It may seem like an odd time for investors to be excited about healthcare real estate given the industry's challenges of late. After all, hospitals and health systems are cash-strapped – operating on the thinnest of margins as elective surgeries have been put on hiatus and patients stay at home, drying up revenue streams.
But thanks in part to loans from the federal government – which require hospitals to maintain staffing levels and continue to pay rent on their buildings – the real estate space is doing better than expected, and relatively few organizations have had trouble meeting their rent obligations, considering the breadth and scope of the health crisis.
Joe Shull, EVP of property management at Flagship Healthcare Properties, said his firm remains fairly upbeat, especially when taking the long view.
"We've seen overall that we've had quite a few rent-deferment requests from our tenants for April and May's rents, but the PPE loan has really come through at a great time," said Shull. "It's what a lot of folks were looking for to get them over the hump."
The firm places tenants in one of two buckets: Those who are part of a real estate investment trust and those who are not. Of the firm's 450 non-REIT tenants, there were 93 rent-relief requests in early April – just under 25%. Flagship worked out rent-deferment agreements with select tenants on a case-by-case basis and put a process in place between the property- and asset-management teams to handle the requests, pointing tenants to SPA loan applications when appropriate.
With those tenants, the firm entered into a rent-deferment amendment that includes 25%-50% rent deferment over two to three months – rent that will be paid back over the course of the year.
"By the end of the year we've made the rent back, and charged interest on that rent as well," said Shull.
Of the 195 REIT tenants, 53% requested rent relief, said Rex Noble, Flagship's EVP of asset management. Ten received it, and, at a 5% interest rate, Noble said the firm will recoup the money within the calendar year and give healthcare organizations a break in the short term, with many eyeing a resumption of elective surgeries in the near future.
"We do private REITs; we're not correlated with the stock market," said Noble. "With a public REIT, they flow in value somewhat with where the stock market is going. When you think about that and what's going on with the stock market, those public REITs have taken quite a hit."
Of those organizations seeking rent referrals, the challenges they're facing are what one might expect: Cancelled elective surgeries have affected hospital-level acute care settings, and the squeeze has trickled down into non-acute care settings. Practices are getting back to work, and elective surgeries are set to tentatively resume, which could ease this burden in the short term. Whether there are downstream ramifications is largely dependent on whether there is a second wave of the virus.
"The stimulus, I think, for those who have applied for and received the funds, I think we've probably weathered this storm," said Shull. "We'll see. It may be too early to tell, and if we get a second wave then all bets are off."
Noble said a clearer picture should start to emerge within the next month or two, since reimbursements typically lag for 30 to 60 days.
"For the tenants who were immediately affected on the front end, it will be interesting to see how they're affected on the back end," said Noble. "Because of the delays in reimbursement, people were conservative and cautious even though the revenue would trickle in for 60 or 90 days.
"It's very interesting how many practices, especially single practices, spend all they make," he said. "And not all of them save for a rainy day. The way laws are set up and the way practices are set up, you see complete distribution of profits for the year. There's typically not a lot happening early in the year, not a lot of time to build up funds, whereas if this had happened in the fall, there would have been a different outcome."
Flagship's approach during the pandemic with respect to its tenants has been one of partnership as opposed to negotiation. Such firms have a lot of operating expenses and debt service to pay, so it's not an option to simply forego collecting rent. But rent deferment has proven beneficial to both sides in the past several weeks, as healthcare organizations receive the temporary relief they need while the real estate company expects to be made whole again by year's end.
"Part of the reason we wanted to charge interest is because the FDA mandates something like 3% or 4%, and we wanted to be above that," said Noble. "We're trying to establish who has a need and who has a want. Most had a want – about 10 or so had a need."
Shull said that one of the likely byproducts of the coronavirus pandemic will be an increase in consolidation. That was happening long before COVID-19 hit U.S. shores, with large health systems merging and independent practices being acquired by bigger entities. While there will always be a need for physicians, Shull thinks it likely that most will be employed by health systems, leaving independent operators in the minority.
For outfits like Flagship that own the physical properties of these hospitals and practices, changes are likely to occur. Top priorities will include limiting the amount of surfaces people are required to touch, increasing access to hand-sanitizer stations, elevators that allow for social distancing, revised traffic-flow patterns in buildings and stairwells, and perhaps even mobile check-ins.
In that way, the virus could influence future building designs, perhaps with larger atriums or the ability to do prescreenings before a patient comes into the office.
"There will likely be some folks who don't make it through," said Shull, "but in real estate, we think it may come out a winner, and a lot of investors who are looking to place money in real estate will look at healthcare as a safer investment than some of the other asset classes."