Look Who’s Investing In Healthcare

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Commercial real estate has been in a whirlwind.

Industrial properties are incredibly hot—and expensive with subterranean cap rates. Multifamily is nearly as in demand, but many keep wondering if the end of federal Covid unemployment assistance combined with significant unemployment and the Delta variant could pull a rug out from under the sector.

You could look at the office and wonder when companies will be fully back; retail and remember e-commerce continues to grow; self-storage and ask when demand could max out; or you could look for a different investment prescription.

Medical real estate has a lot going for it: an economic sector that represents 17.7% of U.S. GDP, tenants with high credit and financial strength, and a customer base for which services are a literal matter of life and death.

“There’s always been investors with a healthcare strategy,” Andrew Twito, vice president of capital markets at Ryan Companies, says. “In the last 12 to 18 months, essentially every type of investor has been evaluating the sector. What they’re finding now is it’s an attractive place to deploy capital because it’s a defensive sector during a recession. People still get sick, they still have to go to the hospital, and they still have to get treated.”

Medical also means following big changes in healthcare delivery and structures and facing popular distrust in skilled nursing and elder care segments. Opportunity, for those who want to jump in, needs some preparation and a reexamination of the landscape.

Transformation Of The Medical Office

“Medical office is doing well,” Bo Stuart, a senior associate at Transwestern’s Southeast healthcare advisory services team, tells GlobeSt.com. “It started coming out of the pandemic earlier than certain product types and there was less uncertainty.”

The cap rates are relatively good compared to, say, threes in industrial.

“I’ve seen anywhere from stuff in the fours to a lot of stuff in the fives,” says Ben Reinberg, founder and CEO of Alliance Consolidated Group of Companies. “You have short term leases that trade in the sixes and sevens.”

Investment rewards are nothing new to those with experience investing in the sector. John Wilson, president of HSA PrimeCare, points out that the medical office building, or MOB, sector performed well in the financial crisis of 2008 through 2012.

“It not only remains strong, but I think the pandemic has accelerated the growth and number of investors and it’s brought new capital because of some of the fundamentals of the space, comparing it to general office,” Wilson says. “General office is still facing the uncertainty of employees coming back, when they’re going to come back, how many are going to come back. Medical office shows more clarity in long-term demand.”

This hasn’t been a surprise to those like Robert Atkins, a principal at Atkins Companies, whose multigenerational family firm, with 700,000 square feet of medical office space, was in MOB “way before it was considered a separate asset class.”

“Having a lot of different asset classes through the years, residential, retail, general office, we decided years ago to focus almost exclusively on medical office,” Atkins says. “We believed it was one of the most attractive and stable asset classes in our experience through the various peaks and valleys of the real estate market.”

However, for all the benefits, this isn’t a market to nonchalantly enter.

“Healthcare is a very complex industry,” says Alfonzo Leon, CIO, Global Medical REIT, who has been in the space since 2005. “The thing that always stood out for me when I compared it to apartments or office or retail, it takes a long time to make sense of the healthcare landscape. Apartments are pretty straightforward, with a lot of demographic analysis. In healthcare, you also have demographic analysis, but it’s more complex. There are relationships between hospitals and physicians, payment issues, a lot of regional stuff, each city has its own dynamic and history. Then you get into the insurance companies. I felt like it took me five years to feel I understood what I was looking at and what the risks were.”

For example, demographics will direct which types of practices will thrive in specific areas. As the dynamics of the relationships change, so do the fundamentals of associated real estate investment.

“If you go back 20 or 25 years, you had mom and pop practices,” says Wilson. That is increasingly rare.

Atkins has watched the evolution of single practitioners getting swallowed up by larger medical practices or hospitals.

“It’s almost impossible now for a young doctor to come out and hang his shingle,” Atkins says, because the economics are unfeasible with student debt, insurance, and the cost to buy or establish a new practice. “The only single practitioners and single groups you see are the old timers finishing out their careers and who don’t want to get involved with the larger groups.”

