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29 EXECUTIVE BRIEFING SPONSORED BY M any physicians who own their ASC and MOB real estate may be considering a sale-leaseback of their ASC/MOB real estate to take advantage of the increase in value of medical real estate. Due to the long-term success and profitability of ASCs, excellent credit history and rent coverage, and the likelihood that the ASC will remain in the same location for many years to come, ASC (and MOB) real estate has become very attractive to real estate investors. This is reflected in the current competition to buy and leaseback ASC real estate and the high multiples of 14X to 20X rent being offered. Sellers can realize high selling prices, no change in rent, and retention of control through NNN leases. 2022 Outlook for selling ASC & MOB real estate In 2021, over $16 Billion in medical investment real estate properties closed, a record number and a dramatic 75% increase from the previous year. Several portfolio transactions of ASCs, surgical hospitals and MOB real estate closed at historically low CAP rates and high prices per square foot. This has been led by investment companies entering the healthcare real estate sector and their willingness to pay above market values to achieve immediate scale. These portfolio acquisitions have created new comps that are benefiting ASC/MOB owners and increasing sale prices. 2022 is expected to see continue growth in medical real estate sales volume. As medical real estate buyers have become more competitive in bidding against each other, they have looked at ways to make a sale more attractive to physicians. Buyers are becoming more flexible in the terms they are offering physicians owners for the sale-leaseback of medical real estate. Some buyers have offered capital improvements and upgrades on top of paying high valuations for medical- office-buildings. A greater percentage of buyers are also willing to pay for building expansions and renovations as part of a transaction. An increasing number of buyers are also offering the physicians the ability to co-invest as part of a sale-leaseback. This has included tax deferred participation and equity back into the property as well as an "UPREIT" where physicians receive REIT stock. The ability to sell real estate at a top of the market number and retain minority ownership in the property with a world class ASC/MOB real estate operator is very appealing to some physician groups. We believe that this will lead to continued ASC/MOB sales growth. A major potential counteraction to the growth in ASC/MOB sale volume is the impending rise in interest rates. Historically, major increases in interest rates have negatively impacted the value of medical ASC/MOB real estate. This has the potential of causing an inflection point where CAP rates increase instead of contracting. Increase in interest rates The U.S. Federal Reserve is expected to raise interest rates six times this year for a total of 150 basis points (1.5%), a faster increase than previously predicted, according to research reports. Major investment banks have been penciling in an increasingly strong run of interest rate hikes for 2022 after higher-than-expected inflation data ramped up pressure on the Fed to take a firmer stand against soaring prices." When interest rates increase, the cost of borrowing rises. Since most commercial real estate transactions are funded with borrowed money, the increased cost of capital is likely to be reflected in lowered purchase prices for medical property. While global uncertainty does have the potential of reducing the number of interest rate hikes, several interest rate hikes are still expected in 2022 to reduce inflation and this is expected to reduce the positive impact of the new comps. This increase in borrower costs is expected to be reflected in lower prices offered to sellers later in the year. With the potential for higher rates approaching, and the current historically low interest rates, the best time to sell would be now. In summary, ASC, surgical hospital and MOB owners have an opportunity to take advantage of the historically strong market prior to significant changes in market conditions. Seven common mistakes made by sellers of ASC/ MOB real estate Here are 7 common mistakes made by sellers of ASC/MOB real estate and some tips for maximizing the value of your real estate: 1. Rent is too low. ASC/MOB owners often charge themselves below-market rent in order to maximize the EBITDA of the ASC business. Rent is a primary factor in determining the value of ASC real estate. Fair market NNN rent for ASCs averages $30 to $40 per sf, or sometimes more, depending on location. The multiples for the sale of real estate are significantly higher than the multiples for the sale of the Selling ASC & MOB Real Estate: The 2022 Outlook and Mistakes to Avoid By Jon Vick, Founding Partner, ASCs, Inc. & Jason Winokur, Vice President, JH Winokur, Inc.