Health Care Real Estate Advisor

Stark Law Final Rule – Impacts on Health Care Leasing Arrangements

Stark Law Final Rule – Impacts on Health Care Leasing Arrangements

Hall Render attorneys from four offices across the U.S. discuss CMS’ Final Rule modifying various Stark Law regulations, including those specifically geared toward health care real estate arrangements. CMS issued the Final Rule on November 20, 2020, and starting January 19, 2021, health care organizations nationwide were required to comply with the new regulations. The podcast discussion addresses key guidance provided by the Final Rule, and covers topics of fair market value, commercial reasonableness, and Stark exceptions that may be available to health care organizations.

Podcast Participants

Libby Park

Attorney, Hall Render
Denver Office

Gerard Faulkner

Attorney, Hall Render
Dallas Office

Joel Swider

Attorney, Hall Render
Indianapolis Office

Kiel Zillmer

Attorney, Hall Render
Milwaukee Office

Libby Park: Hello, everyone. And welcome to the Healthcare Real Estate Advisor podcast. My name is Libby Park and I’m an attorney with Hall Render, the largest healthcare focused law firm in the United States. Thanks for tuning in today. We have some great content for you. Today, we’ll be talking about CMS’s final rule aimed at modernizing key fraud and abuse regulations under the Federal Stark Law. CMS issued the final rule in November, 2020, which became effective as of January 19th, 2021. These regulations have now been in effect for a few weeks. So, we hope that this podcast has content that is relevant and timely to our listeners. Today, we’ll hear from three Hall Render attorneys from different geographic locations around the U.S. Joel Swider is joining us from our Indianapolis office. Hi there, Joel.

Joel Swider: Hi, Libby. Thanks for having me.

Libby Park: Of course, welcome. Kiel Zillmer is based out of our Milwaukee office. Hi, Kiel.

Kiel Zillmer: Hi, Libby.

Libby Park: And Gerard Faulkner is from our Dallas office. Hey, Gerard.

Gerard Faulkner: Hey, Libby. Happy to be here.

Libby Park: Thanks for joining us. I’ll be moderating our conversation today, and I’m located in Hall Render’s Denver office. Thanks, everyone, for joining me today. Today, we’ll discuss the big three areas of the Stark law final rule changes that will impact healthcare leases, fair market value, commercial reasonableness, and exclusive use. Joel, let’s start our conversation with fair market value, as it relates to the final rule. Can you tell us what changes did CMS make to its interpretation of fair market value in the real estate context?

Joel Swider: Thanks, Libby. When it comes to fair market value, CMS did a couple of things in the final rule. The first is that they finalized changes to the structure of the definition of fair market value, the structure itself. CMS advanced a general definition of fair market value, as well as some more specific definitions that apply in the rental of office space and rental of equipment contexts. The general definition of fair market value that was finalized is, and I’m quoting here, “The value in an arm’s length transaction, consistent with the general market value of the subject transaction.” So, they’ve really scaled it back and made it more basic.

Joel Swider: And then, CMS went on to give additional definitions for, in our context, the rental of equipment and the rental of office space. And so, part of that definition, from the rental of office space exception or the new language from the final rule says, “With respect to the rental of office space, fair market value means,” and I’m quoting here, “the value in an arm’s length transaction of rental property for general commercial purposes, not taking into account its intended use, without adjustment to reflect the value that the perspective lessee or lessor would attribute to the proximity of convenience to the lessor where the lessor is a potential source of patient referrals.” So, this was a concept that appeared previously, but was somewhat disjointed and they kind of brought it down into one definition.

Joel Swider: And then, furthermore, and I’m quoting again here, it says, “It must be consistent with the general market value of the subject transaction.” So, the CMS also updated the definition of general market value to sort of bifurcate it into multiple parts, applicable to different scenarios and applications. They had one part for assets, one part for compensation, and there’s a separate definition for general market value that is specific to the rental of office space and equipment. And what CMS finalized there is, it says, “With respect to the rental of equipment or the rental of office space, the general market value is the price that rental property would bring at the time that the parties enter into the rental arrangement, as the result of bonafide bargaining between a well-informed lessor and lessee that are not otherwise in a position to generate business for one another.”

Joel Swider: So, these concepts in verbiage are really consistent with how those definitions read in the past. But they’ve been consolidated and they’re easier to find. And so, really to my mind, from a practical perspective, I don’t know that this necessarily changes the end result of what would be considered fair market value. But I do think that it makes it easier for a health provider to find and use the definitions. It also makes it easier when we are, let’s say, reviewing an appraisal that has come in from a third party. We can make sure that they’re using the right definitions and that they’re using them in the right contexts.

Joel Swider: So, the other thing that I’ll mention about the fair market value definitions for real estate arrangements was CMS removed part of the text that used to say a rental payment does not take into account intended use if it takes into account the costs incurred by the lessor in developing or upgrading the property. And CMS had originally added this language to the Stark regulations to basically clarify that rental payments may reflect, they are allowed to reflect the value of improvements or amenities, which I think to most of us practicing in the real estate realm or anybody that’s an appraiser or works with valuations frequently would realize that that is a base assumption upon which the fair market value of the space is based, is those costs that were incurred in improving it. But CMS basically said this was really confusing to people. It wasn’t necessary. And so, they took it out.

Joel Swider: So, I guess, in summary, the CMS in the final rule, they modified that definition of general market value to more closely align with valuation principles that are already used. And any sort of FMV appraisal or broker’s opinion of value that a provider might have previously used is probably still accurate, even if it’s based on those old definitions. But, from a practical matter, I think one takeaway for me and to those listening is, consider updating your template fair market value reports, your fair market value policies, your lease templates, because these definitions have changed. And to the extent that an appraiser would, in his or her professional judgment, base an opinion on these, obviously they’re going to be very important for those purposes.

Libby Park: Thank you, Joel. And thanks for offering some practical tips for folks listening in as to how we can apply some of these changes. Another question, in regard to fair market value, Joel, did CMS opine on any methodologies for setting FMV in real estate transactions?

Joel Swider: They did. So, what CMS said in terms of methodologies was basically that CMS will not prescribe any particular method for coming up with fair market value. And CMS said it would accept a range of methods, appraisals, comparables, looking at documentation of other transactions. They even talked about cost plus a reasonable rate of return, which is something that hasn’t appeared in commentary for a long time. Basically they will accept any method that’s reasonable.

Joel Swider: And I think, from a practical perspective, this really gives providers a bit more leeway to use their discretion, which is a good thing for providers. And I think that’s where too, from a legal perspective, some of our guidance comes in the form of let’s look at this arrangement, let’s look at the stakes involved and the parties involved. And maybe we can apply a cheaper, or faster, or easier method to come up with fair market value, as opposed to getting an appraisal, which is really sort of the gold standard. And that’s something that you would want to use in a more high-risk type of arrangement. So, I think in general though, it was good because CMS gave additional leeway to providers in this area.

Libby Park: Thank you, Joel. Appreciate your thoughts on the fair market value portion of this. Let’s shift to commercial reasonableness. Gerard, can you please tell us a little bit about what changes did CMS make to the definition of commercially reasonable?

Gerard Faulkner: Yeah. So, CMS’s definition of commercially reasonable was sort of expanded in order for them to try and take a more objective approach to their analysis. And so, they ended landing in the final rule on commercially reasonable meaning that the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty. CMS also kind of added in there that an arrangement may be commercially reasonable, even if it does not result in profit for one or more of the parties.

Libby Park: Gerard, thanks for that definition. How will CMS determine if an arrangement is commercially reasonable? And how does the new definition impact this analysis?

Gerard Faulkner: So, now under the final rule, the new rule, CMS’s determination is based on a case by case analysis that turns on whether or not the arrangement makes sense as a means to accomplish the party’s legitimate business goals. And so, when CMS is making this determination, they’re going to look on a case by case fact specific inquiry on the characteristics of the parties. And that will kind of depend on which parties are involved. So, they’re going to be looking at things like the size, the type, and scope and specialty of the parties.

Gerard Faulkner: CMS indicated in the publishing of the final rule that it views this updated standard is more objective since it requires assessment of the characteristics of the parties themselves rather than the previous rule, which had more of a focus only on the perspective of those parties as they entered the arrangement. So, that’s really how the previous CMS commentary had framed this commercial reasonableness discussion. It’s important to remember though that just because an arrangement ultimately achieved a legitimate business purpose, that doesn’t mean that that arrangement was necessarily commercially reasonable. We can take from the final rule that the focus here will not, obviously, be on that result of the arrangement, and moreso a fact-based inquiry, case by case inquiry into whether or not it was reasonable to enter that arrangement in the first place for the parties.

Libby Park: Thanks for those thoughts, Gerard. And can you tell us how will this definition, what are your thoughts on how the definition of commercially reasonable will work in conjunction with the requirement that lease space does not exceed the amount of space that is reasonable and necessary for the legitimate business purposes of the leasing arrangement?

Gerard Faulkner: Yeah. So, that’s a bit of a mouthful, but CMS essentially clarified the additional requirement that the leased space does not exceed that which is reasonable and necessary for the legitimate business purposes of the lease arrangement. In the office space exception, it’s separate entirely from this commercial reasonableness standard. According to CMS, the language in that office space exception is more geared towards the prevention of sham lease arrangements where the rental charges are for office space for which the lessee rather has no genuine or reasonable use. So, it’s not serving legitimate business purpose.

Libby Park: Great. Thank you for your thoughts on this topic, Gerard. Kiel, let’s close things out today with a discussion on the changes to the rental of office space exception. Did CMS make any other noteworthy adjustments to the rental of office space exception that providers should be aware of?

Kiel Zillmer: Thanks Libby. Yes. In addition to the changes to FMV and commercial reasonableness that Joel and Gerard have discussed, CMS finalized another significant change to the rental of office space exception and how we view leasing arrangements in the healthcare context. One of the requirements of the rental of office space exception is that the lease space be used exclusively by the tenant. The rationale for this requirement was to prevent, as Gerardo alluded to previously, sham or paper leases in this case where a landlord receives payment from a tenant for space that the landlord continues to use itself. However, without further clarification, this requirement was also interpreted to mean that the tenant could not share the space with other tenants contemporaneously. So, when we had clients who wanted to structure part-time or shared space arrangements, we were inclined to rely on the timeshare exception to protect the arrangement, which does permit non-exclusive use. But, as those who work with the timeshare exception know, it does have a number of strings attached to it and a number of hoops to jump through.

Kiel Zillmer: In the final rule, CMS incorporated a comment in the rental of office space exception, which clarifies that the exclusive use, as used in the exception, means that the tenant and any other tenants of the same space uses the space exclusion of the landlord or any person or entity related to the landlord. So, in other words, the landlord may not be an invitee of the tenant to use a space, but the tenant and any other tenant operating in the same space may use it at the same time. So, this is a significant clarification by CMS, particularly in light of the trend of hospitals employing more physicians, as value-based healthcare becomes more prevalent. It allows for greater flexibility in how leasing arrangements can be set up, and provides more collaboration between tenants in clinical space.

Kiel Zillmer: So, a prime example of the situation would be where a physician invites another physician into its clinical space to treat a mutual patient for the patient’s convenience. This may have previously been considered a Stark violation, given our understanding of the rental of office space exception and the exclusive use requirement. However, with the revisions to the exception, CMS has made it clear that these types of arrangements would not pose a risk of program or patient abuse, provided that they continue to meet the other requirements of the rental of office space exception. And lastly, I should also mention that CMS also incorporated a similar change to the exclusive use requirement in the rental of equipment exception. So, there is some additional leeway there as well.

Libby Park: Thanks, Kiel. It sounds like the final rule added in some flexibility, which will be beneficial to providers and further clarification as well. Another question, does the final rule provide any other insight on Stark exceptions that may be available to providers in structuring real estate arrangements?

Kiel Zillmer: Yes. As I mentioned, when we look at protecting real estate leasing arrangements, we have typically looked at the rental of office space and timeshare exceptions. However, in the final rule, CMS made clear that leasing arrangements may also be protected under the fair market value exception. But this is also a drastic departure from CMS’s position in previous rulemaking and is significant, particularly in light of the fact that the fair market value exception does not have a one-year term requirement like the rental office space exception does. This provides healthcare entities with greater flexibility for one-off arrangements that may be shorter than one year or arrangements that otherwise do not qualify under the rental of office space or timeshare exceptions.

Kiel Zillmer: In the final rule, CMS also confirmed its position that other exceptions, even beyond the rental of office space and fair market value exceptions, may protect space lease arrangements. For example, CMS reiterated that the arrangements with hospitals exception could cover certain real estate arrangements like, for example, rental payments made by a teaching hospital to a physician to rent his or her house, as a residence for a visiting faculty member. Likewise, CMS repeated that the payments by a physician exception could protect payments by a physician for the lease or use of space other than office space, such as for leases of hospital owned storage space or residential real estate.

Kiel Zillmer: And finally CMS finalized this proposal for a new exception for arrangements with limited remuneration. Provided certain requirements are satisfied, this exception would protect remuneration from an entity to a physician for the provision of items or services that does not exceed $5,000 per calendar year. So, this exception could be available to protect one-off or short-term lease arrangements with terms that are set in advance, even if the arrangement is not set in writing, that is not a requirement under this exception. So, obviously, it provides some greater flexibility there as well.

Kiel Zillmer: And lastly, I just wanted to mention two other changes CMS made that could also be relevant for those who practice in the healthcare real estate realm. First, CMS revised its position with regard to missing signatures and the writing requirement rules. Previously, if a written agreement lacked the party’s signatures, they were allowed to obtain the signatures within 90 calendar days following the effective date of the arrangement, provided the arrangement complied with all other required elements of an applicable exception. In the final rule, CMS expanded the scope of the late signature exception to include a grace period for the required writing, along with the missing signatures. In the event the parties fail to compile a written agreement for a particular arrangement, if that’s a requirement under the applicable exception, they now have 90 days from the arrangement’s effective date to compile a collection of documents that evidences the course of conduct and the terms of the arrangement between the parties and reduce that collection to assigned writing. So, we’re expanding it, not just to the signature, but also to the required writing requirements for certain exceptions under the Stark.

Kiel Zillmer: The second change is with regard to the isolated transaction exception. Healthcare entities have historically used this exception to protect a one-time transaction involving a single payment or one that involves integrally related installment payments. In the leasing context, we typically see this exception called upon in the instance of a missed rental payment or a similar oversight in an arrangement. But the final rule clarifies that the forgiveness of an amount owed in settlement of a dispute, so for example, the payment of back rent or a missed rental payment, is itself a separate arrangement which may be covered under the exception. However, the important thing to note here is that the compensation arrangement, which is the subject of the underlying dispute, is not retroactively made compliant simply because a settlement arrangement is achieved by the isolated transaction exception.

Kiel Zillmer: So, it gets to be a little complicated and convoluted when you go down this path of trying to figure out if an arrangement or a back payment could fit under the isolated transaction exception. So, if there is any confusion or any question as to whether an arrangement would comply with the exception, we often tell our clients to go through the facts and consult with their attorney to figure out if they can rely on the exception in that case.

Joel Swider: Yeah. And, Libby, this is Joel. The only thing that I would add there, and I think Kiel makes a great point, that these additional exceptions that CMS has allowed providers to avail themselves of in the leasing context is a really big and important departure from past guidance, and one that I think a lot of our health provider clients will be able to utilize.

Joel Swider: So, I guess, two quick notes. One is on the isolated transactions exception. As Kiel noted. I mean, I think the important thing to consider there is that CMS didn’t have a lot of guidance on that particular exception in the past. And so, one of the big, I guess, departures or clarifications that was made was the fact that it doesn’t make the underlying arrangement compliant. And Kiel noted this, but I just want to highlight that, that even if we have a payment that needs to be made to settle a dispute, that payment itself might qualify or be compliant under the isolated transactions exception, but it does not make the underlying arrangement compliant, if it otherwise wasn’t, otherwise didn’t meet the other standards.

Joel Swider: The other thing I wanted to point out too is the fair market value exception, because I think that that one, in particular of all of the three or four that CMS pointed out and sort of opened up to leasing arrangements, I think the fair market value exception is going to be really important and provide a lot of flexibility to providers because it can sort of help cure or cover arrangements that, as Kiel noted, they maybe don’t fit within the realm of office space exception. Maybe the term is less than a year. And they maybe don’t fit in the timeshare exception, because it’s actually a lease. It’s not a license. It’s conveying a possessory leasehold interest. But nonetheless, it can meet the other elements of the fair market value exception and, in some ways, that might be easier for certain arrangements. So, I think that’s another one that I think it provides a really good backstop for providers who are really trying to do the right thing with their arrangements, but for whatever reason, the terms of that arrangement don’t fall neatly into the rental of office space exception.

Libby Park: Thanks for jumping in, Joel, and for those additional thoughts on the two exceptions and highlighting their relevance to our listeners today. That’s all that we have on our discussion format for today. Thanks to all of our listeners for tuning in and to Joel, Gerard, and Kiel for joining me today. Please feel free to email any of us directly with follow-up questions. Our emails and contact information is located in the show notes of this podcast and also on Hall Render’s website at And additionally, I’d let listeners know that we prepare a newsletter called the Healthcare Real Estate Advisor. And, to be added to this list, please email me directly at Thanks again for tuning in, and have a great day.

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An interview with Connor Siversky, Research Analyst, Real Estate, Berenberg Capital Markets

An interview with Connor Siversky, Research Analyst, Real Estate, Berenberg Capital Markets

In this interview, Andrew Dick sits down with Connor Siversky, Research Analyst, Real Estate with Berenberg Capital Markets to talk about publicly traded healthcare REITs.

Podcast Participants

Andrew Dick

Attorney, Hall Render

Connor Siversky

Research Analyst, Real Estate, Berenberg Capital Markets

• BCM is making a market in Ventas (VTR)
• BCM is making a market in Medical Properties Trust (MPW)
• BCM is making a market in Omega healthcare (OHI)
• BCM is making a market in LTC properties (LTC)
• BCM is making a market in Caretrust REIT (CTRE)
• BCM is making a market in Healthcare Realty (HR)
• BCM is making a market in Healthcare Trust of America (HTA)
• BCM is making a market in Physicians Realty (DOC)
• BCM is making a market in Community Healthcare Trust (CHCT)
• BCM has no company-specific disclosures on Alexandria (ARE)
• BCM has no company-specific disclosures on Welltower (WELL)
• BCM has no company-specific disclosures on Healthpeak (PEAK)
• BCM has no company-specific disclosures on Sabra Healthcare (SBRA)
• BCM has no company-specific disclosures on National health investors (NHI)
• BCM has no company-specific disclosures on Global Medical REIT (GMRE)

Andrew Dick: Hello and welcome to the Health Care Real Estate Advisor podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare focused law firm in the country. Today, we are speaking with Connor Siversky, a REIT research analyst with Berenberg Capital Markets. Connor currently covers nearly all of the publicly traded healthcare REITs, which gives him a unique perspective on the healthcare real estate sector. We’re going to talk about Connor’s background, the different healthcare REITs that he covers, and a variety of other healthcare real estate topics. Connor, thanks for joining me today.

Connor Siversky: Thanks for having me, Andrew.

Andrew Dick: Connor, before we jumped into the discussion, talk about your role at Berenberg Capital Markets and your background.

Connor Siversky: Yeah, sure. I was born and raised in New Jersey, town of Montclair. Stayed in the state, went to Rutgers New Brunswick as an undergrad, got a degree in finance. And then I think in the fifth grade I said I wanted to be an investment banker ski racer, so I think I got pretty close to one of those goals.

Andrew Dick: How did you end up at Berenberg Capital Markets? It’s an interesting niche covering healthcare REITs.

Connor Siversky: Yeah. For sure. For sure. I took a bit of a backdoor to get into the securities business. Immediately after college, I was doing construction. There was a little ferry New Jersey based GC called Mobile Construction. We did all sorts of projects throughout the state, a lot of municipal work. Incredible learning experience to see how those boots all work on the ground. And then I moved to a property manager called Solstice Residential in New York City. I was on the special projects team there. We had an excellent boss and mentor, in some respects. His name was Ken Lupano. We did a whole slew of projects in and around the borough, so Local Law 11 projects, roof replacements, facade replacements, leak repairs, all sorts of things like that.

Connor Siversky: I got to see a lot of different parts of the city, whether that was from the roof of 220 Madison Ave or maybe on the trains going to the different boroughs. It was a very interesting experience as well. Around spring, summer 2018 I got a recommendation from a buddy I actually went to college with and took on the associate role in the real estate team at Berenberg Capital Markets. Definitely a bit of a learning curve coming from the construction side of things, but some aspects of training fell in the right direction. It wasn’t very long turnaround before we were writing notes, building models, and all the things like that. It definitely helped that the lead analyst on the team, Nate Crossett, he’s still there today, extremely knowledgeable in remodeling and equity research in general. He was a ton of help in my development as an analyst.

Andrew Dick: And so how did you get the responsibility of covering healthcare REITs? Pretty narrow niche.

Connor Siversky: Yeah. It was a pretty fast turnaround, too. Nate had started covering the data centers, and then he moved on to the net lease group. He was up to capacity pretty quickly. And right around April 2018 or 2019, sorry, I think I had gotten the mandate to cover the healthcare names. Right after the first level of the CFA that June, I pretty much spent the entire summer working on the initiation report and launched on the eight names September 2019.

Andrew Dick: Got it. And for the listeners that aren’t familiar with how firms like yours review REITs and provide recommendations, how does that work in layman’s terms?

Connor Siversky: Typically, I mean, from start to finish, if we’re initiating on a company, we’ll read through all the 10-Ks, 10-Qs, the quarterly reports. We’ll use the financials. We’ll build out a financial model. We use a four pronged valuation systems. We have an AFFO multiple. We do a discounted cashflow with the AFFO out of 10 years. We do a net asset valuation, an appraisal of the portfolio at a point in time, and then a TV EBITDA multiple. Through the writing, depending on our opinions of maybe the intangible aspects of the company in conjunction with the valuation, we’ll come up with our rating. And we do a traditional buy, sell, hold at Berenberg Capital Markets, so a buy and sell would be a 15% upside or downside, respectively, and then the hold rating is anywhere in the middle.

Andrew Dick: Got it. And right now you’re covering most of the well-known healthcare REITs. I think when we spoke before, Connor, you said there’s really only a couple that you don’t cover. What are the two or three that you don’t cover?

Connor Siversky: Yeah, so we covered pretty much all the healthcare REITs that I would consider really coverable. I think DHC would be the last one, and then there’s another named SNR. Neither of those names have a lot of coverage, so those are ones that we’ve left off the table for now.

Andrew Dick: Got it. You’re covering a pretty wide gamut of diversified healthcare REITs, and then a number of pure-play REITs, for example, senior housing, medical office buildings, some of those pure-play REITs, but you’ve got a lot to cover there. How many REITs are you really covering today? Is it 10 or 15? I mean, the healthcare REIT sector is pretty big.

Connor Siversky: The healthcare REIT sector, we have 14 names in the healthcare REIT sector, and then four more names, the smaller cap industrial REITs, which is something that we’re going to be working on going forward as well. So, it’s 18 total at the moment.

Andrew Dick: Got it. And so when you think about breaking down the sector, when you’re talking to others in the industry, how do you break it down? I mean, I typically think of the big three that are diversified healthcare REITs: Ventas, Welltower, Healthpeak. And then there’s all these other niche players. I mean, is that the right way to think about it?

Connor Siversky: Right. It’s an interesting question because I think when you look at the healthcare REITs from an outside perspective, you want to lump them all together, but they’re really quite different, right? So, maybe if I just run down the list here, you could start with the life sciences assets, laboratory space, biotech, pharmaceutical development. And the real name there is ARE, Alexandria. And you also have Healthpeak and Ventas, which are building out life science portfolios as well. Then you’ve got medical office buildings, so outpatient medical office buildings, surgery centers, things like that. HTA, HR, and DOC are really the dedicated names in that space. Healthpeak, Welltower, and Ventas, they have some MOB portfolios as well.

Connor Siversky: And then when you look at the smaller names, say GMRE and CHCT, they chase after some medical office buildings, probably smaller assets in secondary and tertiary markets where they’re not really competing with those larger names. Of course, you have skilled nursing and senior housing. The important difference between the two of them, so skilled nursing is primarily funded by Medicare and Medicaid, right? The three main names in that sub-sector would be Omega (OHI), Sabra, and CTRE. And then LTC, NHI, they have SNIF portfolios as well. And then senior housing, again, there’s an element of diversity within senior housing in itself, so Welltower and Ventas are really the biggest names here. The interesting element in those portfolios are the operating portfolios where the REIT is the owner and the operator in effect. Sabra has an operating portfolio as well. And then they also have the net lease portfolios as do Omega (OHI), CTRE, LTC, and NHI.

Connor Siversky: You also have hospitals. The only true player in the hospital real estate space, at least in terms of the public REITs, is MPW. They take a unique approach here, an international approach, to investing in hospital real estate. They’ve been growing very quickly over the past several years. Very interesting name to keep track of. And then I think, finally, again, going back to the smaller cap names, more diversified assets, surgery centers, ambulatory care centers, some medical office buildings, dialysis clinics, things like that, and that’s where you’ll find GMRE and CHCT. And these names are interesting. I mean, they’re looking at these secondary and tertiary markets. They’re finding higher yields than some of their larger peers do. And they’re not really competing for those assets in primary market, so they can find higher yields. They have a better spread versus their cost of capital. And they’ve been growing very quickly over the past several years as well.

Andrew Dick: So, Connor, looking at all these different healthcare REITs, which ones do you find interesting right now in the world that we live? Which sectors are you focused on, or which rates do you really like right now based on the interesting world that we live in?

Connor Siversky: Right. The pandemic environment has definitely had a profound impact on healthcare in general and the healthcare real estate owners. There are a lot of different dynamics at play here. I think the names we like right now have an element of safety in them. For example, Alexandria (ARE), they have very strong tenants. Even though they can be grouped as office buildings, there’s still an element of human interaction within those facilities. By and large, all of those facilities are open. ARE has done a very good job on leasing and growing the portfolio with a 1.3 to $1.6 billion development pipeline. That’s one name we like a lot.

Connor Siversky: I do like the medical office buildings. Their share price has been depressed somewhat this year, so their cost of capital is a little bit higher. It’s harder for them to generate growth from external opportunities when they can only manage, say, a 50 to 100 basis point spread against their AFFO. But, they’re very high quality facilities. People are still going out and getting elected procedures. And for the most part, these names have been collecting all of their rents through the entire year, so you can definitely see an element of resiliency for the medical office buildings. Again, that would be HTA, HR, and DOC.

Connor Siversky: I like skilled nursing compared to discretionary senior housing. I think a very interesting name within skilled nursing is OHI. It’s one of the larger names in the space. They have a huge reach in terms of who their operator tenants are. They have the best cost of capital among the skilled nursing names, so when the time is right, when it’s prudent to do so, I would expect these guys to go out and start acquiring assets again and generate some external growth. Interestingly-

Andrew Dick: They’ve been around a long time. We’ve talked about that before.

Connor Siversky: Right. Right. They have been around for a long time. If I remember correctly, I don’t think they’ve had to cut the dividend in either 17 or 18 years. And the management team has been in place for a long time as well. They’re very clear with their messaging. They’ve done a great job managing skilled nursing assets, which is a very tough business to be in, especially in the current environment. And then one interesting takeaway there is that the skilled nursing operators have been the beneficiaries, of some degree, of government support through the pandemic. I would never want to say that they’re completely out of the woods yet, but these are also portfolios that have been collecting high-ninety percents of their contractual rents pretty much every month.

Andrew Dick: Which is impressive. Yeah. How do you look at a company like MPW? We haven’t talked about hospitals, but you made a point that, look, they’re international, they’ve been growing significantly. I find the company to be really interesting. How do you react to it?

Connor Siversky: Right. I mean, I agree with you completely there. They’re really the only name among the public REITs that are going after hospitals. And I think you can take into consideration that underwriting hospitals is quite difficult. I mean, from my understanding, you would have to go in there; you have to underwrite the patient flows to a certain degree; you have to have a familiarity with the physician groups operating in the hospital’s geography as well. And also, who are your competitors within those markets? It’s a very dynamic underwriting process. And I think MPW definitely has a bit of a strategic advantage of being able to underwrite those assets.

Connor Siversky: They’ve been growing very quickly over the past several years. 2019, 2020 in particular, they’ve done multi-billion dollars in acquisition for both years on an international scale as well: Australia, the UK, Switzerland, Germany. They’re even going into Columbia now. They definitely have wide reach. They’re definitely approaching the real estate space in general from somewhat of a unique avenue. And I would expect them … this year, I think they’re going to continue to execute on external opportunities. And it’s also worth noting, too, that hospitals, you can consider them, by and large, critical pieces of healthcare infrastructure. There’s definitely an element of social and government support for those operators and those assets as well.

Andrew Dick: Yeah. Good point. What about diversified REITs?

Connor Siversky: So, the diversified REITs, I mean, you can look at this in two ways. Maybe we could say this is the big three that have MOB portfolios. They have their senior housing operating portfolios, the net lease portfolios, but, to me, I like to look at GMRE and CHCT for these names. They have a lot of smaller assets that they can pick up in these secondary, maybe tertiary markets throughout the United States. And through this business model, which I think is very valid, particularly in the current environment where REITs are coming down, they can acquire at seven, eight, in some cases, nine, ten percent cap rates. And the math just works out as such that GMRE and CHCT, I mean, they can generate 10% AFFO growth if they continue to execute on these opportunities, not withstanding any kind of tenant issues or something like that. But, for the past couple of years, they’ve been pretty stable in that regard.

Andrew Dick: Talk about the impact of COVID on the REIT industry.

Connor Siversky: There are a lot of impacts in a lot of different places. I mean, I think maybe we could rewind to late February, early March when the issue was really coming to a head when we all started to get eyes on it. I think the most profound impacts have been in senior care businesses. In terms of skilled nursing, I mean, you’ve seen the headlines all over the place. It’s a very dangerous situation to be one of those more frail patients in this current environment. The impact has been felt there. Also, in senior housing I think one of the developments that really impacted the real estate fundamentals is that as the virus rolled inland from the coastal cities, it would force the state and the local governments to shut down admissions for these facilities.

Connor Siversky: There’s always a background rate of attrition, as much as I hate to sound morbid, but when you combine that with admissions restrictions and also an element of fear involved in maybe enrolling into one of these facilities or maybe electing to go to one of these facilities as a senior citizen, the impact on the real estate fundamentals has not been good. When we look at the Q4 NIC map data dump that came out a couple of weeks back, you see both skilled nursing and senior housing occupancy is down approximately 10% across the board. Obviously, it varies in different markets, but when you’re underwriting … let’s just say, if you’re underwriting a skilled nursing facility at 83% stabilized occupancy, and now you’re down to 75%, I mean, that’s a very profound difference in how the facility’s cashflow profile looks.

Andrew Dick: Where do you the most opportunities, Connor, for some of the healthcare REIT sub-sectors as, hopefully, over the next six to nine months, we’ll see some recovery as the vaccine is more widely distributed. Do you think that’s going to help valuations? Are these REITs going to recover or is that already priced in?

Connor Siversky: I think for the time being there are still some headwinds at play. I mean, we still see that we’re still getting an element … we’re still seeing rising infection counts in a lot of locales. Vaccine distribution maybe hasn’t gone as smoothly as we would have hoped thus far. I think safety is somewhat the name of the game right now. And I think if you’re looking for yield, you can hide out in some of the skilled nursing names, such as OHI. If you’re looking for stability of your tenant base, you can look at the medical office building names. And if you’re looking for a combination of both, I think Alexandria is a very attractive option where you can get very strong tenants. You can also get internal and external growth, albeit at a bit of a premium valuation. As we make it to the spring and summer months, I think the dynamics will change somewhat.

Connor Siversky: If we can start to see a trough in occupancy for senior housing and skilled nursing, if you can start to see these REITs get more comfortable getting back into the external environment, then we can start to see a reemergence of AFFO growth. And at the moment, these REITs are trading at depressed valuations versus where they were before the pandemic. I think there will be a time when those options become very attractive again, but for now, for safety sake, I think you remain in a holding pattern for most of those names.