Where once the primary tenants for medical offices were small practices, now it’s large-scale medical systems, hospitals, and private equity groups acquiring specialty practices.

“We’re in North Jersey in Essex county,” Atkins says. “Our home office is in the building but we’re the only non-medical office.” The tenant next door was an oral surgery group of four doctors, with multiple locations, reaching retirement. “They sold out to a younger oral surgeon, an aggressive guy buying a bunch of these practices, and he just re-upped on a new 10-year lease. This group of doctors had a strong reputation.” The young doctor wanted to keep it.

But such examples are minor compared to the larger healthcare industry forces at work, which are visible in both leasing and construction.

New Developments And Leasing

“There’s a backlog of projects,” says Doug King, national healthcare sector leader at Project Management Advisors. “Healthcare, there’s a backlog of projects that were probably already on their radar.” “What clients are building are the outpatient or ambulatory care facilities being planted in neighborhoods in urban areas. They’re outpatient services, but also have diagnostics or treatments that are fairly sophisticated. There’s a fair amount of money out there for community health and public health.”

There are even moves to have some overnight beds.

“They’re allowing observation beds in some areas so you’re able to do them in a lower cost structure and keep the patient safe,” says William Colgan, a managing partner at CHA Partners.

The same pattern appears in leasing, as large organizations set up treatment centers that are far less expensive to run than traditional hospitals but with enough resources to provide more expansive care than clinics.

“You see money migrating to those types of facilities,” Colgan says. “Smaller types of office buildings are less attractive. The larger, consolidated healthcare services under one roof for convenience is where you find money chasing. What used to happen in healthcare, every doc was an entrepreneur. We have a whole new generation of docs that are all employees.”

The change in healthcare delivery—due largely because of the complexities and realities of much more “risk-based reimbursement” of providers, as Colgan notes—has changed what potential tenants want in buildings.

“The old-style medical office building had small suites,” says Mindy Berman, senior managing director and co-head of JLL’s healthcare capital markets group. “Some of them are in good real estate locations and will be adapted, not that hard. These newer models need more infrastructure.” Heavier equipment requires more floor load and power.

Even the number of columns, column spacing, and floor to ceiling height become important.

“If you get an eight or eight-and-a-half foot ceiling, it’s somewhat confining,” HSA PrimeCare’s Wilson says.

More space also reduces the anxiety levels of patients, improving the experience and presumably making them more likely to come back rather than to choose another facility.

Skilled Nursing And Senior Care

There are long-term forces at work in skilled nursing and senior care as well, but also shorter-term reactions to pandemic experiences. Think of all the stories about nursing home residents dying from Covid-19.

“Every two to six weeks you see a New York Times story about nursing homes,” says Don Husi, a managing director of privately-held investment bank Ziegler, which does a lot of work in healthcare and senior living. “There’s a group of people out there doing their best to give our industry a bad name without outlining the good things we’re doing.”

Husi and some others in that part of the industry thought that ultimately the criticism was forced and ignored the origins of the problems.

“No one knew where the numbers were going to go, and you can’t discharge somebody out of a hospital to nowhere,” Colgan says. “If you receive them from a nursing home, where do you discharge them to? The governor’s mandating you send people back to free up beds. No one knew how long these people could infect other residents. The most vulnerable people were the ones affected by covid and we cohort the most vulnerable into one facility. It’s unclear whether things would have been as bad if the people had been dispersed and not concentrated.”

The impact on the segment was sharp and difficult. Colgan pointed to the State of New Jersey considering a requirement that everyone had to be in a private room.

“If investing in a large nursing home and 70% of the beds are two to a room—these are Medicaid patients—think about the amount of revenue they’ll lose if they’re in private rooms,” Colgan says. Then there were discussions of a 100% air exchange. “Could you imagine taking 10-degree temperature air and having to heat it to 72 to make it comfortable for a senior? The amount of energy you need is through the roof.”

