Discussing the possibilities and future of the intersection of healthcare and commercial real estate
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Trisha’s guest this week is Josh Richmond, Founding Principal and President of Evergreen Medical Properties. We discuss how investing in healthcare properties is much more than just the numbers. The long-term investment success of healthcare real estate property involves the long-term success of the healthcare companies and clinicians that occupy the property, and meeting their needs so they can successfully treat their patients.
In this episode, we talk about…
[2:05] The story behind Evergreen Medical Properties
Josh’s business was born out of conversations with a personal and professional mentor. This mentor had a successful law career and then left the legal profession to open an investment management company. Josh’s mentor had always been interested in the medical sector, and they would chat about it several times a year. One day they were having a conversation that resulted in them creating a company together. They came to some agreements about what real estate investment companies should have in terms of ethics and value systems, and the business grew from there.
Their shared values centered primarily around alignment, but also around transparency. His mentor came into the investment management space trying to find ways to better align with the investor, who is putting up the bulk of institutional capital – someone like Josh.
Josh was seeking something similar in the industry, but he wanted to go one step further. In most asset classes, the tenant is not often a big stakeholder in the real estate itself. In medical, it’s different because you are actually providing care. If you are in a general office building and the lights don’t come on one day, you can ask your employees to work from home. If you are in a medical practice and the lights don’t come on, you are done for the day. You lose revenue, and you have to work through the logistical nightmare of rescheduling all of those patients.
Beyond that, in terms of the quality of the facility itself, your patients are walking in and making judgments about their care based on the cleanliness and conditions of the building. So in this sector, more than any other sector except for maybe senior living, the actual tenant is a major stakeholder. At Evergreen, they are really looking to align those three groups in the medical office building: the tenants, the investor, and the operator of the investment.
[5:20] How Josh started his career in healthcare real estate
Josh graduated with a liberal arts degree, which he says means he learned a little bit about how to think but not about how to do anything super useful to an employer.
His father was a medical office developer, and he got into that business in the late 1970s. Josh’s grandfather was a general surgeon and his father had some relationships through him that allowed him to pioneer the physician investment model. When Josh graduated from college, his father was taking the company through a new iteration, and he brought Josh into the business. He was able to cut his teeth on the leasing and development side, and then ended up transitioning over to working for two of the largest healthcare REITs in the market.
[7:18] Targeted real estate investing and looking for numbers that make sense
Josh describes Evergreen Medical Properties as “a pretty targeted investor”. There are a lot of people out there buying on velocity, but Josh says he and his company tend to fall in love with an asset, or the providers in the asset (he thinks they are the biggest part of the value). They have a lot of conviction about a particular investment and then go really hard from an investment perspective.
This investment strategy requires that they look nationally, and Josh’s experience is investing across the lower 48. It is important in terms of your personal life to have a relatively central location that has airport hubs that can get you into some of the smaller markets. Evergreen is currently based in Denver and Atlanta for that reason.
In terms of concentration, thus far they have been investing in the Phoenix area, Florida, and South Carolina. They are starting to concentrate more in the Northeast and Northwest as well.
Josh’s liberal arts background allows him to look at his investments across multiple functions. They look at the numbers, but they also look beyond the numbers. The company is interested in who a provider is in the market and how they provide care in that market. They invest along the attributes of an office building and the participants in it as much as they do along what the rent roll looks like and what the real estate itself looks like.
[12:24] Josh’s ideal tenants
All specialties are necessary to the holistic provision of care in our country. When they look at property, they don’t think that one specialty is necessarily better than another. There are definitely specialties that have higher or lower margins, and that is something they take into account.
Primarily, however, they are looking for the right kind of ecosystem. That could be a single specialty – for example, an ecosystem built around orthopedics that might have a surgery center and imaging and is anchored by an orthopedic group. It could also be a multi-tenant building with an ecosystem that is not just inside the building itself, but operating outside of it in the submarket. When they look at these assets, they try to understand as much as possible how the various providers in the building are actually operating both within the asset as well as within the market, and then they drill up from there in terms of how that might impact value.
[13:52] Physician ownership
Offering physician ownership allows Evergreen to get back to its value of alignment. If they bring physicians into an investment with them, both parties are much better aligned. It creates an easier closing process and a better relationship thereafter.
A common issue is the fact that some of the physicians may have ownership in the real estate while others do not. Josh’s company also tries to help create alignment even within that practice in terms of creating some optionality, depending on what the physicians’ goals are.
[15:28] Josh’s favorite transaction stories
Josh shares that he doesn’t think he has had one transaction that has turned out exactly how he thought it was going to. His favorite transactions end up being those that involve the physicians in real estate.
One of the most interesting ones that comes to mind is a transaction he did in California. There was a group of physicians that wanted to sell real estate, and the health system that was nearby had no space in the building and was not affiliated with the building in any way. They were affiliated with the physicians, but only by virtue of the fact that the physicians were on staff.
