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Maximizing Healthcare Consolidation Value Through Collaboration

2 minutes read
Discover how collaborative partnerships with investment banking and real estate experts can lead to optimal financial and non-financial M&A outcomes in our new white paper.

Avoid healthcare M&A transaction pitfalls with expert guidance

Private equity continues to drive healthcare M&A, with investments in physician-owned hospitals and ambulatory surgery centers rising.

Some physicians attempt to handle the process alone or with a single attorney. However, healthcare transactions are tricky, and there’s only one chance to get it right. Teaming up with investment bankers and healthcare real estate specialists who work collaboratively can lead to better deal alignment and structure considerations, ensuring the highest valuation for the business and real estate.

Monetizing passive healthcare real estate assets helps physician-owners and creates opportunities to maximize their Practice’s value

Table of Contents

While in the process of working with a healthcare investment bank to seek a partner for their physician owned surgical hospital (“Hospital”), the Hospital was approached by a national healthcare real estate investor with an unsolicited offer to acquire the hospital real estate (“Property”). The physician-owners were initially pleased with the $50 million offer. After all, they never considered their facility’s underlying real estate to be a standalone investment, and the price offered was many times more than the recent appraisal they received. As reality began to sink in, the physician-owners realized there were many factors to consider that could impact both the Hospital and the Property. The concern was that they could be leaving considerable money on the table and failing to account for long-term operational control considerations that can impact the sale of both entities. To determine the Property’s value, they asked the Hospital’s banker to coordinate with a healthcare real estate specialist to discretely navigate a four-week marketing campaign to ensure they were maximizing the value of the Hospital. This process involved evaluating the various real estate options to better understand the impact that selling the Property would have on a potential sale of the Hospital’s operations. Engaging both advisors was well worth it – In the end, the physician-partners received several offers from a variety of private equity firms and REITs (Real Estate Investment Trusts), including a Hybrid SLB (hybrid sale-leaseback) option that allowed them to monetize the majority of the Property while continuing to own a minority ownership interest for long-term physician alignment. Through a coordinated process, the healthcare real estate specialists and investment

bankers were able to better align the key deal points and various structure considerations to ensure that neither transaction would have the potential to undermine the other. Ultimately, through a competitive bid process, the REIT that was originally offered on the Property was selected for $8 million more than their initial offer. In addition to garnering a price that was 16% higher, the Property’s owners were also able to leverage the controlled marketing and bid process to obtain favorable terms that were not included in the original offer: For example, the transaction included (1) continued physician ownership in the Property for longterm practice alignment, (2) several options to extend the lease at fair market value, (3) the ability to renovate and expand the Hospital for future growth, and (4) addressed tax deferral through a reinvestment in the REIT’s real estate portfolio known as an UPREIT — providing monthly dividends, diversification, and estate tax planning opportunities. On the operations side of the Transaction, the Hospital’s owners were able to secure a growth partner and professional manager who would help drive the Hospital’s success moving forward. Importantly, the complexities of the Property’s transaction were managed by the bankers and healthcare real estate specialists in a manner that only enhanced both transactions. For physician-owners nationwide, this transaction underscores the importance of understanding the current marketplace and types of creative transaction structures that are unique to healthcare providers. In a world of uncertainty, ASCs, Hospitals, and MOBs (Medical Office Buildings) are proving to be an attractive investment where investors see stability, positive demographic fundamentals, and a lower correlation between healthcare expenditures and the broader economy. On the flip side, physician-owners of their medical practice or hospital operations are increasingly looking into how they can incorporate their real estate assets when considering a capital event or strategic partner for their healthcare operations. This evolution and mindset enables physicians to achieve the highest valuation of their businesses — and real estate — without compromising future growth.

CONTRIBUTING FACTORS: WHY ARE INVESTMENTS OCCURRING?