Investors took notice.

“Generally, what you’ve seen from the REIT market is repositioning their portfolios to position themselves for growth in a post-Covid world, if there is such a thing,” Husi says. “You look at HealthPeak, who sold off all their independent living portfolio. But they like for-profit entrance fee communities.”

While the criticisms and potential for additional expenses, with resulting lower margins, was one reason, there was another.

“If you’re a publicly-traded REIT, just speaking to that market, it was an opportunity or excuse to reposition your assets and look to the future,” says Husi. “If we get through the next 24 months, our senior housing and care industry is going to do very well just because of demographics and the lack of new properties coming online. Pre-covid, we were overbuilt. There will be less overbuilding because it’s more difficult to get a construction loan for senior living. There are new buildings going up, but it’s at a much slower pace than pre-covid.”

There are also other challenges for skilled nursing and senior living. Labor shortages are causing issues.

“I think medical office buildings right now look attractive more so than skilled nursing facilities,” Iman Brivanlou, managing director of high-income equities at TCW and the TCW Global Real Estate Fund, tells GlobeSt.com. “Those, especially the operators there, are being decimated by labor costs. They’re dealing with operational pressures that are going to be more pronounced than people think. Senior housing is catching a little improvement because occupancies are increasing.”

But with problems and resultant falling values come those that want some bargains while they still last.

“For the first time I’m starting to hear different kinds of groups—that would be large private equity, REITs, large family offices, strategic investors in seniors housing— talking about wanting to make large portfolio and platform acquisitions again after taking a long pause,” Ted Flagg, senior managing director and co-head of JLL’s healthcare capital markets group, tells GlobeSt.com about communications starting in late summer. “I’m hearing that from enough smart money that something interesting must be happening out there to cause that.”

“We’ve seen real increases starting around April through August and September, with August being a real kick up even from the average occupancy pickups of April through mid-summer and July,” Flagg adds.

He sees performance for senior care and skilled nursing as taking a turn toward the positive over the last quarter or so. There are also expectations of a cyclical bull market, given baby boomer demographic waves coming and the reduction of supply during the pandemic.

“I think there is no doubt from most smart money that the next five years are going to be significantly up in terms of NOI, pricing, occupancy, and everything else,” Flagg says. “The real question is around what the time and what is the pace of that increase. Is it next year, two years from now, today? People are thinking in terms of the right entry point. Strategic players are starting to come to the table and what’s available in terms of reasonable acquisitions today.”

In other words, 2022 has the potential for being an inflection point and possibly a time to buy into these asset types, just as values are tipping toward a rise. Or it could be too early.

It’s just another way that healthcare might tempt and then taunt CRE in 2022. There’s medical office space going through transitions, with those trying to jump on having to negotiate a steep learning curve. Then skilled nursing and senior living make a comeback … at some point.

But, more importantly, there’s a sector that’s been an alternative to other CRE types for years. One where there are longer-term leases, clientele that can’t just shrug off getting services, providers that are long-term with great credit, and an industry that’s closing in on almost a fifth of the GDP of the largest economy currently in the world.

Nothing is guaranteed or easy but making good investments in medical real estate seems like a good treatment plan for lower alternative yields. Who’s investing in medical CRE? Maybe the answer should be you.

 

Source: GlobeSt

Navigating the Tension Between Medicine, Real Estate And the People Who Pay For It All

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In what has been a transformative year for healthcare, more than 250 national leaders in the sector just came together in person at the GlobeSt. Healthcare Real Estate conference in Scottsdale, AZ.

And while many of the sessions drilled down into the opportunities to be had in this asset class, at least one discussed the tensions that can exist between the practice of medicine and the realities of paying for it.

According to Angie Weber, a first VP at CBRE, healthcare has two speeds… Slow and slowest. “Covid added a new one…slowest. You have the physicians who want what they want and you have the finance folks where a plan needs to be in place before anything gets done. Who will come out on top depends on the system and the state.”

