Tenet Healthcare Headquarters

DALLAS-Over the last few decades, more and more hospitals and health systems have become comfortable with the notion of selling certain ancillary buildings, namely medical office buildings to third-party investors.

For the most part, however, not many health systems have been willing to part with the real estate ownership of their acute-care hospital buildings, which they often consider sacrosanct and central to their identities.

On occasion, however, hospitals have been willing to sell the hospital facilities they have long owned to raise capital. However, because large providers are expected to become more pressed for cash in the coming years, there is speculation that some will at least consider selling hospital buildings and then lease them back from the buyer. Yet we haven’t seen this scenario happen very often.

In fact, other than transactions associated with health system mergers and acquisitions, one of the only hospital real estate transactions we’ve heard about recently involves a health system buying back three hospitals from the country’s largest healthcare real estate investment trust.

During a recent earnings conference call, Long Beach, CA-based HCP Inc. chief investment officer and executive vice president Paul F. Gallagher noted that, “During the quarter, (Dallas-based) Tenet Healthcare exercised its option to acquire three of our hospitals. The purchase price will be at fair market value and will be effective February 2014.”

HCP owns five acute-care hospitals, and the fact that it plans sell three of them caught the ear of Wells Fargo Securities analyst Todd Stender, who, during the earnings call, asked: “(It) sounded like Tenet was exercising purchase options to buy three hospitals. Is that correct?”

HCP chairman and CEO Jay Flaherty III replied: “Yes. We announced on the last call in February … that they had purchase options that were in the zone where they had to notify us as to whether they were going to renew or purchase. They did that shortly after our February call,”

Flaherty noted that, although the three hospitals leased by Tenet “cash flow quite well,” the annual rents total about $23 million, or only about 1% of HCP’s revenue.

“Is this a surprise to you guys?” Stender asked. “It seems like it would go against maybe what we would think of as hospitals should only be focusing on their operations and not on their real estate.”

Flaherty said HCP’s reaction is just the opposite, as it was surprised Tenet sold the hospitals in the first place. “Historically, hospitals have wanted to own … what they call the strategic assets, which is their hospitals,” he said. “And depending on lots of considerations they will look to monetize the non-strategic portions of their campuses, which typically tend to be medical office buildings or clinics.

“So it’s really – if anything – I would say that Tenet’s decision to reacquire these three hospitals would be more consistent with the traditional view of real estate from a standpoint of acute-care hospital operators.”


Murray W. Wolf is the Founder and Publisher of Healthcare Real Estate Insights™, the nation’s first and only publication totally dedicated to covering news and trends in healthcare real estate development, financing and investment. For more information, please visit www.HREInsights.com.