1. POPULATION DEMOGRAPHICS: AN AGING U.S. POPULATION

The population in the United States is aging rapidly, forcing changes in housing, the workplace, healthcare, and virtually every other aspect of the economy.1 In fact, within the next two decades, Americans 65 years and older will outnumber children in this country for the first time since the U.S. Census Bureau began counting.2
A key driver in the growth of independent specialty practices is the change to regulatory and reimbursement policies that allow practitioners to perform Centers for Medicare & Medicaid Services approved procedures in ambulatory surgery centers rather than on an inpatient hospital basis. This creates a significant pathway for practitioners to take advantage of a new revenue stream for cases that they’re already doing and grow their practices. Before these changes, certain specialists were almost entirely hospital-driven because there was no practical or viable mechanism for physician-driven, physician-centric businesses to thrive. It isn’t just new revenue streams driving specialists in this direction, however. In private practice, specialists can be more autonomous than they would be in a large hospital system. They can make their voices heard, govern themselves internally, have more control over patient care and monetize services to improve their compensation. But in the absence of size, controlling sites of service, and having robust data collection and data management, it can be difficult for small practices to grow and be consistently profitable. This is especially the case with alternative payment models and in light of increasing consolidation of health systems, payers, and primary care, and other referral sources.
AN AGING AMERICA3 Seniors expected to outnumber minors by mid-2030s
As the nation grows older in the coming decades, the demand for healthcare services is expected to increase dramatically, according to the U.S. Centers for Medicare & Medicaid Services (CMS). In particular, spending on Medicare is expected to peak — both as a share of the overall economy and the nation’s total healthcare bill — within the next two decades, CMS data shows. The federal program currently insures about 54 million Americans and covers the costs of inpatient stays, outpatient care, prescriptions drugs and other common healthcare services, according to the Congressional Research Service.5

1 https://www.census.gov/

2 Ibid.

3 Ibid.

4 http://www.medpac.gov/

5 https://crsreports.congress.gov/

MEDICARE SPENDING6

Federal program covers a wide range of healthcare
services for seniors

 

TOTAL BENEFIT SPENDING = $814 BILLION

As the nation grows older in the coming decades, the demand for healthcare services is expected to increase dramatically, according to the U.S. Centers for Medicare & Medicaid Services (CMS). In particular, spending on Medicare is expected to peak — both as a share of the overall economy and the nation’s total healthcare bill — within the next two decades, CMS data shows. The federal program cur srently insures about 54 million Americans and covers the costs of inpatient stays, outpatient care, prescriptions drugs and other common healthcare services, according to the Congressional Research Service.

6 https://crsreports.congress.gov/product/pdf/IF/IF10885

Part A: Inpatient hospital services, skilled nursing care, hospice care and some home health services

Part A and/or B

Part B: Physician, laboratory, outpatient hospital and some home health services, physician-administered drugs, and durable medical equipment

Part C: Medicare Advantage

Part D: Optional outpatient prescription drug benefit

PRACTICE CONSOLIDATION: THE SHIFT TO PHYSICIAN EMPLOYMENT

Another macro trend impacting the healthcare industry, which is being driven by America’s demographic shift towards an aged population amongst other factors, is the drive towards consolidation in healthcare services. Mergers and acquisitions are one of the primary ways this consolidation is achieved, though there are others. For example, in 2018, the percentage of physicians who were employed (47.4%) surpassed those who owned their Practices (45.9%). This is a startling statistic considering that as recently as 2012, 53.2% of physicians owned their Practices compared with 41.8% who were employed. In under a decade, the shift towards physicians being employed en masse — and further consolidation — has continued and accelerated. This trend is more pronounced in some specialties (e.g. psychiatry) when compared to others (e.g. surgical subspecialties like cardiovascular or orthopedic surgery). Furthermore, according to the AMA, this trend is even more pronounced amongst the youngest generation of physicians — aged 40 and younger — where the percentage of employed physicians was estimated at 69.8%. This shift in physician Practice ownership is another way consolidation is occurring without direct mergers or acquisitions activity taking place. This trend is not surprising, as the benefits of consolidation can be significant, including superior economies of scale, improved patient care and experience, and enhanced negotiating power with insurers and regulators.
A SHIFT IN PHYSICIAN PRACTICE OWNERSHIP7

For the first time, fewer physicians are owners than employees

3. INEXPENSIVE CAPITAL AND THE SEARCH FOR HIGH-YIELD INVESTMENTS

Along with an aging population and a rapidly consolidating physician workforce, inexpensive capital — a direct byproduct of short-term borrowing rates set by the U.S. Federal Reserve Board — has pushed yield-hungry institutional investors into once obscure healthcare real estate and business investments over the past decade, generating unprecedented valuations for these properties and Practices.
With many other types of investment opportunities drying up or leaving investors searching for higher yield, investors are willing to pay a premium for assets widely considered to be recession proof given the shifting demographics: For example, in many markets, MOBs and other healthcare real estate assets are now selling for as high as 17 times earnings.8 This has been especially true during the COVID-19 pandemic where healthcare (along with tech) has emerged as a beacon of returns and a relatively safe space for investors to place their capital.