Jon Boyajian, a principal at Echo Real Estate Capital, says there is also an arm wrestle in the hospital between the operations group and the finance group. “Their capital and expansion plans really got turned on its head during Covid,” he said. “The finance folks want to move all the family practice and provider groups into buildings they already own, and the operations people are saying, ‘no wait, those buildings are well located and are great amenities etc….why would you move these practices.’”

As for what the future holds for these spaces, Weber said that she believes the systems will start to utilize their space within the four walls of their hospital differently than they have been.

“What Covid showed is that they cannot afford to not do surgeries because of other patients being too ill, said Weber. “I think we will start to see that over the next five to 10 years, they will take things out of the mother ship and put it nearby. You will see different utilization for space within the walls of the hospital because they don’t have a choice. They do have to make money and oftentimes, elective surgeries is how they do that. The behavioral health side is also going to be more of a trend in a big way for sure.”

Switching gears, when discussing flexibility of healthcare space, Boyajian said that every doctor his company has spoken with would prefer larger exam rooms for people to spread out. They also said they would want larger or multiple break rooms for provider and staff and admins to spread out.

“The footprint will increase in the future because they want and need to spread out,” said Boyajian.

Weber added: “You have two things right now…you have the physicians and the ones who own them.  There has been a real tug over the last years over what physicians want and the reality. I think Covid will increase the size of a lot of space, but I also think it will be a reevaluation of how they do things. All of these changes and even putting as many flags in as many places as possible takes resources and dollars and it isn’t just systems. There is a lot of VC money that has come into healthcare. They are going big and all over whether it is 3,000 square feet of space or 15,000 square feet of space and they are planting flags in spots like fertility groups, oncology groups and more. On the systems side, some have more financial wherewithal than others.”

Boyajian added that private equity companies don’t just make an investment and sit on it.

“They make an investment and want to see growth, said Boyajian. “The good part about it is private equity groups when they can partner with nimble development groups, they can roll out more quickly and then the landscape and network is there.”

 

Source: GlobeSt.

It’s Destination Dallas For Medical Care, Validating The Booming Industry’s Broad Appeal

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People travel here for all kinds of reasons: to cheer on the Dallas Cowboys, to shop at Neiman Marcus — and to get some of the best health care anywhere.

Antonio Dobos, a 4-year-old with a rare deadly brain disease, made the trek with his parents from a small village in Romania. He received a gene therapy treatment in a clinical trial at the University of Texas Southwestern Medical Center and Children’s Health, and his gait has already improved since he arrived in Dallas in late July.

“He’s walking normally and he’s very much a normal child, except he’s not talking yet,” his parents said through an interpreter.

Antonio’s case is an example of the amazing medical advances being made in Dallas. In the past year, such efforts have attracted over 8,000 people from outside the state to UT Southwestern alone. Other North Texas providers have become medical destinations, too, especially in cancer care and heart surgery.

These medical visitors speak to the quality and capacity of a booming local industry — one that’s invested billions in new facilities, services, research and personnel.

“A lot of people think you have to go to New York or Houston or San Francisco to get the best care, but we have some of the very best treatment right here,” said Stephen Love, CEO of the Dallas-Fort Worth Hospital Council, an advocate for the industry. “We save a lot of lives.”

The best are getting better. Five years ago, UT Southwestern had two specialties ranked in the top 50 nationwide, according to U.S. News & World Report. In the most recent ranking, UTSW had eight specialties in the top 25,, including those attracting the most medical tourists: neurology, cancer, cardiology and urology.

Clements University Hospital also has ranked as D-FW’s top hospital for five consecutive years. Clements was completed in late 2014 — 12 stories, 1.3 million square feet with a price tag of $800 million. It’s among several signature projects transforming the UT Southwestern campus and larger medical district, about 4 miles northwest of downtown Dallas.

Less than a year ago, UT Southwestern added a 12-story third tower that houses the clinical home of the O’Donnell Brain Institute. It just broke ground on a $120 million biomedical engineering research center, a collaboration with UT-Dallas.

