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EP91 - The Resilience of the Medical Office Asset Class with Todd Jensen

Trisha’s guest this week is W. Todd Jensen, Executive Vice President of Investments at CADDIS Healthcare Real Estate. CADDIS acquires and develops healthcare properties, primarily in the smile states.  It started out and remains a physician-owned company, and Todd shares the CADDIS background as well as where its focus is moving forward.

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In this episode, we talk about…

[2:10] The background of CADDIS Healthcare Real Estate

CADDIS is an outgrowth of a large private physician practice that was based in Dallas, TX, called Medical Edge. At the time, it was the largest practice in Texas and perhaps one of the larger practices in the country with around 650 physicians. So with a group that large, they had a lot of real estate needs and they started to put experts in place to address those needs. Eventually, that grew into a real estate company. They ended up selling the practice to Texas Health Resources, a not-for-profit hospital system based in Dallas.  They also sold most of the portfolio they had developed as a physician practice, and an outgrowth of that was the birth of CADDIS. The founders of Medical Edge are still involved, as they own CADDIS along with former college classmates of theirs who are real estate professionals. 


[3:37] Todd’s background and his interest in the healthcare real estate asset class

Todd has about 25 years of experience in healthcare real estate. He worked at Citibank in their real estate investment banking group, but it wasn’t a great place to be at the time because they were trying to shrink their real estate portfolio in the early 90s. He saw an ad in the Wall Street Journal for a development associate position and it turned out to be with Hammes Company. He got the job and joined them in their Milwaukee headquarters in 1995. A couple years later, they offered him to join as a partner in the firm and open a regional office for them. He opened an office in northern Virginia just outside of Washington, DC, and things grew from there.

He was recruited to Lauth Property Group and had national responsibility for building their healthcare development practice.  Todd ultimately left during the 2008 crisis and joined a small boutique in Florida named DASCO. He worked there for a couple years, and then he was recruited to American Realty Capital and he helped start a series of public non-traded rates. They raised about $5 billion of equity and invested all of it in healthcare-related properties. They ended up listing one of the companies on the NASDAQ stock exchange, and then it was acquired by VENTAS.  Todd worked on his own for a bit, and he has been an investor with CADDIS for several years. He has known them since the firm was started, and he happened to be talking to the CEO and they felt that his skillset was relevant to their needs. Todd has been working with CADDIS since June 2021.


[6:00] Where CADDIS focuses investments and developments 

CADDIS focuses on the smile states, or the west, southwest, south, southeast, and mid-Atlantic states. They have a national purview and they aren’t prohibited from investing anywhere in the United States, but certainly growth markets are more appealing to real estate investors. The focus on smile states is due to the growing population and therefore the growing job opportunities in those areas.

CADDIS both acquires and develops medical office buildings and outpatient facilities, as well as senior housing communities. Todd is focused on the medical office side of the business, so for him the attractive opportunity is different for acquisitions versus development. On the development side, they are looking for locations that they think will have good demand from physicians or hospital providers for outpatient services in those smile states. They are looking for pretty robust returns given the risk involved in development. THeir underwriting looks for around a 20% internal rate of return.

For acquisitions, they are investing right now for their second medical office building. For the most part, CADDIS is buying stabilized assets. They may do some value-add when there is leasing involved, or redevelopment or renovation, but largely they look for stabilized assets. The return target is much lower there, and they look for internal returns in the low to mid-teens for those types of properties.


[8:16] Offering physician ownership in properties

CADDIS won’t often lead with physician ownership. They are sufficiently capitalized where they can capitalize projects themselves. If it is very important to a specific tenant or group of tenants, however, it can be done. In a sale leaseback situation, a physician practice may also want to retain some ownership but monetize the majority of their interests. CADDIS is open to it and they don’t mind doing it in certain situations.


[8:56] Interesting acquisitions for CADDIS

Since Todd has not been with CADDIS very long, he has not seen something go full cycle. There are, however, some interesting acquisitions that they are making with some complexities to them. They are working on restructuring leases, master leases, and subleases. There is a project in Fort Wayne, IN, that is connected on all three floors to an orthopedic hospital that in turn is connected to a general acute care hospital. It’s exactly the kind of asset they would want to own on a hospital campus, but it had a bit of a strange lease structure. Part of their proposal to acquire the property was to restructure the leases and move from master leases to straight leases with the actual occupiers of the space. It is going to take them some time to get to that ultimate resolution, but they have a bridge in place to allow them to acquire it successfully. 

Todd shares that medical office buildings are great investments. They are solid performers and yield good results for investors. He personally acquired one, and he was able to flip it in less than two years and achieve some very attractive returns. 