CHEAP MONEY9

Historically low federal funds rate is driving shift to healthcare-focused real estate

FEEDING FRENZY10

Private equity, REITs now involved in more than 3/4s of all MOB sales

7 https://www.ama-assn.org/system/files/2019-07/prp-fewer-own
ers-benchmark-survey-2018.pdf

8 https://www.healthcarerea.com

9 https://fred.stlouisfed.org/series/DFF

10 Revista

Investors and practitioners share a desire for growth and increased revenue. But doctors approach prospective deals with a distinct set of concerns about consolidation and acquisition, as essential as such transactions may be for viability and growth. Evaluating opportunities involves much more than considering financial terms. Specifically, the challenge for doctors in private practice is how to balance their desire for autonomy with the ability to access capital or take advantage of scale so they have a level playing field. A practitioner who’s obtained independence and control over his or her practice will be understandably reluctant to work for a hospital system or a big medical group. After being an owner, the physician won’t want to become an employee. Practitioners may be able to address these concerns by choosing partners they’re comfortable with and those that align with their goals. In turn, investors must be cognizant of the tension practitioners feel between necessary growth and desired autonomy and its role in their decision-making process. Failing to acknowledge and address these concerns during negotiations could quickly sour a practice owner on the potential benefits of a proposed transaction. Similarly, the medical practice advisers who find opportunities, connect potential partners and facilitate deals for practice owners also need to recognize and consider how emotional these transactions can be for practitioners who live and breathe the business they’ve built for themselves. Advisers want all parties to see the opportunity as a win-win. The adviser’s role is to provide sound, objective data to help guide doctors through the process and make them feel good about what they’re doing.

It’s about more than dollars and cents

Merritt Healthcare Advisors focuses exclusively on representing owners of surgical facilities and health care practices that are considering strategic options, whether selling an interest in their organizations, creating new partnerships or growing through acquisitions. As the industry’s leading mergers and acquisitions firm, our proven process and extensive buyer network enable us to help our clients realize the absolute best financial and nonfinancial outcomes. We’re unique in that we’re the only firm that combines an investment banking background with actual “owners” experience that comes from developing and managing our own health care facilities. We’ve used this experience to successfully complete more than $4 billion in transactions on behalf of our clients.

SLB: HAVING CAKE, EATING IT TOO

In many cases, a Sale-Leaseback (“SLB”) offers the best of both worlds for physician MOB owners. The arrangement, in which physicianowners sell the majority of the property and retain continued physician-ownership in a tax-deferred manner, allows physician partners to monetize all or a portion of their real estate while leasing it back. In doing so, ownership can unlock up to 100% of their passive equity to invest in their core business, modernize facilities and equipment, expand an existing facility, build a new facility, reduce debt, make partner distributions, and maintain stability for their Practice in the future.
In a seller’s market, owners can take chips off the table, retain control through a long-term lease with multiple renewal options, retain the ability to reinvest proceeds tax-deferred into a larger diversified medical office portfolio, and maintain physician alignment between the real estate and the Practice. This last point is paramount to the success of any transaction being considered by physicians for their Practice’s operations. Real estate is a key factor healthcare operations investors consider when evaluating a potential investment opportunity. The real estate-practice relationship is most attractive when (1) there is a long-term lease in place (e.g. 12 year lease term with four 5-year options to extend), (2) the ownership is stable, and (3) there is common ownership between the healthcare operating business and the real estate entity. By pursuing a SLB strategy and ensuring an investment banker and healthcare real estate specialist coordinate their marketing strategies, physicians can have the best of both worlds when monetizing their assets.

Practice focus:

Free up time to focus more on the practice of medicine and less on real estate ownership and management issues.

Improved economics:

Unlike traditional debt financing with a loan-to-value ratio of 65 to 75%, a sale-leaseback unlocks 100% of the value.

Practice alignment:

A SLB offers creative transaction structures that allow for continued physician-ownership in the real estate, providing lower buy-in for physician recruitment.

Portfolio reinvestment:

SLBs also offer the ability to structure a tax-deferred transaction and diversified income through an UPREIT transaction.

Improved financial statements:

The lease can be structured as an operating lease to reduce any impact on the balance sheet and loan covenants.

Operational control:

Maintain longterm full operating control over the facility with the ability to modify the space as the business evolves.

Tax benefits:

Rental payments are fully deductible, whereas a fully depreciated asset does not offer any tax benefits

Reduce conflict:

Eliminate challenges of having future physicians as owners in the practice but not in the real estate.

Interested in learning more about the healthcare real estate landscape? Let’s talk.

