RTG 's Michael Honeycutt and President Greg Gheen presented “Challenges and Opportunities of Medical Real Estate” at the Tennessee Orthopaedic Society. They covered: Current trends in real estate ownership. Financing scenarios for physician-owned real estate. Strategic considerations associated with different partnership structures for ownership.

1. TENNESSEE ORTHOPAEDIC SOCIETY
Challenges & Opportunities with Medical Real Estate
Se p t e m b e r 27, 20 14

2. DISCUSSION AGENDA
• RTG INTRODUCTION
• TODAY’S HEALTHCARE INDUSTRY
• TRADITIONAL REAL ESTATE OWNERSHIP MODELS
• DISCUSSION OF REAL ESTATE INVESTMENT TRUSTS (REIT’S)
• HEALTHCARE REAL ESTATE MARKETPLACE
• CASE STUDIES
• TAKEAWAYS

3. • Healthcare Real Estate Advisory Firm that combines
Industry Knowledge and Expertise
• Affiliate Company of Pershing Yoakley & Associates
• Independent and Objective Advice
• ADVISORY
• OPERATIONS
• CAPITAL PROJECTS
• Serving Health Systems and Physicians
RTG INTRODUCTION
1

4. Disclaimers:
Please be careful associating general market conditions and assumptions
with your individual real estate assets. Generally speaking, real estate is
still very much a “localized” asset class.
Consult your accountant, attorney or real estate advisor for information on
local market conditions and advice on real estate ownership decisions.
2

5. TODAY’S HEALTHCARE INDUSTRY
• Payment Reform is Transitioning to Value-Based Care System
• Continued Shift from Inpatient to Outpatient Setting
Source: The Advisory Board Company
• Industry Consolidation / Competitive Pressures
• M&A Activity
• Hospital / Physician Alignment
• Increasing Capital Demands for Providers
• EMR / Technology
• Medical Equipment
• Physician Recruitment & Retention
• Increased Regulatory Scrutiny
3

6. AUDIENCE SURVEY
Regarding your Practice’s Real Estate:
• More than five (5) practitioners in your practice?
• Own v. Lease?
• Multiple locations?
• ASC investment (real estate)?
4

7. TRADITIONAL REAL ESTATE OWNERSHIP MODELS
Physician tenants
and/or a third-party
owner create a new
company or LLC to
jointly own a medical
office building,
ambulatory surgery
center, etc.
Condominium Ownership
Physician tenants
own the suites they
occupy in a medical
office building;
condominium
association owns
common elements.
Direct Ownership
Physician
tenants wholly
own a medical
office building.
Generally best
suited for a single-tenant
building.
Physicians lease
from a third-party
owner, such as:
• Hospital
• Developer
• Private Investor
• REIT
Joint Venture or Partnership Ownership
MOB and
Common Elements
Third-Party Owner
Physician Tenants
Third-Party Ownership
Physicians
Owner-Occupant
Single Tenant
5
Physicians Third-Party
Physician-Owned
Condominium

8. REAL ESTATE INVESTMENT TRUSTS
What is a REIT?
• Institutional Investor - Industry has grown to sixteen (16) public and non-traded
REITs
• Healthcare focus - many REITs invest in medical office buildings and
other healthcare real estate assets
• Generally two categories:
• Equity (90%)
• Debt
• Three corporate structures:
• Publicly traded
• Publicly registered, not traded
• Private
• Generally seek long-term relationships
• Extremely competitive with acquisition capital
6

9. HEALTHCARE REAL ESTATE MARKETPLACE
Billions $ Volume
$8.0
$7.0
$6.0
$5.0
$4.0
$3.0
$2.0
$1.0
$-
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Year
# Transactions 87 122 245 289 462 693 654 547 249 380 396 722 797
Source: Real Capital Analytics
Historical MOB Sales Volume
7

10. HEALTHCARE REAL ESTATE MARKETPLACE
Transactions by Asset Type
(18 Month Period: December 2012 - May 2014)
• Over 700 Transactions
• $6.75 Billion in Sales Volume
• Average Cap Rate of 7.50%
Acute (18)
ASC (27)
Dialysis (34)
MOB Single Tenant (173)
MOB Multi Tenant (430)
Specialty Hospital (22)
Source: Pulse on the Market: Healthcare Transaction Report, Stan Johnson Company, May 2014.
6%
10% 3%
2%
57% 22%
8

11. HEALTHCARE REAL ESTATE MARKETPLACE
Pricing Indicators
9.0%
8.5%
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
Avg. Cap Rate
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
$250
$200
$150
$100
$50
$-
Avg. PSF
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Source: Real Capital Analytics
9

12. HEALTHCARE REAL ESTATE MARKETPLACE
Today’s Financing Environment
Multi-Tenant
Investment Property
Refinance Existing
Single-Tenant
Owner-Occupied
New Construction
Single-Tenant
Owner-Occupied
Refinance Existing
Interest Rate 3.95% 4.0% 4.20%
Initial Term 5 Year 7 Year 10 Year
Amortization Period 20 Year 25 Year 25 Year
Loan-to-Value 75% 85% 85%
Guarantees (Recourse) Typically Required Construction Only Negotiable
10
*All information based on recent RTG project experience. Each project is unique; a number of variables will impact project-specific financing terms.

13. HEALTHCARE REAL ESTATE MARKETPLACE
Typical Investment Criteria
• CREDIT - Risk Mitigation
• Stability - Established Tenant
• Lease Structure - Term & Rate
• Building Location and Quality
11

14. CASE STUDY: ARLINGTON ORTHOPEDIC ASSOCIATES
• 21 Physician Practice
• 2 MOB’s (49,660 SF)
• 100% Occupied, Single-Tenant
• 12 Year Lease
Primary Location: 37,100 SF Satellite Location: 12,560 SF
Source: Healthcare Real Estate Insights
12

15. CASE STUDY: HARBIN CLINIC
• 145 Physician Multi-Specialty Practice
• 7 MOB’s (330,000 SF)
• 100% Occupied, Single-Tenant
• 15 Year Lease
13

16. TAKEAWAYS
Key Considerations when Evaluating Real Estate Ownership Alternatives
Know Your “Story”
• Current real estate scenario(s) - Is there a precedent?
• Does practice ownership mean real estate ownership?
• Timing considerations - Physician Demographic / Career Horizon
Understand Strategies and Objectives for your Medical Practice
• If you have multiple locations, which are Core / Strategic location(s)?
• Are there potential Consolidation or Expansion Opportunities?
• Flexibility and Control Considerations
Balancing the Economic Risks and Rewards
• Capital Investment (Initial and On-going)
• Alternate Investments / Opportunity Cost
• Potential Income Stream
• Operational Cost Containment
• Ownership Costs vs. Rent Expenses
• Tax Strategies
• Future Liquidity / Illiquidity
14

17. CORPORAT E O F F I C E - K N OXV I L L E
On e C h e ro ke e M i l l s , 2 2 2 0 S u t h e r l a n d Ave n u e
Knox v i l l e , Te n n e s s e e 37 9 1 9 | 8 6 5. 5 2 1 .0630
ATLANTA
1 1 0 0 J o h n s o n Fe r r y Roa d , B u i l d i n g 1 - S u i t e 4 0 0
At l a n t a , G e o r g i a 3 0 3 4 2 | 404.47 7. 3 0 0 9
www. re a l t y t r u s t g roup.com