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UPDATED: Baylor Scott & White, Memorial Hermann Merger: What It Means For CRE


Two not-for-profit healthcare systems in Texas plan to merge and create the biggest system in the state. 

The Baylor Scott & White Health and Memorial Hermann Health System boards signed a letter of intent Monday to enter into a period of exclusive negotiation and regulatory review. An official agreement is expected to be completed next year. Together, the systems will provide services across 30 counties and employ more than 73,000 workers across the state. 

The faith-based systems include 68 hospital campuses, 1,100 clinics, about 14,000 independent and academic physicians and assist nearly 10 million patients annually. 

“This is about two mission-driven organizations — both committed to making safe, high-quality healthcare more convenient and affordable — building something transformative together,” Baylor Scott & White Health CEO Jim Hinton said. Hinton will be the new company's CEO.

The combined system will select a new name to be determined before closing but will retain its independent brand within each service area. It will provide executive and support staff based in Austin, Dallas, Houston and Temple. 

The merger between the Texas systems is another example of an ongoing national trend of healthcare system consolidation.

Deloitte Center for Health Solutions projects the number of nongovernment health systems (1,833 in 2014) to be cut in half by 2024 and erase all of the independent hospital systems by that time. 

"Consolidation between these two systems would clearly result in statewide dominance, while also providing a more transformative change in the combined organizations," Colliers International Senior Vice President Beth Young.  

Due to the fact that the two health systems cover different geographical areas and haven’t overlapped in the past, closures of any locations are not anticipated because of the merger, she said. However, since the consolidated systems will be the largest in Texas, she expects to see eventual expansions in suburban submarkets of the major cities and into some new areas throughout the state. 

"Expectations are that the increased scale will improve operating efficiencies, and provide better care and range of services for patients and the communities," she said. "Providers are feeling financial pressure from the evolving insurance market and the way hospitals are reimbursed. There may be significant advantages of size when the systems are in discussions with insurance companies, providing terms that squelch outside competition." 

Bryan Tower in Dallas and its parking garage.

One building may be at risk: Bryan Tower in Downtown Dallas, which is anchored by Baylor, Scott & White and is 69.5% occupied. Morningstar Credit Ratings placed the $61.9M Bryan Tower loan on the Morningstar Watchlist and reduced its estimate of collateral value by 27.1% because of concerns that Baylor, Scott & White will likely vacate when its lease expires in less than two years. 

Morningstar first expressed this concern last month — Baylor, Scott & White occupies about 25% of the 1.1M SF tower, and it has been expected to leave this building when its lease expires in August 2020 because it is building a new office center near Baylor University Medical Center — but news of the merger increased its focus on the building.

"Without significant new leasing, Morningstar is concerned that the debt service coverage ratio could fall below break-even levels and push the loan into default," a news release from the company Wednesday said. "Our analysis suggests the property’s value stands at $53.8M, down from our previous value of $73.8M, which translates to a 115.1% loan-to-value ratio."

But there are possible positive effects of this merger on real estate.

Transwestern National Director Eric Johnson expects more ambulatory surgical centers and microhospitals to be announced as a result of this merger. Both systems have the same joint venture partners in these services lines: Emerus for microhospitals and United Surgical Partners International for ambulatory surgery centers.

He believes the merger will make both systems stronger.  

"These two systems have been forward-thinking and are aligned in quality of physicians, facilities and reputation," he said. "I do not expect to see much attrition due to this acquisition. In fact, it should help them compete better overall.”  

UPDATE, OCT. 3, 11:21 A.M. CT: The article was updated after Morningstar issued a warning Wednesday morning that this merger could dramatically impact a Dallas office building.