Andrew Dick: Yeah. I have one question, Connor. That’s a great response. One question that we hadn’t talked about is we have a pretty diverse group of healthcare REITs that are publicly traded. We’re seeing some growth in these privately or non-public REITs. How does that affect the public REIT market in your opinion? I feel like we’ve got a number of these smaller, regional private healthcare REITs that some of the developers operate. Does that have any impact on the public REITs that you’re covering? Is there competition for investment? What are your thoughts?

Connor Siversky: I’m sorry. You cut off at the beginning of your question there. Could you run that by me again?

Andrew Dick: Sure. So, Connor, what do you think about some of the private healthcare REITs that aren’t publicly traded? Do those compete with the public REITs? I mean, we’re seeing more and more developers and investors create their own funds or REITs. Is it one or the other? Are they looking for … How do you distinguish those private and public rates? I mean, what are the investors chasing there?

Connor Siversky: I mean, I think the reality of the situation is that any investor is going to be going after a high quality asset. When we look into our primary markets, whether it’s a long-term thesis for senior housing, or maybe a shorter term play for something more stable in the current environment, like a medical office building, you’re going to have more eyes on those assets. Without digging into too much specifics where we see maybe private equity funds with these private funds getting involved in real estate, I think the intuitive answer is that you see some cap rate compression. And in one sense, that’ll benefit the revaluations in terms of the NAV. In another sense, if their AFFO multiples aren’t increasing to a level where they can generate accretion based on their financing methods, then it makes it more difficult for them to grow. It’s a bit of a double-edged sword there.

Andrew Dick: Great. Moving on to the end, we had a couple of questions. What advice would you give to someone who’s just getting into the real estate business or the equity research business? You’re still a relatively young guy. You’ve learned the business quickly. What advice would you have for someone who’s starting out in the business?

Connor Siversky: Yeah. It might sound a little cliché, but I think the best advice is just to talk to as many people as possible and act like a sponge in that regard. In finance in general and equity research in general, there’s so much to learn whether it comes from valuation or the narratives you want to push, or how stocks are traded or what kind of different funds or entities look at the stock. I mean, every time that we have a client call, or if I get on the phone with one of the corporates, you always try to take away a couple of key points that help expand your knowledge of what we’re studying and what we’re looking at. Ultimately, you can pick up a lot from reading a 10-K or a 10-Q, and we do that as well.

Connor Siversky: But, sometimes the best pieces of information will come from someone else or a message from someone else, or maybe asking to have a more clear or more detailed explanation for one of the dynamics that’s coming into the market. And that could come from maybe one of our salespeople at Berenberg. It could come from an IR conduct at another company or maybe the funds come from. There are really, I think, a ton of different ways to just keep learning about the dynamics of real estate or healthcare real estate specifically.

Andrew Dick: Great. So, Connor, I know you’re in the business of publishing research on healthcare REITs, where can folks find more information about you and your company?

Connor Siversky: Well, we are operating … I mean, as a broker dealer, the research, it goes to our clients specifically. It’s not exactly publicly available to anybody who wants it. I would definitely recommend if anybody wants to learn more about the healthcare REITs, you always go to the IR websites. You can always take up … the supplementals are full of valuable information like that. In terms of help with the industry, I mean, there’s always LinkedIn, there’s always the Berenberg website, if someone wishes to have access to our research, but I can’t exactly provide it myself like that.

Andrew Dick: Sure. Well, Connor, thanks for being a guest on our podcast. Thanks to our listeners as well. We publish a newsletter called the Health Care Real Estate Advisor. To be added to list please email me at

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The “New Normal” for Managing Medical Office Space

The “New Normal” for Managing Medical Office Space

While the CDC and other governmental and trade groups have issued wide-ranging guidance on “reopening” medical office space in light of COVID, the realities are that these spaces never truly closed, and furthermore, it would be nearly impossible to abide by all of the standards that have been published. This session instead focuses on what hospitals and other MOB operators are actually doing from a facilities perspective to manage medical office space to reduce the risk of liability.
Attendees will:

  • Learn about industry trends and best practices for operating medical office facilities in light of COVID
  • Hear tips on reducing liability for COVID-related legal challenges that may be brought by patients and other users of medical space
  • Have an open forum to discuss experiences managing medical office space with similarly situated individuals navigating this complex issue

Podcast Participants

Joel Swider

Attorney at Hall Render

Julie Carmichael

Advisor at Hall Render Advisory Services and President of Carmichael & Company

Mark Theine

Executive Vice President – Asset Management at Physicians Realty Trust 

Ryan Walters

Senior Real Estate Manager at Providence St. Joseph Health

Today we’re presenting The “New Normal” for Managing Medical Office Space, presented by Hall Render with a few guests.

Joel Swider: Thanks, Julie. And thanks so much to those joining the call for investing some of your time with us today. I’m Joel Swider and I’m a healthcare real estate attorney at Hall Render. Today we have a very experienced and distinguished panel here to talk about The “New Normal” for Managing Medical Office Space.

Joel Swider: We at Hall Render have had clients ask for the past year or so guidance about reopening medical office space post lockdown. And the reality is that most of these spaces never truly closed. And so owners and operators of medical office space have really had to learn and implement new procedures on the fly.

Joel Swider: We’re not really concerned as much anymore with reopening or getting ready for COVID, but we’re dealing with operating in this new reality, which we’ve called the new normal that we all have to navigate. So our goal in our discussion today is that whatever your role is in this industry, that you will come away with new ideas, fresh perspectives. Something that you can apply to be more successful in your day-to-day role, as it relates to COVID preparedness and liability protection.

Joel Swider: So I guess at this point, I’d love to have our panel introduce themselves. Julie, could you tell us a little bit about yourself and your background in this topic?

Julie Carmichael: Sure. It’s nice to be here today. Thanks everybody for logging on. My name’s Julie Carmichael, I’m a healthcare consultant in Indianapolis. I have a consulting business that I started about six years ago. Prior to that, I was the chief strategy officer for Ascension St. Vincent in Indiana. And I had responsibility there for all of our real estate and design and construction. So I have a practical hands-on experience in this area. And then I work today with health systems and private physician practices and get involved in quite a bit of their real estates and medical office issues. So glad to be here.

Joel Swider: Yeah. Well, thanks for being here, Julie. Mark.

Mark Theine: Yeah. Joel, thanks to you and thanks to Hall Render for including us on the panel. I’m really privileged to be here, appreciate it. So again, my name is Mark Theine. I’m the EVP of asset management for Physicians Realty Trust. We are a publicly traded REIT under the ticker symbol DOC. D-O-C go by a lot of times. So our portfolio today is about five million in healthcare real estate investments located in 36 States across the country. About 15 million square feet. So it’s really been interesting managing our portfolio through the [inaudible 00:03:00] and then the care nationwide and watching into this, we’ve had different spikes in different regions. So hopefully can bring a little perspective to that, but day in and day out. My role as the lead in the operations team is release asset management, property management, leasing in capital construction.

Joel Swider: Great. Well, thanks again, Mark and Ryan.

Ryan Walters: Yeah, thanks for the invite. My name’s Ryan. I’m our senior real estate manager for Provenance in the Washington and Montana region. Less are a big Swedish portfolio over in Seattle. So we’re across seven States, each area is broken up with a different real estate manager.

Ryan Walters: So today I’ll talk about our portfolio across Washington, Montana. It’s about 275 properties, mostly MOBs, but we have office buildings, industrial, land, and all sorts of fun gifts that people have donated. So I’ll try to talk mostly about the MOB perspective. We have a team of property managers at CVRE and Kiemle Hagood that are really out, seeing what the differences and implementing all these new best practices for us. So try to talk to some of those and what our technicians are seeing. So before this, I was a property manager and broker at Kiemle Hagood in Spokane, I guess that’s me.

Joel Swider: Great. Well, thanks again to our panel and for your time and expertise, by the way if those of you listening today enjoy our discussion. We have three additional ways that you can connect with us and continue the discussion on healthcare real estate. First is to consider subscribing to our podcast, which is called the Health Care Real Estate Advisor. And you can find it on the Apple Podcast app or on our website.

Joel Swider:The second is we publish a monthly newsletter with news and insights related to healthcare real estate. And if you’d like to be added to that list, please reach out to me by email,

Joel Swider: And third, I want to let the group know that we have another of these round table discussions similar to this happening on February 25th on healthcare real estate strategy consideration. So it’s sort of an offshoot of today’s discussion where we’ll be talking about the impact of COVID, recent regulatory updates and other trends on the broader strategy discussion.

Joel Swider: So I’m very excited to hear from our panelists. I want to give one or two quick backdrop notes from a legal perspective, because I think that we will find through this discussion that this is really more of a practical issue than a legal one.

Joel Swider: From a legal perspective, medical office space is really distinguishable from inpatient space in terms of the regulatory environment. So any certified provider or supplier that’s subject to survey by Medicare has to comply strict infection control protocols. Those require cohorting of positive or negative COVID patients. There’s a guidance level on surveys for social distancing and things along those lines. But outside of the inpatient setting and outside of the ASC setting, there’s not a licensure or accreditation requirement, in most States anyway, when it comes to medical office space.

Joel Swider: And so even though the guidance is there from CDC and CMS and [Ashe 00:06:25] and the World Health Organization and others, there’s no enforcement mechanism in this setting. So in some ways that’s a good thing because it means flexibility for landlords. In some ways it’s a difficult thing because it means it makes it more difficult to discern a reasonable approach when there’s no requirement.

Joel Swider: The last thing that I’ll say on the legal front is we did some research and found that the majority of States at this point have implemented or are advancing serious discussions around liability shield laws. And those generally protect a business owner from COVID liability so long as they act reasonably and are not negligent or grossly negligent.

Joel Swider: So what I’m hoping that we’ll come away with from today’s discussion is some sense of what is reasonable in this setting so that we can all serve our patients while also obviously avoiding liability.

Joel Swider: So with that as background, the first question that I want to pose to the group is, what are hospitals and other MOB operators actually doing from a facilities’ perspective to manage their medical office space? And maybe Ryan, if you could walk me through from the time somebody drives into the parking lot to receive medical care to the time that they leave what changes in protocols would that patient or visitor encounter?

Ryan Walters: Yeah, and I think my general response to this new normal, I think what we’re finding is if the buildings were professionally managed and following best practices pre-COVID, there’s really been minimal impact. I think there was a lot of unknown upfront of, “Oh no, what else are we going to have to do?” But I think we found our best practices have held true through this.

Ryan Walters: We obviously have more coordination, more PPE and some extra signage, but when a patient comes in, you’ll probably see some tents at some of our MOBs for testing facilities. So you might have to find a different parking spot. And I guess you’re used to. You’ll probably see some signage on the building entrance and maybe some directional signage on certain doors to enter or not enter. Please wear masks, social distance.

Ryan Walters: Often though when you walk into our lobby it’s the same friendly face. They’ll just have a mask on. You’ll probably see furniture spaced out a bit more in our waiting rooms. I think you’ll probably see less people in those waiting rooms. Trying to get patients back to an exam room as quick as possible. And we do have less people in our buildings. So it’s a much more coordinated effort. When vendors need to come onsite our technicians or property managers are meeting them at the front door, escorting them into the facility and getting out as efficient as they can. But other than that, for the most part, I think that’s what you’re going to expect to see.

Joel Swider: And Mark or Julie, I know when we talked earlier, you said there were some jurisdictional related items too, that you having a portfolio for example, Mark, that is in multiple States, you might see some variation in that. Any additional thoughts?

Mark Theine: Yeah, absolutely. Certainly. It’s going to be a customized approach based on the size of the building, location of the building geographically, climate, things like that. I guess even taking a step back it’s amazing that, I read an article this morning on [Axial Self Care 00:10:02], that one year ago today there were about 2000 confirmed cases of COVID and most of which started in China, of course. And there was just a handful in the US.

Mark Theine: So I mean what a ways we’ve come in just one year’s timeframe. And I’m really proud that within our company, we sent out our first communication to our healthcare partners around the country at the end of January of 2020, just about the importance of good hygiene. And if you’re feeling sick staying out of medical office buildings. And then obviously we got into March and pandemic started spreading a little bit faster and the awareness of what was coming at us increased.

Mark Theine: And within our team we formed our own COVID task force at that time. And we developed a 32 page building readiness manual for our property management workers around the country. So we could approach this with a customized and plan that we could implement all around the country.

Mark Theine: We also put together a tenant guide for all of our hospital partners with best practices and whatnot. And it outlined exactly what Ryan just said. All of those [inaudible 00:11:13] COVID crisis that we’re so used to seeing now with the importance of PPE, mask, ingress and egress of the building, and then your point about jurisdictional.

Mark Theine: And that was probably one of the biggest challenges that we addressed early on was about screening within buildings, medical office buildings. As patients were coming in, who was in charge of that screening? Was it the building owner? Was in the hospital system? And in the case of our portfolio, we partnered with the hospital system and entered into a license agreement to allow them to use common area space in a multi-tenant medical office building, or use a parking lot for screening or now the vaccine administration.

Mark Theine: But it definitely varied region by region. And we’ve worked with our revenue management teams across the country to implement those best practices that Ryan was outlining a minute ago.

Ryan Walters: And Mark that’s a good point too on who’s doing it. I think if you were to, I’m going to talk strictly from our real estate perspective. So our property managers and technicians, but really it’s our clinic managers that are in the buildings and the operations team that have taken on a bulk of the changes that need to be implemented. Because they’re there at the front door and taking on the temperature screening and those kinds of things.

Mark Theine: I would just say one additional thing we did this Summer was to partner with Julie and her company in a survey of health care consumers in five of our largest markets across the country.

Mark Theine: And we asked them just about their comfort level of coming back to medical office buildings, again, to your opening comments. They never really closed [inaudible 00:12:55] more people back and the volumes increased. But what would make them more comfortable coming back to medical office buildings?

Mark Theine: And one of the answers that didn’t surprise us, but one of the answers we heard loud and clear was, not just telling us the things that you’re doing in the buildings and you’re wearing PPE and you are cleaning, but physically seeing someone in the lobby, cleaning, cleaning the buildings, cleaning the common areas, elevator buttons, door handles, et cetera.

Mark Theine: So we’ll talk a little bit more about that survey, but yeah, those are the things that we’ve adjusted on our team to be very visible, very transparent in the communication and the efforts that we’re doing within our buildings.

Joel Swider: Yeah. I’d love to jump into that. Julie, how can we communicate to consumers that it’s safe to enter, and in some cases reenter, because a lot of people have put off care, right? So how do we get them comfortable?

Julie Carmichael: It’s a question that really puzzled me and why we started back in July with a survey in Indiana to see what consumers were feeling. I had heard a lot of anecdotal examples of patients not going to the hospital with heart attack symptoms. And I wanted to understand why that was and what it was going to take to get them feeling comfortable.

Julie Carmichael: So the results that we found in Indiana, and then when we did the survey for Docreit, really are similar across the country and we boiled it down to five key points. The first being consumers prefer strongly, 75% prefer to seek services not on a hospital campus. I think that’s important for us to think about from a strategic standpoint, especially as we’re trying bring patients back. If we have off-campus locations where medical office buildings and other facilities that are not on our main campus and we can ease people back into that setting. I think there’s an opportunity.

Julie Carmichael: As Mark mentioned consumers told us, “We want to see what you’re doing.” Show not tell. Just this need to visibly see that precautions are being taken and that we’re taking their safety very seriously. So I think that’s going to continue and will really contribute to getting people to come back.

Julie Carmichael: Consumers also want us to go above and beyond the requirements. Frankly, they look at what the CDC and others have said. And it’s great, but if you can do more than that, we would really prefer you to go further. And then when we’re communicating to patients, the last two points really get communication. One is physicians and nurses and clinical staff are the best way to communicate with patients that it’s safe to come back and what all you’re doing to keep them safe.

Julie Carmichael: We found, surprisingly, hospital CEOs were on the bottom of the list for folks that should be out in front and giving these messages. In fact, consumers told us they’d rather hear from their local legislators than hospital CEOs. Which I thought was very interesting. So think about who you’re putting out in front.

Julie Carmichael: And then the final point is, to the extent you can, one-to-one communication is appreciated. So rather than just putting out broad notices, broad marketing strategies, being able to send that email to your patient, kind of a one-on-one communication that, “Hey, these are the things we’re doing. This is what you’ll see. This is what you’ll experience when you come into the building.” I think consumers really like that knowing what they’re going to face, as Ryan discussed. What’s it going to be like when I come back to a health care facility?

Julie Carmichael: So that’s the study in a nutshell, and we can talk more about it and I’m happy to share if folks want to dive into that outside of today. Reach out and let me know. I think it’s helpful as you’re thinking about real estate strategy and just getting people to come back to your medical office buildings.

Joel Swider: Well, and that’s very interesting, Julie. I think one of the things that we’ve gotten some questions about is related to certifications and using that potentially as a way to say, maybe it’s a communication device, maybe it’s a sort of check the box item. I don’t know, but anybody on the panel have any experience with those sort of outside certifications that have come to the market recently? Is there any validity to those? Are they worthwhile or is your money better spent elsewhere? Any thoughts on that?

Ryan Walters: I can kick it off. We haven’t pursued any specific certifications. I mean, we have our employed infection preventionists and the relationship between that team and our real estate team is the strongest it’s ever been.

Ryan Walters: They are meeting with our janitorial vendors, looking at their scope and cleaning products, making sure they’re appropriate. And if there’s ever an issue they’ll run over to a building and meet the real estate team to look at the issue. Other than that, certification wise, we’ve definitely been doing more test adjust balance reports from certified vendors that are capable of doing those to make sure we have proper air flows.

Ryan Walters: But Mark or Julie, I don’t know if you’re seeing anything else on the certification front.

Mark Theine: I think you described it really well. Yeah, there’s a lot of groups obviously popping up now. Claiming to have the latest and greatest new certification and trying to monetize that.

Mark Theine: But back to Ryan’s initial point. I mean for groups that have already been operating their buildings to high level, we’ve already invested in the platforms to improve the patient and physician experience in the buildings. And what COVID’s really done, and managing through this right now, is improved the focus and communication of the operations teams.

Mark Theine: So to Ryan’s point again, we are communicating more and more frequently and sharing data in real time from our systems about what we’re doing for our work orders, for hours that people are in the building, screenings, tracking patient volumes. And these are systems that we had in place already pre-COVID, but the focus has really been on increased communication transparency around the efforts that we are doing. Both to our hospital partners and then ultimately to their patients.

Julie Carmichael: I would just add that our survey results really showed that consumers listened to the CDC more. The CDC and local health departments. So as these companies that do the building certifications have popped up, it’s really been after we’ve done the survey, but I go back to consumers have certain people that they view as experts. CDC, State Department of Health, your physicians. And then I think I’d spend my efforts making sure that what I’m doing is well communicated and visible and not necessarily putting a stamp on a building from an organization that consumers don’t know anything about.

Joel Swider: Yeah. That makes sense. And I guess we haven’t really gotten into, another question that we get a lot I’ve heard from you all so far today on communication and some of the protocols. Which to my mind don’t cost a lot or don’t have to cost a lot. Are there any capital outlays that have been necessitated in light of COVID that any of you have seen or recommend?

Mark Theine: Yeah, I can jump in and help here. So from a capital outlay perspective, certainly we’ve evaluated our entire portfolio form, mechanical systems, where we can improve, fresh air flow. We haven’t gone in, wholesale made changes to existing facilities. Where there’s new development facilities we can of course pick things as we’re in the projects, now with COVID implications in mind.

Mark Theine: But we haven’t gone back to retrofit an entire mechanical system or anything like that. But where we are investing our money now is in, when we’re doing common area renovations we’re putting in touchless sinks or automated doors. Sometimes elevators that you can have just one call button instead of pressing the button on every floor.

Mark Theine: So we’re looking at that. And then clearly on tenant improvements as we’re renewing leases and offering some capital to freshen up the space. We are looking sometimes at the design flow of how the office section lays out one way in and then a separate exit out. So it’s one way traffic.

Mark Theine: Some practices are considering not having as large a waiting room and taking patients straight back to the exam room and wait there, so that they’re separated. But then there’s other systems that want larger waiting rooms to separate everyone. So it’s customized by my practice there, but where we are investing our money, again, is more on the TI and the remodels as they’re coming up in our portfolio. But we haven’t gone back to wholesale [inaudible 00:22:51] yet.

Ryan Walters: Yeah, very similar opinion as Mark. We have design guidelines for our primary care and our specialty care clinics. So our architects have been revisiting those and having some conversations around some of the things that Mark mentioned.

Ryan Walters: So things we’re looking at are, should we have power and water hookups in our parking lots, or maybe a bigger plot of land? Should we need to use our parking lots to put up tents in the future? Should we have bigger entrance canopies if we have lines going out our front door? The automated door hardware and hands-free faucets for patients that Mark mentioned. What do we do in our exam rooms to increase our telehealth capabilities? Do we have some extra negative pressure exam rooms near a separate entrance? And where should the doctor’s workstations be for those telemedicine visits? Should they be in the clinic or elsewhere? Just some things we’re thinking about.

Joel Swider: Ryan, I want to follow up on one point you made. Talking about preparing the parking lot as another potential site of care. I suppose that’s easier when it’s owned real estate. I mean has that been successful on the tenant side as well and saying, “Hey, landlord, you’ve got to do something here.” Or it’s not really a TI issue as much as a facilities issue and amenity, if you will. Has anyone seen that on the tenant side?

Ryan Walters: Yeah, so we own about half our properties and lease about half. And I was just going to say, we do have tents set up. We are the single occupant in the MOB, which helps. But we’re very thankful to our landlords. It’s really come down to just a transparent conversation. Hey, who are the vendors? Show us some diagrams, how traffic flows going to work? What electrical systems are you going to tap? How are you going to restore it?

Mark Theine: Yeah, similar to me. Again it goes back to that collaboration with our hospital partners and how quickly can we help them set up something in the parking lots. Initially it was testing sites in the parking lots, but most recently in the last week or two, we’ve been having conversations about vaccine administration and drive-thru vaccine sites through larger tents.

Mark Theine: And some of the discussions get interesting and maybe you’ll appreciate this from a legal perspective is, some of those sites we own the buildings be simple, but in others we ground lease them. So the hospital may already own the land and we own the improvements of the building, but in those cases the hospital has decided on their campus to set up the tent and we just need to kind of over-communicate on where are we going to display some of that parking in those cars. Because a few of our leases do have minimum parking requirements in the leases.

Mark Theine: And it just creates some challenges operationally, in patient flow, and then again for our property managers to be able to communicate that to everyone. In the multi-tenant building those tenants that are not hospital tenants, so ground leases being reviewed a little bit more as we’ve set up testing sites and now vaccine locations.

Joel Swider: Yeah. I want to delve a little bit more into this idea of transparency. And Julie, you mentioned this earlier, Mark, you echoed it as well. Can we talk a little bit about how do we serve our customers, whether at patients or, Mark in your case, hospitals maybe by providing more transparent data. Have you seen that play out?

Julie Carmichael: Well, I think in a couple of the practices that I’ve worked with, I’m seeing the providers just be much more communicative. More regular communication, whether that’s newsletters, quick emails. That one office that’s done a great job putting out videos where the provider will talk about what’s the latest protocol in the office. What’s changed since the last time you were in.

Julie Carmichael: I think it’s just an extra attention to communicating things that we think that probably people already know. It’s that mindset of over-communicating. So that’s really what I’ve seen with most of the medical offices that I’ve worked with. I don’t know Mark, Ryan [crosstalk 00:27:49] seen something different.

Mark Theine: We’ve had employees before COVID, which really helped us excel in their customer service to the hospital partners during COVID. A work order management system platform, where we could track and measure and monitor all requests that we’re getting from our partners.

Mark Theine: So we could track how long until a work order is dispatched. How long until it’s completed? One of the most useful tools is at the end of the work order we can get a rating on how well we did. So thumbs up, thumbs sideways, thumbs down just like an Uber. You get a four star, five star Uber rating.

Mark Theine: We get real-time feedback on how well we’re doing on our work orders. And then in that system we can also track janitorial schedules, engineering hour schedules. And so we have all this data and we put together a [inaudible 00:28:40] report to our hospital systems.

Mark Theine: We share with them on a very routine basis all this data about here’s how we’re doing on work orders. Here’s our customer service to the physicians. They’re rating of our work order in our teams and then how quickly we’re responding to them. And then also showing them that we’re thinking about adjusting janitorial hours or engineering hours to take care of the team’s health, but yet also servicing the building. Those communication back and forth has just really gone long way to keep these buildings open and then ultimately keep the providers and patients safe in the buildings.

Joel Swider: Thanks one other, I want to switch gears a little bit, because one topic that we talked about on our prep calls was how taking the COVID response seriously when it comes to property management can actually enhance business. It could be an opportunity. And of course I don’t mean to be light of a very dire situation, but how can we, from a business perspective, enhanced business in our COVID response? Julie, I know you’ve talked about this before a little bit.

Julie Carmichael: it does feel somewhat awkward talking about trying to grow and expand market share in this environment. And at the same time, I think this is the kind of environment where there are opportunities to grow market share.

Julie Carmichael: Things that I think are important are looking at your portfolio. And if you’ve got assets that are not on campus, figuring out how to maybe drive more service there. I think consumers now like convenience, smaller offices, it’s just that big campus setting that I think people are a little bit leery of. So looking at where you’re providing services. If you can put services together in convenient locations and convenient packages so that people can do multiple things in one trip. I think that’s a good opportunity right now.

Julie Carmichael: And then just from a general standpoint, I think as you’re serving your competitive landscape there are a number of people that you’re probably competing with that are so focused on just responding to COVID because they’ve had to be. So if you’re not in that situation, or even if you are maybe pulling out a small group of people who you asked to focus on the future and think about where are the opportunities that we have.

Julie Carmichael: If everyone is thinking about today and no one’s thinking about tomorrow, I find that to be a bit dangerous from a strategic standpoint. So I like the idea of having at least a small team of people that are thinking about the future and where those growth opportunities are, because they are there.

Mark Theine: Yeah, I think that’s one of the trends that we’ve seen. Accelerated over the last year is the shift to the off campus buildings. I mean the reimbursement and technology and all those enhancements were already driving more and more care off campus. The COVID continued to accelerate that. As consumers didn’t want to go to the big box hospital where the COVID patients are being taken care of. They’d rather get their care closer to home in a clean and safe environment.

Mark Theine: So I think Julie’s spot on with her comments about shifting care to the off campus setting there. In fact 72% of new construction starts last year were in off campus buildings.

Mark Theine: And I think that historically healthcare has been very hospital centric and in the future, as Julie just said, it going to be very consumer centric. And it’s going to be more about the patients and their preferences. How to get care in a clean, safe, convenient way is the way to be thinking about healthcare in the future.

Ryan Walters: Which may or may not be in an exam room in a medical office building.

Joel Swider: Yeah. Ryan, could you elaborate on that? Because I think from the hospital perspective, I think, we just heard a lot of people are not wanting to come on campus or they’re not, obviously there are certain conditions where you have to, but for an office visit. Any thought from the hospital perspective in terms of how you’re responding or plan to respond in the year ahead?

Ryan Walters: Yeah. There’s lots of interesting conversations that I’m sure everyone’s asking throughout the industry, but with the care that’s being delivered in a car out in front of an MOB. What does it mean to look at a car as an exam room? What’s telemedicine do? And what’s an exam room look like if it’s in a patient’s home? Lots of interesting questions and conversations around that.

Joel Swider: Well, I’d like to wrap up our discussion with exploring the future horizon and what have we learned? What does this new normal look like? What will we keep and what will we discard? Obviously we can’t see the future. Any thoughts on that? On what we’ve learned and where we go from here.

Ryan Walters: I think, so big questions in my role, we oversee all of our leasing, buying, selling. Most of our office employees are remote today and plan to be through Summer.

Ryan Walters: I don’t know of many medical office buildings that have formally closed, at least not for very long, throughout this process. But we did close a lot of our office buildings. So we foresee a need for much less office space or a different type of office space. Where nobody has a reserved desk or cubicle. And we deploy a reservation system where you can reserve a cubicle or meeting room, depending on the type of work you need to do in the city that you’re currently located.

Ryan Walters: So we’re identifying which caregivers are fully remote moving forward. My VP recently told me I’m one of those. So I’m a guinea pig in this effort. And who needs to be in front of a desk five days per week can be assigned cubicle and who’s in between.

Ryan Walters: And then on the medical office side, it’s what is the impact of telemedicine? Does that allow us to see more patients and postpone the next new building a few years? Because we have some more capacity. Do we need a different type of space for telemedicine? Some of the questions we’re asking,

Julie Carmichael: I think it’s going to be a mix in some ways. I think a lot about the fact that people are pretty quick to forget things. And I wonder what the lasting impact on all of our psyches will be after living through a pandemic. Will it change our behavior forever, or will it change our behavior for a while?

Julie Carmichael: And I think there are probably some things that may change forever. I think telemedicine is something that has worked well in certain instances, but there are a number of practices and specialties. I think about obstetrics as an example, and a lot of women’s health where it’s just not practical to do a lot of that care via telehealth.

Julie Carmichael: So I think, to Ryan’s point, we’re going to have to live in both spaces. We’re going to have to figure out, maybe we can delay some additions that we thought we might need to do some expansions. And I also think it’s going to be interesting to watch what happens on the ambulatory surgery side. With changes to Medicare and other insurance companies being willing to pay more and cover more services in that setting. And providers, I think, starting to feel that the quality is comparable. I think we’re going to see a lot of activity in the ASE space going forward. But it’ll be interesting to see. I wish we knew for sure, but I think we’re all guessing.

Mark Theine: I love the optimistic question about thinking about what’s coming in the future, especially given how challenging this year has been. But the truth of the matter is that we are still in a crisis and there’s still a lot of COVID care being developed.

Mark Theine: And it’s really important for us to remain disciplined in our operations of the facilities today in what this new normal is that we’re talking about. It’s very easy to get COVID fatigue and not wear your mask or start settling into the new normal of your management hours and things like that. Your management tasks, but it’s really important to continue to stay disciplined for the very foreseeable future.

Mark Theine: And then further into the future to answer your question though. I, talking to a CFO yesterday of the hospital system, and one of the comments he made that really resonated with me is that they shifted more of their surgery procedures off campus, the AFCs.

Mark Theine: Again, the same capacity in the hospital system. And those procedures will probably now for a very long time continue to be located in that off campus surgery center. So there’s a lot of opportunities for certain off campus surgery centers, [inaudible 00:38:51] future. And procedures that have shifted away from the campus, off campus will continue to stay there in the future.

Joel Swider: Great. Well, that is the extent of my prepared questions here. Julie, Ryan, Mark, thank you so much for your insight and thank you to our audience for joining us.

Joel Swider: We will be sending out contact information to the extent that anybody has questions that didn’t get answered today and you’d like to continue the conversation. We have our strategy discussion coming up on February 25th, which I think will be an interesting follow-up to this one.


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Using Existing Health Care Assets to Advance Social Determinants

Using Existing Health Care Assets to Advance Social Determinants

Few hospitals and health systems currently have plans in place to address social determinants of health (“SDOH”) in their communities, but more aim to structure their policies, programs, and initiatives to better address these issues in coming years. As providers brainstorm ways to structure and implement SDOH strategies, each should consider how its existing asset portfolio (including existing real estate assets) could be used to effectuate those SDOH goals. This upcoming panel will focus on how some systems already use these assets in a such manner and their SDOH initiatives more generally. The goals of this panel discussion will be to (1) help attendees have a better understanding SDOH, (2) hear from providers as to their SDOH initiatives, and (3) provoke attendees’ thinking about how their existing assets may be used to address SDOH in their communities.

Podcast Participants

Addison Bradford

Hall Render

Matt Paradiso

Hall Render

Ashley Brand

CommonSpirit Health

Patricia “Pia” Dean

Denver Health

Today, we’re preventing using existing healthcare assets to advance social determinants, presented by Hall Render attorneys Addison Bradford and Matt Paradiso.

