GHS says sale of buildings will inject cash into reserves

Greenville Hospital System University Medical Center has signed a letter of intent to sell 900,000 square feet of medical and administrative office space to a real estate investment company and then lease the property back.

The properties include The Life Center and the Memorial Medical Office Building on Faris Road, the Cancer Treatment Center at Greenville Memorial, four office buildings at the Patewood Medical campus, and the two new medical office buildings at the Greer Memorial campus.

GHS practices occupy about 80 percent of the offices, GHS general counsel Joe Blake said. The rest are other health-related businesses.

The deal does not involve any “core assets,” defined as inpatient hospitals, outpatient radiology services or clinics. And while the price is still being negotiated, it's in the range of $170 million, Blake said. GHS declined to identify the buyer because of a confidentiality agreement.

Blake said GHS hopes for an August closing. The sale would be seamless for doctors and patients, he said.

The move is designed to beef up the hospital's cash reserves, he said, and has nothing to do with the fact that GHS is paying $45 million for its half-share of Palmetto Baptist Easley Hospital.

“We had the cash anyway to buy Baptist,” Blake said. “This was just an opportune time to enhance the cash position.”

Blake said there is a lot of interest in real estate investment currently because of the insecurity of the stock market. It provides more steady income, he said.

“They like the return of a rent payment stream versus the pure fluctuations of an equity market,” he said.

And GHS only has three ways to raise capital — through borrowing, earnings and selling assets, he said.

Blake said GHS sent out requests for proposals and that more than 150 firms responded, with 16 making an offer.

Chief Financial Officer Susan Bichel said GHS has discussed such a move a number of times, but that this is the first time the hospital has actually done it.

Generally, credit-rating firms say GHS is in good financial shape.

Fitch Ratings, for example, says the rationale for its ‘AA' rating includes adequate liquidity, the hospital system's dominant market position in a demographically strong region, support from an endowment fund that exists for the exclusive benefit of GHS and provides a guarantee on the system's debt service, and successful completion of two major capital projects.

Fitch, Standard & Poor's and hospital system officials say GHS has approximately a 70 percent market share in Greenville County.

Fitch says its stable-rating outlook for GHS reflects its expectation that the hospital system will sustain current levels of operating profitability over the near term.

Ken Rodgers, a credit analyst with Standard & Poor's, said GHS, like nearly all of the nation's health-care systems, faces challenges with the uncertain economic environment and questions about health-care reform that some fear may lead to reduced payments to hospitals.

“So the issue of liquidity is of paramount interest to investors and health-care bonds,” he said. “Most organizations are taking a careful look at their investment policies in light of the market debacle this past fall.”

“We've seen an increased interest on the part of a number of health systems, including Greenville, in pursuing so-called monetization of assets strategies,” in which assets such as medical facilities, medical office buildings and, in some cases, research buildings, are sold and leased back, he said. “They oftentimes are able to realize a significant increase in their liquidity by selling these and leasing them back.”

Carolinas Medical Center in Charlotte last December sold 750,000 square feet of office space over 15 buildings for $162 million to Realty Trust and is leasing it back, said spokesman Kevin McCarthy.

“You can view real estate as an investment or an asset,” he said. “Given the current economic environment where a health-care system may be seeing declines in their investment incomes, this is another type of asset you can use to fund growth in other areas.”

He said that Carolinas, like everyone else, was hit by the recession. The money Carolinas raised through the sale was used for capital needs, like opening a surgery center and purchasing equipment for the hospital.

Blake said a hospital's credit rating is tied to how many days' cash on hand it has.

“They like to see our creditworthiness is strengthened by having more cash,” he said. “That's what the rating agencies and people who buy our debt want to see.”

S&P has rated the hospital system “AA-,” signifying a stable outlook with a “very strong” capacity to repay its bond indebtedness in a timely fashion, Rodgers said.

He said that using 2008 as a guide, the median ratio for AA- rated health systems was 192 days cash on hand. GHS officials say the sale of the buildings would add 50 days to their cash-on-hand capacity, bringing the total to 190 days.

“To protect and enhance your market position in that kind of market does require investment and facilities,” Rodgers said. “They've probably been one of the more aggressive hospitals or health systems in the Carolinas in terms of making sure their facilities were fully up to speed and kind of meeting the expectations of not only physicians, but also patients as well.”

Bichel said a higher credit rating allows the hospital to borrow money at a lower interest rate, though GHS has no plans to borrow money now.

Earlier this year, GHS announced that because of the recession, it was postponing the purchase of some big-ticket items, including a Da Vinci surgical robot, which costs around $2 million, along with special stereotaxis equipment for treating heart arrhythmias, and an extra endoscopy lab at Hillcrest Hospital in Simpsonville.

Officials also called for more selective hiring, and put off plans for an outpatient psychiatric program, information technology upgrades, and the upfit of the Institute for the Advancement of Health Care at the Research, Education and Innovation building.

Bichel said GHS has a balance sheet of more than $1.5 billion in assets and annual revenue exceeding $1.1 billion. Its total indebtedness is $550 million, she said.

Fitch says one concern is that GHS has a “historically high percentage” of gross revenue from Medicaid, and given the current economic downturn, cuts to the program “could be a real possibility.”

And the hospital's profit margin, at a little over 2 percent, is off slightly, Bichel said. But both she and Blake said the hospital is not under financial pressure to sell the properties.

“We're not doing this because we have to,” Blake said. “If we don't get a deal we like, that's fine.”

Blake said GHS is comfortable that the sales price will be top dollar, and “significantly higher than the book value of all the assets on this list.” Furthermore, he said, GHS can invest the money it gets for selling the properties and earn interest.

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