How ASCs play a role in medical office transactions — 3 insights from an investment director

An influx of medical office investors is good news for ASC operators, according to John Nero, a director of the healthcare-focused investment banking firm Hammond Hanlon Camp. Mr. Nero told Becker's ASC Review how ASCs could be affected by medical office transactions — and play a role in them.

Note: Responses were lightly edited for style and clarity.

Question: What should ASC operators know about the medical office building market and activity right now?

John Nero: The medical office market continues to see an influx of new capital providers regularly, including private equity, institutional and offshore capital. These investors continue to create a market imbalance where capital outweighs the supply of quality medical office and ASC product, which bodes well for ASC operators that own their facilities and may want to evaluate opportunities to partner or sell in a favorable market environment.

Q: Every week, there are new transactions involving medical office buildings that have ASCs. Why do you think we see these kinds of facilities changing hands? Is it normal or noteworthy?

JN: Medical office buildings with ASCs tend to be viewed favorably, particularly when dealing with facilities located within certificate of need states, where the ability for the tenant to move the ASC is limited and the development of new competitive product is often restricted. While ASCs are specialized uses that cost a landlord more tenant improvement dollars compared with a more traditional medical office user, they also generate higher rents and have higher renewal probabilities upon lease expiration. Having an ASC in a multi-tenant building may also help attract physicians who perform cases to lease their office space there.

Q: What do medical office building operators prioritize when selecting a strategic capital partner?

JN: The top three factors medical office building operators look for when selecting a strategic capital partner are:

1. Alignment on scale expectations. This may be the most important element of creating a successful joint-venture partnership within any real estate sector, but in healthcare, it is particularly important. Some institutional capital providers can have unrealistic expectations of scale and capital deployment in this space. Most operating partners want to align with capital partners that are fairly well-educated on the nuances of the outpatient facilities sector, so that both sides understand what level of scale is realistic within the established investment strategy and defined timeframe.

2. Competitive advantage. Every investor is seeking a competitive advantage, and this goes for both operators and capital providers. Operators are obviously looking for competitive economics in their joint-venture structures, whether it's a favorable promote structure or eliminating requirements on crossing multiple investments within a program. They may also seek a sourcing advantage from their capital, as many private equity capital providers also have strategic investments in healthcare operating businesses (such as ASCs) that may surface off-market real estate opportunities.

3. Speed and efficiency. Most medical office building operators see a tremendous amount of deals on a regular basis. As such, they need to be aligned with a capital partner that can respond quickly on whether or not to pursue opportunities in today's competitive marketplace. The old mantra that "A fast 'no' is the next best answer to a 'yes'" rings true here. Most new arrangements we're advising on have some type of "three strikes" policy, whereby the capital partner can decline up to three opportunities that fit predefined criteria before the operator can pursue the transaction through another capital vehicle.

To participate in future Becker's Q&As, contact Angie Stewart at astewart@beckershealthcare.com.

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