They thought the natural course of the transaction would involve the physicians renewing their leases and extending the term, and it would be a more customary sale-leaseback. What ultimately happened was a three-party negotiation where Josh ended up working with health system to come in and actually take the leases in the building. They ended up master leasing the building and the physicians moved to better real estate for them over time.
It was a great location in the submarket, but the physician groups themselves were starting to grow out of it. Josh’s company started to pick up on the theme that the growth trajectory of the groups in the building was really beyond what the building could offer them, but they still needed to create a liquidity event. Evergreen then had a bigger problem to solve, as did the hospital. It worked out beautifully because the hospital did not want all the square footage at that moment, but they did want to grow into it over time and absolutely wanted to control the building. It ended up being a nice situation where Josh was able to create a win-win-win.
[18:21] How the pandemic affected Josh’s approach in his business
While Josh believes that the pandemic has forced some people to look more closely at a tenant’s financials or to look for higher credit tenants, he shared that he already heavily emphasized looking at credit in his business. The pandemic, therefore, has not changed their approach, but he does see a change in the way the market is looking at credit.
The pandemic also did not really change the way Evergreen pursued assets. Of course, they had more phone calls than in-person visits in 2020. Other than that, however, it has made them rethink some things operationally.
An example would be masking and rules in the building as it pertains to a pandemic. When the pandemic began, they had a ubiquitous approach where the rules in a building in South Carolina would be the same as a building in New Jersey. It quickly dawned on them that they could not think about things that way. Instead, they had to think about the different circumstances in New Jersey versus South Carolina. They needed to coordinate more with their tenants as far as what they needed within their buildings. With that, as well as with how they think about capital, the pandemic has taught them to spend more time engaging with the physicians about how they are managing their buildings.
[20:09] The business’ sweet spot with acquisitions
Josh’s company is generally looking for opportunities north of $8 million in dollar value. They don’t have a cap, and run the gamut in terms of regional locations. In terms of other criteria, they like value-add assets. They have no problem investing in a business with shorter lease terms, and they also have assets that are master leased for a very long period of time. When looking at investment opportunities, they are really looking at the practice or practices and trying to understand how they are delivering care.
[21:18] Josh’s outlook on the future of healthcare real estate
It has been an interesting past 20 years or so in the healthcare real estate market. Before the Great Recession, medical offices or outpatient medical facilities weren’t really considered an asset class. Josh ventures to say healthcare wasn’t even considered a real estate asset class.
During the recession, the broader market started paying attention to healthcare real estate. It brought a lot of newcomers to the sector, which had pros and cons. It made it easier for people to get loans on the real estate, but it also brought in investors who liked what was happening from a macro perspective who did not understand the medical providers as the actual stakeholders.
When the pandemic hit, this happened again and the focus intensified. Even more capital started looking at the space because they saw just how resilient the space was. Josh predicts a similar effect as the recession, where the asset class will attract more newcomers as well as more value to people who are selling the real estate assets.
Overall, Josh sees the changes in the market as positive. In terms of valuation, that may come with the flip side – anybody who is selling a real estate asset and is still going to occupy it should be thinking carefully about who their real estate partners are going to be.
[23:41] Josh’s first job working in his stepfather’s garage
At around age 10 or 11, he started washing and vacuuming cars in his stepfather’s garage. He then moved into patching and plugging tires, doing oil changes, and other various tasks. Josh’s stepfather put him to work at a young age, and he learned a lot about money and customer service.
[24:22] If he was not in healthcare real estate, Josh would do something related to geology and forestry
Josh really enjoyed the geology and forestry classes he had in college, and so he thinks he may have gone into something within the natural resources industry. Whether it would be academia, forest service, or working for somebody who was trying to do something with natural resources in the economy, he would be interested in something along that path.
That is actually where the name ‘Evergreen’ came from. It stemmed out of the symbiotic relationships of all the components of a forest, and our desire to replicate some of those themes within the business.
[25:25] What Josh reads and listens to for information and inspiration
In this world, Josh finds the multidisciplinary approach to be the best. He gets his information from various sources, including podcasts. In addition, he varies how his sources may be geared politically. He reads the Wall Street Journal and the New York Times, and he listens to NPR and watches Fox News in order to triangulate some of my own opinions.
[26:41] Meditation as a form of self-care
Josh meditates 8-15 minutes every day. He doesn’t meditate on anything other than just being quiet, but he finds it to be extremely beneficial.
[28:22] Leaders rise in the right situations
When asked if leaders are born or trained, Josh shared that he thinks they rise out of various situations. He doesn’t believe that it is that binary. Some people are definitely born with leadership skills, and others have probably learned through observation. A lot of great leaders, though, can rise out of need. There may be a crisis or a situation that requires leadership, and they step up to the plate.
Links to resources:
Evergreen Medical Properties: https://www.evergreenmedicalproperties.com
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