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GLOBALHEALTHCARE SERVICES

2014 Healthcare Real Estate Survey Results

2

April 30, 2014

Re: 2014 BOMA Healthcare Real Estate Trends Survey

Dear Respondents and Attendees:

Thank you for your responses to the survey. We’re all interested in healthcare real estate trends and want to stay up to date. This letter is attached to the booklet regarding the BOMA Healthcare Real Estate Trends Survey and gives a current scope of perspectives. The Newmark Grubb Knight Frank Global Healthcare Services team appreciates the opportunity to provide these survey results to the respondents and attendees at the 2014 BOMA International’s Medical Office Buildings and Healthcare Facilities Conference.

The past year has been challenging for healthcare real estate managers and professionals. With the Affordable Care Act (ACA) creating an opportunity for change and efficiency, our experience has never been more important. Our team grew significantly in 2013 and we sold more than $500 million in medical office and hospital transactions. In addition, we took on more than 60 million square feet of hospital and health system transaction management and advisory services. Our mission is to assist the healthcare industry in stabilizing and lowering the cost of healthcare through more effective and efficient uses of medical real estate.

Our team provides clients with a single-source solution for every phase of acquiring, financing, developing and disposing of healthcare real estate. Utilizing a consultative approach and leveraging our national resources and global reach, we assist hospitals, health systems, physician groups, investors and developers in effectively managing their healthcare real estate operations and portfolios, creating and executing long- and short-term strategic plans that deliver reduced occupancy costs, increased efficiency and utilization, greater access to capital, ultimately to maximize value.

The team comprises real estate transaction and consulting professionals with more than 25 years of experience serving hospitals, health systems and medical office building owners throughout the U.S. and across the globe. Our advisors understand the impact of the challenges that arise through hospital affiliation strategies, healthcare reform, demand for healthcare assets in the capital markets and constantly evolving regulatory issues. We have the expertise to advise providers through these complicated changes, compliance and regulatory issues, capital requirements and real estate strategies.

We welcome your questions and comments.

Warm Regards,

Garth Hogan Todd PermanExecutive Managing Director Executive Managing DirectorGlobal Healthcare Services Global Healthcare ServicesDirect: 949.608.2115 Direct: [email protected] [email protected]

www.ngkfglobalhealthcare.com

Welcome LetterGlobal Healthcare Services

3

0 Client Logo

GHS Survey Respondents

33%

20%

47%Advisor / Broker

Healthcare System and Hospital Administrators

Healthcare Investors

There were 128 respondents from 28 states across the country, including a good cross-section of healthcare providers, investors and brokers.

Respondent States

Respondents ProfileGlobal Healthcare Services

Healthcare OverviewGlobal Healthcare Services

About Newmark Grubb Knight Frank

A Global Leader in Commercial Real EstateNewmark Grubb Knight Frank is one of the world’s leading commercial real estate advisory firms. We provide a fully integrated platform of services to prominent multinational corporations and institutional investors across the globe, as well as to owners and users of real estate on a local, regional and national level.

Headquartered in New York, Newmark Grubb Knight Frank and London-based partner Knight Frank operate from more than 320 offices in established and emerging property markets on five continents. Our global platform enables us to effectively serve the property requirements of tenants, landlords, investors and developers worldwide.

Strategic Thinking, Effective ExecutionNewmark Grubb Knight Frank’s integrated services platform provides clients with a single-source solution for every phase of occupying or owning a property - from strategic planning, site selection, design, construction and initial occupancy to ongoing cost-effective operations and dispositions. Taking a consultative approach and leveraging our global reach, we assist corporations, investors and owners in effectively managing real estate operations and portfolios, creating and executing long-and short-term strategic plans that deliver reduced occupancy costs, increased efficiency and, ultimately, maximized value. Our full range of services includes leasing advisory, global corporate services, investment sales and financial services, property and facilities management, program and project management, consulting, and appraisal and valuation services.

Newmark Grubb Knight Frank’s brokerage professionals have broad experience across all commercial property types, including, office, industrial, retail, multifamily, hospitality and healthcare. We work closely with tenants and landlords to assess the impact of real estate trends and how the broader business climate may affect an organization’s critical business needs and overarching goals. Whether a single location or multiple global facilities, we help our clients gain a more thorough understanding of their operating environments and identify where real estate and business optimization opportunities exist. For clients with real estate capital concerns, our NGKF Capital Markets provides strategic capital solutions for our private, corporate and institutional clientele, maintaining direct relationships with a broad investor and lender base, including local, national and offshore entities, both public and private.

