Providers
Properties &
Performance

Discussing the possibilities and future of the intersection of healthcare and commercial real estate

Please send us your email to join our newsletter and stay connected!

Subscribe, rate and review us on your favorite platform

For more information about healthcare real estate solutions visit docproperties.com

EP63 - Why Do Healthcare Companies Need to Understand the Value of Their Properties? with Victor McConnell (Part 2 of 2)

This week’s episode is the second in a two-part series that features Victor McConnell, Managing Director and Head of Real Estate Services with VMG Health.  We discuss trends in the healthcare real estate industry and the healthcare industry.

In this episode, we talk about…

[2:01] The trend of private equity buying and consolidating healthcare practices

It used to be that hospitals were buying and consolidating practices, and they still are.  Private equity is as well, especially when it comes to ophthalmology and dermatology.  Victor shared that some of the private practices really want to focus on serving patients.  Having a parent company take over the operational side, therefore, is attractive.

At its most basic, there’s an arbitrage between buying an individual or a group of practices and then rolling them out into a platform.  Maybe the platform trades at 10 or 12, or whatever multiple, of the individual or group of practices that is being acquired may trade at.  That gap is what is really driving the profitability associated with that roll-up strategy.

That doesn’t appear to be likely to change.  There are questions about sustainability.  Generally speaking, you have physicians who are carving out a piece of their historical comp in order to put a multiple on that in some cases.  In addition, ideally there is income repair.  The physician and the practice become more successful, and so the physician’s annual income then returns to pre-acquisition level.  If it doesn’t, that can be a challenge because then you have a dynamic where physicians are doing the same volume and making less income years after the deal.  

We’ll see how that dynamic plays out over the next five to ten years.  One trend of the pandemic that Victor sees is that there are probably more physicians interested in selling their practices.  They are evaluating whether they want to become employees for the health system, or become part of a private equity platform company.  Those are very different paths and depending on where a physician is in his career or a variety of other factors, he is going to lean one way or the other.  Victor foresees the trend of private equity acquiring practice entities as a trend that is here to stay.

[5:47] Cap rate compression trends

Healthcare real estate has always been attractive to investors.  There are more sophisticated investors that have a track record, and then there are some who get into it because they have a conversation at a cocktail party and someone says they have to get into medical office and healthcare properties.

It is a mission-critical, demand-driven development, and cap rate compression is occurring.  Victor pointed out that, pre-pandemic, no one thought that the primary indexes, the 10-year T note,, the prime rate, and the capital markets indicators were going to go down.  They went down in response to the pandemic, and they have remained low.  So as long as the cost of capital is as low as it is, that constant capital can’t really go any lower.  That places pressure on cap rates and then all of the uninvested capital that exists, all the demand and investor markets, whether it’s on the real estate side or on the operational side, you combine those two things.  You combine a lot of demand with very low cost of capital.  Generally speaking, that’s going to keep cap rates down.  It can’t really go any lower.  So the spread between the primate rate and federal funds and cap rates could compress a little bit, but Victor finds it hard to see it going materially lower.

[7:27] Victor’s outlook on healthcare real estate market trends

Victor pushes back on the idea of healthcare real estate being monolithic.  There are several different slices of the market, and they all have different outlooks.  Generally, you have an aging population, more investors interested in healthcare real estate.  You have a sector that weathered the pandemic relatively unaffected compared to other sectors.  All of those things would make one optimistic if you were an owner or investor in healthcare real estate.

[8:44] The trend toward convenient access to healthcare

The pandemic may have forced us to focus on community health and wellness. It showcased the need to get ahead of healthcare conditions.  Victor shared that he sees convenient access to care as a trend that will continue to accelerate.  That means more remote or virtual  care, and more outpatient sites that are easy in, easy out.  

The larger question of health and wellness, Victor sees in the context of a long-term but  slow trend toward more value-based care.  When you have more healthcare providers who may also be insurers, or cases where there is, in theory, an alignment to drive down overall cost of care, you can see these costs decreasing.  If a hospital is fully responsible for a patient from cradle to grave, then it’s not just about revenue associated with episodic, fee-for-service care.  It’s about effectively treating a health episode so a patient may not require other types of care.

Victor believes the system will continue to inch toward that, as we are better able to track and quantify the impact of certain types of wellness care.  As the government continues to incrementally try to tie more reimbursement to value, this trend will continue as well.

[12:35] Victor’s first jobs

Victor mowed lawns as a kid, and then waited tables and washed dishes as a more formal first job.

[12:49] What Victor would be doing for a living  if he was not working in the healthcare real estate industry 

Victor wasn’t sure what he would do instead.  He was a creative writing major in undergrad, so perhaps he would be writing.  He also said he may have been an attorney.

[13:15] What Victor is reading for inspiration and information

He recently finished She Never Told Me About the Ocean by Elisabeth McKetta, and was starting Underland: A Deep Time Journey by Robert Macfarlane.

[13:49] What Victor does for self-care

Victor is a frequent rock climber, and he tries to stretch daily.

[14:36] Whether leaders are born or trained

Victor believes that the short answer is, “both”.  He believes it is in the nature/nurture dichotomy.

Schedule a healthcare real estate investment strategy call with Trisha

Leave a Comment

Your email address will not be published.

© Three P Media, LLC 2020
Scroll to Top