Merritt Healthcare Advisors is the industry’s leading healthcare advisory firm focused exclusively on representing owners of healthcare businesses, surgical facilities and practices that are considering a strategic transaction, whether it is partnering with another group, selling an interest in their business or growing their business through acquisitions. We offer:

Extensive M&A Experience, Proven Track Record

As licensed investment bankers*, we offer extensive M&A expertise that is the result of completing over $4 billion in healthcare transactions.

Industry Specialization

We are focused solely on representing business owners of healthcare practices, surgical facilities and their associated businesses who are considering a transaction.

Extensive Relationship Network

Our leadership team has extensive experience working with healthcare organizations, hospitals, national strategic firms, private equity and industry leaders on a national level.

Operational Expertise

In addition to transactional expertise, Merritt Healthcare principals have developed and operated over 20 ASCs, partnering with over 300 physicians in the process.

Process and Approach

We are committed to developing a deep understanding of a potential transaction. There are many elements involved in a successful process, and it is our job to ensure that your long-term objectives are met. Our Clients can also expect senior level commitment on all transactions.

Exceptional Results

Merritt has consistently been able to achieve the optimal financial and non-financial results for our Clients. We have the expertise, knowledge and experience required to manage this extremely time-consuming and complex process.

HREA | Healthcare Real Estate Advisors (HREA) is a national leader in advising healthcare providers and real estate investors with various monetization strategies, including disposition, debt & equity recapitalization, and tax-deferred structures, such as the §1031 Exchange or UPREIT. In addition, HREA’s capabilities also include providing health systems and physician groups with 100% non-recourse financing for new development and expansion, as well as monetizing surplus and non-essential real estate assets. We offer:

SPECIALIZATION:

Our relationships in the healthcare industry consistently garner 20%+ additional sale proceeds over fair market value and prevent costly mistakes through a wellnegotiated lease.

EXPERIENCE:

Our expertise ensures that our client maintains long-term control of the building with numerous control provisions that allow for growth, including no personal guaranties, multiple lease extension options, and the ability to modify or expand the building.

FIDUCIARY RESPONSIBILITY:

We are fierce advocates for our client, the owner of the property. Many investment groups will attempt to approach owners directly in order to take advantage of a lack of market knowledge.

MARKET INSIGHTS:

HREA is a member of Revista, the leading healthcare real estate data platform that provides information on local area dynamics, including supply/demand for various healthcare provider specialties, as well as admissions and revenue for all ASCs and hospitals.

Improved financial statements:

The lease can be structured as an operating lease to reduce any impact on the balance sheet and loan covenants.

Operational control:

Maintain longterm full operating control over the facility with the ability to modify the space as the business evolves.

Tax benefits:

Rental payments are fully deductible, whereas a fully depreciated asset does not offer any tax benefits

Reduce conflict:

Eliminate challenges of having future physicians as owners in the practice but not in the real estate.

Contact Us

Contact Merritt

Matt Searles Partner

msearles@merrittadvisory.com

(914) 262-1217


Connecticut Office
63 Copps Hill, 22A Ridgefield,
CT 06877
(914) 556-6266

West Coast Office
521 Bachman Ave
Los Gatos, CA 95030
merrittadvisory.com

Contact HREA

Christopher Stai
Managing Director, Raleigh
cstai@healthcareREA.com

Joshua Rees
Director, San Diego
jrees@healthcareREA.com

Steve Reeves
Director, Cape Coral
sreeves@healthcareREA.com

San Diego, CA Office
(858) 312-0657

Cape Coral, FL Office
(717) 856-4496

Raleigh, NC Office
(480) 433-3494

Meritt Healthcare Advisors (“MHA”) is focused exclusively on representing owners of surgical facilities and healthcare practices that are considering strategic options, whether it is selling an interest in their organization, creating a new partnership or growing through acquisition. MHA is unique in that we are the only firm that combines an investment banking background with actual “owners” experience that comes from developing and managing our own healthcare facilities. We have used this experience to successfully complete more than $5 billion in transactions on behalf of our Clients. As the industry’s leading Mergers and Acquisitions (“M&A”) firm, our proven process and extensive buyer network enables us to help our Clients realize the absolute best financial and non-financial outcomes. The Principals of Merritt acted in their capacity of licensed investment banking agents of Burch & Company, Inc., member FINRA/SIPC.
HREA | Healthcare Real Estate Advisors is a national leader in providing advisory services and innovative solutions to healthcare providers, real estate owners, and investors with various real estate strategies in the disposition process, including property valuation, marketing and exposure, buyer identification and negotiations, transaction management, timing and market insights, and portfolio optimization. HREA also provides real estate developers with access to Equity Financing, Joint Venture (JV) Partnerships, and Forward Commitment Buyers that can secure the necessary capital and resources to execute their development project and help mitigate risk with their exit strategy. HREA’s advisory team has completed over $4 billion in healthcare real estate transactions throughout the U.S. With an exclusive focus on healthcare real estate and simplifying complex transactions, HREA is uniquely capable of providing solutions and outcomes that are tailored to each client.

