Healthcare Might Need to Monetize Real Estate Assets

Much of the healthcare industry may need to monetize its real estate assets, according to a Savills blog post by Nate Brzozowski, The culprit is accumulated excess debt.

Just as many in commercial real estate stocked up on cheap debt and high leverage before and during the pandemic, so did many in healthcare. The reasons were slightly different, though still had similarities.

In CRE, investors and developers wanted to put other people’s money to work while pulling out as much cash as possible to fund other projects. In healthcare, the expansion was in the form of mergers and acquisitions to develop operational scale. The theory was that the bigger the provider, the more it could save in costs by distributing them across a larger base of business, making everything more profitable.

And just like in CRE, healthcare had to contend with rising interest rates, making new deals more expensive and refinancing debt potentially impossible. Savills quoted Moody’s as stating that more than 90% of rated health providers had “excess leverage.” More than half of the healthcare businesses in question had weak liquidity, limiting their ability to pursue their strategies. The debt that seemed so wise was now like an “albatross around the neck of their balance sheets,” with a nod to the Samuel Taylor Coleridge.

Without low-cost capital, continuing the M&A expansion isn’t possible, with “many healthcare systems swelled to unsustainable levels of debt that are no longer affordable nor conducive to near- and long-term business success,” as Savis put it.

Additional stresses include the shortage of healthcare workers and additional needs, with demand outpacing supply, and driving up labor costs. Then there is a decline in primary care utilization, greater regulatory scrutiny, and weakening medical subsidies. Together, the factors threaten already thin margins.

This is why Savills sees the need for liquidity and access to capital as driving factors in the industry. “This quest for liquidity has led to large-scale initiatives by multiple large systems to mine their expansive real estate portfolios for creative structuring opportunities,” it wrote.

As GlobeSt.com has previously reported, healthcare systems want to hold onto core assets like hospitals. However, other properties could be fodder for sale-leaseback arrangements that the healthcare systems could use as relatively certain ways to cash.

Despite the industry, such a quandary sends companies looking through their assets to determine how they could raise capital to continue their quest.