Steve Aleman, CFO of Ontario, Calif.-based Prime Healthcare knows a thing or two about healthcare real estate acquisition.
The health system has 44 hospitals with more than 300 outpatient locations across 14 states and most recently purchased four facilities from Medical Properties Trust for $350 million.
It is all part of a plan to acquire the real estate for all of Prime Healthcare's operations and to decrease the debt levels associated with the facilities.
Mr. Aleman connected with Becker's to learn more about the drive behind the health system's financial plan and why he believes healthcare real estate is a good investment.
Question: Prime Healthcare recently completed a $350 million purchase of Medical Properties Trust facilities. What was the driving force behind that acquisition?
Steve Aleman: For Prime Healthcare, the single, greatest priority is always delivering quality, efficient care to meet the needs of the communities and patient populations it serves. But when you talk about the delivery of care, you not only are referring to those caregivers on the front line and the services they provide, but you are also talking about the care setting of where those services are provided. Successful health systems are experts at managing both the operations of the hospitals as well as appropriately managing the asset portfolio of the healthcare system.
Prime takes a holistic approach to delivering physician-led, patient-centered quality care to its communities, and as a result, it was determined years ago that having full ownership of the healthcare system assets as well as the operations would provide greater freedom and optionality to respond to the evolving healthcare needs of the community.
Q: Prime's business strategy over the last few years has been to acquire real estate for its operations and to pay down debt associated with the facilities. How did this strategy come about and how far has Prime come in its goal?
SA: Prime Healthcare has a legacy of saving hospitals to serve communities. What that has meant over the years is that Prime acquired facilities that were in financial distress and invested in their turnaround when no one else would or could.
As Prime expanded nationally, ultimately saving 46 hospitals in 14 states, often the only means of raising financing to save those hospitals was by leveraging the real estate assets to raise capital and reinvest those funds back into the staff, technology and facility to fund its growth. But that type of financing is expensive, and in fact it just gets more expensive over time.
However, as a result of Prime’s successful implementation of its operating model and continued investment in technology, systems, teams and services into these once struggling hospital facilities, the turnaround of those facilities was ultimately realized acquisition after acquisition, resulting in a multi-year track record of growing operating margins. These facilities reported years of trended solid performance, and as a result there were more cost-efficient forms of capital available that offered the ability to reduce periodic debt service and improve cash flow.
In early 2020, most of Prime’s facility real estate was owned by a third party with expensive lease rates, that all together totaled over $1.4 billion. Four years later, Prime now owns all the hospital facility real estate except for four hospitals. Of those four hospitals, where once there were lease obligations that went out through 2035, now there is a defined negotiated purchase option that Prime can exercise on the remaining assets at any time.
Q: What is the end goal for this strategy and how long does Prime plan to continue these real estate acquisitions?
SA: The end goal is to complete the repurchase of the four remaining hospitals. Prime is currently assessing the capital market conditions to evaluate the right time to go to market for a larger refinancing of its existing High Yield notes. If the timing makes sense, it is very possible the repurchase of the remaining hospital assets could happen before the end of 2024.
Q: What advice do you have for other CFOs looking to chip away at their organizations' debts?
SA: Think about the optionality and flexibility you have regarding your capital structure and seek to maximize both, when possible. Markets can change overnight, so it is important to have multiple options to explore when evaluating how best to address your capital needs.
So be creative, think out of the box and have as many options as possible that potentially provide novel ways for you to reduce your company’s cost of capital. I will note that over the last few years when interest rates have increased 400-500 basis points, Prime has been successful in lowering its cost of capital over that period.
Q: What are the key benefits of health systems owning the real estate of their hospitals?
SA: Aside from enhancing the asset portfolio of a health system and providing optionality to respond to the changing healthcare needs of a community, healthcare real estate is a good investment. For evidence you need to just look at how well healthcare real estate performed in times of economic uncertainty, specifically during the COVID-19 pandemic.
Throughout the pandemic, healthcare asset values stayed solid. Unlike other sectors of commercial real estate that are subject to economic cycles and market volatility, healthcare real estate is characterized by stable demand. People will always need healthcare services, regardless of economic conditions, and healthcare facilities must be available to meet those needs. This makes healthcare real estate a recession-resistant asset class that offers long-term stability.
Q: Do you see more systems following a similar strategy as part of their financial improvement plans? Why?
SA: This is once again a differentiator of Prime Healthcare from other national health systems. Unfortunately, there are currently numerous stories in the press of national providers who financed growth via the sale of real estate but were unsuccessful in improving the performance of the hospitals they operated.
As a result, they had facilities in operational distress, escalating debt service, constrained and tightening cash flow and were left having to make tough decisions that will negatively impact their ability to meet the healthcare needs of the community. On the other hand, Prime Healthcare has successfully turned around 46 hospitals, investing in new technology and services based on community need, strengthening its balance sheet, purchasing the hospital real estate and further enhancing the delivery of quality care. If it can be done, I expect other systems to do so, but it has proven extremely challenging if not impossible for others to replicate Prime's successful track record.