Monetizing passive healthcare real estate assets helps physician-owners and creates opportunities to maximize their Practice’s value

Table of Contents

While in the process of working with a healthcare investment bank to seek a partner for their physician owned surgical hospital (“Hospital”), the Hospital was approached by a national healthcare real estate investor with an unsolicited offer to acquire the hospital real estate (“Property”). The physician-owners were initially pleased with the $50 million offer. After all, they never considered their facility’s underlying real estate to be a standalone investment, and the price offered was many times more than the recent appraisal they received. As reality began to sink in, the physician-owners realized there were many factors to consider that could impact both the Hospital and the Property. The concern was that they could be leaving considerable money on the table and failing to account for long-term operational control considerations that can impact the sale of both entities. To determine the Property’s value, they asked the Hospital’s banker to coordinate with a healthcare real estate specialist to discretely navigate a four-week marketing campaign to ensure they were maximizing the value of the Hospital. This process involved evaluating the various real estate options to better understand the impact that selling the Property would have on a potential sale of the Hospital’s operations. Engaging both advisors was well worth it – In the end, the physician-partners received several offers from a variety of private equity firms and REITs (Real Estate Investment Trusts), including a Hybrid SLB (hybrid sale-leaseback) option that allowed them to monetize the majority of the Property while continuing to own a minority ownership interest for long-term physician alignment. Through a coordinated process, the healthcare real estate specialists and investment

bankers were able to better align the key deal points and various structure considerations to ensure that neither transaction would have the potential to undermine the other. Ultimately, through a competitive bid process, the REIT that was originally offered on the Property was selected for $8 million more than their initial offer. In addition to garnering a price that was 16% higher, the Property’s owners were also able to leverage the controlled marketing and bid process to obtain favorable terms that were not included in the original offer: For example, the transaction included (1) continued physician ownership in the Property for longterm practice alignment, (2) several options to extend the lease at fair market value, (3) the ability to renovate and expand the Hospital for future growth, and (4) addressed tax deferral through a reinvestment in the REIT’s real estate portfolio known as an UPREIT — providing monthly dividends, diversification, and estate tax planning opportunities. On the operations side of the Transaction, the Hospital’s owners were able to secure a growth partner and professional manager who would help drive the Hospital’s success moving forward. Importantly, the complexities of the Property’s transaction were managed by the bankers and healthcare real estate specialists in a manner that only enhanced both transactions. For physician-owners nationwide, this transaction underscores the importance of understanding the current marketplace and types of creative transaction structures that are unique to healthcare providers. In a world of uncertainty, ASCs, Hospitals, and MOBs (Medical Office Buildings) are proving to be an attractive investment where investors see stability, positive demographic fundamentals, and a lower correlation between healthcare expenditures and the broader economy. On the flip side, physician-owners of their medical practice or hospital operations are increasingly looking into how they can incorporate their real estate assets when considering a capital event or strategic partner for their healthcare operations. This evolution and mindset enables physicians to achieve the highest valuation of their businesses — and real estate — without compromising future growth.

CONTRIBUTING FACTORS: WHY ARE INVESTMENTS OCCURRING?

1. POPULATION DEMOGRAPHICS: AN AGING U.S. POPULATION

The population in the United States is aging rapidly, forcing changes in housing, the workplace, healthcare, and virtually every other aspect of the economy.1 In fact, within the next two decades, Americans 65 years and older will outnumber children in this country for the first time since the U.S. Census Bureau began counting.2
A key driver in the growth of independent specialty practices is the change to regulatory and reimbursement policies that allow practitioners to perform Centers for Medicare & Medicaid Services approved procedures in ambulatory surgery centers rather than on an inpatient hospital basis. This creates a significant pathway for practitioners to take advantage of a new revenue stream for cases that they’re already doing and grow their practices. Before these changes, certain specialists were almost entirely hospital-driven because there was no practical or viable mechanism for physician-driven, physician-centric businesses to thrive. It isn’t just new revenue streams driving specialists in this direction, however. In private practice, specialists can be more autonomous than they would be in a large hospital system. They can make their voices heard, govern themselves internally, have more control over patient care and monetize services to improve their compensation. But in the absence of size, controlling sites of service, and having robust data collection and data management, it can be difficult for small practices to grow and be consistently profitable. This is especially the case with alternative payment models and in light of increasing consolidation of health systems, payers, and primary care, and other referral sources.
AN AGING AMERICA3 Seniors expected to outnumber minors by mid-2030s
As the nation grows older in the coming decades, the demand for healthcare services is expected to increase dramatically, according to the U.S. Centers for Medicare & Medicaid Services (CMS). In particular, spending on Medicare is expected to peak — both as a share of the overall economy and the nation’s total healthcare bill — within the next two decades, CMS data shows. The federal program currently insures about 54 million Americans and covers the costs of inpatient stays, outpatient care, prescriptions drugs and other common healthcare services, according to the Congressional Research Service.5