Addison Bradford: Thank you and welcome everyone. As Julie mentioned, my name’s Addison Bradford and I’m an attorney at Hall Render within our real estate team, and my practice focuses on assisting healthcare providers with real estate transactions. Today, I’ll be moderating a panel discussion with three people. We have Pia Dean, who’s the chair of the board of directors for Denver Health, Ashley Brand, the system director for Community and Homeless Health or CommonSpirit Health, as well as my college Matt Paradiso who’s within our real estate section at Hall Render. I’ll give everybody on the panel a little bit of time to introduce themselves a little bit more, but just a few more logistics.

Addison Bradford: We plan for this webinar to be 45 minutes and it will have a conversational format. We will try to stick to that 45-minute timeline as best we can. If you have any questions, feel free to put them in the question-and-answer box and we’ll be happy to the extent we can weed them into our discussion. The goal of today’s webinars is threefold. It’s one to help our attendees have a better understanding of what social determinants of health are, hear from a couple of providers about their existing social determinants of health initiatives, specifically with regards to hospital assets, and then to just hopefully provoke everybody’s thinking about how hospitals, health systems and other providers and parties in the healthcare industry can use their assets to address social determinants of health in their communities.

Addison Bradford: Two quick plugs. The first is this will be the first in a series of webinars that will be hosted by our Hall Render real estate section hopefully on a monthly basis, but in the coming spring. Our next one is scheduled for Wednesday, January 27th at 1:00 pm Eastern Time, and that will be over the new normal for managing medical office space. And that will specifically focus on what hospitals and other medical office building operators are doing from a facility’s perspective to manage medical office space. My colleague Joel Swider will moderate the discussion with Julie Carmichael from Hall Render advisory service as a panelist as well as Mark Theine who is the executive vice president of asset management at Physicians Realty.

Addison Bradford: And now our real estate section puts out a monthly newsletter that’s free. So if you’d like to be on that newsletter going forward, feel free to message me or email me after this and we’ll be happy to get you added up. So well with those logistical issues taken care of, I’d like to welcome our panel. So Pia, Ashley and Matt, start with Ashley, we’ll go alphabetical. If you could just tell us a little bit about yourselves, about you and your involvement with social determinants of health.

Ashley Brand: Thank you Addison. Good morning and good afternoon depending on your timezone. My name is Ashley Brand. I am the system director for community and homeless health for CommonSpirit Health. For those who are not familiar, CommonSpirit Health was created by the alignment of Catholic Health Initiatives and Dignity Health as a single ministry in 2019. Our commitment to serve the common good is delivered through the dedicated work of 1000s of physicians advanced practice clinicians, through clinical excellence delivered across our system of 137 hospitals and more than 1000 care centers, serving 21 states, so we have a very broad footprint.

Ashley Brand: I started my career actually providing direct services to those experiencing homelessness on Skid Row in Los Angeles, California. And I have been in and involved with program management, implementation and evaluation for the last 13 plus years, with a real focus on serving those experiencing homelessness but also the larger vulnerable communities as a whole. I’ve been with Dignity Health for eight years. I started in their community health and outreach division for the Greater Sacramento area. And with the alignment between CHI and Dignity Health, we created a real focus on addressing housing insecurity and homelessness and creating a system wide strategy on how we address those social determinants of health focused around housing. Thank you for having me.

Matt Paradiso: Good afternoon. My name is Matt Paradiso and I’m an attorney in Hall Render’s Michigan office. Along with Addison, I’m in the firm’s health transactions practice group and I focus primarily on real estate transactions for hospitals and other health care providers across the United States. As it relates to addressing social determinants of health, my involvement in that area includes writing on the topic and observing how health systems are addressing these issues in practice.

Patricia Dean: And hello, my name is Pia Dean, thank you for having me. I am a healthcare attorney who spent all of my career at a firm in Denver called Holland and Hart. And during that time, I did an LLM, in health law, and fell in love with this concept of medical legal partnerships, which is just simply the idea of adding a pro bono attorney to a fully integrated medical team.

Patricia Dean: And that led to starting a medical legal partnership in Denver. And really what a medical legal partnership is intended to do is advance care management, or most specifically address social determinants of health. That has led us to expand in several different ways, including at Denver health. I’m also the Chair of the Board of Denver health, which is an anchor institution, it’s a safety net hospital, and a large number of FQHCS that serve a very, very vulnerable population. And as such, we are constantly looking at how social determinants of health and these social factors affect the health of our patients.

Addison Bradford: Great, well, thanks, everyone. Appreciate the introductions. Just to start off, social determinants of health is certainly a big buzzword these days. And it means a lot of things to a lot of people. So, Matt, I’m going to pitch this to you first, because you’re my colleague here, but when we talk about social determinants of health, what are we talking about? What do we mean?

Matt Paradiso: Sure, yeah. Thanks, Addison. When we’re talking about social determinants, we’re really talking about the non medical factors that influence health outcomes. So the World Health Organization defines social determinants of health as the conditions in which people are born, grow, live, work and age. And I came across a TED talk recently that was on social determinants of health. And it was presented by Randy Oostra, who’s the CEO and president of Promedica. Promedica is another institution that focuses a lot of efforts on social determinants. And in his TED Talk, he told this story about a young couple who just learned that they were having their first baby, and they went to the hospital to see their doctor for the first time, the OBGYN walks into the office where they meet the young couple, and he’s very concerned. And he says to them, “I’m worried about your baby’s diagnosis.” And the couple confused and startled, says, “Doctor, I don’t understand. It’s our first time seeing you, we just learned we’re having a baby. What do you mean you’re concerned?” And the doctor responds and says, “Well, your baby is a 43604.” And they say, “Well, that’s our zip code.” And he says, “Exactly.”

Matt Paradiso: So I think that story hits at the heart of it. And studies have shown that one’s zip code is a more powerful predictor of health than one’s genetic code. It’s interesting when you hear it like that, but when you start to think about it, it makes sense. It’s zip code tells where you were born, how you live your life, who your parents were the social and economic conditions of your life. And research has shown that social determinants account for substantially more of the variation in health outcomes than medical care does. Up to 50% of a person’s health and well being is based on social determinants. So social and economic factors, physical environment, et cetera, non medical factors, whereas medical care only accounts for up to 20% of a person’s health and well being. And the remaining 30% is shown to be on health behaviors.

Matt Paradiso: Some of the big areas of social determinants are housing, so homelessness, quality of housing, affordability, neighborhood. Others include transportation, food security, employment and education.

Addison Bradford: Yeah, Matt. That’s great information and good statistics. In addition to location, outside of population, what populations are … there are different populations of people that are more likely to face health issues arising out of social determinants of health?

Matt Paradiso: There are, yes. Yes, several different populations. One that comes to mind is homeless population. Studies show that those in the homeless population have emergency, excuse me, rates of emergency department use and inpatient hospitalization at rates that are three to four times higher than those of the average person.

Matt Paradiso: In 2017, the average emergency department visit, the cost of such was approximately $14,000 … $1400 excuse me. So the homeless population three to four times as much presumably suggests that this population has three to four times the amount of health issues. Other populations, low income, why income level shapes one’s overall living conditions, and that affects psychological functioning, influences health related behaviors, such as quality of diet, standard physical activity, tobacco, excessive alcohol use.

Matt Paradiso: Research has also shown a direct correlation between income and health. Almost 40% of those households making less than $23,000 a year reported being in poor or fair health. And that’s compared with households making more than $48,000 a year, only 12% reported being in poor or fair health. So there is correlation between income and one’s health and well being. And on the topic of low income, another quite startling statistic that was published by the Journal of the American Medical Association is that the difference in life expectancy between the highest 1% in income and the lowest 1% is about 15 years for men, and 10 years for women. And just to give that some context, that’s about the same life expectancy as smoking. So it’s startling statistics.

Addison Bradford: Yeah, it is startling. P and Ashley, you guys have had a hand in this throughout both of your careers thus far, how is the healthcare systems understanding and view of the importance of social determinants changed over the past decade or two?

Patricia Dean: Vastly. And it really started a lot with value based reimbursement. When we started realizing how important it was to keep our populations healthier, and it became a major step towards social determinants. For instance, our state Medicaid agency, is now funding things like medical legal partnerships. They’re interested in some of these housing efforts that we’re putting forth, because Medicaid understands that to make value based reimbursement work, you have to do more than just provide care. And as we move away from fee for service, and more into a PM type of system, it is in everyone’s best interest to address the entire patient and really population health. So there’s been a complete change as I’ve seen it, and it was partially the ACA, it was a lot of different things. But it’s really the understanding that a person’s health is, as Matt said, only minimally affected by the healthcare that they’re receiving. It really is these other social factors, which are going to be determinative.

Ashley Brand: Yeah. And I would just add, I think, even from our frontline staff in the hospitals, it’s a recognition from them that we can do as much in the clinical setting. But if those community partners and that collaborative approach to addressing a whole person is not there, it can be very fragmented. And so I think there’s a recognition of understanding the components that must be collaborative and part of the continuity of care to support these efforts. And I think one thing P and I discussed earlier was this is an ongoing iteration of work. There’s never going to be a point where we have a full understanding because things change so rapidly. COVID-19 is a perfect example where nothing’s new, but everything has been exacerbated. But the way we approach it has shifted, especially around those experiencing homelessness in our community. So I think there’s a better understanding, but our approach is going to constantly shift as we continue to improve our collaborative efforts to address the needs of the communities we serve.

Addison Bradford: Yeah, and there is a study recently published in the Journal of Health Affairs and that study analyzed in all new programs involving direct financial investments and social determinants by US health systems for a two year period spanning from January, 2017 through November, 2019. And that study identified 78 unique programs involving 57 different health systems. So that’s about 9.1% of all health systems in the United States. So I think what that tells us is that it’s not an overwhelming majority of health systems who are focused in this area yet, but what the study also showed is that those who do focus in this are making significant investments.

Addison Bradford: The study revealed that 2.5 billion of health system funds were invested in social determinant programs. And the study also broke down the specific categories where health system focused, the largest being the housing area, 1.6 billion, employment was second, 1.1, and so on and so forth. So I think the takeaway there is health systems are starting to recognize these issues. And when they do, they realize how much social determinants really affect someone’s health and well being and they’re making sizable investments.

Patricia Dean: No. Well, I’ll make this really quick. I spend a lot of time working with young residents and medical school students, and the thinking has changed so much that I now see in this generation that’s coming up, a group that says, I will not be satisfied until I can write a prescription for food and a prescription for housing. And so that’s how much there’s been a change in the thinking and the approach that they want to be able to take with their patients.

Ashley Brand: And I was just going to add, I think the exciting part of this work is the ability for health systems and a variety of partners to come together and really create system transformation in this work. The more we work together, the more we partner, the more we’re engaging with our community partners, engaging with those with lived experiences, the better we’re going to create a solution for a variety of different factors that are falling within social determinants of health. But this is an opportunity. And what excites me is when we bring stakeholders together and we break down some of the competitive nature that we often have to address the community need. We are partnering with funders together, [inaudible 00:17:31] homelessness to create a national health system funders for housing justice, which is exactly that bringing health systems together to create a shared agenda and prioritization on how we create an action focused effort moving forward to address housing and insecurity and homelessness, so that it’s really exciting in that factor that we’re coming together to respond.

Addison Bradford: I agree. On the topic of housing and partners, Ashley, who are the types of partners you traditionally work with? And what makes a good partner in this area?

Ashley Brand: I think that question has so many different answers. We want to partner with everyone. We want to partner with other health systems on a national level, we want to partner with other health systems in our local markets, really engaging around housing with the affordable housing developers, the community organizations that are providing frontline services, our homeless continuum of care, understanding the mechanism in which the local CLC or the continuum of care operates, understanding how coordinated entry works, as we look at chronicity of those experiencing homelessness that are moving into housing, versus medical vulnerability of the individuals that we’re serving. So I think it’s really creating space for everyone to be at the table. Trust is a key component of that work. We have to understand and build trust before we can move forward in a collaborative manner. And oftentimes, that takes just meeting normally in person, obviously, virtually right now and breaking down stigmas, breaking down any barriers, creating shared language, oftentimes, there’s a disconnect between the verbiage we use in healthcare, the verbiage that our homeless service providers use, and our affordable housing developers.

Ashley Brand: And so coming together with that collective vision, and then moving that forward into implementation and operation, I think, to me has really been the key in building these collaborative processes. But it’s also thinking outside the box. What opportunities are out there that we haven’t thought of? And how again do we have individuals with lived experiences at the table helping create those solutions?

Addison Bradford: Ashley on this point, we have a question from one of our participants. What are some of the legal barriers and challenges to working with your community partners and with government or privately funded social assistance partners?

Ashley Brand: I think oftentimes it can start with sharing data. So it’s really working through the legal components of covered versus non covered entities in which we share and how we share data and working through that workflow. But there hasn’t been a time where we haven’t been able to overcome that opportunity. I would say with the government side, the challenges is when there’s an internal system. So if the counties are running the local continuums of care, and there’s a local county hospital, trying to figure out how a nonprofit hospital can be supportive of that work is something that we, from CommonSpirit Health are still trying to figure out. But I think understanding the workflow, understanding the services that are in place and how individuals are referred to what programs, is a good starting place, but the data sharing and the referral process has been challenges, but I want to say barriers that have kept us from moving forward in some of these collaborative processes.

Addison Bradford: On this topic of partnerships, we discussed at a more macro level thus far about social determinants of health. Yeah, I know the Denver health has a housing initiative that’s been in place for a couple of years now. Could you maybe tell us more about that program and how keen to be.

Ashley Brand: Sure. We have a relatively large campus, there was a building that we do not need to use. And so we entered into a partnership with the Denver Housing Authority, whereby we’re redeveloping it, which has been a long process because it’s filled with [inaudible 00:21:58]. So it’s taken some time. But the goal is to make it into transitional housing with specifically for …. two floors will be specifically for patients who have tasked medical necessity who are impatient at Denver Health, but have nowhere to go. And so the idea is we don’t want to return anyone to homelessness. So, that will be transitional housing. But that led to other interesting initiatives and ideas.

Ashley Brand: One of the things that we’ve been dealing with is the fact that we have a number of our employees, we have 7500 employees who do not make a living wage. And we’re really doing several initiatives to try to get all of our employees to living wage, and some of that is career pathways and career ladders, but we’re also looking at a program that we’re going to work on with Elevate Land Trust in the Gary Trust, which would allow us to start with 500 families, 250 of which are employees of Denver Health, and over a five year period tried to pull them out of poverty and into home ownership. Ultimately, we feel like the goal has got to be home ownership, because that’s where wealth is built. So that program runs along the lines of identifying these 500 families, and then helping them with a down payment and rent assistance where necessary, but even a down payment to buy that will then forgive over a period of years.

Ashley Brand: The other major project that we’re looking at is another building on the Denver Health campus, which is an old building, but it has good bones. And I think the feeling is that it should be turned into a low cost housing to try to deal with homelessness.

Addison Bradford: And Ashley, I know we only talked in our initial call, I know we talked to CommonSpirit taking a similar approach with the housing with dignity program, although it’s not using an existing asset but an asset of a third party. Can you tell us about that program?

Ashley Brand: Yeah, so our housing with dignity program developed in 2014 in partnership with Lutheran Social Services, and it really focuses and aims to assist homeless individuals with severe chronic health and mental health issues, obtain and retain housing, care and services designed to achieve stability in their lives. The process is that through our hospital case managers, we work directly with Lutheran Social Services staff to identify participants who will be housed in supportive stabilization apartments and receive intensive case management supportive services. And these are individual apartments that are master lease by Lutheran Social Services. Purpose of the program is to provide up to six months of transitional supportive housing to individuals experiencing homelessness and resulting in reduced hospitalization, identification of permanent supportive housing and or independent housing for the individuals.

Ashley Brand: And it really is a collaborative process recognizing many of our programs were focused more on a shorter period of time, 30 to 45 days. And unfortunately, there’s been a decrease in funding for transitional housing. But some of these individuals needed a little bit longer length of time to get stabilized if they needed behavioral health services, including substance use services. This is a low barrier program for individuals who are interested in moving into housing. This program has been expanded in 2016. We started with five apartments and expanded to 15. And the recognition is that through our partners that are able to work through the processes, I get identification, if they don’t have it, work on income, help with obtaining coverage, if they don’t have it already, or linkage to a primary care provider. And during that time, also getting them ready to move into a more permanent solution.

Ashley Brand: What’s unique about this program is because they are master leased apartments, oftentimes an individual can move from our program, housing with dignity, into their own permanent housing without actually moving in our apartment. So we can use that apartment and transition them into multiple programs, which allows them to create consistency. But it’s also a program where we meet the individuals where they’re at. A story I often share is one of the individuals that was referred to the program, I believe it was about two or three weeks that they slept on the porch outside because they weren’t comfortable sleeping inside. But it was also about meeting them where they’re at and developing that safety, that comfortability of moving inside. And eventually they did. But we want to allow the individual to move at their own pace.

Ashley Brand: This is really focused on establishing individual goals led by the individual we’re serving. And so they’re developing what their priorities are, and we’re moving with them. And I think as a health system, this is really where collaboration is so critical, finding those community partners who are able to engage with the individuals and the participants in the program, understand their needs and help work through that process together. It’s been a great program. The reality is individuals are very ill. So we do see a decrease in hospital inpatient and length of stay, but we also recognize that as they find housing, some of their illnesses actually tend to exacerbate because they’re not in this flight or fight mode anymore. And now they’re addressing these long term chronic illnesses that they hadn’t been able to address early on. But for them to have a roof over their head, have a safe place to receive services and a plan to move in permanent supportive housing has been really successful.

Addison Bradford: We’ve talked about creating these opportunities, but I imagine it’s also difficult identifying the populations that are served by these housing opportunities. I think it’s probably difficult to ask somebody specifically about their living situation as it could be a very sensitive conversation with the patient. Ashley and Pia, how has Denver Health and CommonSpirit worked to identify patients and other people within your communities that would be served by this?

Patricia Dean: That’s a really critical piece. I think that every health system should be doing a social questionnaire, if you will, there’s ICD-10 codes now for homelessness. It’s available in Epic, it’s available in eClinicalWorks. There has to be a screening upfront for social risk factors. And it’s no different than checking for whether people smoke or consume too much alcohol, or have a gun in the house. It becomes as important to say identifying food insecurity and housing insecurity. So we’re not finding it hard to identify these people. We’re not. And we’re using a mobile band to go out and work with people who are living in the homeless community outdoors. And so that’s another way to identify folks. So we’re not finding it as hard to identify who needs help. It’s just a matter of providing all the help that’s needed.

Ashley Brand: Yeah, and the only thing I would add to that we are working, as we have aligned and have a large footprint creating consistency around those types of screenings. I think it is a sensitive topic that some people don’t feel comfortable sharing. So I think one of the challenges that we have is they might not disclose that they’re experiencing homelessness up front, but throughout their time in the hospital, either in the ED or inpatient setting, it does come out that maybe they’re couchsurfing or they’re living in their car. But I think them recognizing what homelessness includes, is something that we want to both educate our clinical teams that are asking these types of questions, but also empowering the individuals that it’s a safe place for them to share some of the challenges that they’re experiencing.

Ashley Brand: I think the one thing that we are really interested in doing a better job is around housing insecurities. Because we’re oftentimes not asking, are you behind on your rent? And I think if we are really looking at this work, addressing both the homelessness side and the housing insecurity side is really critical. Otherwise, we’re going to see the inflow into homelessness just as much as we’re contributing to those moving out of homelessness. And so I think having both sides is going to be extremely important.

Addison Bradford: How are a lot of these projects funded and it looks like we have a question from our audience, specifically, what type of government assistance is available for these programs?

Ashley Brand: Pia, you want to go with the government one?

Patricia Dean: Sure, I’d love to. I didn’t want to keep interrupting you Ashley, I’m sorry. We’re finding that the government is getting easier and easier to deal with, as I mentioned before, especially Medicaid agencies. Now there’s, of course limitations, but there really is an understanding that these social risk factors play a very important part in health. And one of the things that is important is to be able to measure both objectively and subjectively how people are doing with increased interventions. And we’ve been able to pull that data together in a way that we’ve been able to say to our state Medicaid agency, we can reduce the number of ED visits, we can reduce the number of days in hospital, we can reduce the number of missed appointments, we can reduce the number of days of missed work. Not only that, but people report feeling better, being more compliant with medications and being able to look for ways to sustain themselves in a more effective way.

Patricia Dean: So I think that the governmental funders are becoming much more interested in doing this, I think starting with state Medicaid agencies is really important. But I know our own legislature is interested in finding ways to fund things like medical legal partnerships, they’ve opened an office of public guardianship, which is huge and can be very, very helpful. So it’s getting easier. There are some legal barriers to all of these kinds of issues, but I think that the governmental involvement is becoming easier to accomplish.

Ashley Brand: Yeah, and I think a lot of our partners are receiving government assistance. And from CommonS1pirit, it’s kind of how do we fill some of those gaps? And in terms of funding, we do have grant funds, smaller amount that we do provide around housing. One model that we’re looking at in rural community in California is scattered site permanent housing. So partnering with a small, affordable housing developer where they’re actually purchasing homes, remodeling them and then creating shared housing in which housing choice vouchers can be used. And we’re providing the funding to purchase the house and then the housing choice vouchers are able to support the operating cost on that. We also have social innovation grants. But one of the main things that we’ve had historically and since 1990s, our Community Investment Program, and it provides below market interest rate loans to organizations to improve the health and quality of life in their communities.

Ashley Brand: This includes resources to organizations that support projects of housing, access to jobs, food and education and health care for people of low income communities and helping the most vulnerable. Right now the portfolio is to support over 114 community investments and 165-170 million in approved loans. And around housing in fiscal year 20, they’ve approved 12 loans for a total of 27.7 million, leveraging 101 million in funding and supporting the development of 368 affordable housing units. And those community investment loans oftentimes are in collaboration with government funds that are coming and other investors at the table. So I think we’re trying to pull really all the different resources we have. But it’s also again, going back to the partnership with other health systems is, how do we leverage our collective resources to invest in the community?

Addison Bradford: Okay, you mentioned some interesting analytics about days missed from work, what other measurements do we have for measuring the effectiveness of these programs? And for any health care providers that are looking at potentially implementing social determinants of health initiatives? Are there realistic goals that they can set based off those metrics?

Patricia Dean: I think that there are realistic goals. So now we’re out of my expertise. But I work with epidemiologists on this. And so they use all validated measures, and whether it’s [inaudible 00:35:57], or short form, the SP nine or six, there are multiple validated measures that we can use. One of the things that we’re experimenting with and starting to play with is this idea of looking at the number of kids with an EAP. Yeah, there’s lots of different metrics. But I think that is the key, is to keep measuring what you are doing and what you’re trying to put forward, so that we have ideas about effectiveness.

Ashley Brand: Yeah, and I would just add, I think the evaluation piece, understanding it and defining success up front is such a critical component of it. What type of measurements do you want to see improve or do you want to measure over time to determine if a program is successful or not? I think from a housing perspective, if we’re looking at referrals from health systems, there’s two components of it. There’s the internal component of utilization. So doing a pre and post survey of either six months to a year around hospital admissions, length of stay, ET visits, and understanding the pre and post of that. And like I mentioned, it is important to understand that sometimes, you actually see an increase in utilization, but it’s more appropriate utilization and a shorter length of stay, because they do have a place to reside to come back to.

Ashley Brand: But also from a community perspective and what we really look at and partner in with our organizations is, what type of information is important to collect to show the community impact? Looking at overall impact around law enforcement, other types of services that they may have been utilizing, but no longer need once they’re permanently housed. Linkages and successful appointments with their primary care providers, follow up with behavioral health, follow up with any type of legal services required, ensuring that they’re completing their applications for any type of benefits they may be eligible for, and then the linkage to any other resources. So I think we want to look at both sides when we identify these programs, but that’s more focused on housing. I think as Pia mentioned, there’s a lot of different metrics to measure, but you really have to understand that upfront. Otherwise, trying to do it on the back end, I think is what causes a lot of programs not to maintain funding, because they haven’t thought through that process.

Addison Bradford: Great. So we’re getting close to our time here. So I want to make sure I ask this question to you all. Denver Health and CommonSpirit certainly I would consider leaders in this area, and I’m not just saying that. But what would you say to a hospital or a health system that desires to develop or structure an initiative or program to address social determinants of health? What advice would you give them?

Ashley Brand: Well, it’s interesting because a question just came up about the hospital community health needs assessments. And I think that’s a great place to start. Identifying the needs in the community is assuming that you really take a proactive community participation approach of those focus groups and engaging the community in identifying your priorities within your community health needs assessment. But I think that’s a first place to approach. It identifies the priorities that maybe your community members have already identified. I think it’s having these conversations with community organizations of what resources exist, and where there’s gaps in services.

Ashley Brand: I think it’s really important not to go in with this as a solution we’re going to create because oftentimes, you’re the duplicating or you’re fragmenting the local continuum of care. So taking the time to understand the needs and then building the partnerships so that the workflow makes sense, you can see the seamless transitions of care from one resource to another for the population you’re serving. And I think it’s okay to start small. Every health system has a different portfolio of investments and what that looks like. But starting small and building that understanding, building the business case, engaging leadership, and engaging your clinical teams, I think are all part of that process to create a sustainable program that’s integrated within the culture of the organization.

Patricia Dean: I agree completely. The health needs assessment is a great place to start to understand what’s going on in your community. And then figuring out what’s out there and who you need to be talking to is key. And then creating those relationships. Ashley mentioned trust earlier. It is a matter of building trust amongst the different community members, and an understanding of who is doing what and how we can build on what each other is doing. And I would urge any system, if they say we can’t go straight into housing, transitional housing or something else, to start where they can, working with food banks, working with entities that can help people get all of the benefits that they are entitled to, which they often are not getting. How many times we hear people say, “I’m not getting my SNAP benefits because X, Y, or Z.” And so I try to attack housing and homelessness in a number of different ways.

Patricia Dean: In Colorado, we have very poor housing laws. So somebody may come and say, “My housing is inadequate or substandard.” And the concept is, can we work around it other ways? Can we find a way to improve their income basis? Can we work with a program to get them a job, there’s a wonderful agency here called Activate, which basically helps people get jobs and then works with them for a year. And so I would say to a hospital, find an entity like that and agree to hire 50 people from an entity like that, in your own institution. The Activate group here, 58% of the people who are now employed, have experienced homelessness within the last year. So there’s lots of different approaches to work the problem. And it is wherever you feel comfortable starting, but I would encourage everyone to go ahead and start small, medium, you’ve got to start somewhere, and it makes a huge difference. And then once you start realizing what the partnerships can bring, it just expands us.

Ashley Brand: Well, great, thank you, everyone. We’re butting up against our time. We appreciate your time, and certainly the conversation has been enlightening from my standpoint. Just for everyone who’s listening, an audio of this webinar will be available in the coming weeks that will be shareable and public. So if there’s any information you need from there, it’ll be available. Also, if you have any questions about any of the items discussed [inaudible 00:43:15] or I just want to have a dialogue about some of those conversations, feel free to contact us. And with that in mind, I’ll kick it back to Julie to wrap us up.

Thanks, Addison. Thanks to all of our speakers actually, for today’s webinar. It was really insightful. If you’re interested in learning any more about any of the topics discussed today, please reach out to any of the speakers. You’ll see their contact information on the screen here or visit our website at any time

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The Post-Election Outlook for Health Care – A Conversation with John Williams

The Post-Election Outlook for Health Care – A Conversation with John Williams 

Hall Render attorneys John Williams and Libby Park discuss the post-election outlook for health care. John is a shareholder based out of Hall Render’s Washington, DC office, and he provides his thoughts on the following topics: President-elect Biden’s regulatory agenda, the COVID special package, release of the Stark and Anti-Kickback final rules, the future of the 340B Drug Pricing Program, and more. Learn about John’s background for the first few minutes of the podcast, after which we jump into health care specific questions.

Podcast Participants

Libby Park

Attorney, Hall Render

John Williams

Attorney, Hall Render

Libby Park: Hello, everyone and welcome to the Healthcare Real Estate Advisor podcast. I’m Libby Park, an attorney with Hall Render, the largest healthcare focused law firm in the country. Today we will be speaking with John Williams. John is an attorney with Hall Render and based out of our Washington, D.C. office. I consider John a resource on all things healthcare related at the federal level.

Libby Park: Today we’ll talk with John about the post-election outlook for healthcare in the United States. John is a seasoned veteran in the healthcare industry and he has a great story to tell us today about his career and also what’s happening in D.C.

Libby Park: John, thanks for joining me today.

John Williams: Great to be with you, Libby.

Libby Park: John, before we talk about the post-election outlook, let’s talk about your background. Tell us where you’re from, where you went to school and what you aspired to be.

John Williams: Well, born in Indianapolis, Indiana, raised in Galveston, Texas until I was 16, back to Indianapolis where I finished high school and then went to Embry-Riddle University in Daytona Beach, Florida where I intended to be a commercial airline pilot.

John Williams: When I got out of college in 1992 the airline industry had suffered a number of bankruptcies. Pan Am, Eastern, Midway had all gone out of business and you couldn’t find a flying job and so I ended up looking elsewhere and meandered my way into politics, like so many young people before me and after me.

John Williams: Somebody said to me, “You need to go to work on a political campaign.” And so I ended going to work for the mayor of Indianapolis, who at the time was Steve Goldsmith and my job was to drive Steve around and be what they refer to as his body guy. So I did that, bounced around with some other campaigns, did some work at the Indiana State House and then eventually when Republicans took over the House of Representatives in 1994, subsequent to that I went to Washington.

John Williams: Again, like many before and after me who had done campaign work and then ended up making their way to D.C. So I worked on Capitol Hill as a Congressional staffer, mostly at the House Committee on Government Reform and Oversight, where I served as the press secretary, but I also served a policy role for the chairman of the committee. So in that role I covered issues like Social Security, Medicare, Medicaid and that was my first real, real taste of healthcare policy.

Libby Park: So then how did you transition into more fully focused healthcare work.

John Williams: I went to law school in Washington at night while I lobbied during the day for the Aircraft Owners and Pilots Association. So my parents were thrilled that I was actually using my undergraduate degree for something. It came to the point, as for many lawyers, where you have to decide where you’re going to take the bar exam and I realized that if I took the bar exam in Virginia where I was living that I was going to stay in D.C. probably for the rest of my life.

John Williams: And so I was engaged at the time and really in transition and used that as the opportunity to come back to Indiana. And my initial course in Washington at that point had run and I was ready to go and I was done with politics at that point. And so I moved back to Indianapolis, got married and started at Hall Render and that would have been in 2003. I started at Hall Render as a litigator doing medical malpractice and other healthcare defense work, largely because that was as far away from politics that I could humanly get myself, which was my desire at that point.

John Williams: But politics is like the Mafia, in that you never really get out and so along the way I did some things like when Mitch Daniels was elected governor of Indiana I ran the transition for the Indiana State Department of Health for Mitch. We had a Republican mayor in Indianapolis get elected at one point, Greg Ballard, and I helped to the transition of the mayor’s office for him. So I stayed active here and there.

John Williams: And then it just so happened that about eight and a half years into it I had actually made shareholder and it interestingly coincided with the time that Mitch Daniels was deciding not to run for President of the United States, which a lot of us had expected him to do, and had become somewhat invested in that idea. That coincided with the leadership change at Hall Render where John Render retired and Bill Thompson became the chairman, John Ryan became the president and we instituted a growth strategy that happened to include opening an office in Washington.

John Williams: So I decided to take on the task of opening a Washington, D.C. office and dived back into healthcare policy and that’s where I’ve been ever since.

Libby Park: I am learning a lot about you today as well, John, because you have a very interesting background. Before we jump into our specific healthcare topics I have a very important question, do you still fly planes?

John Williams: I do. As a matter of fact. I belong to a flying club in Indianapolis and still fly somewhere between 30 and 50 hours a year. So that’s one thing that I have not given up on.