Nearby, Children’s Medical Center Dallas has been working on a $56 million renovation of the emergency department at one of the busiest pediatric ERs in the country. It will have 26 new exam rooms, including four for behavioral health, and is projected to be finished by mid-2022.

Perhaps the most striking addition is Parkland Health and Hospital System, a modern 17-story facility that opened in 2015 and doubled the size of the old Parkland. The 2.8 million-square-foot campus included major upgrades in multiple areas and cost $1.3 billion.

Throughout the region, providers have invested heavily in hospitals, clinics, urgent care centers and medical offices, trying to keep up with a growing population. Since 2011, Dallas-Fort Worth has added 23.5 million square feet of health space, more than any Sun Belt metro, according to Transwestern, a real estate services company. The cost of those investments topped $10 billion, Transwestern estimated, and demand is expected to keep rising as more residents get older.

‘What Academic Medical Centers Were Built To Do’

The Antonio Dobos case draws on many strengths at UT Southwestern: from basic research in genetics to developing a viral transmission method to push genes into the brain to surpassing the regulatory hurdles for a clinical trial.

“At its most basic level, we’re offering hope to families who have children affected by this rare, universally fatal condition,” said Dr. Benjamin Greenberg, a professor of neurology and pediatrics at UTSW. “It’s what academic medical centers were built to do — to improve the practice of medicine year over year.”

Antonio is the second child to get this particular therapy, designed to treat a disease known as CLN7. UT Southwestern scientists are inserting healthy genes missing or mutated from patients’ DNA, and at this early stage, the focus is on patient safety. Antonio and his parents, Crina and Anton, have remained in Dallas since the boy got a single dose of genes in August. They’ll return to Romania on Nov. 30 and come back in February for more tests.

The parents’ advice to others facing a health crisis? “Just trust God and have faith,” they said through an interpreter. “It is very hard to go through all of this.”

A dose of healthy replacement genes is prepared for delivery into a child with a rare deadly brain disease. By inserting healthy genes missing or mutated from patients’ DNA, UT Southwestern scientists are looking to develop treatments for children with rare genetic conditions.

“It’s encouraging to hear Mom and Dad talk about Antonio walking normally,” Greenberg said. “But it’s too soon to conclude the therapy has succeeded — or even affected his gait.”

UT Southwestern is testing the highest dose of this type of therapy given to a human with a brain-based disease, and it’s using an aggressive regimen to prevent rejection by the immune system. Is the therapy safe? Are kids handling the high dosage of medicine? So far, doctors have not seen adverse effects, but the trial has two parts — lasting two years and then five more years.

“We don’t want to inappropriately declare victory early on,” Greenberg said.

To pull off this work requires great collaboration, he said, starting with UTSW and Children’s Health investing heavily in building a gene therapies program. The efforts also boost the reputation of UTSW and its O’Donnell Brain Institute, and that helps in recruiting more medical investigators.

“It really allows us to stand out on the national stage,” Greenberg said.

The quality of health care in Dallas, along with the region’s strong economy, have attracted many doctors, too. Since 2013, Dallas County added over 1,200 physicians in active patient care, an increase of 21%, according to Merritt Hawkins, a unit of Dallas-based AMN Healthcare. Like most places, Dallas has a doctor shortage, but it has more doctors per capita than the state and the U.S.

And wait times for a new patient to see a specialist in Dallas are shorter than in other metros, according to a Merritt Hawkins 2017 survey.

“There’s plenty of health care available here — no question,” said Marianne Fazen, executive director of the Dallas-Fort Worth Business Group on Health, which works with local companies to reduce health costs. “But we’re one of the most expensive markets in the country. That’s a real problem.”

She’s also bothered by a decline in hospital safety. In a recent report by the Leapfrog Group, about 30% of D-FW hospitals received an “A” grade for safety. While that ranked in the middle among some major metros, 51% of North Texas hospitals earned “A’s” just three years ago.

