Unlocking Your Hospital’s Potential Through Strategic Real Estate Transactions

Wednesday, November 11, 2009

Moderator

 Matthew P. (Matt) Utecht, Esq. Shareholder Haynsworth Sinkler Boyd, PA Email Questions to: [email protected]

Faculty  E. Hunter Beebe Managing Principal HRE Capital  Anne S. Ellefson, Esq. Managing Shareholder Haynsworth Sinkler Boyd, PA  Kathleen C. (Kathy) McKinney, Esq. Shareholder Haynsworth Sinkler Boyd, PA

Agenda 1. Trends in Healthcare Real Estate 2. Strategies 3. Detailed Case Studies 4. Are You a Candidate?  5. Legal Considerations 6. Questions & Answers

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Healthcare Industry Trends These trends, outlined below, are leading health systems and hospitals, large and  small, rated and un‐rated, to explore alternative ways to access capital and fund new  projects.  Disruptions in capital markets creating funding uncertainty  Margin compression due to macroeconomic environment / unemployment  Decline in investment portfolios due to market downturn  Decrease in philanthropy due to donor investment losses  Continued increases in required capital improvements  Looming  “healthcare reform” impact  Difficulty in maintaining a broad mission  Industry consolidation  Conservative approach to pending investment decisions  Continued exploration of physician alignment

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Not‐for‐Profit Hospital: Sources of Capital / Funding In the current capital market environment, liquidity (days cash on hand, etc.) is one of the primary  drivers that rating agencies analyze when underwriting overall hospital / healthcare system credits.  As  such, cash should be viewed as the “option of last resort” when funding capital expenditures. THIRD‐PARTY MARKETS

INTERNAL FUNDING Return on Investments  Dependent upon Investment Market  Conditions Important Source of Cash Flow in  “Lean” Years Typically Limited to “Supplemental” Funding Operating Cash Flow Uncertainty in Annual Amount Insufficient for Large Projects Highly Influenced by Government  (reimbursement rates, mandates)

Philanthropy High Profile Least Expensive (Free) Long Lead Time / Uncertainty 

Sources of  Capital

Cash & Investments Important for Bond Ratings Insufficient for Large Projects Typically Limited to “Supplemental” Funding Able to Feed Liquidity / Cash

Tax Exempt Bond Financing Must be Tax Exempt Use Liquid  Market ‐ Based on Investor  Demand Inexpensive Longer Lead Time  & Need for Large  Offering Used to Refinance Existing or Capital  Project Real Estate Capital Markets Taxable and Tax‐Exempt Projects Debt & Monetization  / Sale Options Various structures available to meet  Necessary Goals, including:  Gain Liquidity / Cash  Maintain Needed Controls  Maintain / Enhance Debt Capacity

Able to Free Debt  Capacity

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Introduction

Real Estate Monetization/Developer Selection Targets Almost all healthcare related real estate projects are candidates for potential  monetization and/or developer selection, which include, but are not limited to, the  following:  On‐ and Off‐Campus Medical Office Buildings  Fitness / Wellness Centers / Rehab Facilities  Ambulatory Surgery Centers and Imaging Centers  Specialty Hospitals / LTACHs / Behavioral Health Facilities   Clinics  Administrative Buildings  Hospice Facilities  Parking Facilities  Senior Care Facilities

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Potential Goals for Monetization/Developer Selection Hospital systems across the United States are exploring monetization / alternative  financing options for owned and to‐be‐developed medical office and other non‐core  real estate assets.  These transactions can be structured to achieve the following:              

Enhance / Maintain Liquidity Minimize Occupancy Costs Maximize Debt Capacity Minimize Capital Commitments to Project(s) Provide Physician Investment Options Limit Involvement in Physician Tenants / Owners “Negotiations” (Stark) Maintain Control of Assets and / or Land Reposition out of Real Estate Ownership / Management / Development Partner with Healthcare Real Estate Management Expert Gain Off‐Balance Sheet Accounting Treatment  Limit Occupancy Costs Improve / Maintain Key Financial Ratios Optimize Credit Profile Retire Existing Debt 7

