest in participating in ASCs, now that they have clearly proven to be the high-quality, low-cost provider. Currently there are over 50 management companies seeking to invest in a shrinking supply of investable (i.e. two or more operating rooms, Medicare certified, etc.) centers. What is new is that there is more demand than ever for a shrinking supply of ASCs, more competition to acquire centers and values are the highest we have ever seen.
Q: Who are the best potential strategic partners for an ASC seeking to sell interest?
JV: The best strategic partner for any given center is a partner that can help the center and the physician-partners achieve their goals. For some centers this means an exit strategy at a very attractive price, for others it means resources for contracting and recruiting new physicians and for others it means a relationship with a hospital that will give the center access to more referrals and advantageous payer contracts.
Q: How have an ASC's options for a partner changed over the past few years?
JV: The most important option that is available today that was not available before is a three-way partnership between physicians, a hospital and an ASC management company. Previously hospitals wanted complete control so they built their own centers and competed with physician-owned centers. Now hospitals need a low-cost provider to complete their ACO strategy, and ASCs have proven to be the low cost, high quality provider. In a three-way deal the physicians get the best of both worlds: a hospital partner with better paying contracts and a management company with the mind-set and resources to make the center more profitable.
Q: Is it a buyers or sellers market for ASCs today?
JV: There is no question that we are experiencing a "sellers market." Multiples being offered are higher than ever and rising, and there is more competition among buyers to acquire interests in ASCs. In almost every situation we see three or four companies competing to buy an interest in a center, and sometimes there are five or six companies interested. In such a market we recommend determining a value using trailing 12-month (TTM) and prospective profits of the center to create a premium value for the center rather than just waiting to see what the buyers will offer. Using this proactive pricing approach we are seeing values that are significantly higher than previously.
Jonathan C. Vick, the founder and President of ASCs Inc., has assisted in development, merger, and strategic acquisition transactions for over 500 physician-owned ambulatory surgery (ASCs), endoscopy centers (ECs) and surgical hospitals since 1984. He has extensive experience in ASC and EC sales, real estate sales, valuations, and ASC strategic mergers & acquisitions. He can be reached at 760-751-0250 or jonvick2@ascs-inc.com. More information can be obtained at the website www.ascs-inc.com.
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