Discussing the possibilities and future of the intersection of healthcare and commercial real estate
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Trisha’s guest this week is David Moises, Director of Investments with Flagler Healthcare Investments. He shares how Flagler uses a very data-driven approach to investing in healthcare. They analyze the health outcomes of a population and then focus on the real estate to support the healthcare industry in that location.
In this episode, we talk about…
[2:23] The background of Flagler Healthcare Investments
Flagler has been in real estate since 1995. They started off focusing on office buildings and data centers, and then shifted to healthcare after the crisis of 2008. From about 2010 to 2018, they focused mostly on south Florida. Now, they have around one billion dollars of assets under their management and they are still growing.
[3:08] David’s focus on healthcare real estate assets
In his early thirties, David went back to school and got his Masters in international real estate. His first job was a senior analyst position with Flagler. He has been with them for about four or five years now, and he is now the Director of Investments.
With healthcare, David notes that you really have to focus on the providers and the operation itself to see if they have excellent outcomes. The real estate is second, and the providers and health outcomes are first. They like to keep some of the physicians in the deal so that they can experience a feel for their operation and the investment as well.
[4:24] Geographic locations and real estate investment
Flagler Healthcare Investments is headquartered in Miami. They started focusing on investments there, but now they have expanded to eleven states and are under agreements in three other states. They focus on acquiring and developing nationally, and they prefer to stick to the top 120-150 MSAs.
They also created a health-based statistical area (HBSA). They created over 35 CPIs based on not just population growth and traffic patterns, but based on health outcomes as well. Their data is very robust, and they can dig in to the county level to see if the health outcomes are less than the U.S. average. You can have a 120 MSA, which may not be as desirable to institutional investors, but the health outcomes and factors could be ranked in the top 95th percentile of all counties in the United States.
[7:02] How to identify opportunities for healthcare investments
Flagler does not acquire anything that’s not in the top 80th percentile of their HBSA metric. The metrics and returns have to make sense. What they’re seeing now is that institutional investors like to show that they have medical office buildings. Flagler likes to focus on main specialities, such as orthopedics, cardio, neuro, oncology, circulatory disease – those are the main factors that they like to focus on, rather than primary care or urgent care.
David describes their current process of acquiring a specialty surgical hospital. They are under an NDA, but he shares that they do a broad range of surgical procedures from gastro to orthopedics to neuro. They are very specialized, but there is a stigma of hospitals not being such great candidates for healthcare real estate.
There is, however, a need for these specialties. You’re not going to be doing major surgical procedures in a medical office building – you need your special operating and procedure rooms. It’s just not focused on the medical office building criteria, it’s really the healthcare criteria in general.
[10:49] Physician ownership opportunities
In David’s opinion, it is a smart strategy to keep physicians in the deal. As an example, physicians may sign a new lease at closing for ten years. Let’s say they are at an age where they aren’t close to retirement, or if they are then they have a great succession plan. The typical whole period would be from three to five years, and after that they would recapitalize the deal. They could potentially keep the assets themselves, but let’s say Flagler holds it for the long term. When Flagler goes to sell or trade the asset, there are only three years left on the lease with the physicians being in the deal. They’re going to understand that Flagler needs to extend the lease or do an early renewal so that the real estate itself has higher value. So it works both ways. They have skin in the game, and Flagler has trust in them.
This situation allows for a mutual relationship where everyone can perform within their specialties. There are many physicians that are very savvy when it comes to real estate. They learn quickly and they’re smart, but it’s not their area of expertise. Flagler’s specialty is not performing medical procedures, and the physicians’ specialty is not real estate investment. Being able to team up and have a good partnership is really beneficial for everybody involved.
[16:50] David’s outlook on healthcare real estate
David foresees healthcare continuing to shift in unpredictable ways. He notes the importance of being flexible enough to go with the changes and the dynamics in the future healthcare sphere. It is true that healthcare is not going anywhere. There is a big push in the United States to have a very healthy country.