Libby Park: Great. Well, thanks, John, for sharing about your background. Let’s jump into some topics that we would like to cover today. So as of the recording of this podcast Joe Biden has been declared the winner of the election and is poised to become the 46th President of the U.S. Can you tell us what the atmosphere is like in D.C. with this recent news?

John Williams: I keep telling myself that I’m not going to use the word unprecedented any more but it’s 2020 and all that so it’s hard not to. The atmosphere in D.C. today is really unlike any other in history because of the pandemic.

John Williams: For people who do what I do, being on Capitol Hill, meeting with members and staff, being in Congressional offices and hearing rooms is vital but Capitol Hill’s been closed to the public for months, I think since March, and D.C. as a whole has almost become a ghost town, almost like New York. So D.C. is unlike any other time that anyone can really remember.

John Williams: As far as the transition goes, on the one hand you’ve got an incoming administration that’s doing all the typical things that an incoming administration does, making Cabinet appointments, making White House staff appointments, putting things in place to take office in January.

John Williams: And then on the other hand, you’ve got an outgoing administration that’s refusing, to a large extent, to accept the results of the election, which again is unprecedented. So you’ve got that playing out on one side and then on the other side you’ve got President-elect Biden who’s doing all the things that you traditionally do to put a new administration into place.

Libby Park: Let’s jump to another topic. On November 20th, the Centers for Medicare and Medicaid, CMS and the Office of Inspector General released long awaited Final Rules under the Federal Stark Anti-Kickback and Civil Monetary Penalties Laws. What’s been the response in Washington to the release of these Final Rules?

John Williams: The response has been great and we’re thrilled as a law firm for that. One of the first things that we did when we opened our office in Washington, D.C. was undertake an effort to reform Stark and eight years ago we would travel to Capitol Hill to have meetings with congressional staff and say, “Hi, we’re here to talk about the Stark Law.” We would get this deer-in-headlights look because Stark, as everyone who’s probably listening to this knows, is so convoluted and it’s so confusing.

John Williams: In the time since then we’ve had some success in terms of getting some changes to Stark made. From a regulatory perspective in the 2016 physician fee schedule we were successful in getting some changes there as far as the writing requirements are concerned and some other technical issues. And then we were able to get those changes codified into the statute, subsequently to that in 2018.

John Williams: So Stark is something that we’ve been working on for a long time and when this administration came in and Seema Verma became administrator of CMS, because she’s from Indiana and so many of us have known her for so long, we jumped at the opportunity to encourage her to take on Stark reform and so she in fact asked us to prepare recommendations for her on what they should consider pursuing and so we did.

John Williams: And those things included things like defining commercial reasonableness or what it means to take into account and creating a rebuttable presumption for fair market value. So we were thrilled to see CMS take a lot of this stuff into consideration. Rebuttable presumption, they obviously did not but the reception so far to what’s been produced has been great. We’re thrilled that they’re able to get it out the door before this administration ends and the response, I think from the industry has been favorable and the response on Capitol Hill’s been favorable.

John Williams: We’ve had members of Congress from both parties praise the administration’s work on Stark and anti-kickbacks. So it’s been great. It’s been great. Now as you well know they’re both long and very convoluted and confusing so we’re still working through it and we may not be as thrilled once we are able to analyze the details of it. But, no, to this point we’re really pleased.

Libby Park: Okay, great. Well thank you for that update. I know that Hall Render has been digesting and processing those rules since they came out and hosted a webinar yesterday in a round table format that discussed these Final Rules and if any listeners of the podcast are interested in that webinar it is available on our website at So take a look at that.

Libby Park: And, John, can you tell us about the COVID special package? What is this and what should we expect from this?

John Williams: Yeah, there’s two things that are happening right now as far as legislation on Capitol Hill is concerned. One, funding for the federal government expires on December 11th. Congress funds the federal government on an annual basis and the last funding legislation expires on December 11th. So Congress must renew that or else we begin to default on our loans and a whole lot of other nasty things happen. So they’ve got to deal with that on the one hand.

John Williams: The other thing is obviously COVID relief and what are they going to do and that has been in a real big stalemate for weeks, even since the election there hasn’t been a lot of action on COVID. That’s changed significantly in just the last 48 hours. And so in the last 48 hours obviously we know that government funding has got to get done and appropriators on the Capitol Hill are working through that right now.

John Williams: We don’t know what the funding levels for each federal agency are going to be. We know that some things might get added to that, non-COVID related. For example, there’s talk about trying to put surprise medical billing legislation into the year end package. I know people are lobbying for that. I don’t think they’re going to be successful because there still isn’t consensus in the House of Representatives on what that should be but I just want to let everybody know that it is out there.

John Williams: But what we’re now hearing in the last 48 hours is that the leadership on Capitol Hill wants to use the government funding bill as a vehicle, what we call a vehicle, to put all the COVID relief language into. And so what you’ve seen this week is you’ve seen different pockets come out with their own COVID proposals. So for example, on the one hand, Senate majority leader, Mitch McConnell has rereleased really what the Senate passed back in September with some adjustments to funding levels for things like unemployment insurance and PPP. He’s tweaked those a little bit but otherwise it essentially remains the same.

John Williams: What everybody is really talking about in the last 24 hours is this bipartisan group of senators and also members of what’s called the House Problem Solvers Caucus, which is 50 members from both parties in the House. They have come together and reached the framework of a deal that would provide $980 billion in COVID relief and that would be spread out in a lot of different areas. Again, it’s the framework right now. So Washington is very much a the devil is in the details type of place so we’re really not going to know where they are until they reduce it to what we call legislative language. They put it in bill form.

John Williams: But right now they’re talking about an extra $300 a week add-on for unemployment insurance, which is lower than the $600 that’s been in existence for quite some time. More money for PPP, a temporary liability shield, which I know a lot of hospitals and other providers are interested in as well as a whole bunch of different industries. $50 billion for vaccine distribution. We’re also hearing that there’s $35 billion in there that would go into the CARES Act provider relief fund.

John Williams: So in other words, more money for hospitals. Now, that’s in the Problem Solvers Caucus bill, this bipartisan proposal. I can’t even call it a bill because it’s not a bill yet. That’s in there. That’s not in McConnell’s proposal. And then on the other hand, we’ve got Speaker Pelosi talking to Treasury Secretary Mnuchin about a deal between them and the White House. So there’s a lot of moving parts to all of this but I think what I can say is we’re seeing more action on COVID relief in the last 48 hours than we’ve seen in the last month.

John Williams: And there’s a recognition in Washington that they’ve got to get something done and no group of people play chicken more than the members of Congress. That’s why everything gets done at the last second. So as I sit right now I think there is a good chance that you’re going to see targeted COVID relief be part of the year-end spending bill that gets passed on December 11th.

John Williams: But I could be wrong. God knows I have been before so…

Libby Park: Well we never know until we know, right?

John Williams: Right. Exactly. Exactly.

Libby Park: Interesting. Well, let’s shift then to a hospital focus. You said potentially this Problem Solvers bill could have earmarked $35 billion towards hospitals, maybe something like the CARES Act type funding that we’ve seen but what should hospitals expect even up … not necessarily through December 11th or in the coming weeks but in the next few years as the administration changes and a second question on that, what is the future of the 340B drug pricing program?

John Williams: So in terms of the Biden administration’s healthcare priorities and Capitol Hill are concerned it’s going to come down to what happens in the Georgia run-offs in January. There are two seats that need to be filled out from there. If Republicans hold at least one of those two seats, which I expect that they will at least one, perhaps two, they’ll keep control of the Senate. Republican control of the Senate means things like Medicare for All, adding a public option to the ACA, the Green New Deal, things that President-elect Biden talked about a lot on the campaign trail are complete non-starters. They’re not going to happen.

John Williams: Republicans in the Senate will never go for that. So the focus then shifts to what a Biden administration can do from a regulatory perspective and that is going to focus a lot right out of the gate on undoing a lot of what the Trump administration has done from a regulatory perspective. I think one of the first things … well, the first thing that you’re going to see happen because it happens in every administration is the incoming Chief of Staff, who in this case is Ron Klein, is going to issue a memorandum to all federal agencies instructing them to freeze work on any unfinished rule.

John Williams: So that’s going to take place first. So if something isn’t done by that point then it’s going to get frozen. And when I say done, it means that there’s got to be a certain amount of time too for implementation that has to pass. So if that clock hasn’t run then that’s going to be a problem for a lot of unfinished rules. And again, every administration does that.

John Williams: The second thing I think you’re going to see happen is that Biden is going to do what Trump did in terms of going to the Oval Office on the day that he’s sworn in and start issuing some executive orders and I think that one of the first executive orders you’re going to see is going to be directed at what’s going to be his biggest priority and that’s shoring up the ACA. So I think you’re going to see Biden issue an executive order that reopens enrollment for the Affordable Care Act.

John Williams: My understanding is that closes on December 15th but Biden can use the public health emergency as an excuse, a reason, justification for issuing an executive order to immediately reopen enrollment for the Affordable Care Act. So there’s one thing that he could do. He could also start using the public health emergency to direct monies to things like increased marketing for enrollment, funding navigators to help with enrollment. These are things that the Trump administration drained money from. They didn’t market enrollment. It was their way of trying to starve the ACA to death.

John Williams: So you’re going to see Biden reverse those. One of the interesting things that people are talking about is whether or not he can actually move money around from different federal agencies to do things like increase subsidies for the ACA without having to go to Congress in order to do that or even to go through the rule making process to do that and I think you’re going to see the Biden administration look to some of the Trump administration moves for around things like the border wall where the Trump administration moved money around internally from agency to agency in order to fund construction of the border wall because Congress wouldn’t fund it.

John Williams: So I think you’re going to see the Biden administration use that precedent to try to do things like increase subsidies. Beyond that, actions to reverse other Trump administration regulations are going to have to go through the traditional rule making process. So that means notice and comment, that means it takes time, right? That could take up to a year in some cases.

John Williams: So if you want to talk about things like reversing the funding cuts for Planned Parenthood or other abortion providers, rolling back the contraception mandate coverage stuff from the ACA, the anti-discrimination rules for transgender patients, even eliminating the Medicaid work requirements in some states, which were done under waiver, that’s going to take time if they want to try to reverse those things.

John Williams: So the Biden administration is going to have their hands full from an administrative standpoint undoing what they want to undo from the Trump administration. So that’s where the focus is going to be and it could be for the first couple of years. Beyond that, what they want to do from a regulatory perspective is a guessing game right now because nobody really knows because there’s just so much to do in terms of rolling back the Trump administration’s regulations.

Libby Park: Okay. Well, thanks for your thoughts on that and definitely sounds like there is a lot to do. I know that some of our listeners are likely pretty interested in the future of the 340B Drug Pricing Program.

John Williams: Right.

Libby Park: Do you have any intel on what may be happening with that in the short term and the long term?

John Williams: Well, I think as a general rule the Biden administration is going to be much more favorable to 340B than the Trump administration has been. It’s no secret in Washington that pharma hates 340B and they took advantage of the, I guess, if you will, pro business position of the Trump administration to try to really do damage to the 340B Program and you saw that with significant cuts to 340B and in other regulatory actions.

John Williams: So I think that 340B entities can feel more comfortable that they’re not going to get additional cuts from a Biden administration. They could see a rollback of some of the cuts that were made by the Trump administration and just a general overall positive attitude or more positive attitude towards 340B. It’s a controversial issue on Capitol Hill too. The overall growth of the program in the last 10 years has gotten an awful lot of attention.

John Williams: So I think you’re still going to see folks in Washington looking at issues like transparency within 340B Program. “Where does your money go?” I know that we’ve gotten that question a lot from members of Congress when we would go to the Hill to represent our 340B clients. Simply, “Tell me where your money goes? Where does the money go? What do you spend the money on?” I don’t think that’s going to go away necessarily but I think that the Biden administration is going to be much, much less likely to propose additional cuts to 340B.

Libby Park: Okay. Thanks for your thoughts on that, John. And do you foresee any additional challenges or restrictions in regard to physician owned hospitals?

John Williams: This is another controversial issue in Washington. I know that we saw some relaxing of the rules, right, in … during COVID, during the pandemic. Let me put it to you this way, when Republicans controlled the White house, the House and the Senate, if they were not able to roll back the moratorium on physician owned hospitals I don’t know how it’s going to happen otherwise.

John Williams: American Hospital Association and a whole host of others are adamantly opposed to that. It is a huge issue for them and they will lobby hard against any rollback of that moratorium. And that moratorium you’ve got to remember, right, it was part of the ACA. So Democrats are not in favor of rolling back physician owned hospital moratoriums. So unfortunately for folks in that sector I really don’t see any changes coming. That train left the station when Republicans were in control and they didn’t get it even done.

Libby Park: Okay. I’ve got a couple more topics here, two more questions I’d like to ask you, John.

John Williams: Sure.

Libby Park: So have you heard anything on the life sciences front and do you anticipate there will be more or less funding from the National Institutes of Health?

John Williams: Everything is going to focus around the pandemic, right, and so NIH is one of those entities in Washington that’s as much as anything can be noncontroversial because lawmakers can make anything controversial these days, it’s NIH and NIH has really had fairly broad support amongst both parties for quite a long time.

John Williams: When we’ve seen healthcare funding bills come out of Capitol Hill you see cuts to site neutral payments and these other things but for some reason, not for some reason, for the reason that people like the NIH on Capitol Hill, it gets more money.

John Williams: So I do think that you’re going to see more money go into NIH during a Biden administration. I think there’s a lot of support for that and so you’re going to see much more of the life sciences get support as well.

Libby Park: Will there be ACA challenges under a conservative majority court?

John Williams: Well, I think one of the things that you’re going to see and this happens with the change of any administration, right, is that you’re going to have new folks at the Department of Justice and how DOJ goes about participating in ACA related lawsuits is going to change. When the Trump administration came in and it was a Republican Department of Justice they took a different position. There were lawsuits they were pursuing that they just dropped because it didn’t serve their political purposes any more.

John Williams: So you’re going to see a Democratic, democratically run DOJ do the same thing as far as the ACA is concerned. They’re not going to take any litigation position that’s going to undermine the ACA. Now, what Republican Attorneys Generals across the country are going to do could be a different story. We all know that there was oral argument before the court last month, no one really believes that the ACA is going to be taken down in its entirety. It’s much more of a political issue that was both put out during the campaign. We should get that opinion next year.

John Williams: So it’s really going to be up to Republicans at the state level to decide what lawsuits go forward against the ACA and that might reach the Supreme Court because the Democrats are not going to do it. It’s long been a political issue and I don’t see Democrats doing anything that is going to undermine that in the future. So I would be surprised if we get much more ACA related legislation, or excuse me litigation before the Supreme Court in the next four years.

Libby Park: Okay. Well thanks for your thoughts on that as well, John. I feel like we’ve covered a lot of ground today and I’ve learned a lot and I know you have a wealth of knowledge so thanks so much for sharing it with me and with our listeners today.

Libby Park: For folks that tuned in if you would like to pick John’s brain or my brain please feel free to reach out to us. John’s email is and mine is And as always, if you have any topics you’d like to hear covered on the podcast please feel free to email me directly.

Libby Park: Thanks for your time today, John, and thanks to our listeners for tuning in.

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An Interview with David Auerbach, Institutional Trader, World Equity Group

An Interview with David Auerbach, Institutional Trader, World Equity Group

An Interview with David Auerbach, Institutional Trader, World Equity Group. In this interview, Andrew Dick interviews David Auerbach, Institutional Trader, World Equity Group. Andrew sits down with David to talk about trends in the real estate investment trust (REIT) industry.

Podcast Participants

Andrew Dick

Attorney, Hall Render

David Auerbach

Institutional Trader, World Equity Group

Andrew Dick: Hello and welcome to the Health Care Real Estate Advisor podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare focused law firm in the country. Today, we’ll be talking with David Auerbach. David’s an institutional trader at World Equity Group. He specializes in real estate investment trusts or REITs, preferred stocks, close end funds and ETFs. He’s well-known in the REIT industry for being a thought leader, mentor and commentator on trends in the industry. Today, we’re going to talk about healthcare REITs, other REIT product types, the industry in general, and some of David’s other interests. David, thanks for joining me.

David Auerbach: Thank you for having me. I really appreciate it.

Andrew Dick: David, before we talk about your current role at World Equity Group, let’s talk about your background. Tell us where you’re from, where you went to college and what you aspired to be.

David Auerbach: I’m born and raised in Dallas, Texas. With the exception of the four years that I spent at the university of Texas at Austin, welcome Horns, I have found myself back in my old neighborhood. I did spend a couple of years going to Southern Methodist University in their grad school program at night. I have spent my entire career here in good old big D.

Andrew Dick: After you got out of college, you ended up working as a financial advisor. It sounds like you’ve always worked in the equity space, but talk about your first job out of college.

David Auerbach: Sure, so to rewind further than that growing up, I was always fascinated by Wall Street, watching CNN in the early days, learning about Warren Buffett, reading the Wall Street Journal when they used to publish stock tables on the paper. I was just drawn to it at such a young age. My parents love telling the story like six, seven years old kids are up watching cartoons and I’m watching business news just to watch the ticker. I knew at a very young age that I wanted to go down this road.

David Auerbach: I graduated from UT and joined up with a local practice, a CPAs financial advisor, where he my boss was a certified public accountant. He had a book of Wall Street clients. As a result, he brought me on. He helped me get my licenses. It was a great foot in the door to learn about the business, learn about the retail network.

David Auerbach: From there, I went to a firm called Green Street Advisors, which had their trading desk based here in Dallas. Green Street is and was considered the preeminent research firm in the country. I was very privileged to learn from some wonderful mentors, people that I’m still in touch with to this day, that they really paved the way for my entire career. The running joke with that job is that the day I started in March of 2000 was the day that the market rally officially ended. Every couple of years I’ll get an email from my former boss, just like, “You know my portfolio took a hit that day that we hired you.” I’ll never forget it. I spent about 11 years working at Green Street, just under 12 years. It was just a great spot. I’m still very close with a lot of people. It made me the trader and person that I am today.

David Auerbach: From there then I went to a firm called Esposito Securities here in Dallas. I was working on a relationships, the ETF universe. From there I’ve found myself now working with World Equity Group. I’m also working with a partner on some consulting in IR type information. We’ll get into some other things, but it was really that Green Street got me my start in this career, and I’m very lucky.

Andrew Dick: David, what does it mean to be an institutional trader for those listeners that may not be familiar with that title?

David Auerbach: Sure. That’s a great question. I do get that question very often. Institutional trader would be somebody who would talk to a family office, a hedge fund, a mutual fund, a bank, a pension plan, some type of big institution that would have multiple millions of dollars under management or more. You have to qualify to be an institutional investor. There’s various check boxes that a firm would fill out. It’s different than a typical retail broker advisor who would be dealing with what I call the mom and pop investors. Whenever I recommend a company or I’m talking about something, I always refer to the mom and pop in Missoula, Montana. That’s where I always fall back onto Missoula, Montana. It’s a whole different audience. There are high net worth individuals that can qualify under some of the accredited investor, institutional investor check boxes, but traditionally it’s firms that that’s what they manage as an institutional advisor.

Andrew Dick: Got it. When you’re making purchases or selling equities, these are presumably high, big dollar amounts we’re talking about lots of shares, not the retail investor.

David Auerbach: There are some retail investors that do trade that kind of volume, but yes, that is correct. There would be big size orders and on behalf of those guys. Correct.

Andrew Dick: Got it. Okay, so David, just to provide some more background, I met you a couple of years ago. You’ve been a great resource for me and for many others. I think, I found you because I had heard you speaking on one of the Nareit podcasts where they had an update a couple of years ago. Just want to thank you for all the information you share with the REIT community and just a great resource. If you haven’t met David, he’s always willing to help. We will talk a little bit more about that here in a little while. David, we appreciate your thoughts.

Andrew Dick: Let’s talk about the healthcare REIT industry, because that’s really the space that I work in and that’s what our audience is primarily concerned about. We’ll hit on that, but we’re going to dive into some of the other REIT asset types. We just finished the third quarter earnings report for, I think, just yesterday or today was one of the last healthcare REITs reported. I saw that one of the REIT analysts just send out a note about national healthcare investors.

Andrew Dick: Let’s talk about the big three David. When we talk about the big three that’s Ventas, Welltower and what is now called Health Peak. Those are in my mind, diversified healthcare REITs big players in the space with really different models in some cases. Give us a flyover of your perspective of those REITs today. I know we’ve talked in the past about Ventas and its CEO. She’s really dynamic. She’s tough. I have no doubt that she’s going to make Ventas perform very well after we come out of COVID, but give us your thoughts, David.

David Auerbach: Sure, so first from a very high level perspective, I’ve been out on record and I will probably until the day I die, I will say that the healthcare REITs is the only sector that I can think of that will literally make money off of every single American or any individual whatsoever at some point in our lifetime. No matter how you look at it, some kind of healthcare company is going to make money off of you. Whether you have to go to the hospital, the doctor’s office, a medical office building to see a doctor, rehab, sadly, hospice, end of life, assisted living, senior housing. There are so many different segments of the industry that as a whole, the healthcare REITs combined will make money off of every single one of us. I always ended it with as they always say, “Do you know who’s undefeated in sports, don’t you?”

Andrew Dick: Who’s that?

David Auerbach: Father Time. And so I’ve [inaudible 00:08:26] Father Time, hate to say it, we are several minutes older than we were when we started this conversation. As a result, that’s why I’m such a big fan of these companies. Ventas, Welltower, good old HCP, or now Health Peak, as you comment, they are the big three. They’ve been around for so long. They run such effective companies. They make money off of every single American. What’s really interesting when you look back at when COVID started, the one industry that took a hit right off the bat was the healthcare REITs, because of them finding the cases in some of the senior housing communities.

David Auerbach: The talk from the sector has been, “Okay, this happened. How are we going to address this head on, face the pandemic inside our communities, and then deal with the aftereffects coming on the other side?” Well, we’re not out on the other side, but what did we learn from earning season? It wasn’t as bad in the third quarter as it was in the second quarter and as it was towards the tail end of the first quarter. These guys have expected to have occupancy declines this year. I was just reading the Welltower release record as we were getting on the air here, and I think their number, their shop occupancy came in down like 125 basis points, but they were projecting down 125 to 175. If you’re coming in within your expectation, it’s almost like a win in itself.

David Auerbach: If you remember going back, putting on your hat from like 10, 15 years ago, when companies would announce earnings, remember, there was always two numbers. There was the first call estimates, and then the whisper number. Remember the whisper number If you did, it was one thing to beat the first call. That’s nothing, but unless you beat the whisper number, that’s what everybody focused on. Well, for the healthcare REITs, it seems to have been over the past couple of quarters. It’s not everything that they’re doing. It’s what’s the number of the occupancy, looking at their same housing occupancy numbers, shop. If they’re able to come in at, or within a certain range or better than then that’s a win. You’re noticing that happening.

Andrew Dick: David, we’ve talked before about the big three different strategies, a lot of new headlines over the last couple of weeks. One in particular you and I were just talking about is a Health Peak, formerly known as a HCP, moving its headquarters to Denver. They were looking at Dallas …

David Auerbach: Correct.

Andrew Dick: … and Nashville. Then they ended up in Denver. Health Peak’s also been in the news because their strategy has, they’ve given more emphasis over the last couple of years on life sciences properties. Then they’ve announced that they’re going to start disposing of a large volume of senior housing assets. Maybe you could give your thoughts on Health Peak, and then we can talk a little bit about Ventas.

David Auerbach: The Health Peak news is really interesting to me. I remember when they rebranded to Health Peak from HCP just a couple of years ago, not even a couple of years ago now. People were scratching their heads trying to figure out what’s Health Peak. I don’t quite understand. Now, as you just mentioned with them announcing this big senior housing portfolio disposition, as well as moving their headquarters, this is a massive corporate and strategy shift that the company is undertaking. There’s good healthcare companies that are out there outside of the big three, thinking about what Health Peak focuses on. Then you have guys wide Omega Health, OHI, Medical Properties, MPW, where there’s guys focusing on the hospitals, there’s guys that are focusing on the medical office aspect of it.

David Auerbach: I commend Health Peak for making this change. Obviously, a lot of people are taking advantage of good relocations. I mean, Colorado has seen a massive inflow of folks recently, and so what a great place to consider building your headquarters. Everybody is relocating to Dallas too, of course. Texas has very far favorable property taxes and no state income tax. I think if you’re noticing here that this, I don’t think their strategy shift is done.

David Auerbach: I think this is just another step of things that they’re trying to evolve into, because one of the things that I love to talk to you about, and I always pester you about this is talking about Father Time, the nursing home today is different than the nursing home that our grandparents were in. Frankly, what we are going to move into down the road is going to look different than what we see today. I’m curious, thinking about the next generation. I know we’re going to talk about some more of this down the road here in a little bit, but thinking about how we are so technology oriented today by way of our cell phones, are iPads and all this other stuff. How is that going to be implemented and integrated into the nursing home of the future? How is that going to be implemented into the office building, the medical office building that we walk into into the future?

David Auerbach: I think that one of the things, and I know we’re going to talk about Ventas and the life science space and the lab innovation, but I think that just like a lot of companies, like McDonald’s has their test kitchen, I think some of these other guys have, like the hotel REITs, just to shift gears. A lot of the hotel companies like Marriott and Hilton have a lab set up on their campus where they’re working on future innovation. This is what the hotel room of tomorrow is going to look like. This is what the office building of the future is going to look like. I’m pretty sure that some of these guys and their HQs as well, I think they’re trying to figure out what’s the healthcare property going to look like 30 years from now, 20 years from now, because a gen seer who lives pretty much behind the screen, 24/7, they’re going to expect that to be implemented in their daily lives at the next chapter where they move into. These are the things that keep me up at night.

Andrew Dick: Yep. Nope. All good points. You mentioned nursing home you’re right, LTC, Omega, really good companies, what I consider more of a pure play, long-term care REIT. Talk about Ventas, because I know you really like Ventas in the sense that Debbie is a dynamic CEO and just seems to provide really great leadership, and the company historically has done very well.

David Auerbach: You summed it up great. Because when you look, as far as leaders are concerned, Debbie is always one of the first people that is always mentioned. When I was growing up in the industry, and I believe they still do today, her nickname was Diamond Debbie, because everything that she touched, turned to gold. Debbie is so well-respected, and more importantly, she’s such a nice person. I remember talking to her at a conference so many years ago. I went up to her, and I was like fan boy around her, gushing. She’s like, “Stop, just quit it. I’m a nice person.”

David Auerbach: I joke, but in all seriousness, when you achieve the status that Ventas has achieved, when you’re as big as they are, when you’re in the S&P 500, when you’ve earned this cachet, it says you’re doing something right. Thinking about how the company has evolved just in the past 20 years that I’ve been following it, they’ve done one, I want to say two or three public mergers you may may know better off top of my head, but I think three public mergers.

David Auerbach: They’ve now going towards some of these life science deals, like the big joint venture that just announced with the government of Singapore last week, with what they’re doing with One Use City in Philadelphia, I believe it’s in Philly, and some of these other places, they’re looking at the next step as well. You’ll know, it’s like Boston properties, which is an office REIT, announced this big, huge lab space deal just a couple of days ago in Waltham, Massachusetts. Alexandria who is considered to be the pioneer of life science and lab space, they’re always in the conversation.

David Auerbach: Ventas has made such a push over the past couple of years, that this is a big shift. It’s not just, we’re going to operate a bunch of communities and hospitals. They’re focusing on again, the development side of things right now. One of the other, thinking about REITs and how office REITs and healthcare REITs and where they’re in space together, it costs a lot more to build one of these properties because of the sterile nature of lab space and the white glove, white coat, wearing the hood and everything that these guys and the walls. Think about Homer Simpson where he puts his hands on the gloves to do, that’s what these guys are building.

David Auerbach: As a result, the fabrication costs of these properties are so expensive. But remember, and we’re going to talk about this in some other sectors in a little bit, who do you think pays for that stuff? Ventas is the one building the property, but guess what? That costs is going to be passed off to the tenant that’s moving in there. They’re already inherently able to charge an additional premium on the states, because they’ve gone to this effort to build out a white coat lab facility.

David Auerbach: As Debbie’s, she owns a piece of the Pittsburgh Penguins. I’m a Dallas Stars fan. I can’t blame her. Pittsburgh’s got a good team. Thinking in terms of hockey, one of the great expressions is don’t watch where the puck is, watch where the puck’s going. Keep your eyes on where the puck is going to be. That’s what they’re doing. They’re literally trying to stay ahead of the puck. This is one size matters, when you have a pretty stellar balance sheet, when you’re, I have to pull up the rate. I’m guessing they’re pretty highly rated. Your cost of capital is very small. You can go out and get 30 year money for pennies on the dollar for some of these guys and use that to build these properties that are going to be effective 20, 30 years down the road. It’s a really interesting story. Again, how can anybody not trust what she’s trying to do? That’s my opinion.

Andrew Dick: Yeah. One more, I agree, David. I agree. All good points. Let’s talk about Welltower real quick, and then we’ll transition to some of the other sectors. Welltower had a change in CEO. Tom DeRosa stepped down. The chief investment officer was promoted to CEO. Any thoughts there or how the industry reacted? Tom had been around for a while. Welltower, I think has performed over a long period of time. It’s performed pretty well. Big company. They seem to be more interested in finding senior housing opportunities when you compare that to Ventas or Health Peak. Any thoughts on Welltower before we transition?

David Auerbach: You brought up a really good point about the transition, because Tom was so well-respected. A lot of folks were speculating, “What does he know that we don’t know? Why now? What’s happening?” Mr. Mitra has been around for so long, as you had mentioned, that because of his experience, it’s a natural transition. It’d be one thing from them to bring in somebody from the total outside that had nothing to do with the company. When it’s really next up on the bench to take over, it’s not like they’re changing their strategy shifts. As you know, they also did a huge outpatient facility disposition right at the same time.

David Auerbach: This is a little bit similar to what Health Peak was doing is they’re shifting their strategy a little bit, but they’re rebounding. As I mentioned, their occupancy came in within their target people are watching, and so the question that a lot of these folks have to answer, whether you’re a retail investor listening to this podcast or an institutional guy, but the big picture that remains, and I asked you, “What’s your definition of longterm?” When I was growing up in school, when I was taking finance classes and everything, we were taught that the longterm would mean your retirement money. You’re 18, 19, 20 years old sitting in your first classes. When they define longterm, they’re talking 50 years from now, okay? If you talk to a gen Z kid, that’s coming out of college today, that’s 22, and you asked him what his definition of longterm is, two years, maybe five years. Their timeframes are different.

David Auerbach: I ask the person that’s listening to this podcast today, “What’s your definition of long-term.” If you’re thinking about something many, many, many years down the road, then I leave you this question of thinking about Welltower and what they do and their properties, thinking about Ventas, thinking about Health Peak. It’s not what’s happening today with COVID, it’s what is this going to look like 10, 15, 20, 30, 50 years down the road.

David Auerbach: Now you want my take. Here’s what I think. There’s a reason why you’ve got the big three and a lot of the other players that are out there, Capitol senior, you mentioned LTC, Genesis, Brookdale, some of these other operators that are out there. When you have so many companies that make up the sector, I was always taught to think one thing, the big get bigger, the small get smaller. In a universe that probably is dominated by an 80/20, 90/10, and they know what that means, where 20% of the folks control 80% of the properties or more, It means that these guys are going to continue to acquire their smaller competitors. If you, we’ll use Ventas as the example, as I mentioned, I think they’ve done two or three public mergers, but maybe more. When Ventas wants to grow, they’re not just going to go buy a property or two, they’re going to buy a company to grow.

David Auerbach: I think these guys are, Welltower helped pick these guys. The big three are doing a good job driving down their lanes of a highway, knowing what they know so well, that it’s pretty much everybody trying to get in their lanes. Because of their size, they can just muscle them out. I think it’s going to be really interesting to watch, especially as we get older and as this industry shifts. As we move on, I will say again, keep in the back of your head, medical office buildings, senior housing facilities, the rehab facility, drug rehab, a hospital for your x-rays, unfortunately for your end of life and your hospice care final living days, the healthcare REITs are the guys that are making money off of every single one of these people. That’s you. That’s me. That’s my mother and father, my grandmother, my grandfather, my brother, my sister. Every single one of us is going to be paying money to these guys.

