FSED - Stan Johnson Company

The Investor Market
As more FEDs are built in the years ahead, investors will have the opportunity to purchase these facilities as net leased investment
opportunities. Hospitals will likely look to third-party developers to construct these, off-campus, and non-core facilities as they will
seek to keep their available capital invested in the operations, or available for physician practice and competitor acquisition
opportunities.
The typical FED will be between 10,000 to 15,000 square feet, with a cost to construct averaging between $350 - $450 per square
foot, depending on the market and land cost. The high price per square foot to construct will pose as the biggest challenge for net
lease investors analyzing this type of investment. It is important to note that the most successful FEDs are located on high-traffic
retail out parcels therefore; proposed FEDs should not sacrifice business opportunities in favor of cheaper land costs. In
comparison to a Walgreens drug store, (a popular net leased investment) the cost to build is considerably higher, can have far less
favorable credit supporting the lease and is extremely ‘special purpose’ in its construction and design. With average NNN rents for
FEDs starting at $38+ per square foot, investors will have legitimate concerns with regard to their ability to replace the rental
income stream, should the tenant default. A net lease investor will look for longer lease terms (15 to 20 years), annual rent
escalations and more favorable cash-on-cash yields as protection against these negative elements.
In comparing the FED to a typical retail net lease investment the FED does offer some attractive advantages. FEDs typically achieve
breakeven performance with annual volume of 13,000 to 15,000 patient visits. For a facility open 24/7, 365 days per year this
translates into a modest average of only 38 patients per day. It is anticipated that FED EBITDA/rent coverage ratios could easily
exceed 4 times rent which, when compared to the average retailer’s rent coverage ratio of 1.25, this should increase the appeal of
the asset for the net lease investor. An additional highlight to this investment type has been the access to attractive debt. Lenders
are very interested in the relative safety offered by investments in healthcare real estate, and the competition for the product
amongst lenders is providing favorable debt terms in the market.
Key Points
Developers and FED tenants should look for sites near well-known retail outlets, as this will increase customer traffic as well as
brand awareness within a new market.
Proximity to a popular retail center will make the real estate investment more attractive to net lease investors.
Proposed development projects sponsored by hospitals or healthcare systems will be viewed far more favorably in the
investment market than projects sponsored by independent operators or operator/hospital joint ventures.
Require long-term lease commitments of 15 to 20 years. (A project this expensive requires a demonstration of commitment on
the part of the tenant)
Look for opportunities in rural communities where emergency options are limited to older, functionally obsolescent facilities.
Credit behind the lease will be heavily scrutinized and when present, reflected in the pricing paid for the investment.
Conclusion
Freestanding Emergency Departments represent an evolution in the way healthcare services are delivered, and provide
tremendous benefits to healthcare providers and consumers alike, by offering much needed services in a more cost efficient
environment. As more and more investors recognize the impressive growth and demographics driving the healthcare industry,
competition to own healthcare real estate will continue to increase. FEDs should be very attractive to net lease investors, if the
leases are structured appropriately.
Toby Scrivner, Director
Stan Johnson Company