I have an interview with a REIT that buys up healthcare facilities (hospitals, medical office buildings, etc.) What interests me most I'd say is I feel like this is an unprecedented time in history. 10,000 people are turning 65 in the U.S. every single day. People are living longer. I feel like the wind is at our backs.
Would be interested in hearing any advice or information on the industry.
Healthcare/Medical is consistently in the top 3 or 4 asset classes in terms of investment and development prospects in the "Emerging Trends in Real Estate" publication from PWC/ULI. If you look at Healthcare REITS like Welltower and Ventas, they have performed exceptionally well for a long time.
What type of position are you interviewing for? Does the REIT do any development or is it mainly through acquisitions?
It is for a variety of responsibilities such as asset management and acquisitions.
Healthcare is generally hard to be profitable if not for the major regulatory headwinds you face operating your facilities and most critically your revenue is 90% reimbursement based on Medicare/Medicaid (the commercial payors always peg their reimbursements to medicare/medicaid) and private pay is 90% written off. From an operational perspective margins tend be quite limited as a result and you basically can only maximize NOI by cherry picking the best payor customers (minimize private pay census). From a RE perspective, hospitals tend to be hihgly expensive assets to run (backup generators, vertical transportation, widened hallways and enlarged rooms).
I think the best play in healthcare is transitional facilities (urgent care, transitional rehab), that (1) have highly favorable remibursement rates (2) shortened length of stay and (3) the biulding itself is fairly simple to build and requires limited maintenance.
At first, I misunderstood what you were saying. I looked up some studies and one study showed that from and audit of 203 not-for-profit hospitals, less than 8% of revenue was self pay. The rest was reimbursement.
My step father is in the medical field and I think he said that he typically gets 60-70 cents on the dollar of what he charges, not to mention it may take a few months to collect. Keep in mind that he has to hire someone just to negotiate and collect, so throw that into the equation as well. Collecting reimbursements is a nightmare, which is why he gives discounts to people who pay in cash.
I have some experience in the lending space for this, snfs, AL, etc., and dealing with collections can be excruciating to say the least. Commercial payors fight tooth and nail to not reimburse as much, and the shutdown was a bit scary in terms of holding up some HUD deals, though not stopping Medicare payments. States with strange budgets like Illinois are also harder to deal in.
Great points about medical office buildings, I think they're the most flexible in terms of overall maintenance and operations not really focusing on one type of patient usually. Welltower has recently been snapping up a lot of deals in this space.
Kind of the opposite... at least in senior housing. People misread the demographics and senior housing got overbuilt. Most people don’t need assisted living at 70, they need it at 85. The first baby boomers hit 80 in 2025. The demand will come, but not yet.
To diversify, the big 3 healthcare reits have increasingly looked to life-sciences and MOBs. Also, operators are no longer signing many NNN leases and it’s more 3rd party managed structures (RIDEA).
Healthcare reits are some of the most complicated and the most interesting. They are also some of the only reits that trade a premium to nav right now. Good place to be despite the headwinds in senior housing.
So we bought some healthcare NNN deals. Here is the problem with them. Healthcare is all about being the best no matter what. The new hospitals of today are world class facilities. These health systems are simply trying to increase their rankings, while stockpiling funds from donations and other charitable vehicles. I reviewed countless PnLs off operators and there overall EBITDA margins are minuscule. Wages and continuous investment make it hard to make substantial profit. When these facilities start getting old, in many cases they decide not to renovate, instead they find another buyer willing to do another 20 year NNN lease to build them a new facility near their existing one. They then leave the current owner holding the bag. Now this owner is stuck with a 300k sqft hospital facility with no tenant. You have be very careful here. Especially if the tenant has an amazing credit profile, there will be countless firms lining up to do a new build for them.
do they acquire skilled nursing/seniors housing facilities as well?
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