Healthcare Sale-Leasebacks Might Be Necessary Despite Opposition

The involvement of REITs and sale-leasebacks in healthcare real estate has become a sticking point for many regulators, lawmakers, and policymakers. But a consulting economist, likely writing a study for industry figures, says the conclusions are mistaken and misconstrue the source of financial pressure in healthcare. Also, Savills has previously said that the healthcare industry may need to monetize its real estate assets for financial reasons.

Concerns about REITs and sale-leasebacks picked up momentum because of one current large event. The Steward Health Care bankruptcy has shaken up the healthcare industry. The largest privately owned, for-profit health system in the U.S., announced after filing for bankruptcy last month that it would sell all of its 31 hospitals in auction sales. Of those hospitals, eight are in Massachusetts. The situation has set the state’s government to seek ways to prevent REITs from performing future sales leasebacks.

Fred McKinney, an economist with a PhD from Yale and co-founder of the consulting firm BJM Solutions, wrote a white paper on REITs and healthcare systems.

McKinney said that legislation in Massachusetts, Connecticut, Rhode Island, and Pennsylvania is looking to limit REIT in the hospital industry comes partly from concern over the “financial health of hospitals, particularly safety-net hospitals serving low-income and rural communities.”

He argued that the financial straits aren’t a result of REIT participation and sale-leasebacks. Instead, he said financing models are a result of other factors causing economic problems.

The real problem McKinney referenced is low reimbursement to hospitals for services, including low Medicare and Medicaid reimbursement rules. He said that reimbursement rates and uninsured patients “drive hospital closures.”

“Without substantial philanthropic contributions, safety-net hospitals cannot cover their operational deficits, eventually leading to bankruptcy,” McKinney wrote. “If we want to fix the financial problems facing America’s urban and rural hospitals, government at all levels need to pay hospitals a fair price for the services they provide their patients.”

Savills has said that much of the healthcare industry might need to monetize their real estate assets. Healthcare systems looked to scale their operations through mergers and acquisitions. 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 Savills put it.

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.