How can hospitals address capital costs in this upside-down market?
WITH HIGH INTEREST RATES AND FAILED BOND AUCTIONS, IT CAN BE MORE COSTLY TO ACCESS CAPITAL. SELLING REAL ESTATE ASSETS COULD BE ONE GOOD OPTION.
CHICAGO, March 5, 2008 – Because of the disruption in today’s capital markets, hospitals are reporting failed tax-exempt bond auctions and remarketing agents that have “abandoned ship.” Some are even facing the potential termination of liquidity lines by their banks. In this challenging financial environment, the sale of non-core assets, such as medical real estate, has become a more attractive option for many hospitals and health systems.
Today many A+ and higher rated hospital bonds are trading at values significantly greater than poorer quality credits. This unique situation is due to the fact that financially strong hospitals previously bought bond insurance to achieve the most attractive interest rates. Some of these insured bonds, auction rate bonds in particular, provided for periodic repricing in financial market auctions. In recent auctions, due to uncertainty surrounding the insurers’ financial condition, investors have not bid for the bonds. As a result, many hospital bonds moved to the highest allowable rate – some in excess of 10 percent tax-exempt.
“Disruption in the capital markets will further exacerbate the spread between high and low investment grade hospitals,” says Todd W. Lillibridge, Chairman and CEO of the healthcare real estate firm Lillibridge.
In an “upside-down” market, Mr. Lillibridge says that hospitals have four basic options to improve their financial position:
- Refinancing – Investigate refinancing options. Some may be prohibited under the terms of the bond agreement.
- Retiring debt – Consider the option of retiring debt and accessing the capital markets at a more opportune time.
- Obtaining bridge financing – Even taxable debt may be less costly in the near term and can be used to launch projects, generate revenues, and subsequently refunded with tax-exempt.
- Selling assets – Sell non-core assets such as well-located medical real estate.
Mr. Lillibridge says the fourth option, selling non-core assets, has been used successfully by many of his firm’s hospital clients over the years – and current capital market conditions make that option even more attractive today. Plus, investor demand remains strong for healthcare real estate.
“Fortunately even in this time of capital market instability, investors are still attracted to the stable market of healthcare real estate even as other real estate investments sour,” he says. But before making any decision, Mr. Lillibridge advises hospital and health system executives to work with their financial advisors to carefully analyze their capital position and debt structure.
ABOUT LILLIBRIDGE
As a healthcare real estate firm, Lillibridge is an equity investor with a portfolio in excess of $1 billion in medical office and outpatient facilities. Lillibridge offers a full complement of real estate services and capital, exclusively to hospitals and healthcare systems. The company’s services include buying and developing medical office and outpatient / ambulatory care facilities, program management for building or renovating inpatient and acute care hospitals, asset and property management services, and advisory services for strategic, financial and operational real estate issues. Lillibridge's national scope encompasses more than 250 hospitals and healthcare systems across more than 40 states, including 6,000 physicians and hospital tenants, and approximately 10 million square feet of medical property. Headquartered in Chicago, Lillibridge has multiple regional offices and more than 200 dedicated employees. For more information, go to www.lillibridge.com or call (312) 408-1370.