1 https://www.census.gov/

2 Ibid.

3 Ibid.

4 http://www.medpac.gov/

5 https://crsreports.congress.gov/

MEDICARE SPENDING6

Federal program covers a wide range of healthcare
services for seniors

 

TOTAL BENEFIT SPENDING = $814 BILLION

As the nation grows older in the coming decades, the demand for healthcare services is expected to increase dramatically, according to the U.S. Centers for Medicare & Medicaid Services (CMS). In particular, spending on Medicare is expected to peak — both as a share of the overall economy and the nation’s total healthcare bill — within the next two decades, CMS data shows. The federal program cur srently insures about 54 million Americans and covers the costs of inpatient stays, outpatient care, prescriptions drugs and other common healthcare services, according to the Congressional Research Service.

6 https://crsreports.congress.gov/product/pdf/IF/IF10885

Part A: Inpatient hospital services, skilled nursing care, hospice care and some home health services

Part A and/or B

Part B: Physician, laboratory, outpatient hospital and some home health services, physician-administered drugs, and durable medical equipment

Part C: Medicare Advantage

Part D: Optional outpatient prescription drug benefit

PRACTICE CONSOLIDATION: THE SHIFT TO PHYSICIAN EMPLOYMENT

Another macro trend impacting the healthcare industry, which is being driven by America’s demographic shift towards an aged population amongst other factors, is the drive towards consolidation in healthcare services. Mergers and acquisitions are one of the primary ways this consolidation is achieved, though there are others. For example, in 2018, the percentage of physicians who were employed (47.4%) surpassed those who owned their Practices (45.9%). This is a startling statistic considering that as recently as 2012, 53.2% of physicians owned their Practices compared with 41.8% who were employed. In under a decade, the shift towards physicians being employed en masse — and further consolidation — has continued and accelerated. This trend is more pronounced in some specialties (e.g. psychiatry) when compared to others (e.g. surgical subspecialties like cardiovascular or orthopedic surgery). Furthermore, according to the AMA, this trend is even more pronounced amongst the youngest generation of physicians — aged 40 and younger — where the percentage of employed physicians was estimated at 69.8%. This shift in physician Practice ownership is another way consolidation is occurring without direct mergers or acquisitions activity taking place. This trend is not surprising, as the benefits of consolidation can be significant, including superior economies of scale, improved patient care and experience, and enhanced negotiating power with insurers and regulators.
A SHIFT IN PHYSICIAN PRACTICE OWNERSHIP7

For the first time, fewer physicians are owners than employees

3. INEXPENSIVE CAPITAL AND THE SEARCH FOR HIGH-YIELD INVESTMENTS

Along with an aging population and a rapidly consolidating physician workforce, inexpensive capital — a direct byproduct of short-term borrowing rates set by the U.S. Federal Reserve Board — has pushed yield-hungry institutional investors into once obscure healthcare real estate and business investments over the past decade, generating unprecedented valuations for these properties and Practices.
With many other types of investment opportunities drying up or leaving investors searching for higher yield, investors are willing to pay a premium for assets widely considered to be recession proof given the shifting demographics: For example, in many markets, MOBs and other healthcare real estate assets are now selling for as high as 17 times earnings.8 This has been especially true during the COVID-19 pandemic where healthcare (along with tech) has emerged as a beacon of returns and a relatively safe space for investors to place their capital.