Summary of Available Transactions The list below is a sample of the types of transactions that may be available to  healthcare providers.  These options should be considered in the context of a systems  goals and objectives and should be tailored to the specific situation:  Single‐Asset or Portfolio Monetization   Fall‐away Master Lease / Master Leaseback Structures  Support Agreements  Partial Sale / Leaseback (taxable or tax exempt)  Developer / Operator Selection for to‐be‐developed Project  Ground Lease Structures (control and / or participation)  Physician Syndication Structures / Condominium Structures   Joint Venture  Debt Financing / Refinancing  Credit Tenant Lease Debt (100% of project cost)  Tax Exempt Build‐to‐Suit or Sale / Leaseback  Restructuring of Existing Arrangements to Better achieve goals (shorten  lease, redevelopment, purchase/sale leaseback etc) 8

Case Study #1

LOCATION

Greenville, SC

SYSTEM PROFILE

Four acute care hospitals and 11 specialty healthcare facilities with a total of 1,268 beds

FINANCIAL PROFILE

 AA Credit Rating (Fitch)  Total Assets of $1.3 Billion  Annual Revenues of $1.1 Billion

SERVICE PROVIDED

 Strategic Real Estate Options Assessment Evaluation of 25 currently owned and to be developed medical office assets.

TRANSACTION COMPLETED

 Portfolio Monetization  Developer Selection

TRANSACTION SUMMARY

Monetization of a 16 building, 855,376 square foot portfolio, with a total value of $162,820,000 and Developer Selection for several to-be-developed buildings

BENEFITS OF TRANSACTION

Created substantial unrestricted liquidity and beneficial accounting treatment, while maintaining appropriate control 9

Case Study #2 LOCATION

Benton, AK

SYSTEM PROFILE

Standalone rural community hospital with 167 beds

FINANCIAL PROFILE

 Unrated  Total Assets of $72 Million  Annual Revenues of $80 Million

SERVICE PROVIDED

 Strategic Real Estate Options Assessment Evaluation focusing on physician ownership and existing short-term lease structure of currently owned medical office assets.

TRANSACTION COMPLETED TRANSACTION SUMMARY

 Portfolio Monetization

TRANSACTION BENEFITS

Generated substantial liquidity at a key time for SMH, while maintaining appropriate control. Investor plans to offer physician ownership…

Monetization of a 4 building, 110,315 square foot portfolio, with a total value of $15,000,000. Transaction was structured to include an ownership option for physician-tenants.

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Are You a Candidate for Monetization / Developer Selection? The following questions may help a health system or hospital ascertain if they are  a potential candidate for the monetization of non‐core real estate assets.  Need for Unrestricted Cash / Liquidity?  Limited Access to Traditional Funding Sources?  Income Generating Real Estate?  New Real Estate Development Projects on the Horizon?  Expert Management?  Reduce Debt?  Fraud & Abuse Laws of Concern?  Benefit from an Expert Real Estate Developer as a Partner?  Physicians Seeking Real Estate Ownership?  Exploring For‐Profit JV’s that include New or Existing Real Estate? 

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Real Estate

What Process Should I Undertake to Determine Appropriateness? The best approach to achieve your goals is a structured process geared towards a  customized result.  The approach should entails the following two phases outlined  below: Phase 1: Strategic Real Estate Options Assessment (“ROA”)  The ROA will serve to educate senior management and board members  regarding control issues, valuation of assets, partnering with real estate  companies/developers, various financing options and structures, the impact  on financial statements and others.  It clearly delineates the rationale for  pursuing a particular type(s) of transaction structure(s).  Phase 2: Transaction Marketing Process  This is a highly structured and intensive process that is designed to generate  interest and competition in the marketplace and includes the creation of a  marketing plan, production of offering materials, contacting of interested  parties, solicitation of offers, and negotiation and closing of the transaction.

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Legal Considerations  What Are You Going to Sell?  Footprint vs. Land and Building  Contents of the Building  Services Necessary to Operate the Building

Legal Considerations  How is the Building Operated?   Hours of operation and approved uses  Utilities  Maintenance    Alteration   Subletting  Insurance  Taxes and other impositions  Expansion Rights  Use Restrictions

Legal Considerations  What Happens When the Buyer Wants / Gets Out?  Use restrictions on the land itself  Right of First Refusal  Foreclosure  Other Considerations  Buyer financing

Legal Considerations

 For governmental hospital, check enabling legislation or  ordinances.  For all hospitals, check bond documents:  Master trust indenture  Insurer agreements  Letter of credit bank agreement

Legal Considerations

 What Possible Actions Must You Take?  Pay off bonds allocated to this project; or  Use receipts from sale for other capital projects

Legal Considerations

 If property to be sold is financed in whole or in part with tax‐exempt bonds, you will need an opinion of bond  counsel to proceed

Questions & Answers [email protected]

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