A Strong FoundationBGC Partners is a leading global brokerage company servicing the financial and real estate markets. Products include fixed income securities, interest rate swaps, foreign exchange, equities, equity derivatives, credit derivatives, commercial real estate, commodities, futures, and structured products. BGC also provides a wide range of services, including trade execution, broker-dealer services, clearing, processing, information, and other back-office services to a broad range of financial and non-financial institutions. Through its BGC Trader and BGC Market Data brands, BGC offers financial technology solutions, market data, and analytics related to numerous financial instruments and markets. Through the Newmark Grubb Knight Frank brand, the Company offers a wide range of commercial real estate services including leasing and corporate advisory, investment sales and financial services, consulting, project and development management, and property and facilities management. BGC’s customers include many of the world’s largest banks, broker-dealers, investment banks, trading firms, hedge funds, governments, corporations, property owners, real estate developers, and investment firms. For more information, please visit www.bgcpartners.com. BGC, BGC Trader, Grubb & Ellis, Grubb and Newmark are trademarks and service marks of BGC Partners, Inc. and its affiliates. Knight Frank is a service mark of Knight Frank Limited Corp., used with permission

Company OverviewGlobal Healthcare Services

5


The changing healthcare landscape will continue to have a substantial impact on all providers and healthcare real estate in 2014. Declining reimbursements and operating margins, combined with a heavy regulatory environment, are putting pressure on hospitals and health systems to adapt.

Standard & Poor’s Ratings Services recently revised its outlook for the healthcare sector to ‘negative’ and expects credit rating downgrades to continue to exceed upgrades in 2014. The rating actions in the second half of 2013 were increasingly negative and outpaced upgrades compared to the first half of the year when upgrades exceeded downgrades. In addition, negative outlook changes increased by 20% in 2013, which suggests that additional downgrades will occur in 2014 and 2015.

2013 U.S. Not-For-Profit Healthcare Rating Trends

Significant M&A activity was the source of many rating changes in 2013 and is expected to continue in 2014. In the first half of 2013, there were 37 hospital mergers and acquisitions with an aggregate value of approximately $6.0 billion with several mega-mergers, including Community Health Systems and Health Management Associates, Tenet and Vanguard, Trinity Health and Catholic Health East. Although a limited number of mega-mergers are expected

in 2014, deal volume in the sector is expected to increase as small standalone not-for-profit hospitals align with larger and strategic healthcare organizations as a result of compressed revenues and increased competition.

2013 U.S. Hospital Transactions ($ Amounts in Millions)

Demographic trends within the healthcare industry indicate substantial growth for the next decade. Healthcare accounts for approximately 17.6% of the overall GDP for the U.S. and is expected to increase to 19.9% by 2022. In large part, this is due to demographic shifts, an aging population and the emphasis on relocating more outpatient care to a lower cost setting. Individuals over 65 years of age have three times as many office visits per year as people under 45, and the oldest of the 78 million baby boomers will reach 65 in 2012, the youngest in 2029. Furthermore, 32 million uninsured Americans will be covered by health insurance under “healthcare reform.”

*Source: S&P

0

2

4

6

8

10

12

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Upgrades

Downgrades

0

20

40

60

80

100

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2008 2009 2010 2011 2012 6 Mo.2013

*Source: Levine Associates

$ Volume of Hospital Transactions

# of Hospital Transactions

6


Aging Population Trends

Investment Demand

The medical office investment class has emerged from the recession as one of the most dominant and risk adverse investments in the commercial real estate industry, and investment demand for stabilized medical office buildings will continue to accelerate in 2014.

In 2013, the average capitalization rate for all medical office buildings located in the U.S. was 7.40%, which is a 33-basis point decline from 2012 (RCA). The majority of both the healthcare investors and brokers that participated in the survey perceive capitalization rates for off-campus, multi-tenant medical office buildings that are not affiliated with a hospital will trade at a capitalization rate range from 6.5% to 7.0%.

With the Federal Reserve committed to keeping interest rates down through 2014, to enhance economic growth, and with significant medical office investment demand, we expect capitalization rates to continue to decline for both on-campus and off-campus stabilized medical office buildings. More than 55% of the healthcare investors that participated in the survey see values for both on-campus and off-campus medical office buildings that are hospital-sponsored increasing over the next 12 months.