CHEAP MONEY9

Historically low federal funds rate is driving shift to healthcare-focused real estate

FEEDING FRENZY10

Private equity, REITs now involved in more than 3/4s of all MOB sales

7 https://www.ama-assn.org/system/files/2019-07/prp-fewer-own
ers-benchmark-survey-2018.pdf

8 https://www.healthcarerea.com

9 https://fred.stlouisfed.org/series/DFF

10 Revista

Investors and practitioners share a desire for growth and increased revenue. But doctors approach prospective deals with a distinct set of concerns about consolidation and acquisition, as essential as such transactions may be for viability and growth. Evaluating opportunities involves much more than considering financial terms. Specifically, the challenge for doctors in private practice is how to balance their desire for autonomy with the ability to access capital or take advantage of scale so they have a level playing field. A practitioner who’s obtained independence and control over his or her practice will be understandably reluctant to work for a hospital system or a big medical group. After being an owner, the physician won’t want to become an employee. Practitioners may be able to address these concerns by choosing partners they’re comfortable with and those that align with their goals. In turn, investors must be cognizant of the tension practitioners feel between necessary growth and desired autonomy and its role in their decision-making process. Failing to acknowledge and address these concerns during negotiations could quickly sour a practice owner on the potential benefits of a proposed transaction. Similarly, the medical practice advisers who find opportunities, connect potential partners and facilitate deals for practice owners also need to recognize and consider how emotional these transactions can be for practitioners who live and breathe the business they’ve built for themselves. Advisers want all parties to see the opportunity as a win-win. The adviser’s role is to provide sound, objective data to help guide doctors through the process and make them feel good about what they’re doing.

It’s about more than dollars and cents

Merritt Healthcare Advisors focuses exclusively on representing owners of surgical facilities and health care practices that are considering strategic options, whether selling an interest in their organizations, creating new partnerships or growing through acquisitions. As the industry’s leading mergers and acquisitions firm, our proven process and extensive buyer network enable us to help our clients realize the absolute best financial and nonfinancial outcomes. We’re unique in that we’re the only firm that combines an investment banking background with actual “owners” experience that comes from developing and managing our own health care facilities. We’ve used this experience to successfully complete more than $4 billion in transactions on behalf of our clients.

SLB: HAVING CAKE, EATING IT TOO

In many cases, a Sale-Leaseback (“SLB”) offers the best of both worlds for physician MOB owners. The arrangement, in which physicianowners sell the majority of the property and retain continued physician-ownership in a tax-deferred manner, allows physician partners to monetize all or a portion of their real estate while leasing it back. In doing so, ownership can unlock up to 100% of their passive equity to invest in their core business, modernize facilities and equipment, expand an existing facility, build a new facility, reduce debt, make partner distributions, and maintain stability for their Practice in the future.
In a seller’s market, owners can take chips off the table, retain control through a long-term lease with multiple renewal options, retain the ability to reinvest proceeds tax-deferred into a larger diversified medical office portfolio, and maintain physician alignment between the real estate and the Practice. This last point is paramount to the success of any transaction being considered by physicians for their Practice’s operations. Real estate is a key factor healthcare operations investors consider when evaluating a potential investment opportunity. The real estate-practice relationship is most attractive when (1) there is a long-term lease in place (e.g. 12 year lease term with four 5-year options to extend), (2) the ownership is stable, and (3) there is common ownership between the healthcare operating business and the real estate entity. By pursuing a SLB strategy and ensuring an investment banker and healthcare real estate specialist coordinate their marketing strategies, physicians can have the best of both worlds when monetizing their assets.

Practice focus:

Free up time to focus more on the practice of medicine and less on real estate ownership and management issues.

Improved economics:

Unlike traditional debt financing with a loan-to-value ratio of 65 to 75%, a sale-leaseback unlocks 100% of the value.

Practice alignment:

A SLB offers creative transaction structures that allow for continued physician-ownership in the real estate, providing lower buy-in for physician recruitment.

Portfolio reinvestment:

SLBs also offer the ability to structure a tax-deferred transaction and diversified income through an UPREIT transaction.

Improved financial statements:

The lease can be structured as an operating lease to reduce any impact on the balance sheet and loan covenants.

Operational control:

Maintain longterm full operating control over the facility with the ability to modify the space as the business evolves.

Tax benefits:

Rental payments are fully deductible, whereas a fully depreciated asset does not offer any tax benefits

Reduce conflict:

Eliminate challenges of having future physicians as owners in the practice but not in the real estate.

Interested in learning more about the healthcare real estate landscape? Let’s talk.

Merritt Healthcare Advisors is the industry’s leading healthcare advisory firm focused exclusively on representing owners of healthcare businesses, surgical facilities and practices that are considering a strategic transaction, whether it is partnering with another group, selling an interest in their business or growing their business through acquisitions. We offer:

Extensive M&A Experience, Proven Track Record

As licensed investment bankers*, we offer extensive M&A expertise that is the result of completing over $4 billion in healthcare transactions.

Industry Specialization

We are focused solely on representing business owners of healthcare practices, surgical facilities and their associated businesses who are considering a transaction.

