Discussing the possibilities and future of the intersection of healthcare and commercial real estate
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This week’s episode is the first in a two-part series that features David Lynn. He is the president and chief investment officer of Healthcare MOB REIT at White Oak Healthcare Finance. We discuss how being a mission-critical, demand-driven asset class helped healthcare real estate retain its value through the pandemic and bodes well for long-term resiliency in the market.
In this episode, we talk about…
[2:18] White Oak Healthcare Finance and the Healthcare MOB Real Estate Investment Trust
David’s company is primarily a lending platform with a large presence in healthcare lending. They are a private REIT and they focus on medical office buildings (MOBs) around the country.
[3:03] How David’s past career experience led him toward his focus on the healthcare real estate asset class
In school, David studied architecture and engineering and then went on to get a doctorate in finance and economics. He started working in development early in his career and then went over to Singapore to work for a large regional company in the late nineties.
The company had a mandate to do medical development and acquisition, so part of David’s job involved investing in clinics and hospitals around the region. That company went public and then he started his own firm, Everest Healthcare Properties, in 2014.
David has a passion for the healthcare asset class, and he likes being a part of the healthcare delivery equation. The tenants you interact with are highly accomplished and doing good work, and the medical technology is fascinating as well.
[6:34] The impact of critical and expanding medical services on real estate
Demand continues to be strong in the area of healthcare, and David points out that demographics play a role as the population continues to age. In addition, the services that are being offered are expanding and people are getting more proactive about their healthcare. Technology has made it easier to make appointments, but you will always need a physical building to interact and address healthcare needs in person.
There has also been a proliferation of less invasive surgery techniques, meaning that services have migrated from hospitals to outpatient centers. It has been easier for doctors to put their operating facilities in the MOB environment. With all of these advances, David anticipates the demand for healthcare real estate will only increase as time goes on.
[9:52] A comparison of the healthcare real estate market in the United States versus in Singapore
Singapore does have MOB assets, which is unusual. The MOB trend is still emerging in most of the world. David predicts it will continue to expand, but most countries still tend toward the traditional big, urban hospital model.
[10:28] Where White Oak Healthcare Finance focuses acquisition efforts
An attractive feature of this space is that people need healthcare everywhere. There isn’t a “top five markets” for healthcare. Another important factor is that most Americans have healthcare insurance, therefore subsidizing medical care.
David’s company looks toward larger cities (at least 100,000 populations) but they will invest in primary, secondary, and tertiary markets. They prefer to be near a hospital or medical corridor. Otherwise, they look for the same things as you would look for with other real estate asset types: good visibility, good access, parking, purpose-built buildings, class A and B. There are hundreds of investible markets in this country.
[12:08] Physician ownership
Typically, the physicians David encounters want to sell the building and would like a sale leaseback. They may want to monetize their investment in the building near retirement – whether that involves selling their practice or their share of the practice, or selling the buildings. Sometimes they want to stay, and the company can accommodate that.
Other times, physicians want to do an upreit. This is a way to defer taxes, particularly if you have a very low base. This is a good option for investors that want to stay in without taking on a bunch of capital gains taxes.
[13:39] Interesting transaction stories
Recently, David’s company was closing on a portfolio and one of the doctors was concerned that his tax base would skyrocket. In that jurisdiction, they charge by sale price. Because of this concern, the doctor threatened to hold up the transaction at the 11th hour – the before they were supposed to close.
David had a conversation with him and they agreed to bring in a very good tax consultant to make sure they get the best tax treatment. Together, they can ensure it is not as big of a hit for him as he feared. David was also able to reassure him that they are active, communicative managers who develop improvement plans for their properties. That was a big deciding factor for this particular doctor, because he was convinced that his new landlords were going to add real value and would be responsive. It didn’t hurt that he sent a mobile attorney to his home with a bottle of champagne – there really is a human dimension to private equity real estate.
As far as a deal they didn’t do, David described a large portfolio he was trying to underwrite two years ago. Once they got into it, they saw that it had some issues with vacancy and other problems. Sometimes the best deal is the one you don’t do. Another company bought it and it really hit their stock price. David shared that they try to buy opportunities, not problems. They are very careful, therefore, in the underwriting phase.
[18:34] His company’s response to the COVID-19 pandemic
With the onset of the pandemic, the company only got one call from someone worried about making payment, and then he ended up paying on time. David didn’t see any delinquencies or defaults at all. He was surprised, but he believes that medical tenants see the bigger picture. Doctors are generally in pretty good financial situations and they tend to be conservative with their finances.
David’s tenants didn’t panic, and by July 2020 things were waking up. People were going back to the doctor with new protocols, and every month was better than the last. By January 2021, he saw demand was back to where it was a year before. A lot of people took advantage of the PPP, as well. Overall, David sees the MOB space as a great litmus test for how resilient the healthcare real estate market actually is.
Links to resources:
White Oak Healthcare Finance: https://www.whiteoaksf.com
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