NEW YORK — H2C Securities Inc. (“H2C”), a healthcare-focused investment banking firm, served as the exclusive real estate and financial advisor to ProHealth Care, a Wisconsin-based not-for-profit health system (the “System” or “ProHealth”), in connection with its acquisition of two medical office buildings and a rehabilitation hospital (the “Portfolio”) and the restructuring of a long-term lease for four assets located throughout its primary market area.

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The System initially engaged H2C in 2020 to evaluate its portfolio of seven properties that were master leased (the “Properties”) through a sale/leaseback transaction, many of which were nearing milestones that provided the System the opportunity to extend leases or exercise over-market purchase options through right-of-first-offer provisions. As part of its engagement, H2C reviewed the System’s master-lease agreement and ground lease agreements with the third-party owner.

 

During the first phase of this engagement, H2C conducted an extensive analysis that provided the estimated value of assets, market lease rates, and the potential savings ProHealth could achieve by purchasing select properties and/or restructuring terms of the master lease. After reviewing the System’s properties and discussing the strategic nature of each property with the executive leadership team, select buildings were targeted as potentially accretive acquisitions, as the current master lease included out-of-market terms and conditions.

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The System engaged H2C to pursue multiple transactions, and H2C led negotiations with the third-party owner of the Properties to strike an agreement on favorable acquisition prices for the Portfolio and the removal of select terms in the master lease.

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“We relied on H2C’s knowledge of the healthcare real estate markets and analysis, which showed there were substantial savings through the acquisition, especially considering our planned long-term occupancy of these targeted assets,” said ProHealth’s Brad Treichel, Chief Transformation Officer. “We were extremely pleased with the expert real estate guidance and negotiating skills H2C provided throughout this process and the cost savings this transaction provided to our system.”

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The Portfolio acquired from a third-party owner represents long-term strategic assets for the System. By owning the Portfolio, the System is able to maintain its footprint within space currently occupied, which resides in strategic locations, and realize savings through rent termination for the portfolio. The restructuring of the lease for the remainder of the Properties provides the System with fixed rent increases it can budget for and greater flexibility in planning future tenancy.

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“The master-lease rate was substantially above market, and the landlord had no contractual requirement or incentive to reduce the System’s lease rate or sell back the Portfolio,” said Philip “P.J.” Camp, Managing Director, H2C. “We were able to leverage the System’s improved financial position since the initial transaction and offer certain trade-offs to incentivize the landlord to sell the Portfolio back to the System.” Email P.J.

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“This transaction allowed the System to gain full ownership of 105,000 square feet across three properties that are strategic assets while reducing the System’s overall cost of occupancy,” added Matthew T. Tarpley, Vice President, H2C. Email Matthew.

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Increasingly, health systems are taking a proactive approach to optimizing their leased and owned real estate portfolios, H2C has found. By acquiring leased properties, health systems can consolidate other leased space, mitigate future lease liabilities, and save money on real estate taxes, depending on local and state regulations. The potential savings is compounded by financing acquisitions through traditional debt sources or bond financing at historically low interest rates, sometimes with rates equating to the annual escalation of rent increases due to today’s capital markets environment.

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A more holistic capital planning approach is particularly well-suited to a COVID-19 environment, where some organizations are finding they may not be optimally positioned or able to own and operate all the care they want to provide. As a result, many healthcare leaders have begun to emphasize resource allocation and capital investment in their core (and not easily replicable) hospital inpatient service mission over enhancing ancillary capabilities and diversifying service lines.