Looking for lending opportunities in this challenging economy? Look to the hospital market.
As an example of the financial power of the hospital sector, consider the financial performance of the hospital market in the greater Phoenix metropolitan area.
Though the Phoenix area was among the hardest hit by the housing foreclosure crisis and Great Recession of 2008–2009, general acute care hospitals located there posted impressive EBITDAR profits before, during and following the recession (EBITDAR: earnings before interest, taxes, depreciation, amortization and rent).
Excluding the government-owned Maricopa Medical Center and Phoenix Children’s Hospital, there are 23 general acute care hospitals in the greater Phoenix area. Except for ordinary losses experienced in the first year following new hospital startups/openings, all 23 of the hospitals in the area posted strong, positive EBITDAR performance before, during and following the Great Recession.
Although the EBITDAR profits for the hospitals in the Phoenix market dipped by 9.34 percent during the fiscal periods ended in calendar year 2008, such bottom-line profits nevertheless exceeded a half-billion dollars, even during the worst recession since the Great Depression of the 1930s. Moreover, such bottom-line profits bounced back at a rate of 40.54 percent in 2009 to $740,908,682; and then further increased 9.19 percent in 2010 to $809,027,769. Now that, by any measure, is a profitable business sector and a testament to the power of the hospital business. This at a time that other sectors in Phoenix have been hard hit: residential, retail and hospitality.
If the hospital market in Phoenix is thriving, then the potential for hospital profits in your community may be even greater. Hospitals located in smaller communities tend to have less competition yet benefit from many of the same demographics that contribute to the success story in Phoenix.
As to loan security, note that real property in hospital real estate may include considerable entrepreneurial profit, as has been shown within the hospital sector in the greater metro-Phoenix area, for example.
Entrepreneurial profit may materially increase the market value of existing hospital real estate when the existing hospital real estate enables a purchaser of the real property to gain timely access to the profitable market (such as that in Phoenix), without having to endure delays related to permitting, design, construction and then stabilization of a substitute property. In a profitable market, time is money. And an existing hospital may present considerable premium value (entrepreneurial profit) if it enables timely access to that money.
In taking hospital real property as loan security, the potential market for the property is national. Market values vary considerably depending on applicable competitive market dynamics, as well as on age, condition and functional assessment of the hospital real estate. Recent pricing related to newer, state-of-the-art hospitals has been noted in the range of $400 to more than $500 per square foot of gross building area. That pricing pertains only to real property in the hospital real estate — excluding tangible personal property value and excluding business (intangible personal property) value.
When considering lending activity in the hospital sector, underwriting due diligence, of course, must include assessment of the regulatory landscape as it may pertain to hospital reimbursements/funding.
Commonly known as “Obama Care,” the Patient Protection and Affordable Care Act presents the possibility that about 32 million uninsured residents may obtain health insurance. The resulting increase in effective demand for healthcare services would be positive for the hospital sector. However, even if the PPACA is repealed or drastically scaled back by Congress or declared unconstitutional by the U.S. Supreme Court, note that hospital market profits, such as those in Phoenix, were not derived from the PPACA. And the prospects for such profits are considered to be strong whether or not the PPACA remains intact.
Although government budgetary pressures continue to ignite political discussions of possible reductions to Medicare and Medicaid, these sorts of discussions and political struggles are not new. History shows hospitals tend to prevail when proposed reductions in healthcare funding levels result in outcry from stakeholders in the system.
We see this from efforts to constrain federal spending on healthcare during the 1990s. The Balanced Budget Act of 1997 proposed major reductions in federal healthcare expenditures proposed to balance the federal budget by 2002. But, in 1999, due to political pressure the Balance Budget Refinement Act was passed, reducing the impact of the original BBA.
Is the federal budget balanced today as had been intended by the BBA? No.
Has the hospital sector survived and even thrived since the BBA/BBRA of the 1990s? Yes. The data in Table 1 for the hospital market in Phoenix says so, even though the general economy in Phoenix has been among the hardest hit in the nation in recent years.
Though politics of the moment may swing to the left or right, note that the hospital sector benefits from fundamental and powerful support of the baby boom demographic. The aging baby boomers have the financial and political power to influence laws and the allocation of resources. Therefore, demand of the aging baby boomers for healthcare services will provide strong support in the hospital sector for the foreseeable future.
Every hospital lending project is different. Diligent analysis of the hospital business enterprise will provide the foundation for accurate valuation of its component assets, including hospital real property pledged as loan security.
Community bankers may find well-secured profits by lending to hospitals.
Copyright (c) April 2012 by BankNews Media