U.S. Cumulative Monthly Volume ($ Amounts in Millions)

There was over $7.17 billion in medical office transactions in 2013, a 7.6% increase compared to 2012, and there remains significant opportunity (RCA). The Healthcare REITs raised $9.28 billion in 2013 primarily in senior debt and common equity. Health Care REIT Inc. raised the largest amount of common equity with a $1.69 billion offering completed in May (CoStar). There is an inventory base of more than $1.0 trillion in healthcare-related real estate in the U.S. and only 8% to 9% is institutionally owned with healthcare providers owning the majority. With declining operating margins, significant capital requirements and fears of potential credit rating downgrades, we anticipate that struggling healthcare providers will begin to monetize their non-core healthcare assets to raise capital while improving their balance sheets.

Sources

http://www.beckershospitalreview.comhttp://aharesourcecenter.wordpress.comhttp://www.levinassociates.comhttp://www.aoa.gov

*Source: Administration on Aging

Healthcare Overview

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

100,000,000

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

ProjectionsAge 65 +Age 85 +

*Source: RCA

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

J F M A M J J A S O N D

201320122011

7

Survey ResultsGlobal Healthcare Services

REIT, Developer, Advisor/Broker

Real Estate Advisor / BrokerInvestor

Where do you see values for premier on-campus medical office buildings heading during the next 12 months?

During the next 12 months, which asset types will you consider for acquisitions?

On-CampusMOBs

Off-Campus Hospital-Affiliated MOBs

Off-Campus Non-Hospital

Affiliated MOBs

Specialized Assets

Skilled Nursing Facilities

% of Respondents

Senior Housing

1 Client Logo

US Regions

Pacific Northwest

7%

West

19%

Southwest

16%

Southeast

16%

Northeast

6.5%

Midwest

22%Which regions are preferred for new acquisitions or development?

8


What is the average hold time frame for your clients’ medical office investments?


53%Under 3 years3-7 yearsOver 7 years

47%11%

Going-in Cap RatePurchase Price/SF

Cash-on-Cash ReturnIRROther

Which type of measurement do your acquisition clients utilize most?

57%14%

11%6%

For new development and future acquisitions, is there a preference to align with a for-profit or not-for-profit healthcare system or hospital?

For-profitNot-for-profit

32%

68%

What is the minimum initial development yield that your typical client would consider for a medical office development meeting their highest standards?

% of Respondents

9



Where do you perceive capitalization rates for the following on-campus medical office building scenarios?

5.0 - 5.5% 5.5 - 6.0% 6.0 - 6.5% 6.5 - 7.0% 7.0 - 7.5% 7.5 - 8.0% 8.0 - 8.5% 8.5 - 9.0% 9.0 - 9.5% 9.5 - 10.0%

PRIMARY Market, SINGLE Tenant, Health System:

8% 12% 31% 25% 17% 5% 2% 2% 0% 0%

SECONDARY Market,SINGLE Tenant, Health System:

0% 5% 9% 31% 28% 16% 11% 0% 0% 0%

PRIMARY Market, MULTI Tenant Physician: 3% 3% 12% 32% 29% 14% 6% 0% 0% 0%

SECONDARY Market, MULTI Tenant Physician: 0% 0% 3% 13% 30% 31% 16% 8% 0% 0%

If a hospital or healthcare system were to sell any of its real estate assets, what do you predict to be the top 3 reasons?

Where do you anticipate healthcare system development activity to be during the next 12 months compared to a year ago?

50%

7%

43%

HigherSameLower

Low

cap

italiz

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n ra

tes

Impr

ove

its

bala

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Pro

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m

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Mod

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ent

New

real

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ate

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ent

Red

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faci

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man

agem

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mai

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resp

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bilit

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Exc

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real

est

ate

as

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Oth

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% of Total

10


What types of financing sources are your clients utilizing?


All Cash from Funds on Balance Sheet

Bank DebtBond Financing

Credit Tenant Lease FinancingInsurance CompaniesLine of CreditOther, please specify

26%

28%5%

8%

15%

17%1%

Where would you project the annual rental growth rate to be for medical office buildings during the next 12 months?

Real Estate Advisor / BrokerInvestor

For new development, what is the minimum pre-leasing threshold for an off-campus medical office building?

13%24%

23%40%

More than 80%70%-80%60%-7050%-60Less than 50%

What is the minimum lease term that you would consider for an on/off-campus sale-leaseback by a health system?

25%

15%2%

58%

More than 20 years

15 - 20 years10 - 15 years5 - 10 years

11


In the future, when you look back on 2013 to assess the healthcare real estate investment market, how do you think you will rank the factors below from the highest impact (1) to the lowest impact (7)? Please pick each number once to rank the factors from highest to lowest.