[11:40] Pursuing healthcare real estate opportunities during the COVID-19 pandemic

Todd does not feel as though the pandemic significantly impacted healthcare real estate opportunities. Travel was more difficult, and it was harder to go see properties. They had some trouble getting third parties to do the diligence that they needed assistance with, such as environmental or property condition assessments. Everything became a longer process, and raising capital slowed a bit as well. Everyone got a bit more cautious and “wait and see” about healthcare real estate or medical office buildings. While it slowed things down, CADDIS’ approach didn’t really change. They have shifted to more virtual meetings, but the pandemic has not affected their underlying approach or the real estate fundamentals for the long term.

In fact, Todd thinks the pandemic demonstrated how well medical office buildings perform. In their portfolio, very few tenants sought rent relief. Many of the tenants learned to adapt and continued to operate. They may function under slightly different conditions, but overall the asset class really performed very well. Many investors saw that, and as a result more capital is rotating into the sector.  This has been the underlying story for probably around 15 years, but we are seeing an acceleration that may be related to the pandemic.


[13:57] Todd’s outlook for healthcare real estate over the next three to five years

Todd thinks we will continue to see capital want to migrate into the sector. There is very little speculative development of medical office buildings, so to Todd that is part of what makes it attractive. Supply and demand is almost always close to imbalance – unlike other property types like multifamily, retail, hospitality, senior housing, or whatever else. With those property types, there is often a lot of speculative development based on where you are in the cycle, which exacerbates the cycle. We don’t really have that in medical office, as it is largely a built-to-suit driven development pipeline. As a result, supply and demand generally stay in check.

Moving forward, Todd thinks capital is going to continue to move into the sector which will continue to compress cap rates long term. In the coming three to five years, he sees cap rates going lower than they are today. He would argue that cap rates have compressed 70-100 basis points in the last 12 months.  This is good if you are a seller and not so great if you are a buyer, but CADDIS is still finding attractive opportunities and they believe that cap rates will be lower in the future based on the continued increase in demand – particularly by institutional investors in this property.


[16:16] The effects of materials pricing and the supply chain on development

The fluctuation in material prices and the supply chain has made it difficult to be able to accurately forecast what your costs are going to be.  If anything, Todd thinks this might slow the pace of development in the near term because people aren’t feeling as confident about their costs. They may take a “wait and see” approach, and there will also be some extra rigor with the contractors as you work toward the ultimate construction costs. People will want to really pin it down before starting a construction project.

CADDIS is pursuing a couple developments right now that are struggling with this issue of trying to guess what costs will be six months from now when they are through the entitlement process. It is difficult to predict, and at this point it seems like a constantly moving target.  They are doing their best to project where it is going to be and keep things on the conservative side. If it is still viable, they will forge ahead and hope they can tamp it down or that some of the supply chain disruptions will be eased by the time they actually execute a construction contract.


[18:25] Todd’s first job

Todd’s first job was shoveling snow and mowing lawns as a kid. He started an early morning paper route in the seventh grade. His first true employment was working at a shoe store in high school. The summer after his freshman year of college, Todd worked at a bank processing center and then McDonald’s at night. His first professional job out of college was with a company called Hewitt Associates. It was a benefits consultancy, and they were a terrific company to work for. After working there a couple years he moved into sales and enjoyed that more than the computer programming he started doing.  He had an uncle who was a real estate developer in Chicago, and he would visit with him every few months. As Todd learned about his profession and career, he started to get interested in real estate development. That is why he made the jump from benefits consulting to real estate development and investment.


[19:43] What Todd would be doing for a living if he was not working in healthcare real estate

Todd thinks he would be working in some other form of real estate. He really enjoys it, and he thinks it is a great industry to work in.


[20:06] What Todd is watching for news and information

Todd watches CNBC for a bit with his morning coffee. He uses that for business information.


[20:41] What Todd does for self-care

Todd is a regular, habitual exerciser. He runs, does weight training, bicycles, and plays touch rugby. He played rugby until he was 53 and he suffered a severe broken leg. He took up touch rugby after that.


[21:14] Whether leaders are born or trained

Todd leans more toward leaders being trained. He thinks that leaders are people who want to lead, and he attributes that more to socialization than to an innate trait.


[25:14] Investing in a medical office building fund

CADDIS is currently raising capital for, and deploying and investing capital for, their second medical office building fund. It is open to accredited investors, so if you qualify as an accredited investor and you are interested in investing in a medical office building fund, you can find information on CADDIS’ website.

Links to resources:

Todd Jensen
Executive Vice President, Investments
CADDIS Healthcare Real Estate

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