Extensive Relationship Network

Our leadership team has extensive experience working with healthcare organizations, hospitals, national strategic firms, private equity and industry leaders on a national level.

Operational Expertise

In addition to transactional expertise, Merritt Healthcare principals have developed and operated over 20 ASCs, partnering with over 300 physicians in the process.

Process and Approach

We are committed to developing a deep understanding of a potential transaction. There are many elements involved in a successful process, and it is our job to ensure that your long-term objectives are met. Our Clients can also expect senior level commitment on all transactions.

Exceptional Results

Merritt has consistently been able to achieve the optimal financial and non-financial results for our Clients. We have the expertise, knowledge and experience required to manage this extremely time-consuming and complex process.

HREA | Healthcare Real Estate Advisors (HREA) is a national leader in advising healthcare providers and real estate investors with various monetization strategies, including disposition, debt & equity recapitalization, and tax-deferred structures, such as the §1031 Exchange or UPREIT. In addition, HREA’s capabilities also include providing health systems and physician groups with 100% non-recourse financing for new development and expansion, as well as monetizing surplus and non-essential real estate assets. We offer:

SPECIALIZATION:

Our relationships in the healthcare industry consistently garner 20%+ additional sale proceeds over fair market value and prevent costly mistakes through a wellnegotiated lease.

EXPERIENCE:

Our expertise ensures that our client maintains long-term control of the building with numerous control provisions that allow for growth, including no personal guaranties, multiple lease extension options, and the ability to modify or expand the building.

FIDUCIARY RESPONSIBILITY:

We are fierce advocates for our client, the owner of the property. Many investment groups will attempt to approach owners directly in order to take advantage of a lack of market knowledge.

MARKET INSIGHTS:

HREA is a member of Revista, the leading healthcare real estate data platform that provides information on local area dynamics, including supply/demand for various healthcare provider specialties, as well as admissions and revenue for all ASCs and hospitals.

Improved financial statements:

The lease can be structured as an operating lease to reduce any impact on the balance sheet and loan covenants.

Operational control:

Maintain longterm full operating control over the facility with the ability to modify the space as the business evolves.

Tax benefits:

Rental payments are fully deductible, whereas a fully depreciated asset does not offer any tax benefits

Reduce conflict:

Eliminate challenges of having future physicians as owners in the practice but not in the real estate.

Contact Us

Contact Merritt

Matt Searles Partner

msearles@merrittadvisory.com

(914) 262-1217


Connecticut Office
63 Copps Hill, 22A Ridgefield,
CT 06877
(914) 556-6266

West Coast Office
521 Bachman Ave
Los Gatos, CA 95030
merrittadvisory.com

Contact HREA

Christopher Stai
Managing Director, Raleigh
cstai@healthcareREA.com

Joshua Rees
Director, San Diego
jrees@healthcareREA.com

Steve Reeves
Director, Cape Coral
sreeves@healthcareREA.com

San Diego, CA Office
(858) 312-0657

Cape Coral, FL Office
(717) 856-4496

Raleigh, NC Office
(480) 433-3494

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Gain insights from the healthcare industry’s leading M&A experts

Merritt Healthcare Advisors (“MHA”) is focused exclusively on representing owners of middle-market healthcare businesses considering strategic options, whether selling an interest in their organization, creating a new partnership or growing through acquisition.

MHA is unique in that we are the only firm that combines an investment banking background with actual “owners” experience that comes from developing and managing our own healthcare facilities. We have used this experience to successfully complete more than $5 billion in transactions on behalf of our Clients, ensuring the absolute best financial and non-financial outcomes.

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East Coast Office

63 Copps Hill, 22A

Ridgefield, CT 06877

West Coast Office
521 Bachman Ave
Los Gatos, CA 95030

contactus@merrittadvisory.com

(914) 556-6266

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Investment
Bank
Merritt principals are licensed investment banking agents of Burch & Company, Inc. (“BCI”), 4151 N. Mulberry Dr., Ste. 235, Kansas City, MO 64116 member FINRA/SIPC. All services requiring a securities license are performed through BCI. BCI and Merritt are unaffiliated entities. Testimonials presented may not be representative of the experience of other clients and are not indicative of future performance or success.
© 2024 Merritt Healthcare Advisors. All Rights Reserved .

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Gain insights from the healthcare industry’s leading M&A experts

Merritt Healthcare Advisors (“MHA”) is focused exclusively on representing owners of middle-market healthcare businesses considering strategic options, whether selling an interest in their organization, creating a new partnership or growing through acquisition.

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