(1) HIGHEST IMPACT 2 3 4 5 6 (7) LOWEST

IMPACT

Healthcare systems focused elsewhere 29% 35% 15% 6% 12% 3% 0%

Lack of available product to buy 15% 15% 21% 26% 12% 9% 3%

Increased buyer competition 24% 32% 21% 15% 6% 3% 0%

Healthcare system M&A 6% 24% 24% 21% 9% 12% 6%

Development of hospital and healthcare system MOBs 9% 21% 12% 18% 24% 15% 3%

Compressing development yields 6% 18% 18% 21% 15% 24% 0%

Other 3% 0% 3% 0% 3% 3% 18%

Which types of medical office buildings are preferred by your clients? Please rank in order of preference with (1) being the highest.

(1) HIGHEST IMPACT 2 3 4 5 (6) LOWEST

IMPACT

On-Campus Single-Tenant MOBs 41% 19% 22% 3% 5% 5%

On-Campus Multi-Tenant MOBs 43% 30% 11% 5% 3% 5%

Off-Campus Multi-Tenant MOBs - Hospital Affiliated 22% 32% 24% 11% 0% 5%

Off-Campus Multi-Tenant MOBs - Non Affiliated 8% 14% 19% 16% 35% 5%

Off Campus Single-Tenant MOBs - Hospital Affiliated 8% 24% 22% 30% 5% 5%

Off Campus Single-Tenant MOBs - Non Affiliated 11% 8% 8% 19% 14% 41%

(1) HIGHEST IMPACT 2 3 (LOWEST IMPACT)

On-Campus Medical Office Buildings 30% 24% 15%

Off-Campus Hospital-Affiliated Medical Office Buildings 36% 30% 9%

Off-Campus Non-Hospital Affiliated Medical Office Buildings 15% 21% 27%

Specialized Assets 12% 6% 9%

General Acute Care Hospitals 0% 0% 12%

Senior Housing 21% 3% 18%

Skilled Nursing Facilities 12% 3% 6%

During the next 12 months, select your top 3 asset types that you are targeting for acquisitions. Please rank in order of preference with (1) being the highest only choosing the top 3.


12


Health Systems & Hospital Administrator

PRIORITY

Cost reduction 14

Quality / patient safety 13

Increase market share / ability to compete successfully in market 12

Improve patient experience / patient satisfaction 11

Reimbursement 10

Developing an accountable care organization 8

Technology system / equipment 7

Care coordination 7

Physician recruitment and retention 7

Construction / capital improvements 6

Physician staff ventures / realignment 6

Revenue cycle 6

Mergers & Acquisitions 5

New clinical products / services 5

Leadership development 4

Physician employment 4

Nurse / staff recruitment and retention 3

Improve supply chain dynamics 3

How would you rank your organization’s top priorities for the next 3 years?

13



Are you willing to acquire the real estate?

YesNo67%

33%

Generally speaking, is your hospital seeking to own more medical office buildings or less?

YesNo

58%42%

What part of real estate development is needed as part of your growth strategy?

% of Respondents

Med

ical

offi

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build

ings

Urg

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/ fre

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Out

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Oth

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If your organization is acquiring group practices, rank your organization’s priorities for types of service providers for the next 3 years.

0123456789

10

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Wom

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Ped

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Inte

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Low Priority Neutral High Priority

14


If the hospital were to sell any of its medical office buildings, what would be the driving reason?

% of Respondents

For real estate development needs, what is the estimated increase in square footage that is needed?

Less than 25,000 SF

25,000 SF - 50,000 SF

50,001 SF – 75,000 SF

75,001 SF – 150,000 SFMore than 150,000 SF

36%

7%

29%

21%

7%

If yes, where in the monetization process is your organization?

Actively pursuing

A potential option

Already occurred

Not interested

Other


Low

cap

rate

s

Impr

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its

bala

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shee

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Pro

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mar

ket

shar

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Mod

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New

real

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Red

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faci

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man

agem

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and

mai

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re

spon

sibi

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s

Exc

ess

real

est

ate

as

a re

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of a

mer

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Oth

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What is the overall occupancy level for your on and off-campus medical office building portfolio?

Physician recruitment Renovating existing facilities and development new MOBsAcquiring systems or other hospitalsPartnering with other systems and hospitalsMaintain current level of market share

40%

7%

33%

7% 13%

15%

46%8%

31%

15

NotesGlobal Healthcare Services

www.ngkfglobalhealthcare.com

Garth Hogan Executive Managing Director Global Healthcare Services 949.608.2115 [email protected] Todd Perman, CCIM Executive Managing Director Global Healthcare Services 404.806.2510 [email protected]

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