INSIGHTS

“New Normal” for Healthcare, Great Opportunity for Stand-Alone Medical Offices

The events of the past several months have led many in the healthcare space to rethink their business models and strategies. This is especially true for the owners of stand-alone practices, which have faced challenging conditions on both the clinical and clerical sides of their operations. In many cases, revenues and expenses have each been moving in the wrong direction.

Among other things, patients have postponed check-ups and other elective procedures amid worries about catching COVID-19 and government mandates designed to slow the spread of the disease. At the same time, providers have had to ramp up spending on personal protection equipment. They’ve also had to make costly adjustments to schedules, staffing, and structures to ensure patients and employees stay safe.

A one-two hit to profitability

This one-two punch has hit the bottom lines of single-provider and small group practices, many of which did not have the resources to adequately weather the storm. For those that started up fairly recently, the impact has been much greater. Consequently, many practice owners have been considering other options, including joining forces with a real estate investment trust, or REIT.

In fact, medical office building (“MOB”) REITS have been resilient amid the recent turbulence. Even after years of strong growth, this segment has stood out, bolstered by strong balance sheets and continued access to capital, enabling operators to readily adjust to the current, more challenging realities. Many have also benefited from having large portfolios spread across regions, providing a significant diversification benefit.

Income, tax advantages, and security

In the current environment, REITs that own properties with triple-net leases also offer other advantages to MOB owners that join the fold. Tenants assume responsibility for all costs associated with a property, including taxes, insurance, and maintenance, typically in exchange for a lower rent. Generally structured as long-term agreements, they provide a measure of stability, an attractive income stream, and tax advantages.

Now is an ideal time for MOBs to go the REIT route. While independence has its virtues, business risks will likely remain uncertain and difficult for the foreseeable future. Aside from the drain associated with cash flow shortfalls and safety-oriented structural upgrades, a shortage of readily available financing suggests such properties may end up deteriorating over time.

With all this in mind, it’s hard not to think that today’s “new normal” represents a timely opportunity for the owners of stand-alone medical practices to capitalize on the advantages of getting together with a REIT.

To learn more about how this could work for you, please reach out to Jared Elfvin at jelfvin@e78advisors.com.

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