NEWS

11.1.06
"Texas Healthcare Property Sector is Healthy"
By Scott Lynn, Director / Principal, Metropolitan Capital Advisors, Ltd.

Once shunned by capital providers as being too "specialized", healthcare properties are now the "darling" of the real estate industry. The reasons are obvious; the burgeoning and aging Texas population is driving demand for healthcare. Capital providers have become better educated on the intricacies of this sector. Moreover, the way healthcare services are delivered to the patient market has changed. These factors have created new development, investment and lending opportunities.

Historically, healthcare oriented commercial real estate investments were limited to medical office buildings ("MOB's") located on or near hospital campuses. Today, however, it is not unusual for an MOB to be located in a suburban market close to where patients live. Changes in healthcare reimbursement policy have motivated many hospitals to relocate what was perceived to be unprofitable services out of a hospital environment. This has created a new wave of development projects such as Long Term Acute Care Hospitals ("LTAC's"), Ambulatory Surgery Centers ("ASC's") and specialized rehabilitation centers. All of these property types deliver highly specialized care not available in a conventional hospital and, at a much lower cost for patient services which is welcomed by the health insurance industry.

Whether a project is a MOB, a LTAC, a surgery center or rehab hospital, the underlying economics of each project are driven by the feasibility of the marketplace. Economic feasibility is often validated by various physician groups investing in either the real estate ownership or the operational ownership of the healthcare enterprise which, in turn comforts capital sources that the project will ultimately be successful if doctors have a financial incentive to send their patients to a particular facility. Furthermore, practically every healthcare project today is supported by long-term net leases from a medical service enterprise that usually has some aspect of physician sponsorship. Once a healthcare project is leased, there is usually very little turnover. Property ownership does not have to deal with constant ongoing tenant finish and leasing commission issues versus a conventional multi-tenant real estate property.

Long term capital providers such as Life Insurance Companies,1031 Exchange Buyers and publicly traded REIT's have all taken notice of the healthcare sector. Permanent lenders historically categorized healthcare as too specialized and where often frightened by the high cost of these projects (tenant finish alone often exceeds $100 s.f.). Permanent lenders are now educated and are willing to go much higher up the leverage curve (75% to 80% LTV). Healthcare properties are being aggressively priced by 1031 Buyers and REIT's all seeking the long term consistent cash flow offered by this sector. It is not unusual to see a MOB or a Rehab property trade at sub 7% Cap Rates in Texas.

Opportunities will continue to present themselves as various physician groups splinter from associations with conventional hospitals. The methodology by which healthcare services are delivered to the public continues to evolve. For now, the healthcare sector in Texas gets a "clean bill of health".

Metropolitan Capital Advisors is a Dallas based real estate investment banking firm exclusively representing developers, investors and property owners in the real estate capital markets. During 2006, the firm completed over $100,000,000 of debt and equity transactions for Healthcare oriented properties in Texas.

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