So far, Flagler has not gone into senior living. They think it’s a smart move to invest in senior living, but they haven’t specialized in that with their data components at this point. They don’t see healthcare, however, as going to a hospital or an urgent care or a medical office building for a checkup. It should be a part of your life in order to truly create better experiences and outcomes.
Healthcare as a real estate component is still very new, compared to multi-family, industrial, or office buildings. People are catching on quickly, but there is still plenty of room to shift. When you have to adapt, the real estate itself has to adapt. Something for everyone to think about is that as office buildings have to adapt to potentially smaller spaces, healthcare may have to adapt to smaller spaces with more locations.
Being flexible and being able to read the markets is something that Flagler focuses on. They want to avoid the kinds of bad deals that happened in 2007 and 2008. A lot of people were left holding a lot of bad deals, didn’t know what to do with them, and sold them for pennies on the dollar.
[20:32] An interesting transaction story
Every deal is so different, and Flagler prides themselves on doing really good due diligence. Having physician groups co-invest also makes the process a lot easier. They do a lot of work upfront to ensure a smooth closing.
The closing of the Oasis Hospital went very smoothly, but it was interesting. It is an orthopedic specialty hospital in Phoenix, AZ. It is a fantastic asset with 64 beds and over 40 physicians. The Flagler team had to show each of those physicians a forecast of their return levels, while also taking care of their partners. It was very interesting to model everybody’s returns so they could feel comfortable before executing the deal.
[23:12] Inpatient, outpatient, and institutional settings
David mentions that a couple years ago they noticed a trend of physician groups doing brand new leases at closing. Their leases are marked up to around 20% above market, so they’re getting a huge price on sale rights. On renewal, though, they don’t want to renew their leases and they can move on to the next property. If they have no skin in the game, they have no problem. Flagler is very careful to make sure their prices are on market. Now that we have seen a big cap rate compression, going with that trend and not overpaying is something that is critical. The market has compressed in the last 8-12 months and it has changed Flagler’s focus a bit.
Before, Flagler’s focus was more on the outpatient setting. Speaking for himself, David sees more of an institutional setting where centers of excellence and centers of care could be in one full location. You could have everything from neuro to orthopedics, to a full range of specialties, so that all your needs are in one institution. Instead of having so many dispersed locations, you can have one location.
You could go get a check up, get imaging done, get labs done, and go to physical therapy or follow up with your cardiologist, or whatever else you have to do. You could schedule everything for one morning, and then go to the little cafe nearby for lunch. It’s a smart move with a more therapeutic touch.
[28:19] David’s first job as a busboy
When David was 13 years old, he worked as a busboy and a dishwasher in a burger shop within a golf course in Florida. He wanted to work, and when he was 16 he started working almost full-time in the restaurant and hospitality industry. You work nights and weekends, but during the week he was free to study. It got him through college, where he majored in international relations.
After college, David decided he did not want to become a restaurant or nightclub owner and work 80 hour weeks. He always liked real estate, and once he finished college he started investing in condos in the Miami market. He eventually went back to school to get a Masters in real estate. David wanted to learn the analytical side of modeling assets. His first job was in healthcare, and now he is working with Flagler as they continue to make good growth.
[31:48] What David reads for news and information
Like many of us, David always has about 10 different tabs open on his browser. He is always looking at Reuters, the swap rates, and the treasury rates, and how they’re constantly moving up and down. He tries to keep up on what the Fed is saying as well. We are in a very, very low interest rate environment, and there could be even more cap rate compression down the line. When interest rates go back up, however, cap rates go back up. They don’t want to be stuck holding low cap rate buildings when they could increase significantly down the line.
[33:13] Working out as a form of self-care
A few times a week, David goes to the gym with some of his co-workers for an hour to an hour-and-a-half. These workouts allow them to clear their heads (while still talking about a little bit of business).
[33:52] Whether leaders are born or trained
David believes that sometimes the answer is both. If people are born leaders, they have to be trained to be able to be flexible with the current environment and with others as well. If they are not born leaders but they are trained, they could be as good as if they were born leaders. They have to take other people and other situations into consideration.
Links to resources:
Flagler Healthcare Investments: www.flaglerinvestment.com
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