“They’ve clearly shown they can do it,’” said Erica Mobley, Leapfrog’s vice president of administration. “But if safety isn’t top of mind, something can slip.”

‘A Great City Has To Have A Great Public Hospital’

One of the most impressive things about Parkland’s new hospital was the local support that made it happen. In 2008, 82% of voters approved a $747 million bond election, and donors stepped up to contribute $150 million.

“A great city has to have a great public hospital,” Nancy Strauss Halbreich, co-chair of the fundraising committee, said at the time.

“Parkland’s new emergency department is five times larger and is the nation’s busiest ER, treating almost 205,000 people last year,” a spokesman said.

Parkland was the first Level I Trauma Center in Texas. The new Parkland has more space for pregnant moms, along with a lactation clinic and more infant services. Parkland, which has been called “The Baby Factory,” delivered over 12,000 babies last year, and nearly 1,400 were discharged from its Level III Neonatal ICU.

Ninety-seven percent of women delivering there received prenatal care, in part because of Parkland’s efforts to reach underserved communities.

“Industry leaders know they must look beyond their core business to lift the region,” said Barclay Berdan, longtime CEO of Texas Health Resources. “We’ve come to realize we don’t really improve the health of communities simply by operating hospitals. We’ve recognized the need to think differently about how we pursue our missions.”

That includes addressing a growing need for doctors. North Texas has critical shortages of many specialties, including cardiologists, pediatricians and psychiatrists, according to a state report.

In recent years, the region’s three largest hospital systems pledged to fund hundreds of new residency slots, the capstone to doctors’ training. Having more residents improves patient care and greatly increases the odds of those physicians remaining in the state. It’s an expensive proposition, and hospitals often must shoulder much of the financial burden of expansion. The cost of training a resident is about $150,000 a year, and the state provided just under $12,000 to offset that, according to a legislative report.

‘It Makes All Our Physicians Better’

Texas Health, which had 40 residency slots at its Presbyterian hospital in Dallas for decades, is growing to 70 slots by next summer and 130 residents by July 2024. Those include new programs in general surgery and internal medicine. Texas Health said it will spend $50 million on the residencies over the next four years.

In 2018, Medical City Healthcare launched a training consortium that’s grown to 220 residents and fellows in 13 programs. Young doctors work at 10 local Medical City hospitals, including in Dallas, Plano and Frisco. The company plans to expand to over 400 residents in the next three years.

Baylor Scott & White Health is adding hundreds of residencies in Dallas andFort Worth, in addition to moving 200 slots from Temple to its flagship hospital in Dallas. It’s also teaming with Baylor College of Medicine to createa new medical school in Temple, which will eventually train 160 doctors a year.

“We can’t address the needs of Texans without a well-educated, energized workforce, and a big part of that is training them,” said Pete McCanna, president of Baylor Scott & White.

The system has a large research institute in Dallas that employs 600, including scientists and research nurses. Investing in research and medical training has an add-on benefit:

“We believe it makes all our physicians better,” McCanna said.

Baylor is especially proud of its cardiac surgery program.

“The Heart Hospital in Plano has regularly received three-star ratings from the Society of Thoracic Surgeons and has the fourth-highest volume in the country,” a spokeswoman said. “It performed 1,780 heart surgeries in fiscal 2021 — 58% more than a decade earlier.”

Baylor operates one of the largest cancer centers in the region with an outpatient facility and cancer hospital on the Baylor University Medical Center campus near downtown Dallas. The research and treatment hub has become a destination for patients seeking immune therapy and clinical trials. It’s valuable to be recognized nationally and draw patients from outside the area.

“But it’s important to strike the right balance,” Baylor said.

“We’re not here only for the brand,” said Dr. Alejandro “Alex” Arroliga, Baylor’s chief medical officer. “We’re here to serve our community — and community care is local.”

 

Source: The Dallas Morning News