Andrew Dick: Yep. Good point, David. Let’s switch gears. You and I have talked about other REIT sectors before. Give us an idea of what’s happened over the last six or eight months as a result of COVID. I mean, we’ve all heard or read the headlines about the retail sector. It’s taken a beating. You and I have talked before about companies like Simon Property Group, which happens to be headquartered here in Indianapolis, where I’m at. The company in my opinion is really well ran, has some of the best properties in the world. I think once we get through COVID, it’s going to be just fine. Give us your take.

David Auerbach: I have the most respect for David Simon of Simon Property Group. You will never hear me say anything bad about him whatsoever. There’s some great, great, great stories that go under the radar in COVID right now, because as you mentioned, everybody focuses on the work from home situation, so therefore, the office building is dead, what they read about with JC Penney and Sears and some of these retail closures and the mall is dead. Now, everything, obviously there is an asterisk pre-COVID, post-COVID. We all understand that. Let’s take a couple of different sectors at a time and we’ll hit on some different points.

David Auerbach: Okay, first things first, you and I are doing this podcast on the web today. I’m looking at you. You’re looking at me. I hear you. You hear me. This is all being run through data centers and cell towers. Data center REITs and cell tower REITs have been two of the best performing sectors this entire year. We’re all Zooming using cell towers. As a result, these are the guys that are benefiting the most from that.

David Auerbach: Take it one more step. Okay, I don’t know about you, but my wife and I, we love this little tiny website called Of course, it’s great. With Prime they deliver within the hour. It’s awesome. The thing about where all that stuff is stored, all that stuff stored at big industrial warehouses that are owned by a bunch of REITs. Another sector that’s done amazingly well this year is the industrial REITs, because Amazon, Walmart, Target, all these guys have these big, huge warehouses that store their products and their properties.

David Auerbach: You mentioned retail, Simon. Okay, so Simon has been very active this year. They just had the earnings a couple of days ago. It’s a great transcript to read. If you haven’t, I highly suggest you read it. David’s really tapped into what’s going on. What Simon’s been doing, they joined up with a company called Authentic Brands. They have been going out and acquiring a bunch of retailers this year. People were like, “Why? Why are you buying JC penny? Why are you buying Lucky Brands and Brooks Brothers? What is the benefit there?”

David Auerbach: The answer is there’s a variety of reasons. The big 10,000 foot version of why they’re buying this, think about how much real estate a JC penny owns at a property as an anchor tenant. I’m just going to throw a number out there. Let’s just assume a 50,000 square foot box. It could be less. It could be more. But let’s just use a random 50,000 foot number. Why is this important? Okay. Simon will be more than happy to buy a 50,000 foot empty vacant box and then do a couple of different things. We can bring in a new tenant that’s not around there right now. One of the questions that they got asked on their call was about a joint venture they have that [inaudible 00:27:11] talked about called Allied Esports. Allied Esports is an e-sports arena that kids or folks can go and watch people play video games, participate in some of these games. Instead of watching on Twitch or on one of these online platforms, it’s a way to draw traffic back to the mall, the millennial generation, back to the mall.

David Auerbach: If that doesn’t work out, Simon would be more than happy to spend some money and taking that 50,000 foot box and breaking it up into a 20,000 foot box, another 20,000 foot box and a 10,000 foot box. Now you can bring in three other tenants to make up one space. More importantly, in the call, they mentioned that they’re signing more leases right now during COVID on the look out through on the other side here that it’s, they call it the Warby effect, the Warby Parker effect. Are you familiar with the term called showrooming?

Andrew Dick: Uh-uh (negative).

David Auerbach: Have you heard the term showrooming? For those that don’t know showrooming is I’m going to go to the store. I’m going to look at the product. I’m going to play with it, touch around with it, but then go home and order it online. I’m not going to buy it in the store. It used to be very frowned upon. It killed Circuit City. Best Buy took a big hit form it. If you go back and read some of their transcripts in the early 2000s, they talk about this showrooming effect.

David Auerbach: Well, now the Simons of the world and some of these other retailers have said, “Okay, you know what? People are going to be people. They’re going to do what they want to do. Instead of shunning it, let’s embrace it.” A perfect example of that was Tesla. If you recall, Tesla built dealerships in these malls, but you couldn’t buy the car there. You had to go home and do the process online. They put it there for you to showroom it. Come check it out, come press the buttons, come hear the engine roar or not roar exactly, and then go home and buy the car online. These guys at Simons of the world said, “You know what? Go ahead, Warby, go ahead and go to a store here. Don’t make any sales. We don’t care. You’re going to pay us rent. Then you have a chance now to expand your footprint.” I think that you’re seeing the shift in the retail landscape of the bricks and mortar enhances their online component. I’m a big fan of what’s happening in the data centers and the towers.

David Auerbach: I’ll give you one more statistic before we move on to a different sector. The former CEO of American Tower, his name is Jim Taiclet. He went off to a company called Lockheed Martin. He’s looking out for your defense. Jim had a great quote a couple of years ago at a conference I was at. I use it in every interview, because it staggers me. There’s 24 hours of content posted to YouTube every minute. That stat’s a couple of years old. If you assume things only go up, let’s say that number is now 28 hours or 30 hours. That’s a lot of content. Where is that being stored? It’s in this thing called the cloud. It just floats above us. In all seriousness, it’s housed in data centers in servers and racks and all these buildings across the country. That’s run by data center REITs, Digital Realty, Core Site Realty, Cyrus One, QTS. There’s several publicly traded data center REITs.

David Auerbach: Another interesting way to play it’s through the ETF space. If you play exchange traded funds, if you don’t know what an exchange traded fund, I call it a publicly traded mutual fund. You can buy a basket of tower and data center REITs. There’s two products out there. One is run by a company called Pacer Benchmark, the ticker is SRVR. It’s the data center and server or tower infrastructure ETF, and then Global X, which is another very large ETF issuer, just launched one a couple of weeks ago on their tickers VPN, how appropriate Victor, Paul Nancy. These are just some interesting ways to potentially play a couple of different spaces.

David Auerbach: One more sector that’s getting a lot of coverage right now is cannabis. There are several, there’s one publicly traded cannabis, [inaudible 00:31:19] pure play, and that’s Innovative Industrial, IIPR. You’ve got a couple other companies that are trying to get their foot in the door, try to grow in the warehouse side of the cannabis space. You have a big candidate. One of the first SPACs, the special purpose entities, focusing in REITs was just filed a couple of weeks, just launched a couple weeks ago. It’s involved in the cannabis space. The company’s called Subversive. You’re seeing, one of the questions I always ask when I get to talk to the analyst or the company is this, “What’s the next sector? What’s the next industry?” If you go back 10, 20 years ago, nobody would have talked about towers and data centers. If you go back 10 years ago, nobody would have talked about cannabis REITs. Now, the question becomes, “What’s the next sector?”

Andrew Dick: David, those are all good insights. You and I have also talked about some of the more novel or niche REITs that we’ve seen. One in particular, Safehold REIT, relatively new REIT that plays in the ground lease space. It’s performed very well. How do those fit into when you’re looking at the REIT industry overall? I mean, I think it’s a very interesting company.

David Auerbach: I love Safehold. I love the guys there. One of the things that I love about it is that it’s a unique play. If you look at a partner REIT, there’s 10 publicly traded partner REITs, maybe more. There’s 10 plus healthcare, 10 plus office, 10 plus lodging. There’s only one ground lease REIT that’s out there right now, and that’s Safehold. It’s an interesting story, because thinking about the Warren Buffet mantras and things that we grew up on, talking about, number one, being a first mover. They were the first mover to take advantage of this situation.

David Auerbach: Number two, building an island. When you’re out on an Island by yourself, and somebody has to literally, you build a moat around you because as a first mover, somebody is going to have to invest a boatload of capital to go and compete against you. Frankly, up in where they’re located and what they’re doing, there’s really only a handful of guys that can truly compete with them right now at this moment in time, that being Colony Capital and Starwood Capital. I know that they’re, I think they’re tiptoeing into it, but they are not diving into the effect that Safehold has done.

David Auerbach: Number three, they are backed by their parent company, iStar. Now that can both be good and bad. Why do I say that? A lot of the institutional investors in the REIT community sometimes shun the fact that it’s an externally advised company by the parents. Not that there’s necessarily collusion, but it’s not a standalone entity, because it could fall back on the parent to take care of it. But in the same breath, that’s not a bad thing because they can fall back on the parent, and also knowing that if they’re doing a deal, it’s because the parent is behind the deal. As an example, Safehold just did a secondary offering last night. They upsized the deals. It was in the market for two days. They were able to upsize it, but concurrently with it, they did a private placement to the company of a slug of stock.

David Auerbach: Rewind, going back to a COVID, Safehold was the first, one of the few companies and the first company to float a public offering during the pandemic. While everybody was on Zoom doing what you and I were doing now, they may actually get a secondary offering off on the table. At the time, the company, rightfully so, was so established that they were able to get a deal done like this in COVID right at the beginning stages of it.

David Auerbach: What’s interesting is that they have such a unique set of properties. It’s office. It’s lodging. There’s some apartment type stuff. The number one rule of real estate is location, location, location. A lot of the stuff that they’re investing is the intersection of Main and Main is what I call it. Because you have such good properties, with the way that the ground lease works, and I’ll give you the 10,000 foot. For those that don’t know the website to go check it out, it’s a safeholdinc, I-N-C, .com ( It’s a interesting story.

David Auerbach: A ground lease, what happens is pick a building. Let’s just use the Empire State Building, which is owned by a different REIT, but we’ll just use the Empire State Building. What Safehold does is they go to the guys that run the Empire State Building and say, “Okay guys, you own the building, we’ll own what’s below the ground. We’ll own the ground. You rent that from us. Upon the maturity of the lease in 99 years, Safehold will take possession of the Empire State Building.” What they’ve done is they’ve amassed quite a portfolio, above and below ground real estate, that they own, when they talk about their valuation, they equate it to like a 99 year bond. They talk about the MIT bond. It’s in their metrics. It’s just such a unique story that until somebody says, “We’re coming after,” again, who’s to fight against them.

David Auerbach: Now let’s flip it. They do their earnings based on earnings per share. Most REITs focus on FFO or AFFO. That’s one caveat to be aware of. Number two, rates traditionally have a very high dividend yield. Right now, I believe you mentioned Nareit before. I highly recommend you go check out That’s the website for Nareit. Right now, the typical REIT dividend yield, I believe is just around 4%. Safehold is well under that. Now the company says as they go out and acquires how they raise their dividend and raise the yield. Again, thinking about the definition of longterm, Safehold is not a day traders type of game. Safehold is not a name that you’re going to want to sit here and just own for a year. If you’re buying Safehold today, it’s what is this going to look like five, 10 years from now as they continue to amass high quality real estate portfolio.

David Auerbach: One other thing, if you’re a sports fan, and I think you are a sports fan, they happen to be locally here in Texas, because I know this. One of their partners is somebody who used to go by the nickname of The Admiral. Do you know who The Admiral was?

Andrew Dick: No.

David Auerbach: David Robinson, who was a famous basketball player, who played for the San Antonio Spurs, won many, many NBA championships and was in the Navy. He was a Naval, I believe he was an, not national, but he was very highly up in the Navy. He was on the Spurs. His company, Admiral Capital, is a partner with Safehold on some of their Texas properties here. There’s a sports tie in there for you.

Andrew Dick: Very interesting. Yeah, I think the company’s interesting as well. We see a lot of ground leases in the healthcare industry, and so I like it. I think it’s very interesting. David, let’s switch gears. We’ve only got a couple minutes left. Mentoring, last time we spoke you, you told me you’ve been spending a fair amount of time mentoring young professionals. You’ve always given back to the REIT community in terms of your time and resources. I know you used to publish a weekly newsletter. You may still do that.

David Auerbach: Still do.

Andrew Dick: Talk about giving back, mentoring, because a number of folks who listen to the podcast, they’re young professionals looking to advance their career.

David Auerbach: It’s a great topic. I really appreciate you bringing this up. I think at some point in our careers, we know that the next generation is coming up in the ranks. After 20 plus years of doing this, we learn a couple of things. If I’m able to pave the path, smooth the path for the next generation by dealing with my experiences, or if I’m able to answer some questions that they’re afraid to ask, then that gives them a little bit more sense of comfort.

David Auerbach: I’m also a big believer of karma and what goes around, comes around that when I used to interview folks, at my own shops. Whenever anyone would come in, usually there’d be interviewing with four or five, six other people. I would always say the person just to try to, first of all, throw them off a little bit, but second, just so they feel a little bit more at ease, I would always say to the person, “My job here as I sit here and interview you is to get you to ask me the hard hitting questions. You are to ask me the questions that you’re afraid to ask, because I don’t want you to come on board here and say, ‘Well, nobody told me about this. I wasn’t expecting this. How come I didn’t know that this?'” I would always say, “There’s no such thing as stupid questions just stupid people.” Have you heard that expression before.

Andrew Dick: I have.

David Auerbach: I love using that expression. I always say, “There’s no such thing as a stupid question. What you may think is stupid may actually be the secret sauce that what you should be asking that you you didn’t realize that you should ask.” It carries through to the mentorship thing that I’m trying to do, because I want people to number one, not be afraid of the interview process. A lot of people now, because they are so tied to their phones, they lose out on the face-to-face interaction. When you’re sitting across the table from somebody, and if you don’t know how to cure yourself in a face-to-face conversation, you have to understand, you may be investing in this company, be a management of this company, you could own this company, which means you’re going to be dealing with the media and all this other stuff. If you don’t know how to interact with people, what kind of message is that going to say to your boss, your partners, your shareholders, whatever.

David Auerbach: I feel like now, especially with the folks that I’m focusing on, it’s the guys that are anywhere from getting out of high school, going into college, dealing with their first intern type interviews, going into grad school, coming out of grad school, going into their next positions, whatever it is, but if my 20 plus years of REITs and ETFs is able to help them understand just a little bit more of what they’re walking into or I had somebody reaching out to me today asking me about Safehold. I got them an interview with the company. He wanted to understand what is the company. I sent him a friend’s video. I’m like, “Watch this. If you watch this, then when you call the guy and have your interview with him today, you’re able to come prepared with a roster of questions, because you said, ‘I watched your interview. You said this. Can you explain this to me? I don’t understand.'” What does that say to the person across the table from you? This guy spent his time doing his homework. He really cares. He’s really interested.

David Auerbach: When somebody calls me and says, “I’ve got the second interview, I got the job, whatever,” that’s about as valuable as a paycheck is in my opinion. More importantly, it could be a year from now, 10 years from now, a hundred years from now, that guy isn’t going to forget. He is going to remember that I helped him get to that point.

Andrew Dick: David, last question. What advice would you give to a young professional who’s looking to get into the real estate business?

David Auerbach: It’s the same, same thing I’ve heard, that I’m sure you’ve heard a million times over and I stand by it. It’s not what you know, it’s who you know. Networking as a full-time, 24 hour a day job. It’s why I lost my first job as a retail broker before I joined Green Street. My boss and I had a disagreement as far as the proper times to be networking. He thought it should be an after the stock market hours type of job. I said to him, “Wait, if a prospect says they want to have lunch with me, I have to tell him no, because my boss said I can only network after hours?” I said, “That’s the craziest thing I’ve ever heard.” They fired me the next day because I said that. As a result, you and I would have not connected if it wasn’t from networking back in the day. I wouldn’t be able to email David Simon and him email me back on a day of earnings without networking. As I say on a mentorship platform, you never know when you’re going to come across your next partner, your next boss, your next client, whoever it is. It’s all because of networking. I would emphasize get out there, meet folks, explore LinkedIn, ask questions, learn, as Red says in Shawshank, “Get busy living or get busy dying.”

Andrew Dick: Good advice. David, where can our audience, how can they reach you?

David Auerbach: I am affiliated with a broker dealer out of Chicago called World Equity Group. My email address there is davidauerbach, D-A-V-I-D A-U-E-R-B-A-C-H. @weg, W-E-G, ( If they want to ask about the daily REIT note that covers the REIT sector, please feel free to reach out to me at that email address or on my consulting address at, I-R-R-E-A-L-I-Z-E-D, and I’d be happy to chat with you more there as well.

Andrew Dick: Great. David, thanks for your time. Thanks to our audience for listening on your Apple or Android device. Please subscribe to the podcast and leave feedback for us. We also publish a newsletter called the Health Care Real Estate Advisor. To be added to that list, email me at 

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An interview with Andy Van Zee, Senior Housing Advisors, Marcus & Millichap

An interview with Andy Van Zee, Investment Broker, Knapp Group – Senior Housing Advisors, Marcus & Millichap

An interview with Andy Van Zee. In this interview, Andrew Dick interviews Andy Van Zee, Investment Broker, Knapp Group – Senior Housing Advisors, Marcus & Millichap. Andrew sits down with Andy to talk about senior housing trends.

Podcast Participants

Andrew Dick

Attorney, Hall Render

Andy Van Zee

Investment Broker, Knapp Group – Senior Housing Advisors, Marcus & Millichap 

Andrew Dick: Hello, and welcome to the Health Care Real Estate Advisor podcast. My name is Andrew Dick. I’m an attorney with Hall Render, the largest health care focused law firm in the nation. Today we’ll be talking to Andrew Van Zee. He is an investment broker with Marcus & Millichap. In particular, he works in their senior housing group. We’re going to be talking about his background in the industry, how we ended up where he is at today, and then we’re going to talk about seniors housing in general. Andy, thanks for joining me.

Andrew Van Zee: Hey, thanks, Andrew. Appreciate being able to have this opportunity to talk with you about this.

Andrew Dick: Andy, before we jump in to trends in the industry, tell us about yourself, where you’re from and where you went to school and what you wanted to be when you grow up.

Andrew Van Zee: Absolutely. So I’m originally from small town, Prairie City, Iowa, just East of Des Moines. I grew up there. My family still all lives there. I’m currently in Indianapolis with my family, my personal family, and went to undergrad, South Dakota State, wanted to kind of get far enough away from my parents that I couldn’t drive home on the weekend. I got a political science degree at South Dakota State and originally thought that I was going to get into politics. Did a lot of the grassroots politics route, multiple campaigns working with one of the national parties for several years to a point where let’s just say I ended up on the wrong side of the ticket and needed a little bit of a change. So I went to law school thinking that I was going to end up back into government or politics of some sort, but the Lord had other plans.

Andrew Van Zee: So I went to Thomas M. Cooley Law School, which is now Western Michigan up in Auburn Hills, Michigan. I met my wife at that time. We got married. But she was a Hoosier. So after graduating, we moved down to Indiana, where I found myself working in-house for a major skilled nursing developer and was really introduced to the senior housing industry through that timeframe doing a lot of work specializing in the certificate of need laws. I applied for a certificate of need applications in states across the country, as well as just kind of going through some of the licensing process for our group to be able to continue to grow and expand and was introduced also to some awesome operators during that timeframe, a lot of the people who we were directly in partnership with on new deals or just kind of consultants along the way, a lot of great people in this industry that when I moved on from that position, I started to do some on my own in the world of certificate of need.

Andrew Van Zee: I did a few more projects notably with a major hospital health system actually back in Iowa. Through that timeframe, real estate, that development aspect of being able to see this industry grow and be a part of that is what brought me back to or brought me to Marcus & Millichap. We had networked with them throughout the timeframe when I was doing certificate and need, also looking for beds. Jim Knapp, who is a part of the Knapp Group Senior Housing Advisors within Marcus & Millichap, the team that I’m now associated with, I had called upon him back in 2015. When I joined Marcus & Millichap, it was just a great landing spot to be able to build upon some of the knowledge that I currently had, but also be with a great group of senior agents within the firm to be able to launch and grow outward from there.

Andrew Dick: So thanks, Andy. That’s a very interesting career path, what you and I have had the chance to work together over the years, and I’ve always enjoyed working with you, and I’ve always thought of you as an expert in the long-term care space. When I heard you landed at Marcus & Millichap, I was personally excited for you. It’s a great platform and a great organization. Before we dive into some of the what’s going on in the industry, Andy for our listeners, tell us about the senior housing industry and how you break down the different asset types. I typically think of senior housing as skilled nursing facilities, assisted living, et cetera. But be more specific for maybe those who aren’t familiar with the different asset types.

Andrew Van Zee: Certainly. Well, let me touch a little bit about that and Marcus & Millichap, even the platform that I’m with. So Marcus & Millichap is a full service real estate brokerage company that we only specialize in investment sales. But each agent has their own product type, I should say, that they have really drilled down into and try to become experts within. So within senior housing, we really focus on skilled nursing assisted living, independent living, memory care, and CCRC products that obviously would encompass all of those other four components onto one campus. We only focus on real estate. However, there is times when we do come across home health companies that will be connected with an operator’s skilled nursing business or a senior housing business in some way or another, and we will work with those as well. But primarily, from our platform, we are really focused on that core of skilled nursing assisted living, memory care, independent, and CCRC.

Andrew Van Zee: Medical office space is a separate group within Marcus & Millichap. So we don’t really touch into that as well as a hospital and in those really high acuity dialysis or other dentistry, any of those types of medical type real estate components is now part of our group.

Andrew Dick: So your group is able to focus and really get into the weeds on valuation and what’s going on in the industry is my understanding, Andy?

Andrew Van Zee: That’s exactly right. We really try to become experts throughout Marcus & Millichap, but in the senior housing space, especially when it’s different than any other type of… or I should say of the most real estate components, in which when you’re selling the asset, the underlying real estate asset, most oftentimes you’re selling the business with it, and/or it’s a specially built property where the value is driven by the actual operation of that specialty, skilled nursing, assisted living that has been operated out of that space. So we really are unique in that format that we drill down in to understand both the real estate trends but also the operations. There’s a lot going on, especially in the last couple weeks, months with COVID in the health care space in senior housing specifically that if we tried to cover all of health care, we couldn’t be the experts that we really need to be for our clients.

Andrew Dick: So you mentioned COVID, Andy. I know that senior housing has been significantly impacted by the virus. What has that done, or what are you seeing in the industry as a result of COVID? Has it impacted occupancy? Has it impacted operations financially? What’s it done to sale prices, et cetera? Give us kind of a broad overview?

Andrew Van Zee: Good question, Andrew. It’s definitely had an impact. When we look at what has happened with COVID, it’s had an impact just like any other real estate asset or any other business really. What’s interesting about the health care is it’s always been deemed one of those essential businesses. So the lights have always been on. Employees have always been coming to work. People are still getting care. Even unlike some of the medical office space where a lot of those elective procedures were put on hold or even telemedicine where you could go somewhere else. In senior housing, it’s always been a truly essential part of the economy and a business that has continued to operate. From that standpoint, because it’s continued to operate, it’s been exposed to COVID in more ways than a lot of other industries, and therefore, there have been some negative press that’s come about that exposure.

Andrew Van Zee: But it’s really been six months now past the start of this pandemic. It’s really been a really strong and resilient industry and a fun one to be able to kind of watch and interact with. By and large, I would say starting with the skilled nursing aspect of it, everybody that I have interacted with, every operator has taken COVID seriously on day one. There was a time where I was visiting some facilities before some of the mandates came out back in early March that weren’t letting me. As soon as some of these just even scare started to arise, they were shutting the doors. I would say that that has been something that has been pretty consistent throughout that every operator that I would say has been in the business, and most operators in senior housing are truly in it because there’s something more than just the operation of a business and collecting a paycheck. They want to care if there’s a care component deep within them. They care for those residents that are inside their buildings. They’ve done a good job of containing it.

Andrew Van Zee: Now, that said, there’s been a lot of change. So skilled nursing, obviously, the biggest impact right away was the shutdown of the electives seizures in some of the hospitals. If you had any sort of Medicare component to your revenue model, you weren’t just a truly long-term care and relying upon Medicaid. You had an impact on day one. That was in terms of occupancy. So as occupancy goes down and you weren’t able to continue to backfill those, definitely there’s been an impact on revenue on day one. Assisted living seemed to be a kind of the next, the next group that was impacted, but it wasn’t as immediate. They were affected more through attrition and/or just marketing efforts, kind of a mixed bag, and some of the trends have shown that really, it has been a downward trend on occupancy overall.

Andrew Van Zee: But when there was a run on supplies in March and April, May, there were some reports early on that those assisted living facilities that could market appropriately through virtual tours or just kind of quickly being able to change their strategy, we’re actually seeing an increase in occupancy for a period of time as people were wanting to have more of a secure spot to be. Unfortunately, I think some of the negative press overall of mostly driven by isolation than today than the fear of an outbreak is assisted living and independent living because it is more of a choice to move into those types of facilities. They’re having a slower recovery, whereas skilled nursing, once elective surgeries have picked back up, they have shown a stronger rebound, but it’s also does come back to the quality of the operator. As a whole, overall, the industry occupancy wise, and income’s all driven by occupancy in this category.

Andrew Van Zee: It is still has ways to go to catch up to where we were. But the plus side is there’s been a lot of positive stimulus cashflow that has been pouring into the system from day one, starting with the PPP, but there was Medicare advanced payments. There were a lot of grants that are still now new grant money out there specifically targeted for senior housing operators who can develop or create isolation wings, whether that be brand new or converting still reimbursed for converting those spaces. There are been more reports now on skilled nursing specifically if there’s been an outbreak, and they’ve had to isolate and shut down any part of the organization. Medicaid even is reimbursing some of that 14-day period of time for some groups

Andrew Van Zee: So I think the upside is the government as a whole recognizes that this is a strong industry, I think, that needs to… We need to take care of our residents. We need to take care of our seniors. I think it’s going to be a really good setup for the future. This has always been an industry that has a very long runway, and we’ve always been very bullish when you just look at the aging of the population as a whole. New development has led the way I think on a lot of the growth and a lot of the change in the industry. But because of COVID and because of the focus on the quality of care, and especially in terms of isolating our residents and taking care of our staff, I’m seeing changes that I think will have some long-term impacts overall, that’ll be good, even for the established business who maybe can’t win the market share on day one because they don’t have the newest and shiniest product in town.

Andrew Van Zee: Example, I’ve got an operator that I’m working with in Iowa, done a phenomenal job, kept COVID out of the building. It’s an older property. But they were older in terms of it’s not new within the last 10 years but has still kept COVID out of the building, has kept an isolation wing, always made available for new residents to be able to come into an artificially held occupancy low because of that so that they can have those excess beds open. As a result of that you know, some of these newer advancements that are coming out just recently of COVID testing units in the buildings, because of the focus on the care of residents and staff in this building and the quality that’s been driven, this facility is one of 10 in the state that’s going to get one of those first new testing machines in the building.

Andrew Van Zee: So I think that’s what’s going to be kind of the silver lining, I guess you could say out of all of this going forward is that people have been forced to change throughout this entire process, and they were forced to change very quickly. In the last six months, senior housing has done an amazing job of taking care of the residents and adapting with it through technology of virtual tours, through technology of just virtual meetings, technology of tracking the flow of visitors, but even down to just operationally shifting very quickly, delivering meals in the rooms. You get on social media, and you see countless videos or photos of innovative ways in which family members can still see their loved one in a facility behind a plexiglass wall or something that is… things we have never seen before. Obviously, we’ve never seen this pandemic before, but all of these changes I think are going to set up this industry for a very strong run in the future.

Andrew Van Zee: That said, I’m sorry for being long winded on your question, Andrew. But that said, because of all the stimulus, there’s also been several groups that I think at the first quarter or first half of next year, we’re going to start to see some stress fractures in the operations. Obviously, not everybody in the graduating class or the top of the class. There’s always some that are just getting by. Those who are in this industry today, who have not adapted very well, and I’m not been able to either through a desire or lack of just ability economically or otherwise. I think that when all these stimulus opportunities start to wear off, and some of the cashflow that has come through that has artificially been propping up some of these groups, we’re going to start to see some of those, the fallout that’s going to come with that in terms of exchanges in the marketplace, ultimately sales.

Andrew Van Zee: Hopefully, it’s not foreclosures or anything of that nature, but I think that we’ll start to see a lot more transactions in the near future for those distressed assets than what we are today.

Andrew Dick: So, Andy, that was a great overview. I talked to Rich Anderson, who’s an equity REIT analyst. He covers the publicly traded health care REITs for SMBC bank a couple of days ago. He was comparing skilled nursing to assisted living and independent living. He said most of the stimulus money has really flowed to the skilled nursing operators. Unfortunately, independent living and assisted living operators haven’t received any funding and in most states. Has that impacted how investors look at the different asset types, Andy? I mean, I think you’re you’re right that a lot of folks I’ve talked to said, look, the federal health care programs are not going to allow skilled nursing to fail in most cases. But independent living, assisted living, they’re kind of on their own. I mean, is that a fair analysis, or what are your thoughts?

Andrew Van Zee: Yeah. A good question. You’re absolutely right. Short of the Payroll Protection Program and any type of advancements that was really more for assisted living that actually had employees working independent, depending on how involved you may have had from a staffing standpoint. Yeah, it didn’t get a lot of funding. Didn’t get a lot of help. I know there’s been a lot of talk recently about possibly sending some money in that direction of future stimulus funds. From an operator standpoint, there’s been a lot of groups that have… Well, let me take a step back. From a real estate standpoint, just in general, transaction-wise, everything was really put on hold, screeching, stop, in March. All properties that were on the market remained on the market. But our office, our group didn’t list anything, didn’t put anything new on the market for at least four and a half months.

Andrew Van Zee: That was really true of a lot of the brokerage companies that we’ve networked with or banks or anybody across the board. So there was a lot of money because of the uncertainty of what was to come that nothing transacted. When there were several groups that we were talking to in January and February who were looking at 2020 as a year in which they were wanting to acquire or sell, get out of the business altogether. So the fact that, back to assisted living this, this stimulus aspect of it of until we can actually have, even on these most recent conversations out of Washington is money coming to resonant. It’s held back the flow of inventory on the market, number one. Groups that have seen a decrease in occupancy through this timeframe are afraid to take anything to market that their properties are going to be devalued accordingly.

Andrew Van Zee: For the most part, it’s a very valid concern. The question really comes in is, how long can some of those groups last, and how long will it be before they recover, coupled with the lending aspect of it? A big piece of what we’re seeing during that timeframe of close transactions, where right at the peak of this, we had the lowest interest rates that we’ve had on record in years, and refinancing and looking at new acquisitions as a result of that was a huge opportunity. Then that became unsteady, especially in this market. So we’re starting to see the banks come around and those lending institutions come back on board, which is helping. But we’re still not seeing on assisted living and independent living the occupancies really jumped back as quickly as skilled nursing is.

Andrew Van Zee: Because of that, we’re not seeing as many groups who are willing to just jump into the game and transact as strongly. We have taken a property to market. Our group did within the last month. It was a CCRC that was mostly with no skilled nursing component, so assisted living, independent living, memory care. We did see some good market activity on it. Overall, I think that right now, there’s a lot of pent-up demand in the marketplace. There is still a good opportunity where because there’s nothing out there, and there are groups that need to be active to continue to survive and/or just wants to take advantage of a timeframe where there’s not as much competition on bidding on properties. It’s a little bit more of a buyers’… I mean, a sellers’ market in that way with that pent-up demand. But we’re still not seeing a lot of groups ready to jump into that yet, especially on assisted living and independent living because of potential stimulus money is still coming in and/or these occupancies that just haven’t come right back yet. I hope that answered your question. [crosstalk 00:24:11].

Andrew Dick: No, that was great. That was great. You hit on a couple of points there. One was what the lending institutions are doing. Talk about the capital markets. If you’re the owner of a senior housing facility, is it a difficult time to refinance? If you’re a buyer, and you need some capital, how are the banks looking at the different asset types? Is it tough to get interest, or have prices went up for the cost of capital?

