The real estate component of ambulatory surgical centers (ASCs) has long been a back seat driver when performing ASC valuations. With strong capital markets having turned healthcare real estate investing from a niche market to mainstream investment platform, real estate for ASCs has begun to take a more visible front seat location when it comes to maximizing the value of your ASC. Facilities that are encumbered by a longer-term lease, or occupied by credit tenancy are currently in strong demand from real estate investors on a national basis.
Historically, the business valuation of the ASC has taken the spotlight in strategic planning and determining value for surgical centers, with multiples generally in the 6 to 8 range. Administrators were actively trying to increase EBITDA in order to generate a higher valuation for the ASC practice. In a lot of instances, this was generated through reductions in real estate rental payments. However, over the last several years, savvy administrators and operators have been actively trying to lower EBITDA through increasing real estate rental payments (and subsequently real estate net operating income), given that capitalization rates for ASC real estate currently range from approximately 6.0 to 9.0 percent. This has led to a surge in ASCs setting up operating companies “OpCo” and real estate companies “PropCo” for ownership of the ASC.
When entering into new leases for existing ASCs, or contemplating new construction rental rates, the market has witnessed a substantial push towards higher real estate rental payments (within FMV ranges, of course) in order to fully maximize current capital market trends for good-quality, well-leased healthcare real estate.
To illustrate this point, let’s assume that a 15,000 square foot surgery center is contemplating a new financial structure that would increase rental rate lease payments by $100,000 per year (and subsequently reduce EBITDA by the same $100,000 – the “OpCo” side), or keeping the rental rate payments the same and increasing EBITDA by $100,000. Applying a business valuation multiplier of 7.0 yields a value estimate of $700,000 for this $100,000 revenue stream if it remains on the “OpCo”business valuation side. However, by increasing the real estate rental payments by $100,000 (and subsequently increasing the NOI attributable to the “PropCo” side) and applying a capitalization rate of 7.0 percent results in a value estimate of $1,429,000. This generates an additional $729,000 in overall ASC value by simply utilizing the existing real estate as an asset.
As the real estate side of the healthcare market continues to remain strong, increasing lease rates and real estate values have generally led to an increase in fair market value rental rates for surgical centers. This allows practice owners and administrators to employ this strategy and maximize value. ASC real estate is largely financed through obtaining debt on the facility through traditional mortgage payments. As interest rates for healthcare real estate lending continue to remain favorable, this strategy of maximizing real estate value is expected to continue through the short term. HealthCare Appraisers continues to see related real estate activity from a strategic planning standpoint, as savvy operators and administrators work to employ this strategy. Given the longer lead times associated with real estate transactions versus business valuations, this strategy is becoming more employed as existing real estate leases come up for renewal, as numerous operators are actively trying to transfer value from OpCos to PropCos, as real estate oftentimes can be viewed as a more attractive investment.
HealthCare Appraisers continues to see related real estate activity from a strategic planning standpoint, as savvy operators and administrators work to employ this strategy. Given the longer lead times associated with real estate transactions versus business valuations, this strategy is becoming more employed as existing real estate leases come up for renewal, as numerous operators are actively trying to transfer value from OpCos to PropCos, as real estate oftentimes can be viewed as a more attractive investment.