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Hospital chains make big money in real estate by unloading properties

Recent deals add millions to bottom line as health systems scale back space.

Susan Morse, Managing Editor

Image of Weill Cornell Medical Center from <a href="">Wikipedia</a>.Image of Weill Cornell Medical Center from Wikipedia.

The move away from inpatient care towards services provided outside of the hospital setting is leading many healthcare systems to sell off properties owned by their hospitals in an effort to scale back and raise some extra cash.

For example, Weill Cornell Medical Center in New York City recently gained $65 million by selling 21,000 square feet of space in an attractive East Side neighborhood for $3,095 per square foot, according to Laca Wong-Hammond, head of the healthcare real estate practice for investment banking firm Duff & Phelps.

Mike Hargrave, principal for the healthcare property data firm, Revista, said larger systems are crafting detailed real estate strategies. Kaiser is number one on a list of large real estate holders and Catholic Health Initiatives has a dedicated real estate department, he said.

A merger or acquisition can also free up prime real estate.

In Boston, the century old New England Baptist Hospital announced earlier this year it planned to move out of its 19-acre campus valued at $170 million.

"There's a great opportunity for urban hospitals," Wong-Hammond said. "New England Baptist Hospital can come out of this with both of their objectives met: in divesting their current campus to someone who can rezone it; and delivering a cashless new campus for them in a site that costs less money."

[Also: Healthcare real estate deals expected to pick up through 2015]

The financially strapped St. Vincent Catholic Medical Center, built in lower Manhattan in the mid-1800s, could have made a real estate deal that would have kept its doors open, but ended up selling the property in 2011 to real estate developer Rudin Management Co., according to Wong-Hammond. Rudin bought the property for $530 million, developed 200-plus condos that are selling for $3,500 a square foot, and separately, in partnership with North Shore-Long Island Jewish Health System, North Shore-LIJ opened a $110 million outpatient center there, she said.

"Hospitals need a smaller footprint," said David E. Williams, president of the Boston consulting firm Health Business Group. "If you're on a valuable piece of property, one way is by selling and moving; another is a sale and lease-back, sell that to someone else and become a renter there, get money up-front for capital improvements; or rent out part of the facility."

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Hospitals with large parking lots may want to consider investing in a parking garage, Williams said, if it frees up valuable land that can either be sold or put to another use.

In the expansion of off-campus medical practices and other facilities, hospitals are more commonly leasing or renting the space rather than buying, said Murray Wolf, publisher and founding editor Healthcare Real Estate Insights.

Also more common is for healthcare organizations to partner with real estate investment trusts, according to Hargrave.

REITs are strong income producers, paying out at least 90 percent of their taxable income in the form of dividends to shareholders.

In the Revista list of the largest healthcare real estate owners for 2013, the last full year in which data is available, Kaiser was in the top spot with $31 billion in property; followed by Health Care REIT at $22 billion, and the REIT Ventas, at $20 billion.

In April Ventas surprised the industry by both acquiring healthcare real estate and owning a percentage of hospital operations.

"This is potentially groundbreaking for a REIT hospital partnership," Hargrove said.

For $1.75 billion, Ventas acquired 10 hospitals from Ardent Health Services, saying it would sell hospital operations to entities owned by Ardent, while also owning up to 9.9 percent of the hospital operating company.

"It's important to the future of healthcare, there's more you can do with real estate," Revista Principal Elisa Infante Freeman said.

Twitter: @SusanMorseHFN