Andrew Van Zee: For the most part, I think the biggest variable right now that is looking at, how hard of a hit did you take on occupancy as well as just kind of the fundamentals, age of the building, what’s your blended rate on your payer types? Financing’s coming back. It definitely pulled back. Even though we had these bottom-of-the-market interest rates, lenders in senior housing were putting floors on those to try to cover some of the risks with the biggest fear being, is COVID going to get into your building and wipe everything out between time for closing and/or shortly after you close on it. Right? So that was the number one thing is we saw floors right away. Then kind of the loan-to-value ratio started to creep up, where you could have maybe gotten a 75% loan-to-value, you were down to 70. Maybe if it’s an older building, 65.

Andrew Van Zee: So some of that amount of leverage that you can put on some of these buildings is definitely been scaled back from what it was at the beginning of the year. I think by and large, we’re starting to see that banks are coming around and slowly more and more are getting onboarded. I would kind of liken the banks to what we’re seeing even on a very macro level with some of the REITs. Some of the REITs on the recent transactions that we’ve had, the recent deals that we’ve had have been the more conservative bidders currently. We’re seeing a lot more of the private equity or just private money in this space being more active in the bidding and in the aggressiveness of those bids right now in the last two to three months. I really likened that to kind of the way the banks are. They’re institutional in that same fashion as the REITs. They’re taking the longer look. They obviously are having to deal with imminent foreclosures that are now starting on other product types outside of just senior housing.

Andrew Van Zee: So as we can have more time from the beginning of this pandemic and more space, more data to show these lending institutions that senior housing is still a safe place. It’s a very safe place to be, and there’s a lot of runway. I foresee that we will continue to have greater access to capital. Even we were projecting that some time after labor day, that it would really start to look more normal. I don’t know that we’re normal in terms of where we were pre-COVID yet. But we are certainly getting back to it much like the rest of the country is, quite honestly, in terms of we have to move on. So is there access to capital, and a very short answer to your question, yes, there is. There definitely is. It may not be as highly leveraged. But the interest rates are still low. They’ve still remained the low, and it’s still a great time to start to be looking at the future in senior housing.

Andrew Dick: Yeah. That was a good summary. I’ll tell you what some of the experts I’ve spoken to remain bullish long term on senior housing, given some of the demographics that we’ve all seen in the news with the aging population. In fact, some of the… I talked to some folks who said they’re looking forward to picking up more of the senior housing assets as things settle down. They just think that the demographics support long-term growth in the industry. Andy, would you agree with that and maybe also weigh in about, some of the critics have said there’s too much supply?

Andrew Van Zee: Sure.

Andrew Dick: Specifically in the independent assisted living areas, but-

Andrew Van Zee: I definitely am very bullish on senior housing in terms of a solid investment, a good long-term investment. I think there’s a lot of runway still here. I believe a lot of groups are believing that as well. We’re starting to see it. Like I said, the Knapp Group within Marcus & Millichap, we’ve successfully put three properties on the market now within the last two months, and I’m actually getting ready to have a call for offers on a skilled nursing facility here in the Midwest next week, and I’ve had some very strong activity of groups, honestly of more groups that have not played in this region before that are looking to grow and expand their footprint. Long term, I think that there definitely is a great time still to even look at senior housing. Early on, within Marcus & Millichap, especially with the retail sector, the retail sector getting a lot of a lot of pressure and even into the multifamily sector. We’re starting to look at some of the lockouts on evictions and the fear of people not making payments in the near future.

Andrew Van Zee: As we were talking to investor groups during the slow time for us as brokers, not the slow time for the industry as they deal with the pandemic, but the slower time for us, we were getting a lot of questions from groups who had never really looked at the space before wanting to see deals, wanting to know what’s going on, wanting to understand it. To that end, it will continue to be a strong space for future growth. Just as you mentioned, there’s a lot of baby boomers still that are aging. The aspect of what it looks like is changing overall. So when you say independent living, assisted living, what’s that look like? Development has slowed, and there was a lot of development in that space, and you could argue that the industry was perhaps becoming over bedded in certain areas. But I don’t really see that that was the case.

Andrew Van Zee: I think it was really certain markets. When you look at the country as a whole, there was obviously been a lot of development in certain metropolitan pockets, some of the hotspots just in real estate in general, Texas, Florida. Those two markets especially have had a lot of focus over the last several years, but some of the more tertiary markets, the secondary markets of the Midwest, the more rural Southeast, some of the West, the mountain region, been a lot of still growth out in those areas. Predominantly, that’s where a lot of the population that is aging is aging in place. I think that what’s going to take place out of this pandemic, what we can look to see is slower development in those categories. But we still have to have development in those areas just to continue to meet the oncoming future demand.

Andrew Van Zee: As far as evaluation is concerned, we have kept our valuations and our cap rates that we’re applying to a lot of these properties that we’re underwriting and listing steady throughout this entire pandemic. Most other brokers are doing the same. Appraisers are doing the same. I think that speaks volumes to this industry as far as where it’s going as well as where the value even is today, even despite some downward pressure from occupancy due to the pandemic. Cap rates have not changed. In some ways, depending on the product type, I think you could argue that those investors, and I can’t back this up a hundred percent yet, there’s just not enough data of transactions yet, but in some ways, some of those investor groups who are transitioning over, maybe from multifamily housing over into assisted living or independent living, I think there’s a possibility that some of those cap rates could even be driven down a little bit as we see capital migrate from different parts of the country or different sectors of the economy into senior housing.

Andrew Dick: All right, Andy. Tell us about the capital markets. Are lenders still willing to make loans to owner-operators to investors? How have the lenders and the equity sources reacted to the current state of the market?

Andrew Van Zee: Good question, Andrew. There’s definitely money available. There’s definitely capital flowing through the industry. By and large, it’s starting to pick up it’s. If we go back to the end of this pandemic back in March, we had record low interest rates across the board and a lot of refinancing, a lot of groups looking to acquire new properties as a result of that, and even some talk about, what are these low rates going to do to cap rates accordingly? Are they going to continue to be driven down with the interest rates? Unfortunately, the brakes were put on pretty hard during that point in time, starting with the banks putting floors on those interest rates, and then with that, also starting to scale back the loan-to-value ratio. So instead of possibly being able to get 7% leverage on a new product, a new property, you might be looking at 70, or in some cases, down to 60 and even 55%.

Andrew Van Zee: That seems to be where a lot of the pullback was coming from the capital markets was the amount of money that they were really wanting to go at risk for on a property. Most of that had to do with just the fact that this overall fear of what happens if we get COVID in the building, what happens if we have an outbreak, and we lose all of our occupancy, all of our residents, all of our income? For the most part, that has not happened. There obviously has been some hotspots, and those hotspots have made the headlines that have tainted a little bit of what we just previously talked about, where I think the industry has been and where it’s going.

Andrew Van Zee: But for the most part, I think the further away that we get from the beginning of this pandemic, the more the whole country even starts to just get into what is the new normal. We’re seeing on the lending side that some of that banking as usual is starting to come back into play. We were projecting that after labor day, we were going to see more of a normalcy in the capital markets area. I don’t know that we can really say that we’re 100% there yet across the board of what pre-COVID was. But we definitely are seeing lenders who are willing to extend capital and who are wanting to get into the game. When it comes to who are looking at deals right now, we as a group, the Knapp Group within Marcus & Millichap, we’ve now launched three new properties onto the market over the last two months and has some really strong interest in all the properties that we’ve put out there.

Andrew Van Zee: There’s definitely some pent-up demand in the space. To that end, what we’re seeing though, from those who are actually bidding on it, it seems as though it’s the private equity, it’s the private owner operators, it’s those who are wanting to take advantage of this timeframe where they don’t have to be bidding as heavily. I shouldn’t say that, where they’re more bullish overall on the marketplace. That’s where we’re seeing more the aggressive bids come in and aggressive to the point where we just had a property, a CCRC with a lot of skilled nursing beds up in the State of Maine. We had a call for offers on a couple of weeks ago, and we had over eight offers on the property, four of them at or above list. Those groups who were bidding on it were the private equity groups who were really pushing that envelope.

Andrew Van Zee: Some of the other properties that we are marketing right now, I’ve got one in the Midwest, a skilled facility in the Midwest, and I’ve got everybody looking at it again, the REITs, the private equity, local groups out of the region, and it seems to be following that trend a little bit more, that the groups that are more interested and a little bit more aggressive in their conversations up until this point are those in the private equity space. So there is definitely money to be had in those groups. I do take advantage of leverage through the capital markets. But from an institutional standpoint, it seems as though that those lenders, whether they were REITs originally or the banks, they were definitely conservative overall but are picking up again. There is money flowing back in the industry, to answer your question.

Andrew Dick: It’s good to hear. I think as real estate professionals, we always worry that the capital markets will slow down, and the lenders and the equity sources will hit pause. But I think what you described is what I’ve experienced as well. I think we’re starting to… Well, we’ve continued to see activity, but we’re seeing even more activity over the past few weeks as everyone starts to realize that this is the new normal. Andy, let’s switch gears. When I’ve talked to you in the past, we’ve talked about trends in the industry, unique concepts that some of the operators have launched, whether it’s a lifestyle type center or a high-end independent or assisted living facility. What type of trends are you seeing like that in the industry, and do those type of products tend to… Are they attractive to investors, or how do the investors react to those kind of niche product types?

Andrew Van Zee: Good question, Andrew. I would say probably that there’s no… So everybody’s looking for the silver bullet, that one product you can continue to punch out over and over and over again. It’s going to be the home run every single time. I always chuckle a little bit when I kind of hear some of those types of conversations thrown around a little bit because there’s not one type of housing products on the regular housing across the country. We are dealing with housing. It’s senior housing. But it’s ultimately still housing. From a niche aspect though, I think that what has been growing and something that is honestly in a little bit of an interest to me, so maybe a little biased when I say this is I really think that some of the smaller facilities that the small house design, the greenhouse design, those types of concepts are going to continue to grow across the country, especially as we look to the more affordable concepts that Welltower has been pushing quite a bit, trying to find solutions for.

Andrew Van Zee: Some of the bigger investment groups are wanting to look, shift a little bit of their focus to, what’s sustainable? What’s a sustainable model, and what’s sustainable in the country long term is getting to that middle class or even, in some degrees, the lower class that are aging at the same rate as the upper class? So some of these smaller types of concepts I think are very attractive for somebody who wants to move into those parts of the country, that middle America, if you will, that traditionally would be overlooked because you can’t plop down a 180, 200-unit facility right there. Now, that said, our cities are also growing. There’s still a lot of growth that needs to continue to happen on a large scale and some of the cities. I think that when you start to look at more of the metropolitan areas and you start to see some of the, let’s just call it an evolution of the villages down at Florida, ultimately, right, that was a very innovative concept of creating a community around a single age group. Senior house is always trying to create community.

Andrew Van Zee: How do you do it? How do you do it in a unique way? I think the wellness center and the intergenerational approach that is starting to pop up, not everywhere, but here and there I think is also becoming more attractive as you start to get into areas where maybe you have a lot of other box assisted living or independent living structures in your market area, and you want to create that niche. What’s one way to do it? I know obviously, a lot of groups have been talking about the wellness model of, how do you incorporate a true wellness lifestyle into it so that you can age in place?

Andrew Van Zee: I really see it as more of an evolution of what the CCRC model started out as, as a means for somebody to age in place, but taking it a little bit further and focusing more on wellness. So there’s a couple of unique developments that I’ve seen over the past several years. There’s one of them in the Midwest where they really focused a lot on the intergenerational aspect of a community with it still being anchored as senior housing, incorporating a wellness center that would allow moms and daughters and grandkids to come in and do yoga classes together or the culinary aspect of having a restaurant, a really good culinary staff that’s quite honestly more open to the public to get a restaurant style dining that’s true restaurant style, open to the community, flowing through there.

Andrew Van Zee: So I think there’s still going to be niches and growth in those types of categories. From an investment standpoint, bigger is always better. Economy of scale is always better. So early on, as those groups are looking for those niche markets, I think, I think that the long-term investment is still probably better for a larger project versus some of the greenhouse model, unless some of the greenhouse style products can be coupled with a portfolio or on a campus, where you have multiple buildings on the same campus, and maybe one of them is memory care. Maybe one of them is assisted living, and maybe one of them is a skilled nursing component and so that you can still create that economy of scale from the operational standpoint. So as we get back to the very beginning of our conversation, I think that the number one thing that’s holding that model back from going large scale very quickly as a lot of people are very interested in it.

Andrew Van Zee: A lot of people are very interested in, I think, and are looking at it is just operationally, how do you make it efficient when you are doing one building at a time in places? So when we start to get some scale and a tipping point of those facilities out there and the operational expertise of knowing how to run those, I think that’s a very unique model that hasn’t had its spotlight to the extent that it probably should yet, especially in terms of investment.

Andrew Dick: Yeah. The greenhouse model is something I’m very interested in. In fact, I talked to Susan Ryan a couple of days ago from the greenhouse project, and hopefully, we’re going to have her on the podcast soon, a very interesting concept, and it seems like it’s performed very well during COVID in terms of… In some cases, the greenhouse model has almost a zero infection rate.

Andrew Van Zee: Absolutely. I think-

Andrew Dick: But again, you’re right. Smaller scale. Some investors say it’s too small, right, to really pique their interest. But yeah. Andy, let’s switch gears. You’ve been in the business for quite some time at this point in the senior housing business. What advice would you give to someone who’s new to the industry looking to meet folks and learn about the industry? What advice would you give someone in that position?

Andrew Van Zee: Yeah. I think the number one thing, if you want to move into senior housing, you have no experience. Maybe you’ve heard about it, maybe just happened onto a podcasts like this one, Andrew, and you hear that it might be a strong area to invest in. I would say there’s an acuity spectrum that we talk about in the industry and starting at the hospital and then working its way down to independent living. Of course, in our focus of senior housing, we start that acuity spectrum of skilled nursing and work your way down. For somebody who’s coming in, I think if you have no experience at all in the service, it’s actually provided inside some of these buildings is to learn about that and learn about those different acuity levels and really start to understand what the differences are in licensure, what the differences are in staffing, what the differences are on reimbursement.

Andrew Van Zee: A lot of these things, especially at the upper end, at the skilled nursing end because there’s so much government reimbursement that comes out of it. A lot of this, you can actually find out if you’re diligent enough. You can do some of your research on those types of reimbursement things and licensing on your own. It comes down to the economics of the lower acuity, the assisted living, maybe the memory care, the independent living that you need to network. You need to find somebody who’s doing it. There’s plenty of good groups out there that you could get in touch with to learn more about it. Contact a local broker. I mean, that’s probably one of the easiest ways. We’re real estate brokers. But I’d call ourselves the Knapp Group Senior Housing Advisors of Marcus & Millichap. We’re advisors predominantly for those who are already in the industry.

Andrew Van Zee: So find a local broker that is maybe willing to spend some time. But be serious. Don’t waste anybody’s time as well. There’s a lot going on in the industry. To be able to find somebody who can be able to really share some of the details with I think is important as long as you’re sincere about it and as long as you’re serious. That said, senior housing has been around for quite some time, and there’s starting be, I think, an evolutionary shift internally just from the age of management, the age of operators who are out there. There are a lot of smaller groups that are retiring or moving on and/or handed the Baton on to the next generation internally, and that leaves us with a lot of mentors, a lot of sages that have been through it before and a lot of opportunities to just be able to grab a cup of coffee with somebody.

Andrew Van Zee: I’ve done that many times both starting out as an attorney in this industry, but then also as a broker, just wanting to continue to learn and grow my craft as well as don’t be afraid to reach out and ask somebody a question. I think that everybody in senior housing that I’ve encountered for the most part loves people. They love working with people, caring for people, serving. There’s so many servants hearts in this industry that if you are sincere about wanting to know, and you want to know for the right reasons, you don’t just want to know to come in to make a buck, but you want to make a difference, there are plenty of people to be able to get to know. But learn the industry first. It’s not the same as any other just real estate investment class.

Andrew Dick: Agreed. Agreed. Well, that’s good advice. Andy, where can our listeners learn more about you and the Knapp Group?

Andrew Van Zee: Yeah. No, thank you. In two ways. The easiest way obviously is going to be going directly to either our website within Marcus & Millichap,, K as in kite,, and/or just going directly to the Marcus & Millichap website, and you can eventually find this that way. It’s just marcusmillichap,

Andrew Dick: Well, Andy, thanks for joining us today. I want to thank our listeners as well. On your Apple or Android device, please like or rate our podcast. We also publish a newsletter called The Health Care Real Estate Advisor. If you would like to be added to that list, please email me at

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An Interview with James Winchester, Lead Financial Analyst, CMAC Partners

An Interview with James Winchester, Lead Financial Analyst, CMAC Partners

An interview with James Winchester. In this interview, Andrew Dick interviews James Winchester, the Lead Financial Analyst with CMAC Partners. Andrew sits down with James to talk about physician-owned real estate strategies.

Podcast Participants

Andrew Dick

Attorney, Hall Render

James Winchester

Lead Financial Analyst, CMAC Partners

Andrew Dick: Hello, and welcome to the Healthcare Real Estate Advisor podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare-focused law firm in the country. Today, we’ll be speaking with James Winchester, the Lead Financial Analyst for CMAC Partners, a firm that works with physicians to maximize the value of their real estate investments.

Andrew Dick: James has been with CMAC Partners for a number of years. Prior to joining CMAC Partners, he worked for a number of companies, including Siemens. We are going to talk about his role at CMAC, some of the issues faced by physicians that own real estate associated with their medical practice and a couple of other items. James, thanks for joining me.

James Winchester: Thanks for having me Andrew.

Andrew Dick: James, before we talk about your role at CMAC, let’s talk about your background, tell us where you’re from, where you went to college and what you aspired to be?

James Winchester: Great. Well, I’m actually from the UK. I often get confused for being Australian, which I think is probably because I’m starting to pick up some of the Orlando Twine, and I’m becoming this strange little hybrid. But I am actually from London, originally. I did my undergrad education in the UK.

James Winchester: I was actually trained to be a mechanical engineer and decided that that was not for me. Or perhaps it was the other way round, engineering decided that I wasn’t for it. And then I decided that I would make a transition. And I came over to the U.S for grad school, and went to a school down in Florida called Rollins College. And I decided I couldn’t leave the palm trees, and I’m still here today.

Andrew Dick: Terrific. So how did you ultimately end up at CMAC Partners? And then tell us about CMAC in general and what its mission is?

James Winchester: I was actually introduced to CMAC by one of my school connections and I was kind of intrigued by them. They work in a very unique space. And I’d spent some time working at some larger organizations previously and decided I really wanted to work for a smaller organization where I could really be impactful to the bottom line. I was also interested in the fact that they serve clients the whole way through the U.S even though they’re based in Winter Park, Florida.

James Winchester: CMAC is an organization that was started around 16 or 17 years ago now. And really had the mission of assisting physician groups with their real estate financing. And it started off with helping them with bond financing. And there was kind of a unique instrument that groups were able to capitalize on. And when the financial crisis hit in 2008, those bonds became a liquid, and CMAC really had to pivot a little bit. And they were able to really create the same value for their clients, but more using conventional financing with banks and credit unions.

James Winchester: I think that the business has become even more interesting for me. And one of the reasons why I was attracted to it in recent years, is because it’s changed and it’s evolved ever so slightly where we realized that that physician groups, a lot of them are struggling with the same issues across the country. And we’ve created a bunch of solutions that use the financing. And that financing can facilitate some structural changes within the way they operate the real estate. And it’s really become a value-add when we’re going through our process. So we’re not only saving them money, but helping them structure it in a little bit more of a thoughtful way.

Andrew Dick: I like it. Very narrow-niche. Which tells me that you and your colleagues can probably serve the physician clients very well because you’re seeing some of the same issues over and over.

James Winchester: For sure. And we are really specialists in our space. We really only work with one type of group, and that is Independent Physician Practices that have, or are thinking about real estate ownership.

Andrew Dick: Okay, got it. As a financial analyst, tell us what you’re doing on a day to day basis for some of these physician groups?

James Winchester: My role has really evolved into being quite client-facing. I have the opportunity to travel around the country when it’s safe to do so. It’s been a little bit prohibited recently. I really see myself as somebody that really tries to find out the objectives of the practice in the real estate, what are they trying to achieve and what issues may they be encountering at the moment.

James Winchester: And kind of as a by-product, we assist those groups with the real estate financing and save them money in doing so. But really, the primary driver, a lot of the conversations that I have with groups are the issues that are inherent with the way that they’ve been set up historically.

Andrew Dick: So for example, the docs may have set up a partnership or a limited liability company and most practices evolve over time, physicians are buying in and out, and sometimes the way it may have been set up initially may not have been optimized for really what they’re trying to accomplish today. Is that, in a nutshell, what you’re working through with the docs?

James Winchester: Absolutely. We’ve owner-occupied medical real estate. It’s a little bit different from a traditional real estate investment. And there are some ways in which groups can really capitalize on their returns and reduce their risks simply by the way that they structure their real estate. Because the real risk is determined by the credit quality of the operating entity that is occupying the building.

James Winchester: And because that really is in control of the owners of the building of the physicians that own it, they can really, if they have good alignment between the real estate and the practice, they can really maximize their risk adjusted return. And really, a lot of the conversations that we have is helping groups that have gone and entered into good real estate investments at the time. But those real estate investments have really strayed from the objectives of the practice, and suddenly, they become a little bit more risky and the returns are not necessarily as good as what they could be if they looked at it from a holistic lens.

Andrew Dick: Let’s just back up before we do a deep dive into how some of these partnerships and LLCs are set up. Talk about the value of a physician group actually owning their real estate. It sounds like you come in and oftentimes they own their medical office building, for example. But do you also work with groups when they’re thinking about either building a new building or maybe investing in a new medical office building for their practice?

James Winchester: We do. And a lot of the conversations that we have are really helping groups understand what the risks are of them going into a new investment, how to mitigate those risks and what kind of return they’re going to be expecting to receive. And we’re really big advocates of groups investing in the real estate from which they operate for a number of reasons. I think they’re both economic, simply it’s a really good risk-adjusted return. Most of the groups that we work with, if the deal is structured correctly, they’re able to earn cash-on-cash returns of the low to mid teens.

James Winchester: And really, we see it as very advantageous for the groups to be paying rent for themselves and building up their value over time rather than paying it to a third-party. I think even more important than that though, is the non-economic factors, as we like to call them. And one of those is recruitment, for example. One thing that independent physician groups can really offer that a lot of their competitors can’t is some of the ancillary services such as the real estate that are very attractive to the new partners if they can enter affordably.

James Winchester: I think that, for a lot of groups, it can create glue within the partners that are involved in the real estate and something that really binds them together as a group. Probably the last thing is the ability to control the group’s destiny. And a lot of the times, having ownership within the building that the group practice allows them to make expansions, if they decide that that’s strategically important for the practice, or have the ability to control the lease that they’re operating out of to, maybe, reduce their expenses or…. There are a number of different things that I think groups can take advantage of with real estate ownership that they don’t have the opportunity to without it.

Andrew Dick: I think you hit on the two points that I’ve seen over my career. Which has really… You mentioned the glue that can keep a group together, which I think is right. And also the recruitment benefits of bringing in younger or newer physicians, I should say, into the practice. It’s a nice bonus for those docs to be able to buy into the real estate as well.

Andrew Dick: That’s something that many of the health systems can’t offer when you’re competing for newer physicians because the health systems typically don’t allow physicians to invest in real estate opportunities that the health system is undertaking. So I think you’re exactly right. It can be also a powerful wealth-building tool for the physicians.

Andrew Dick: So when we talk about setting up a real estate company or a partnership, what are the things you and your colleagues think about, James, when putting the deal together, if you could start from scratch?

James Winchester: We think that… Firstly, probably, as I mentioned before, the alignment of the ownership of the practice and the real estate entity can be really important. We work with a lot of groups that when they first go into exploring whether they’re going to invest in their real estate, they may have 50% of the physicians interested in participating. We think that that is not necessarily desirable. And if we can increase that number and you may be in a situation where you can’t get everybody involved, that if you can get a solid amount of the practice involved in the real estate, it can reduce some of the problems that are inherent along the way.

James Winchester: There are often conflicts of interest as you see the diversion of those two ownership groups. Because it is an economic asset. And oftentimes, it can be contentious if rents are set at certain levels or leases are negotiated in certain ways that are going to impact individuals within the group disproportionately because of that disparate ownership.

James Winchester: So I’ll say first and foremost, we’re really looking to try and create that alignment. I think a lot of that becomes really an education process. And if the transaction is put through and structured in the correct way, a lot of the times, it can be very desirable. And that’s not necessarily understood from the onset. So if we can really explain that, make it transparent, I think most of the groups that we work with feel pretty comfortable that they can get the vast majority of physicians on board.

James Winchester: I think alongside that, especially for new groups that are new to real estate, they may not be aware of some of the issues that come along the way of having a dynamic ownership group. Which is very different from what we see from a traditional real estate investment where you have new partners coming in and you need to be able to buy existing partners out. So we really look for structures and help groups through structures that make sense and are sustainable for as long as possible.

Andrew Dick: You hit on some really important points, the conflicts of interest that can exist as a big one. You’re exactly right that if only a handful of the physicians in the practice invest in the real estate company, there can be a number of conflicts when you go to negotiate the lease terms and negotiate renewals or talk about the future of the practice. I think you’re exactly right. That alignment is huge. And to the extent that you could get all of the physician partners in the practice to also invest in the real estate, I think that would make the transaction much easier and eliminate a number of conflicts.

Andrew Dick: One of the issues you and I have talked about before is the buy-in and buy-out process for a number of these practice groups. Especially if it’s a real estate partnership or company that’s been around for a number of years and buying in can be very expensive for a newer physician that maybe doesn’t have the capital to buy in or access to capital.

Andrew Dick: Talk about that process, the buy-in and buy-out and some of the things you think about to make sure it can work. Because if you’re going to offer a new physician, for example, an opportunity to buy in, it’s got to be set up in a way that it’s truly an opportunity where that physician can afford to buy in. Maybe talk about that just a little bit, James.

James Winchester: You’re absolutely right. It generally occurs as the real estate investment matures. Most groups will look at kind of an 80% loan-to-value structure or thereabouts, maybe a little bit higher in some cases. And it therefore means that, at the inception of a project, the partners are collectively having to come up with around 20% of the equity, maybe 15% of the equity, based off of the financing that they’re able to achieve.

James Winchester: And what we see is, as the real estate matures and that debt is paid down, and most of the time we’re looking at buildings that are appreciating depending on the market that they’re in, there becomes a widening movement and a delta between the assets and liabilities that’s increasing to the point where, as you mentioned, it can become not achievable for new partners to be able to buy-in based off of the traditional way with which these buildings are valued.

James Winchester: And we’ve seen groups where those buy-ins can be above a million dollars. And you’re looking at the physicians that are typically going to be the most highly leveraged because they’re at that stage of their career where they may have student debt, they may be looking to make their first home purchases. It’s just a difficult conversation for a lot of groups as that number goes up.

James Winchester: And we certainly see, for different groups, that that number can be different. And some are happy to, and don’t see any problems if the buying is quite substantial relative to what other groups see. And they can really struggle much earlier on in the process. We certainly recognize that as an issue. What a lot of groups, I think, don’t recognize it. I think that they recognize the buy-in side much more quickly than they recognize the other side, which can be equally problematic.

James Winchester: And that’s buying out partners. Especially as we’re seeing an aging population and many of the physicians that have been working to build up their equity in these real estate investments are looking to leave the practice and therefore liquidate their shares in the real estate ownership, that there can often be a real struggle to be able to facilitate that process. Especially if that buy-out of those physicians is paid over a short period of time.

James Winchester: And if there are a number of buy-outs that are occurring at the same time without adequate buy-ins occurring at the same time, it can be a real drain on returns. And we’ve seen many groups that have gone from a nicely-yielding investment, where they’re getting reasonable returns to actually having to put money into the real estate in order to be able to buy some of their partners out. Which is not necessarily desirable.

Andrew Dick: All good points. Talk about the algorithm that you and your team has developed called True Course. I was intrigued by that when we talked before. It sounds like it’s a program that helps predict timing of buy-in and buy-out of partners in the real estate company or in the partnership. Maybe just give us an overview of how that works and what it is.

James Winchester: For sure. Really, the genesis of the True Course came from really witnessing what most groups do when they start a new real estate entity or even groups with an existing real estate entity will manufacture an operating agreement, and they will put a certain buy-in and buy-out parameter in there, and they will decide to value their building. And they have these sequence of events that occur for them to get to each of these.

James Winchester: The reality of the situation is typically, for the first three or four years, they can get through and be relatively unscathed. And these buy-ins and buy-outs in the structure that they have in place works. And at some point in time, they reach a roadblock. And one of two things happens, new partners are really turned off by the fact that they’re having to come up with this large sum of capital in order to be buying into the real estate entity or the group’s really struggling to get partners to be able to buy out.

James Winchester: And really, they go through the same process again. Where they will go and look at the operating agreement and adjust it in the best way that they can. And sometimes, groups do a great job in doing that. But we really wanted to look at a process that actually looks at the probability of issues occurring and for groups dependent on the structure that they have in place when these issues are likely to occur based off of the probability of buy-ins and buy-outs occurring and what will be the severity of the issue of these problems occurring.

James Winchester: And typically, we see groups that have a large real estate value, relative to each physician, are going to be the ones that are really prone to this. Because they’re going to see a bigger build up of equity more quickly. And there are some ways, there are some methods that we found by using this program, that can really help groups mitigate these issues and make them occur less frequently.

James Winchester: And I really don’t think it’s an issue that you’re going to completely avoid, but as long as groups understand the different risks that they have, and when those risks are likely to occur, they can really apply some sound financial planning to be able to deal with them and be ready to deal with them when they do occur.

Andrew Dick: So, James, what are a couple of the factors that you look at when you’re inputting the data into that program? Age of some of the owners, value of the building or…? Give me a sense of some of the factors you’re looking at?

James Winchester: Age of the owners is very important. We try and put as much information in as possible. I think there’s something along the lines of 37 different variables that we try and model for. The pace with which the debt is repaid can often be an important one because that can create a trigger event a little bit earlier. We also try and identify what market the group is in. And what that really tells us is, what are the chances of new physician partners joining that market.

James Winchester: If you’re in a growing geographic area, then I think is a little bit easier from the recruiting side. And that generally tends to mitigate some of the issues that you’re going to see on the real estate buy-in and buy-out side because you’ve got more partners coming in than you perhaps do on the way out.

James Winchester: For stagnant or more stagnant markets, it can be more of an issue. Because you may be on the other end of the scale where the size of your practice may be reducing emphasis slightly, and suddenly you’re trying to fund buy-outs when there’s no capital coming into the entity.

Andrew Dick: Interesting. It sounds like it’s a very novel approach to an issue that comes up quite a bit in real estate holding companies involving physicians. One item we’ve alluded to already is, it can be challenging for newer physicians to buy in. You talked about how much, I think roughly, capital a physician may need to bring to the table, whether that’s 20% of the value of the buy-in.

Andrew Dick: Talk about maybe some strategies that younger physicians should think about when they’re trying to buy into a real estate partnership or company. Sometimes it’s easy for them to get loans from a bank to buy in, sometimes it’s not. What are your tips you would give to a younger physician looking at an opportunity like to buy into their real estate entity?

James Winchester: Sometimes, I think younger physicians will become turned off by the value of the buy-in without understanding the true investment of that buy-in. If I enter in with a $500,000, for example, that is really there to provide me a return on investment, which I think needs to be explained first and foremost. Even that being said, I think it’s important for those younger physicians to continue having conversations with the leadership, to see whether there is a structure that really suits that particular group.

James Winchester: And we see a few different models that groups use. And I certainly don’t think it’s a one-size-fits-all. And I certainly don’t think that there’s a perfect answer when it comes to buy-ins and buy-outs. But, there are certainly different methodologies that groups used that can be desirable in certain circumstances. For example, there is a model that’s quite widely used that really bifurcates the ownership with two levels. One would be a voting share, and the other would be an investment share in a class A and class B model, for example. That can be something that is of interest for certain groups.

James Winchester: I think that the downside to that is that it doesn’t necessarily fix anything on the buy-out side. Which can be equally as problematic. Especially if you’ve got some physicians that are investing more heavily, they’re usually going to be the ones that are closer to retirement and therefore going to have a larger amount of buy-out that’s going to be required at the time that they do retire. But it certainly can help with attracting new partners to be able to get in.

James Winchester: We also see certain models that look at vesting the real estate ownership over time and they may have a very minimal requirement for the buy-in to start off with. But the investment really increases as the physician partner contributes more time with the practice paying rents and therefore their ability to be in the real estate. One thing that we certainly see a lot of groups doing is going through cyclical recoup of their investment.

James Winchester: One thing that I think a lot of the time is missed when we’re looking at these real estate investments is, although the real estate investment may have been 80% loan-to-value at the time that it started, when a new physician is buying in, their return on investment is going to likely be reduced as that time goes on, because they’re having to put more capital in for a very similar distribution that they would be receiving.

James Winchester: So a lot of the times we like to say to groups, well, if you have new partners that are coming in and they were investing in this building today and you weren’t occupying this building at the moment, would they come up with 50% of the value of the building to put into it? And the answer usually is no. They’ll probably use more of the bank’s money in order to improve their returns and essentially risk less of their own money.

James Winchester: So sometimes, just framing in that narrative makes groups realize that they need to do something in order to assist these new partners so that they can make it achievable, and they can make the investment desirable.

Andrew Dick: All good points. Let’s let’s switch gears. When you and I have spoken before, we talked about the fact that the healthcare real estate market is really hot right now. A number of investment groups and developers are out there pitching physicians to build new buildings. And the developers, in some cases, will want to own a hundred percent of the ownership interest in the real estate. In some cases, these developers and investors will offer the physicians the right to buy in.

Andrew Dick: I’ve seen a lot of different opportunities being pitched right now. Sometimes, the physicians feel like they need to give the developers and ownership stake in the project. Maybe you could give us an overview of some of the pros and cons of whether or not physicians that partner with the developer. What should they consider, in other words?

James Winchester: Andrew, I think this is a great question. We see it a lot with independent physician groups. I think one of the important things to address, to start off with, is that there is often a difference between development and investment within a medical office building. And they’re often conflated when groups go out and they decide that they want to be involved in new construction. And I think that there are certainly times where it can be beneficial to provide developers a piece of the pie.

James Winchester: But it should be looked upon as really a separate issue from going out and the developer developing the building and more as an equity partner that’s going to provide something throughout the life of the lease when you’re in the building. we see that sometimes groups find it advantageous if the developer is able to share in some of the guarantee risk at the start of the project. And if they are struggling with equity capital shortfalls and they need a contributor, then they may lean upon the developer in order to provide that shortfall and assist in their capital stack.

James Winchester: I would say that more often than not, a long the real estate investment, there becomes conflicts of interest between developers and independent physician groups. Because, simply their objectives are not aligned. And I think that there are some great developers that become good partners with groups. But that’s not always the case.

James Winchester: First and foremost, I think it’s important for groups to identify who’s got control of the asset. And if you’re getting involved with a developer and losing control of that asset, and losing control of the lease that’s in place, that may seem fine at the time that you’re starting the development. But can be something that is not desirable at all, and can leave a group hamstrung once the building is up. And really the developers value diminishes. Because, the value derived from these buildings is really concentrated in that lease that’s in place, because it’s an income-generating asset.

James Winchester: I think that that really leads to a misalignment of the value and compensation as time goes on. We work with many groups that have perhaps got involved with a developer for one of these reasons where they’ve also become an equity partner. But they found that three or four years into the project, they’re looking for ways to be able to exit that developer share or buy that developer out. And they almost always are having to do so at a premium, and they are still able to get some good returns on the building by capitalizing on a hundred percent of that control.

James Winchester: But more often than not, their comment to us was, well, I wish we didn’t give so much of it away at the start. And we’re a little bit more thoughtful as to what this would look like after the construction was completed.

Andrew Dick: Okay, James, let’s let’s talk about the capital markets. That’s really one of the areas that CMAC has a lot of experience in when physicians are going to seek, whether it’s debt or equity financing for a real estate transaction. Talk about what you’re seeing in the markets right now. Is it a good time to seek out capital? Talk about what’s going on in the market.

James Winchester: For sure. My overarching comment was, it’s been a little bit choppy. But it’s starting to settle as everybody understands the implications of COVID a little bit more and banks are able to predict what the next six, 12 months is going to look like. We saw… It was kind of interesting at the onset of COVID. We were seeing, just before it, some very aggressive pricing and spreads. And most of the transactions that we complete, the bank is providing a spread over liable.

James Winchester: And what we saw as COVID here was that banks started to widen their spreads a little bit over liable between the 50 to 70 basis points mark. We were in continuous conversations with the lenders, trying to find out exactly what was going on and why. And they were really explaining to us that some of the indexes from which they were previously pricing on were no longer reflective of their cost of funds. So they were seeing that it was costing them more to be able to borrow the money to provide it for these loans than was reflected in liable, which was usually a pretty good index to be able to measure their costs for providing that capital.

James Winchester: What we’ve seen since is, those spreads have started to come down. I would say that they’re still not at the same levels that they were pre-COVID. And certainly banks have become more selective with the opportunities that they’re going after. We still have a couple of large national banks that are having real difficulty being able to bid on new transactions and some banks that are finding it difficult to bid on new construction projects.

James Winchester: In general, we’re say that we’re seeing most coming back to some level of normality. And because there’s been so much intervention with the fed and rates are so low right now, even though the spreads are a little bit wider than what we saw before COVID, there are still some great opportunities to really capitalize on low fixed interest rates because the underlying market and the index is from which these loans are priced upon are really low and therefore there’s really aggressive rates available.

Andrew Dick: Yeah, it sounds like maybe things are starting to smooth out a little bit, but we have ways to go in terms of the capital markets leveling out. Where do you think the healthcare real estate industry is going in the future? Do you think we’re going to continue to see growth and opportunities? It truly seems like it. But I would welcome your thoughts.

James Winchester: I think that it has, again, proved its resilience. Certainly, if you look at it and compare it against other real estate assets like retail and hospitality, it certainly stood well above those in terms of its performance over the last few months. I think that it’s really going to be based on the underlying performance of the healthcare industry in general, which most people I think expect to remain pretty strong.

James Winchester: And certainly, in terms of values of these assets, we’re seeing actually capital move towards the space. Which almost is counterintuitive considering that real estate in general has been as competitive over the last few months, but because certain investors and real estate investment trusts are moving away from what are deemed to be more risky investments and moving that capital towards the healthcare space, which is deemed as more of a safe haven, we’ve seen on the buyer and broker side some really aggressive proposals come out in recent weeks.

Andrew Dick: Good to hear. Where do you see the most opportunities for physicians interested in investing in real estate? I know that at CMAC you’re focused on physicians often investing in the real estate associated with their practice. Are there any other opportunities out there that you’re working with groups on? What advice would you have when a physicians interested in investing in real estate?

James Winchester: We see a lot of, specially groups that can create real estate investments that really compliment the underlying practice. And I think those are the ones that we like to recommend for four groups. If it’s something where they may be able to… If they’re an orthopedic group and they’re able to invest in physical therapy on-site, for example, that can be something that’s really advantageous.

James Winchester: When physicians at an investment strays into the into other areas where there is a different risk profile for the investment, I think it really comes down to understanding the balance between risk and returns. You can often get into desirable real estate investments that are going to yield a high return, maybe as high as the medical risks that you’re investing in with the practice. But it’s not likely to carry the same level of risk. And that’s an important thing for a physician investing to be aware of.

Andrew Dick: I think that’s a good point because when your practice is the tenant and a so long as you’re practicing within the space, the risk pro profile should be quite a bit lower for the real estate that your practice is using. So, good advice.

Andrew Dick: James, what would you tell someone who’s trying to get into the healthcare real estate business? What advice would you have for someone who’s new to the industry? How can they learn more and grow in the industry?

James Winchester: I would say, especially for independent physician groups, there’s a great resource called the Congress of Physician-Owned Medical Properties that was started a few years ago, and really was put into place because there are so many groups that really don’t the opportunity to discuss with each other what works and what doesn’t work when it comes to their real estate.

James Winchester: Many of these groups are sitting with assets of 40, 50 million-plus. And it can become extremely important for them to be structured in a way that increases their success in the long run. So I would say that that is certainly one resource that I would tap into if I’m a new physician partner and an executive that’s new in the space for sure.

Andrew Dick: James, as we wrap up here, where can our audience learn more about you and CMAC Partners?

James Winchester: I think, probably, the best places to visit our website, which is We are pretty much always available to speak and answer questions that groups have, and we’re happy to do so. I really like to think of us as a group that wants to help the industry become stronger. And we understand that our role or our success is not going to be anywhere near as good if the industry doesn’t succeed with us.

James Winchester: So if there is any opportunity for us to put groups in touch with industry experts, like Hall Render and yourselves that really specialize in this space and can really offer some value, then I think that we love doing that. So we would be happy for anybody to reach out

Andrew Dick: Great. James, thanks for joining us today. I enjoyed the conversation. Thanks to our audience for listening to the podcast on your Apple or Android device. Please subscribe to the podcast and leave feedback for us. We also publish a newsletter called the Healthcare Real Estate Advisor. To be added to the list, please email me at


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An interview with Alfonzo Leon, Chief Investment Officer for Global Medical REIT

An interview with Alfonzo Leon, Chief Investment Officer for Global Medical REIT

In this interview, Andrew Dick interviews Alfonzo Leo, Chief Investment Officer for Global Medical REIT. Andrew sits down with Alfonzo to discuss health care REITs.

Podcast Participants

Andrew Dick

Attorney with Hall Render

Alfonzo Leon

Chief Investment Officer, Global Medical REIT

Andrew Dick: Hello, and welcome to the Health Care Real Estate Advisor Podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare focused law firm in the country. Today, we will be speaking with Alfonzo Leon, the chief investment officer of Global Medical REIT, a publicly traded equity REIT that trades on the New York stock exchange under the ticker symbol GMRE. Alfonzo has been a real estate and investment banking professional for a number of years. Prior to joining Global Medical REIT, he worked for an investment banking firm, helping hospitals and healthcare providers on strategic real estate transactions. Alfonzo along with his colleagues have grown Global Medical REIT to a respectable healthcare REIT. And today we are going to talk about his career and his current role at Global Medical REIT. We’re also going to talk about the Global Medical REIT portfolio and healthcare real estate industry in general. Alfonzo. Thanks for joining me.

Alfonzo Leon: Thanks for having me.

Andrew Dick: Alfonzo, before we talk about your role at Global Medical REIT, let’s talk about your background. Give us a little bit of information about where you’re from, where you went to college and what you aspired to be.

Alfonzo Leon: Sure. Great. So I was born in South America. I came to the US for college, went to the University of Virginia, studied to be an architect initially. Right after I graduated from UVA, I lived in Martha’s Vineyard for a year. While I was on the Island, I enrolled in the center for real estate program at MIT and went to that program for a year. Coming out of that program, I started a job with LaSalle Investment Management, out of their Baltimore office. That was a great opportunity for someone that’s in essence, starting their career. I had a chance to work with a lot of acquisition officers across all asset types, office industrial retail, medical office and hotels. I actually sat next to the acquisition portfolio manager for LaSalle, that was starting a medical office fund.

Alfonzo Leon: So I did a good amount of work with the director of that MOB fund over the years. So I did that for about five years. In 2005, I decided to look for other opportunities. I joined a boutique healthcare investment banking firm called Cain Brothers, out of San Francisco. And it was a pretty, a unique opportunity. At the time, this is 2005, medical office was still considered a very niche investment class and there weren’t really that many people that were in the space. I joined a group within Cain Brothers that was dedicated to MOB monetizations on behalf of health systems. That was the core business model. So over the years, Cain had built many relationships with small health systems across the country, health systems with two, three, four hospitals within their network, which were too small for the big wall street banks.

Alfonzo Leon: The founders of Cain, two brothers actually formed the company in the mid ’80s with a goal of servicing these smaller health systems. So when I joined in 2005, Cain Brothers had completed about a handful of monetizations in the past couple of years. And it was that they were in many ways pioneers in the space. The first monetizations happened in 2001, 2002, when Ascension started, engaged Ernst & Young to evaluate their real estate holdings and they were looking for ways to raise cash, to help their credit ratings. So that in essence started the industry that I’ve been in since in essence 2000 when I joined LaSalle, and Cain Brothers was one of the pioneers. So when I joined them, it was a group of about six bankers, never really grew beyond that number.

Alfonzo Leon: But over nine years from 2005, in 2014, I worked on over $2 billion worth of transactions in the healthcare space. So I spent a lot of time over those years working with health systems, working with physician groups and also interacting with a lot of the buyers in the space. So all the public REITs, the private REITs and the private equity companies that have joined over the years. So it gave me a very unique perspective, in a sense, I had a chance to observe and learn from other investors in the space over nine years. I also had a chance to interact with health systems at the board level, where they were actually making decisions on healthcare. Also I had a chance to work directly with physicians and then most importantly, Cain Brothers, since they had a focus on healthcare for nine years, I had the opportunity to hear from other colleagues who were in the home health business, senior housing business, who were in the managed care business.

Alfonzo Leon: And the medical device companies, IT, I mean a pretty wide spectrum. And Cain Brothers also had a pretty active tax exempt bond business. The guy who ran the real estate group within Cain Brothers, he also ran Cain Brothers, their M&A practice for hospitals. So I also had some exposure to that process when a hospital is acquired by another hospital. I had a chance to observe kind of their thinking and what goes into that process. So very unique perspective that I had prior to joining Global Medical REIT.

Andrew Dick: So Alfonzo, it sounds like when we spoke before you were happy working at Cain Brothers, you had a very good experience. You liked the variety of work and generally weren’t looking for new opportunities. So how did you end up making the move, or what prompted you to make the move to Global Medical REIT?

Alfonzo Leon: Sure. And you’re correct. I mean, I had no plans on either looking for opportunities outside Cain Brothers or leaving San Francisco, which it’s not a bad place to live. So really it was a coincidental, I got put in touch with somebody that was, a person who was the former CEO of Global Medical REIT. He was starting the company, looking for the first acquisition. And I struck up a conversation with him and realized that there was an opportunity to join what in essence was a startup REIT. And while it came over nine years, I saw a lot of funds start with zero assets, and within a two, three year span, grow their portfolios significantly. At one point I sat and counted all the funds that I had seen grow to billions over the years and I counted over like 13 funds.

Alfonzo Leon: I’m not sure how often you have that phenomenon in other sectors but it did catch my eye. I saw a lot of groups grow big funds. So when I met Dave, the former CEO, it was intriguing. And it involved moving to Bethesda, Maryland which I also thought was coincidental because I had lived in Bethesda, Maryland during high school for a couple of years and I knew the area very well. Things moved pretty quickly after that first meeting. I found myself moving to Bethesda, Maryland to join Global Medical REIT in August of 2014.

Andrew Dick: And Alfonzo, did you join as the CIO or what was your initial role within the company?

Alfonzo Leon: Sure. So the startup of the company was very unusual. So Global Medical REIT was actually one company of many that were run out of the Bethesda office. So the company that I joined was actually called Inter-American Management, which in short and in essence was the Bethesda, Maryland office for a family office run out of Singapore. One of the things that this family office out of Singapore wanted to do was become a REIT incubator and Global Medical REIT was actually the second REIT that they had started. The first one was a single family home REIT. So I was joining their second REIT. So when I joined it, there was about a dozen people working out of the office, but really the only two people that were working on Global Medical REIT was Dave and myself, which was interesting.

Alfonzo Leon: So that was from August of 14 to I’d say the end of December 15, it was just the two of us. I ended up right around, at some point in 2015, I hired in essence our first support person that dedicated to Global Medical REIT. This person helped me tremendously and he’s still with us, helped me tremendously at that beginning phase. So with Dave, we bought our first two assets and that was in June of 14, just prior to my joining, in September of 14, that was the first one I acquired. We spent a lot of time trying to raise capital within the US, we did a capital raise in Singapore as well. And by July of 15 we got capital from through the Singapore family office, this group gave us 30 million to put together a portfolio that we could take, that put together a $100 million portfolio that we could use to have an IPO to start the company.

Alfonzo Leon: So with the money we got in July of 2015, we quickly put it to work. And by March of 16, we built a $100 million portfolio and that between March of 16 and June of 16, we ran pretty hard towards an IPO. We put together a team. We got the legal team as well. We did our road show in June and we completed it in the month of June. So things moved pretty quickly, after we got that first a $30 million SLUG and we’re able to put together a portfolio quickly as well.

Andrew Dick: So Alfonzo, do you remember what the first few assets you acquired were, what type of healthcare assets they were?

Alfonzo Leon: Sure. So the first one we acquired was a LTACH in Omaha, Nebraska, 21.7 million. The second asset we bought was a surgery center in Asheville, North Carolina, that was 2.4 million. The third asset we bought was ophthalmology clinic with a surgery center in Pittsburgh. That was about 11 million. The fourth asset we bought was actually a portfolio of six MOBs in Germantown, Tennessee. And it was a sale lease back with a gastro group, that the largest one in the area, that was 20 million. In February of 2016, we completed the acquisition of a surgical hospital in Dallas. That was 18 million. And then in March and concurrent with getting financing, CMBS financing on the entire portfolio, which was in that sense kind of a triple back flip because we were rolling in the portfolio we bought in December from the gastro group and the surgical hospital in Dallas, plus closing on a surgery center in Detroit 4.5 million and closing on a medical office building in Melbourne, Florida for 14.5 million. So that was a very tricky thing to do and one that I swore I’d never tried to do again.

Andrew Dick: I bet it was exciting though. I mean, starting as you described it, a REIT startup that had to be a lot of fun.

Alfonzo Leon: It was fun in the sense that it felt like you were going down a roller coaster with no breaks.

Andrew Dick: Well, tell us about the portfolio today, when you and I spoke before you’ve got a wide range of healthcare assets. In my mind, Global Medical REIT is a diversified healthcare REIT. You’re not a pure play. You’re not focused just on MOBs or hospitals. Do I have that right and talk about kind of the breakdown of the portfolio.

Alfonzo Leon: Sure. So from the very beginning our goal was to build a portfolio of purpose built healthcare facilities. We used a strong healthcare systems and physician groups with leading market share in secondary and tertiary markets with the goal of producing reliable, rental revenue with rent bumps and a diversified footprint and with the goal of having this portfolio be triple net or absolute triple net. So just recently we announced we reached a billion dollars in assets, with about 80 million of annual base rent or triple net rent or NOI if you want to call it that.

Alfonzo Leon: So over 115 buildings with over 100 tenants with an average rental increase of 2% over three square feet of space and with an occupancy of 99.7% and current NOI divided by purchase price, a cap rate of 8%. And with a weighted average lease term across the portfolio of about 8.4 years. So that’s our portfolio currently. In terms of the asset types we buy, I mean, primarily it’s medical office buildings, the bulk of it is medical office buildings but we also buy inpatient buildings. So we’ve got the balance of the portfolio is a mix of inpatient with other asset types.

Andrew Dick: Got it. So talk about your role. You’re now the chief investment officer. What does that entail? What are you doing on a day to day basis? And then take us into what is the ideal opportunity you look for when analyzing assets that come across your desk?

Alfonzo Leon: Sure. So one of the things that I enjoy the most about my current role is that no day is the same. I mean, every day has been very, very different. And even when I think about what I’ve worked on a quarter by quarter basis, it’s evolved quite a bit. Largely due to the fact that the company has been growing as much as it has and at different sizes, there were different challenges and different things that I had to focus my energies to address or to manage. I mean, we went from two people working for Global Medical REIT to today we’ve got 20 people. So it’s been quite a ride and quite a process and that every quarter there was a different set of challenges that we had to overcome. In the early years, it was capital raising and I spent a mind numbing amount of hours working on PowerPoints and making pitches to a wide range of investors.

Alfonzo Leon: And then there was the phase that I remember where we were trying to close on that $100 million portfolio. And then finishing that we moved into conducting the IPO. Then once we got that done and we raised $150 million, we switched into ramping up our acquisition strategy. So that was the second half of 2016. Then in 2017, it was a lot of things happened one of which was, we started, our credit facility with 75 million capacity, with an accordion feature as well. Continued executing our acquisition strategy, 2017 was also a year where we had a turnover of our CEO. That’s when Jeff, our current CEO stepped into the role. We also changed our CFO and we also changed our general counsel. So it was quite a bit for a new REIT, new company. And 2017 was a bit of a blur, I mean, there was a lot happening that year, but we ended up on a high note.

Alfonzo Leon: We raised money in June of 17, about 35 million. And in December, we raised additional funds, 75 million of preferred equity. Just in time for 2018, which was when rates started increasing, the FED started jacking up rates, which really changed the REIT landscape for the year. Fortunately we came into the year with a lot of capital and in 2018, we supplemented that capital, with acquiring buildings, with operating partnership units. So we did about $36 million of deals in that fashion. And 2018 was really sort of, for us, it was a year of us showing to our investors that our business model is working and that we can continue growing this company. 2019 was a great year all around. We hit a lot of milestones. The biggest of which was in, right around Thanksgiving, we got to add it to the Morgan Stanley index, which really increased our volume and our share prices started going from an average of nine, 10 up to 11, 12 and 13.

Alfonzo Leon: So that was a very, very big milestone. In 2019, we did a lot of acquisitions, very, very busy year. And in many ways we were kind of hitting our stride and came into 2020 with a lot of wind in our sails, with a very big pipeline. And when we did our earnings call in February… Sorry, our year end quarterly call with investors at the beginning of March, sorry. After our call, our stock actually went up to almost 16. So it was in large part due to the fact that 2019 we really hit our stride, hit a lot of milestones, had very good pipeline, very good deals. A lot of things came together for us in 2019. So when I think quarter by quarter, I mean, what I’ve had to focus on has changed dramatically. So to reiterate like no week is the same, every day is pretty different. In terms of my responsibility, what I think my primary role within the company is to make sure that I generate as many opportunities to invest capital as I can. In many ways I want to have more opportunities to invest than capital at all times.

Alfonzo Leon: So my team of three acquisition people, we spend a lot of time trying to get ahead of our capital raising efforts so that we can, not just be more selective, but we can… whenever there’s an opportunity to raise capital, we’re never short on pipeline, given the fact that capital raises, to have a successful capital raise, you have to have a pipeline. So what I view my principal role within this company is to make sure that we’re generating the maximum amount of opportunities for the company to grow.

Andrew Dick: And Alfonzo. So when you’re looking at opportunities, what is your sweet spot? What is the return you’re looking for, asset types? Give us just a quick overview of your approach.

Alfonzo Leon: Sure. So our strategy really hasn’t changed since IPO. We focus on buying high quality real estate and desirable secondary tertiary markets, least profitable healthcare providers that are leaders in their respective fields. We focus primarily on acquiring medical office and outpatient treatment facilities in the five to 15 million range and opportunistically acquire inpatient facilities, typically in a 20 to 40 million range. To go back to our composition of our portfolio, I have a breakdown here for you. So 57% of our portfolio is MOB of which 20% of that has surgery centers. 24% of our portfolio is inpatient rehab hospitals. 8.5% of our portfolio is surgical hospitals.

Alfonzo Leon: We have 3% of our portfolio is LTACH. 3% of our portfolio is acute care hospital. 3% of our portfolio is administrative space. And 1.2% of our portfolio is freestanding ERs. Geographically across the country, we have 20% of our portfolio in Texas, 10% of our portfolio in Ohio, 8% in Pennsylvania, 8% in Arizona, 7% in Oklahoma, 7% in Florida, and then the numbers spread out across many other States after that.

Andrew Dick: Very interesting and it sounds like a pretty diverse portfolio. Let’s switch gears. When we spoke before you talked about the fact that Global Medical REIT was at one point managed externally. And recently you and your executive team made the decision to internalize the management function. Give us just a brief overview of how that process worked and what the strategy that’s involved there.

Alfonzo Leon: Sure. So when I joined the company it was… I joined Inter-American Management. So most of the REITs in the universe are internally managed REITs. There are a few and I don’t know if it’s less than five or right around 5% or more, of the REITs in the universe that are externally managed. And really what that means is the employees who run the company are not employed by the REIT but by the manager. So the agreement we had with the manager was the manager provided all the human resources in exchange for a 1.5% fee. Historically, there’s institutional investors do not like externally managed REITs very much. At the heart of that is concerns around governance. There’s also been some bad actors in the REIT space that have not always had the best interest of shareholders in mind when they were running their business.

Alfonzo Leon: So we at the very beginning we set it up to be externally managed really because in outside of the US and in Singapore and Japan, for example, the REITs over there are externally managed. So it was set up from the very beginning to be externally managed for that reason, given the source of funds, the initial source of funds. When we were doing our IPO process, it became pretty clear to us that having the external manager model was going to make it harder for us to access institutional investors. So what we did at the beginning was set a milestone when the board of independence would start the internalization process. So we looked at a lot of case studies that our bankers and our lawyers provided, and we settled on a $500 million market cap threshold upon which when we get to that point, we would ask the independent board would start the process of internalizing the manager.

Alfonzo Leon: So in December of 2019, we raised about 80, $85 million of equity at $13 a share. That got us over the $500 million market cap threshold. So by the end of the year, the board started engaging their consultants, the manager engaged their consultants and attorneys, and the process kicked off in earnest [inaudible 00:26:44] in Q1 of this year. So pretty much for the first half of the year the board, a committee of the board that of GMRE negotiated with the manager Inter-American Management. I mean, really what they were negotiating is the breakup fee. Ours at the very beginning was set very formulaically. It was just three times the 12 month average fee. That number was competed to be about 18.2 million. We had a press release on that at the beginning of July when the process was concluded. And these, the best way to think of it is, this is in essence an M&A transaction.

Alfonzo Leon: If you read through the filings, Global Medical REIT in essence acquired Inter-American Management and Inter-American Management became a subsidiary of Global Medical REIT and all the employees, including myself moved, are now employees of Global Medical REIT. So at high level, it seems like a straightforward process, but nonetheless it is an M&A transaction, and there is a lot of back and forth that happens in normal course of business. In our circumstance, the fact that we had COVID and a lot of market volatility also extended the process longer than it probably should have run by maybe a month or two. But ultimately we got it done and announced that at the beginning of this month.

Andrew Dick: Very exciting. I know that that’s a big milestone. Talk about the leadership’s team, the vision that you and your colleagues have over the next three to five years for the organization. Are there any financial milestones or what are you looking to accomplish over that period of time?

Alfonzo Leon: Sure. So simplistically, I mean, we plan to continue growing and building a diversified portfolio. Every company needs to play to their strength. We’ve built a real estate investment platform to find execute deals in our niche. So our plan is to continue leveraging our experience and knowledge of healthcare real estate to identify deals with good risk adjusted returns at cap rates that allow us to invest our capital creatively. Every stage of growth comes with unique challenges. I consider our internalization that we announced at the beginning of this month as a book and to our startup phase. So the way I see it, we are now a $600 million market cap company in a growth phase, in a market sector with very good fundamentals. So in short, I mean, our strategy is to continue executing our business plan that we’ve had since IPO and continue growing this and continue matching capital raised with opportunities within healthcare real estate.

Andrew Dick: So Alfonzo as you’re executing on this strategy, how has COVID impacted your operations, your facilities, and some of the tenants you’re working with routinely? Give us a snapshot of how the last four or five months of have went for Global Medical REIT in terms of rent collections. And what are you seeing and hearing as you’re working with tenants?

Alfonzo Leon: Sure. So the last several months has been one that we’ve all lived through and it’s been very intense. When I think of the last several months and I compare it with the financial crisis of 2008, in a sense that you had housing. like in 2008, if you think about it, you had a housing bubble, combined with a credit crisis, and both are subject matters that are very relevant to what I do. This time around you had a healthcare crisis and a capital market crisis and the impact on real estate has also across many sectors has also been very dramatic. So in many ways the last several months I’ve been reading obsessively and trying to learn as much as I can about the impact COVID is having across many aspects of what I do for my job and what I do for my career.

Alfonzo Leon: And it’s definitely, I have to believe kind of a once in a lifetime kind of event. It’s been very dramatic. Having said that, we’ve reported our numbers in terms of collections and in terms of occupancy. And in the next week, we’re also going to report our Q2 earnings. And if you compare what we reported thus far with our peers, I mean, our portfolio has performed in line with other medical office portfolios. The month of April was very intense. There was a lot of uncertainty about how this was going to evolve. I mean, if you didn’t read the news for half a day, you were behind the curve in terms of staying current with the news. There was just a lot of new things that we all had to get accustomed to quickly. In discussions with our tenants, we spent a lot of time talking to them.

Alfonzo Leon: I spent a lot of time talking with other companies in our space, a lot of people that I know in the space. I walked away with a few kind of I guess a picture things. I mean for starters, the one thing that I think is clear to everybody is that healthcare is essential. It is an industry that needs to be defended. It’s an industry that is critically important to the country and not just the country, but to the economy. I mean, without a robust functioning healthcare system, you compromise many other aspects of the economy in the country. The other thing that I took away from the last several months, healthcare operators are very resourceful. You’re looking at a group of people that are very smart, very hardworking, that are very mission driven, that are not afraid of to work around the clock, have access to a lot of specialists and consultants that can help them.

Alfonzo Leon: Also as a group, they are very good at managing bureaucracy and paperwork when you think of healthcare reimbursements and if you think about in your own personal life having to deal with insurance companies, it’s tedious, but the healthcare operators are incredibly good at running and managing all that bureaucracy. So I would say in terms of characterizing kind of what I’ve seen, I mean, it’s just a resilient group of professionals in a healthcare space that have adapted quickly. They got a lot of support and help from the federal level and from CMS and from various other sources. So where we are today in terms of where we were even a month ago, I mean, it seems like healthcare providers have found ways to make it work. I mean, by no means, are we out of the woods on this one?

Alfonzo Leon: I mean, I think everyone’s acknowledged and are braced for the fact that this is going to be a long, long process measured. I think folks are thinking, we’re going to be living with this well until the end of the year and very likely through most of 2021. But it’s been remarkable to see just how hard the healthcare professionals have been working, not just in taking care of people, but also in running their business. So my hat goes off to them. I mean, it’s been remarkable to watch.

Andrew Dick: Agreed. I think the industry has fared pretty well given all of the challenges and in most parts of the country, electric [inaudible 00:35:49] procedures are continuing. And some of the providers that had to shut down are open back up, which is good to hear. In terms of opportunities, where do you see opportunities for healthcare REITs or for Global Medical REIT in particular, as we work through the crisis?

Alfonzo Leon: Sure. So within healthcare real estate specifically, among the many things that I’ve been thinking of lately. I mean, it’s pretty well known that there’s been a shift from inpatient to outpatient. I mean, that hasn’t changed if anything, it [inaudible 00:36:28] probably, you’re looking at a scenario where things have accelerated up a little bit. Telemedicine also something that I’ve heard people talk about for a very, very long time. We had an amazing opportunity to see that implemented in an aggressive way. And on the other side of that, I mean, it’s not totally clear how much of an impact that’s going to have on the space. I mean, I had folks in the telemedicine space say it this way, it’s not a replacement to healthcare real estate, but a compliment.

Alfonzo Leon: And as I pulled together, everything I’ve heard on that front, I mean, it definitely seems that rings true. I think actually it’s made some things more efficient. In terms of how healthcare gets delivered or how it evolves over the coming years. I mean, I think there is a lot to be said for convenience. And when you think of large medical office buildings with multiple stories, five, 10 story buildings with elevators versus a single story facility that is a lot more convenient than more single use focus, there’s pros and cons to both, most of what we have is that the latter. It’s a single story or two story facilities that are more… the focus of care within those facilities is more single purpose than multipurpose like you would find on an on campus building.

Alfonzo Leon: I think, there’s going to be, continue to be opportunities and a space as it has in the past. My experience in healthcare for the past 20 years is things don’t change radically year to year. I mean, it’s more of a gradual evolution. I can’t remember any time in the past where I think I’ve seen things evolve rapidly. I mean, it’s more of a gradual change. When I think of healthcare systems and how they think about delivery of care and how they think about their real estate, they also… it’s more of a gradual move and it’s more incremental instead of sort of a change. But all that, to say that I don’t see the healthcare real estate landscape changing dramatically over the next few years. I think a lot of the trends that have been in place for the past couple of decades are just going to continue, maybe accelerate slightly. But what it means for investors, I mean, I think there’s still plenty of opportunities in the space.

Alfonzo Leon: One thing that’s really worked in favor of investors in healthcare is the amount of supply that’s coming to market. And I compare that with where it was 10 years ago, or 20 years ago. 20 years ago, the volumes were fractions of what they are today. And when I thought about the question of why the supply has gone up so much, no perfect answer. I think it has to do with the fact that investors have come in and provided liquidity and you’ve seen cap rates go down and it made it more attractive to sell, and it’s been sort of a circular dynamic that’s evolved over the years. And every year I do get the sense that there’s more inventory, higher quality inventory and more investors.

Alfonzo Leon: So it kind of feeds itself, but when I think of the volume today versus even five years ago, I mean, it’s very robust. One of the things that’s been surprising over the past four months is April, May was slower than average, but by June and July the market pretty much snapped back the pre COVID levels. I mean, it’s been very active. There’s a lot of deal flow. The quality of the deals coming to market are pretty good. As I think of the next a few years and into the future, I mean, I don’t see that dynamic changing dramatically.

Andrew Dick: That’s good to hear, especially for those of us that work in the industry. Alfonzo talk about advice that you would give to someone who’s getting into the healthcare real estate industry. I asked most of our guests, what would you tell someone who’s just getting into the business, what should they read or who should they talk to, or what advice would you give them?

Alfonzo Leon: Sure. So one of the things that attracted me to the industry is the fact that you’ve got real estate, which I liked. And then you’ve got this overlay of healthcare industry on top of that, that makes it a lot more complicated than other asset classes. Prior to me joining into space and dedicating myself to healthcare in 2005, I had done a lot of apartment investments with LaSalle. And when I compare just those two on its own, like apartments versus healthcare, it doesn’t take that long to get your head wrapped around multifamily investments. Whereas with healthcare, I felt like even after two years of dedicating myself to the space and trying as hard as I could, reading everything I could about the space, I still felt like I was a beginner.

Alfonzo Leon: It takes a long time to really get a sense for the industry and the dynamics and the investors and the systems. I mean, there’s just a very, very large knowledge base, which is attractive to me. So I would start by saying that this is an industry with a very high knowledge barrier to entry, which is taxing at the beginning. And a lot of folks that I see started in the space, they are… it works against them, as they’re trying to figure out the industry and trying to figure out who’s who and why things are good, or why things are bad. But once you get on the other side of it, once you’ve got enough knowledge that you sound credible and sound like you know what you’re talking about, it helps because there is a barrier to entry. I would also say that the sector is not very large when you look at the BOMA, MOB conference and you’ve got a 1000 attendees.

Alfonzo Leon: I mean, you’ve got the lion’s share of people that are in the space and have committed their careers to the space. And within that group, I mean on the investment side, I mean the way I think of it, there’s about 100 people on the investment side. So it’s not a very large industry. And when I compare the MOB, healthcare real estate investment crowd with like the apartment investment crowd, or like the senior housing investment crowd that I’ve also had a chance to experience. I mean the one thing, the way I would characterize it is, it’s on average, you’ve got a very institutional mindset. You’ve got a lot of the people in the space are very smart. They’re very good people, very friendly. So I would say, this is an industry that’s, I would characterize as one with a lot of very smart people, hardworking people, very ethical people and good people to work with.

Alfonzo Leon: So one that I enjoy very much, and I guess last thing I would say for anyone that wants to join the space is I would focus especially at the very early start of your career into space is trying to find a good mentor. In my career, I feel very fortunate that I’ve had very good mentors, and so I can’t stress that enough. I think it makes a world of a difference. And I would say, I would pick a better mentor in spite of, the type of job you might have because I think longterm you get more dividends.

Andrew Dick: Good advice. Alfonzo, I’ve enjoyed our conversation and I’m getting to know you. Where can our audience learn more about you and Global Medical REIT?

Alfonzo Leon: I would encourage folks to check out our website. We’ve got a pretty good investor decks that are also posted on that website. I think, I would just highlight the fact that we’re a new REIT. We did our IPO in June of 16. We’ve grown pretty fast but we love what we do. Our group in Bethesda is very united. We’ve got a very strong esprit de corps and very much a lot of the folks that are with us have been with us since the beginning. So it’s been an exciting journey, one that has been very rewarding for me career wise and one that I hope to continue watching grow over the years.

Andrew Dick: Terrific. Thanks to our audience for listening to the podcast on your Apple or Android device. Please subscribe to the podcast and leave feedback for us. We also publish a newsletter called, The Healthcare Real Estate Advisor. To be added to the list please either email me at A-D-I-C-K, 

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An interview with Rich Anderson, Managing Director/Senior REIT Analyst, SMBC Nikko Securities America

An interview with Rich Anderson, Managing Director / Senior REIT Analyst, SMBC Nikko Securities America

An interview with Rich Anderson. In this interview, Andrew Dick interviews Rich Anderson, a Senior REIT Analyst with SMBC Nikko Securities America. Andrew sits down with Rich to discuss health care REITs.

To view relevant and current price charts and the history of changes in SMBC Nikko Securities America investment rating(s) and/ or target price(s), click here

Podcast Participants

Andrew Dick

Attorney, Hall Render.

Rich Anderson

Senior REIT Analyst, SMBC Nikko Securities America

Andrew Dick: Hello and welcome to the Healthcare Real Estate Advisor podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare focus law firm in the country. Today we will be speaking with Rich Anderson, a managing director and senior REIT analyst with SMBC Nikko securities. Rich has been covering equity REITs for many years and is a well known name in the business. Over the years, he’s focused on a number of different REIT sectors including healthcare REITs. A number of our listeners are REIT investors who work in the healthcare REIT industry and I thought it’d be interesting to get Rich’s perspective on equity REITs in general, along with healthcare REITs. Rich, thanks for joining me today.

Rich Anderson: Thanks for having me Andrew.

Andrew Dick: Rich before we talk about your role at SMBC, let’s talk about your background. Tell us where you’re from, where you went to school and what you aspire to be.

Rich Anderson: Okay, I’m from the great state of New Jersey so Jersey boy through and through. Bruce Springsteen fan perhaps. Went to school at the University of Maryland. Not perhaps by the way. Definitely Bruce Springsteen fan. Went to school at the University of Maryland and studied aerospace engineering. Not quite a real estate background, at least from an education perspective, but happy to report to you that standing before you is a rocket scientist. As I always say, you’re welcome.

Rich Anderson: Then for about six years or so, I worked as an aerospace engineer for a government contractor, also in New Jersey, by the way. In South Jersey supporting the FAA Technical Center. Did that for, as I said, six years. In the meantime, was getting my MBA at night at a small school in Jersey called Monmouth University in finance and made the trip to Wall Street. It all makes sense at that point. This is the mid 90s and I worked for an aerospace defense analyst. I figured I had the business degree and the practical experience in aerospace engineering that this would be my career.

Rich Anderson: But at some point early on, I took note of the REIT industry which the REIT model has been around since the early 60s, but as a trading industry really didn’t get started in what we call the modern day era of the REITS until the late 80s, early 90s. The real estate team was physically sitting next to us. I inquired about a job opening and lo and behold, I moved over there in 1996 and started my career covering the REITS and have been doing it ever since. 25 years in now, straight on through as a REIT analyst and here I am with you today as a result of all that.

Andrew Dick: Great. Well Rich, talk about the sectors you’ve covered and what you’re actually covering today?

Rich Anderson: Sure. Over my career, I’ve pretty much covered every asset class that make up the US REIT industry, maybe about 150 different REITS. There are all sorts of walks of life in real estate as you know and all of them behave differently from one another. The fact that I’m a REIT analyst is one thing, but I truly believe we cover many different industries because malls bear very little resemblance to data centers, of course, and so on. My history is quite a wide net in terms of the properties that I’ve covered.

Rich Anderson: Today I cover as you mentioned, the healthcare REIT space, but I also cover the industrial REITS which are known for the Amazon exposure and the logistics of E-commerce and all that that’s going on. The office industry, which is interesting today because of all the work from home and whether or not that’s going to have an impact on things. The multifamily industry, which should benefit from work from home, I guess, if you think of it that way. But I’ve been covering the multifamily sector for quite a long time.

Rich Anderson: Most recently picked up coverage of a relatively new REIT asset class and that’s the gaming sector. There’s three REITS that make up that space that obviously own casinos around the country. Then finally, there’s the one and only Ground lease REIT Safehold. I am one of a few analysts that cover that one. I find it very interesting. It’s, as I said, no other company really does ground lease investing, specifically as Safehold does. It’s been a very interesting story out of the gate coming public in 2017 and really having a breakout year last year as they market their product to the real estate community.

Andrew Dick: Yep, and as we talked about before, SAFE is a very interesting REIT. We monitor it primarily because a number of our hospital clients frequently use ground lease structures when they lease part of their campuses to medical office building owners and investors so yep, very interesting model. Rich, for our listeners that aren’t familiar with what a REIT analysts does and the type of information that they publish, talk about the ratings process, how that works and the different designations. So buy, sell, hold. You said that your company has its own terminology.

Rich Anderson: Right, our terminology, the equivalent of buy, sell, hold would be outperform, underperform and neutral. It’s just a different word same logic. As an analyst, my job is to be as smart as I possibly can about the commercial real estate industry in all its walks of life. What I love about being a REITs analyst is there’s no script. Whatever it takes for you to be smart about the industry you are willing, within reason or you’re allowed to do.

Rich Anderson: That means property tours, that means staying in touch with what’s going on around the country. Whether it’s specific to real estate or the forces that create value in real estate. I always feel like I’m a generalist when I think of the Midwest and manufacturing and technology in the Bay Area and financial services in New York and Boston. These are all the forces of nature that create value in the bottom line bricks and mortar execution of the REIT industry.

Rich Anderson: Staying smart on the space and then drilling down into individual property sectors and then to individual companies. When I’m producing my ratings that I try to keep as balanced as possible, and always testing myself whether a rating change is warranted or what have you, I’m comparing against the S&P 500 because we do have general investors that invest in REITs so that would be perhaps their benchmark. Then I’m comparing an individual REIT against the REIT industry.

Rich Anderson: So just that specific element of the comparison because of the REIT dedicated investor community, really it has to be in that space. There’s a more finer line in terms of thinking about ratings. Then within individual property sectors, what do I think of the management teams relative to their most comparable peers? What do I think about balance sheets? What I think about geographies and for whatever reason, what’s going on around the country how is that affecting this real estate portfolio, whether it’s in the urban core, whether it’s in the suburbs or rural areas? How is, as I mentioned, work from home as an example, how is that going to affect office? How is E-commerce going to affect Industrial? How is COVID-19 going to affect the healthcare industry long term?

Rich Anderson: There’s many, many ways to peel back the onion here. It quite frankly makes my job very interesting because there’s nothing very mechanical about it. You can be very creative in the process and I think you get rewarded for that creativity by applying whatever it is that you think is necessary to be smart and to think about your constituents and who’s reading your research and what matters to them. I try to lump that all together and appeal to the masses as much as I can. Understanding that everybody has a different role from one another that is talking to me or reading my research reports.

Andrew Dick: Rich, two follow up questions. How do you decide which companies and sectors to cover and then who is using your information that you publish?

Rich Anderson: Right. The sectors and the companies that I cover is my decision and where I think I can create value to my end users of my research. Exactly how I come up with those decisions perhaps requires another podcast, but suffice to say I am thinking about where can I make the biggest difference? Where do I have maybe the brightest ideas that I could share that I think are differentiated from my competition that does the same thing that I do? For example, I don’t cover the malls right now. The mall business has been tough. I don’t know exactly how I would create incremental value there where I think I can create value. I know we’re going to talk about health care in that space or multifamily where I’ve been covering it for a very, very long time.

Rich Anderson: That’s the thought process. Kind of a vague answer but the answer nonetheless. My end user is the portfolio managers and anybody for that matter that invests in REITs. That could be the Fidelity’s and Wellington’s of the world. That could be pension funds. That could be insurance companies. That could be endowments. Anybody who is investing money, might ask to read my research and hopefully compensate us for that. That’s how it works. Of course, the companies that I cover are interested in what I’m having to say about them. But that’s the other side of the house.

Rich Anderson: That’s the investment banking side of the house and I have to have as… For legal reasons have to have my blinders on about conflicts of interest and all those things. I really have to be thinking about my end user. If I have a sell rating on a stock and my firm has a relationship with them on the other side of the house I can absolutely not pay any attention to that and of course I don’t. It’s a very important line in the sand that I must never cross. The so called Chinese wall.

Andrew Dick: Very interesting. So Rich, let’s move into the healthcare REIT space. Talk about the different… What I call sub sectors. Healthcare REITs have been around for a long time. There are a number of different REITs that fall under the health care REIT category. How do you break down this sector?

Rich Anderson: The interesting thing about the healthcare REIT space is it is a collection of different asset classes. Whereas most property sectors, at least the way the US REITs are structured are focused in our asset class. You don’t have a whole lot of diversity in the multifamily sector, the office sector or the industrial sector. That’s their corner of the sandbox and they play it well. In the healthcare REIT space, you don’t have that advantage because there’s different types of healthcare real estate.

Rich Anderson: There’s life science, there’s medical office, there’s senior housing, which itself can be broken down between assisted living and senior and independent living. There’s skilled nursing and of course, there’s hospitals, rehab facilities and so on. There’s many, many derivatives of healthcare real estate. What I described earlier about how I go about thinking about asset classes, I do that in a microcosm sort of way when I cover the healthcare REIT space.

Rich Anderson: If I were to pecking order the different asset types within healthcare real estate, I would start with life science. Life science is obviously a solution to the COVID-19 problem. All the tendency of those assets are working around the clock to try to find therapies and work on testing and of course, God willing, a vaccine. There is some great public relations potential there. We all want to see an end to this but there’s also a lot of activity going on within the four walls of a life science facility.

Rich Anderson: That asset class one, one of the larger names in that business, of course is Alexandra real estate which is primarily a pure play life science REIT has outperformed in 2020 substantially. Because of so much activity going on, unlike for example, the malls where people were told to leave and can’t… By the way, can’t go to a mall or can’t go to whatever facility where there’s a lot of crowd gathering. The 180 degree opposite conversation is happening in life science facilities.

Rich Anderson: I would put them as a solution. Then you have medical office which is not quite so much of the solution to the story but is working alongside hospitals and opening up beds to care for people so there’s a lot of activity still in medical office. You are seeing elective surgeries being stopped in this environment. A little bit of a hiccup in terms of the operating business of a medical office facility but nonetheless, still a part of the solution in that sector which has quite a bit of cash flow visibility relative to other property types. Has also outperformed so far in 2020. Both of these have been our calls, by the way, going in speaking about how we think broadly about covering the real estate space.

Rich Anderson: Then the next level is skilled nursing. Skilled nursing obviously a lot of terrible things happening in some assets. Very vulnerable, older folks catching the virus and unfortunately passing away in some cases. You would think as an asset class, would you want to invest in that in this environment? The answer for me is maybe yes. The reason I say that is because skilled nursing like hospitals has access to the various government stimulus programs. They are able to fund themselves and support their themselves financially which in turn is a good thing if you’re the landlord, A.K.A the REIT collecting rent from these operators.

Rich Anderson: In a perverse way, I guess, as a capitalist, this asset class skilled nursing, actually works okay in this environment. Certainly not great for all the reasons we could talk about for quite a long time, but at least you’ll able to meet the rent obligations. Then finally senior housing which will be a great asset class over the long term for maybe reasons we’ll discuss later in this conversation. But for the time being, they too take care of old folks but they don’t have access access to the stimulus programs. It’s mostly a private pay option.

Rich Anderson: So occupancies have been ticking down quite substantially. With that, their ability to pay rent or keep their operations above water in this environment. They do not have the benefit of the stimulus programs that skilled nursing does. In the present tense, I’m somewhat worried about senior housing. Longer term, with demand coming as the aging of the population manifests itself in that business over the next 15 or 20 years. Could be a fantastic opportunity, but for the year now it’s a little bit tougher. A lot tougher.

Andrew Dick: Rich, that was a great overview. I have two follow ups. In terms of other categories, you talked a little bit about hospitals, when we think of REITs that play in that space, there are a number but there’s one that’s really… What I consider more of a pure play hospital REIT. That’s medical properties trust. How are they doing?

Rich Anderson: First of all I want to say they… I don’t cover medical MPW so I want to be a little bit careful about talking too much about MPW. Maybe I could speak generally. I think that perhaps the same rules apply in hospitals as they do in skilled nursing. With the one exception being we are probably over hospitaled, if that’s a word. Over hospitaled in the United States. Perhaps something that might come out of this is a retrenchment of the hospital industry longer term.

Rich Anderson: I am a little worried about that in the sense that you could have some consolidation. You could have some low market share, rural hospitals closing and redirecting patients to another hospital in the area that has better market share, better systems and so on. I guess I’m just a little worried longer term about the hospital more so than I am of the skilled nursing space. The hospital industry is dealing with COVID-19 which is not really a profit center.

Rich Anderson: You might come out of this a little bit weaker in the hospital space than what I might suggest with the skilled nursing space. But nonetheless, for the time being, it is being supported as I suggested with skilled nursing. One other thing I would say, importantly, we have long thought of government regulation for hospitals and skilled nursing is to be a “liability” for those two asset classes, because you have a tough time predicting what Medicare is going to do every year, what the 50 states in terms of Medicaid are going to sign.

Rich Anderson: We’ve had some surprises to the downside in the past that has derailed that business because it so much relies on government reimbursement to run. But now, you would think that the government, state and federal government are unlikely to do anything that is perceived to be taking money away from that industry. The counter to my comment about hospitals long term is the government is probably an asset now, because it is unlikely to take money away from these heroes that have been on the front line doing all this for all of the people that are suffering from this disease. A lot of things to think about. Hospitals and in the healthcare real estate space in general. It’s going to be interesting on the other side of this for sure.

Andrew Dick: Let me bounce around a little bit in some of the different sectors. One, I don’t know that it’s really a sector but at least the way I think of a couple of the big healthcare REITs Ventas, Welltower, Healthpeak. I think of those as the three.

Rich Anderson: Sure.

Andrew Dick: I think of them as diversified healthcare REITs. What are your thoughts about those big players in the industry? We’ve seen some dividend cuts. Some of them have exposure to senior housing, what are your thoughts on how they’re performing today?

Rich Anderson: All three are fantastic organizations. The very fact that they’ve been consolidators and grown to the size that they have become is evidence of the quality of these organizations. Now they have certainly had their difficulties and some headwinds as of late because as you mentioned, they have exposure to senior housing, but taking that matter even a step further, they have exposure to operating senior housing. Very often we talk about triple net leases. In the triple net structure, the operator simply paying a rent to the REIT and it’s very much a passive investment from the REITs perspective.

Rich Anderson: In 2007, laws were passed to allow for the ownership and operations of healthcare real estate, namely senior housing facilities. That was a sea change in terms of how the REITs acted and played in the senior housing space. Now, fast forward to today, Welltower about 45% of its total portfolio is operating senior housing facilities. Not triple net, but literally the operations on their balance sheet. Ventas, about 35% of their portfolio is senior housing operating facility.

Rich Anderson: They’ve taken that law and run with it. They’ve done it because there has been growth over the years. It’s come back to bite them in this environment because they now are feeling the hit directly from occupancy laws in that space. Healthpeak is the third of the big three as you describe them which is what we all describe them as. They have performed relatively better than Ventas and Welltower. I think that’s because their exposure to senior housing operating is significantly lower.

Rich Anderson: They play in senior housing, but they have a fair amount of triple net. They do have senior housing operating less than 20% of the portfolio but they play big in life science. They’re another life science player. They’re benefiting from that and they’re big in medical office. So too is Ventas and Welltower. The lion’s share of the peak story is life science and medical office and that’s why they’ve been a better performer. To that end, my my ratings on those three are outperform for peak and neutral for Welltower and Ventas.

Andrew Dick: Yeah, it’s interesting. I think of those three the same way and I assume the law-

Rich Anderson: That’s right.

Andrew Dick: What we call in the industry the idea type structure where the REITs can be involved in management operation.

Rich Anderson: To be clear not the management. The physical management of the assets has to be run by a third party. What happens is REIT owns all the business but part of their cost structure is to pay a management fee to somebody who’s physically bathing and feeding people because that wouldn’t be considered a real estate activity. They still separate a little bit, there actually structured a lot like hotels where they pay a fee to a flag like a Marriott or Hilton or so on. That’s how the healthcare remodel a set up when they do do a REIT data structure.

Andrew Dick: So they’re getting a piece of the operating income through that structure. The other point you made, which I thought was a good one was about peak. The fact that it has more life sciences assets compared to the other two. It seems to be really working on a number of new development projects in the life sciences space as well which I find exciting. For a while I think it went through a rebranding and now it seems to be really coming into its own and doing well. I tend to agree with you. I like [crosstalk 00:24:28].

Rich Anderson: That’s an interesting company. The management team there has come together over the past five years led by Tom Herzog who I know very well and for a long time. He actually cut his teeth in the REIT space in the multifamily sector but he’s a very smart guy and he’s built a team of very smart people around him. In doing that, restructuring a legacy company into what it is today they’ve really done a fantastic job there.

Andrew Dick: Going back to MOB’s and some of the pure play MOB REITs, I think you cover HTA-

Rich Anderson: That’s right, yeah.

Andrew Dick:  Healthcare Trust of America and then healthcare REIT trust. Is that right, rich? I really like… Both those companies seem to be doing well. Is there any concern that there’s been so much demand for assets that it’s becoming harder to find good product at a good price to make a good return for those players?

Rich Anderson: Yeah it’s always a problem. Particularly in normal times, in low interest rate environment you do have a lot of interest in asset classes and particularly medical office that appeals to a wide spectrum of investors because as I mentioned earlier, it’s such a visible cash flow stream. It’s almost like an annuity and appeals very well to private equity and a lot of different types of potential investors outside of the REIT space. So yes, competition for that asset class has been fierce over the years.

Rich Anderson: We haven’t seen any disruption in terms of cap REITs on medical office facilities, even in this period of time. Now, we’re not seeing a lot of transaction activity but where we have seen it, there hasn’t been a whole lot of disruption in terms of property value. That’s always a good thing if you’re long on the sector which both of those companies are, but if you want to grow it, it becomes challenging. That’s always the difficulty. Now, healthcare REIT and also HTA both have a fair amount of development.

Rich Anderson: The way you get a better return is by taking on the incremental risk of development and you get 150 or 200 basis points return spread over what you’d be able to do as an acquisition. That’s one way to approach growing the portfolio, by going the development route. Of course development comes with its own risks. That’s always a trade off. That’s one way that the two of those companies are managing that issue specifically.

Andrew Dick: Great. One question about life sciences, Alexandria in particular I know recently had a share offering. Raised something like a billion dollars, I believe, which was huge. Then I think Blackstone may have raised a couple billion dollars from one of its life sciences funds. How does a publicly traded REIT like Alexandria… I mean, there’s so much interest in life sciences now and I know they have deep roots in the industry. How do they compete with some of the private equity players in that space?

Rich Anderson: That might be better question for them because I’m sure it’s a doggy dog world out there when it comes to a question like that. Alexandria cost of capital is quite attractive and fantastic balance sheet. I think there’s more than enough to go around. Of course, the best cost to capital perhaps in the planet is Blackstone. It’s a double edged sword when they come into the space. They took BioMed private a few years back and have been managing that portfolio ever since.

Rich Anderson: You’d like to have the stamp of approval of a Blackstone in your space but then you have a pretty sizable competitor as well. I think what Alexandria comes to the table with is reputation. Their portfolio is spectacular in many respects. It comes from mostly their development business and so if you see an Alexandria asset, you almost recognize it before you see the name on the door because they just do such a good job. That reputation precedes them.

Rich Anderson: They have relationships up and down the board throughout the bio pharma industry, they themselves can be characterized as a life science company in many respects. They are not real estate people only. If you meet the management team, you will find scientists and PhDs that are very knowledgeable and interface specifically with their tenants. That’s the differential for Alexandria. They are not just a money machine, they are actually very intellectual when it comes to the underlying business. they host forums with all their tenants.

Rich Anderson: They even have a VC arm where they’re investing into early stage development companies. They run the gamut in the life science business and I think that’s a separating characteristic for Alexandria when it comes to competition.

Andrew Dick: Great. Switching quickly to senior housing, you mentioned earlier, you think the sector will recover over time and may be an attractive investment. A couple of the long term care REITs playing in that space, which ones do you like [crosstalk 00:30:19].

Rich Anderson: Well so I have an outperform rating on SABRA, S-A-B-R-A. That’s about 60% skilled nursing 40% senior housing right now. I’m getting my fix I guess I will say, through SABRA. I get senior housing exposure with Peak even though it’s smaller than the others. I’m still getting it that way. The day may come. Obviously I can’t say when or how that I’ll flip more of aggressive approach into senior housing. Part of the reason for that is fairly simple.

Rich Anderson: If you look at a birth chart in the United States, in 1935 births troughed Right in the midst of the Great Depression. That’s 85 years ago. That’s about the time people go into senior housing facility differently. We are actually at a dearth of demand for senior housing at this very moment in time because of what happened 85 years ago. But then if you also look at that birth chart, from that point forward to call it 1950, or 1955, birth rates hockey sticked up. I guess people got happy. The Great Depression was over with.

Rich Anderson: This doesn’t take a whole lot of analysis to know that over the next 15 to 20 years, you were going to have people entering those years where they start to consider senior housing facilities. Which has a voluntary element to it, particularly in the independent living side where you want to have a little bit more ease of life but you don’t necessarily need a whole lot of care in terms of being fed or all that kind of stuff. Assisted living has more care element to it of course and then memory care unfortunately can play a role in assisted living facility as well.

Rich Anderson: But nonetheless, that demand profile is coming. That question is is it going to be like watching paint dry or is there going to be a real resurgence of activity? That is why I said senior housing probably comes much more interesting in the aftermath of all this because we can plainly see the demand coming.

Andrew Dick: Rich, do you have any concern that some of the independent living facilities, some of those in many states don’t have to be licensed. They’re private pay as you mentioned earlier, which is attractive to many investors but it may be a little easier for competitors to enter the market for those reasons. Any concerns about when you compare that to a hospital or a skilled nursing facility, often those have to have a license, maybe a certificate of need in certain states which are barriers to entry. Is it a double edged sword because you have the private pay which is a good [crosstalk 00:33:13].

Rich Anderson: Well, it has been a problem [inaudible 00:33:16]. Perhaps a silver lining if there could ever be one in this environment is supply getting shut down in the senior housing space, but you’re right. There aren’t barriers to entry. We were worried about… Just to back up for a couple seconds, we were worried about supply in the multifamily industry when it was running at about 2% of existing stock in senior housing and specifically assisted living. It was running five or 6% of the existing stock. That’s real competition from supply.

Rich Anderson: I mentioned earlier a dearth of demand in the present tense was happening at peak levels of supply. Senior housing was really getting it from a couple of different angles. I think, again, the demand comes back but perhaps supply shuts down at least for a period of time. The REITs that traffic in that space will have a little bit of a breather from a competition standpoint. But all bets are off longer term because developers see what we just talked about in terms of demand.

Rich Anderson: You have to be able to balance that and know how supply will work itself into the conversation longer term. Your point is spot on. You don’t have the regulatory environment that skilled nursing has from a supply perspective and hence you’re exposed to supply should that start to turn on again.

Andrew Dick: Rich let’s switch gears. Let’s talk about the healthcare real estate industry in general. It seems like I’ve noticed Nareit put out some reports over the past few weeks on rent collections, generally for the healthcare REIT sector. Rent collections have been pretty strong compared to other property sectors. It seems like the healthcare REITs are performing reasonably well given what’s going on in the world. What are your thoughts [crosstalk 00:35:20]?

Rich Anderson: It depends on the asset class, of course I mentioned the stimulus that’s helping in the skilled nursing space. I think the operators want to stay current in the face of declining occupancy. There is a vested interest to maintain one’s credit and all of that. But there’s also the realistic side of this. If they simply don’t have the money, particularly in the case of a triple net execution, the fortunes of the operator accrue to the REIT. The REIT has to be careful about bullying too much because you can be aggressive and demand rent payments at their current level.

Rich Anderson: If that disrupts the credit of the operator, the REITs, at least in a triple net structure are going to be judged by that. They become a proxy of the health of that operator. You might see rent deferrals depending on how long this situation last. You might see actual rent cuts perhaps in exchange for a lease extension. From a REIT perspective, you don’t want to just blindly cut rents if you can avoid it, you might want something in return for offering that assistance.

Rich Anderson: We’re seeing things like extension of leases or other, what I would call assets as a compromise in that negotiation. But you’re right. To this point, the numbers have born out to be okay. Even though we’ve seen occupancy drifting down so much. There have been two significant… Actually three significant dividend cuts in the healthcare REIT space namely Welltower, Ventas and Sabra have all cut their dividend in this environment perhaps in anticipation of seeing rent come down to some degree.

Andrew Dick: Any predictions from management on whether they’ll increase the dividends once things start to get better?

Rich Anderson: Well I think that will always be the attempt. The REITs have been generally great when it comes to dividend policy and managing their capital and doing it wisely. Generally seeing dividends step up across the REIT industry generally and I think we’ll see more of that. In this time, this is something none of us have lived through perhaps ever. I don’t know how many of your listeners were around in 1918, but maybe.

Rich Anderson: Nonetheless, this is uncharted territories and I think you have to do the right thing and sometimes the right thing is to reset dividends and put yourself in a position to succeed in the future. An interesting quote, and again, not to make light of this, but Rahm Emanuel once said, “Never waste a good crisis.” That is not to be funny at all. What it does mean is maybe this is a time to look at yourself in the mirror as a REIT and fix things that were perhaps a little broken in front of this so that you do emerge from this healthier, and you do have the opportunity as you suggested to grow the dividend and get back to some level of normalcy. This could be a time to reset, rents and reset balance sheets and do things necessary to be a healthier entity longer term.

Andrew Dick: Rich, switching gears what advice would you give for someone looking to get into the real estate or the REIT business? You’ve been doing this for many years? What should folks be reading, who should they be talking to or trade organizations? What advice would you give to someone?

Rich Anderson: If that doesn’t do it for him which should be unbelievably surprising. Just kidding of course. The NARI, The National Association of Real Estate Investment Trust. They have a fantastic website,, and you could get a lot of information about the REIT industry there. REIT 101 type of information about all the language. It can send you in a tailspin a little bit. We don’t talk about EPS in the read industry, we talk about funds from operation or FFL.

Rich Anderson: You have different tax consequences. You don’t pay corporate tax if you pay enough in the way of dividends. There’s a lot to understand about what a REIT is relative to other industries and other C corpse. I think that’s a good starting point. You can really get a lot of knowledge out of NARI REIT. They’re there in part to teach the world about the real estate industry.

Andrew Dick: Rich, where can our listeners learn more about you and your research?

Rich Anderson: I work for SMBC, a very large bank based in Tokyo. Its stands for Sumitomo Mitsui Banking Corporation. Our broker dealer is the Nikko Brand. So SMBC Nikko is my company. I’ve worked for various shops along the way, starting way back PaineWebber, then Citigroup and Bank of Montreal, VISA [inaudible 00:41:06] before this, another Japanese bank and now at SMBC. I imagine I’m an easy find out there on the internet. I’m probably not going to give out my cell phone right now but certainly anyone’s more than willing… I should say I’m happy to field questions and talk to people about the space to the extent there’s time. I’m happy to be an advocate for an industry that’s been my career for the past 25 years.

Andrew Dick: Well Rich, thanks for being on the podcast. I enjoyed the discussion very much. Thanks to our audience as well for listening on your Apple or Android devices. Please subscribe to the podcast and leave feedback for us. We publish a newsletter called The Healthcare Real Estate Advisor. To be added to the list please email me at

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