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EP94 - A Publicly Traded REIT Targeting Single Tenant NNN Medical Office Assets with Alfonzo Leon

Trisha’s guest this week is Alfonzo Leon, Chief Investment Officer at Global Medical REIT. Global Medical REIT is a publicly traded real estate investment trust trading under the symbol GMRE, with a current market cap of over $1 billion. We discuss Global Medical REIT’s history, Alfonzo’s background in the industry, and the assets that Global Medical REIT focuses on in the market.

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In this episode, we talk about…

[2:34] The background of Global Medical REIT

The company had its IPO in 2016, and it had formed a couple years before that. In the two years prior to the IPO, they set up the basics of the company and bought around $100 million of assets. In June of 2016, they raised $150 million through an IPO, and that was the start. Since then, they have acquired a couple hundred million dollars, on average, of medical office buildings. They are now at about $1.3 billion in assets.


[3:26] Alfonzo’s background and how he came to focus on the healthcare real estate asset class

Alfonzo started off as an architect, and he switched over to real estate. He found himself wanting to be a developer, and he went through a program that gave him the finance and legal background he needed. Coming out of that program, he ended up working with LaSalle Investment Management out of Baltimore. Initially, he was exposed to industrial and apartments. There was a gentleman in the office who was starting a medical office fund, and Alfonzo spent some time talking with him. Alfonzo relocated to San Diego, continued to work with LaSalle, stayed in touch with the person who was heading the medical office fund, and ended up getting brought into a lot of projects that involved medical offices. Alfonzo has been working in the space since 2000, and for the first five years around 15% of his time was in medical office. In 2005, he decided he wanted to switch companies and he started looking for other opportunities.

Alfonzo began talking to a company out of San Francisco called Cain Brothers. They were a boutique healthcare investment banking firm, and they were looking for somebody that could join their real estate group. In 2005, there just weren’t that many people in the real estate space with medical office experience. They were really interested in Alfonzo, but he wasn’t so sure about moving from San Diego to San Francisco. He also wasn’t sure about joining an investment banking firm, but he had a feeling that it was probably going to be a good decision. 

Alfonzo moved to San Francisco, and he was with Cain Brothers for nine years. He was exposed to health systems and physician groups, and people in the company had expertise in senior housing, insurance companies, long-term care, medical devices, and healthcare. It was a wide spectrum, and so for nine years Alfonzo was completely immersed in healthcare. He ended up in many board meetings with health systems, and talking with a lot of healthcare developers. Health systems would hire them to help find developers for projects, and Alfonzo was also involved in a lot of portfolio sales. He was in frequent dialogue with healthcare REITs, so he had good rapport with a lot of the acquisition people of these healthcare REITs. He had a chance to look at different acquisition styles, approaches, and business models. He got to see their underwriting, and he closed on a lot of transactions with these groups. 

Most importantly, Alfonzo saw a lot of new REITs in healthcare get formed and very quickly grow to billions in size. There were 16 new funds during his career at Cain that started with zero and grew into multi-billion dollar funds. He found himself thinking, why don’t I do that? In 2014, he found himself talking with a group in the DC area who was looking to start a medical office REIT. He had been in San Francisco for nine years, and Alfonzo felt like it was time for something different. He grew up in Rockville, Maryland, so it was a little bit of a homecoming. The timing was right, so he made the jump and joined Global Medical REIT.


[8:24] Where Global Medical REIT looks for investments and developments geographically

Global Medical REIT looks at the entire United States. They are not geographically constrained, and their philosophy is that healthcare is needed wherever there are people. There has been a large trend toward putting healthcare closer to where people live, so there are a lot of very good medical office options all over the country. Their portfolio currently spans 30+ states, with large concentrations in Texas, Pennsylvania, Ohio, and Florida. They spend a lot of time flying around the country. They have a very diversified portfolio, and they enjoy continuing to build it.


[9:48] What a good opportunity looks like for Global Medical REIT

Global Medical REIT spends a lot of time on every transaction, and that’s something that sets them apart from other groups. They have built their portfolio, in a way, building by building. They have not grown by doing large portfolio transactions. They started this company with a focus on looking for medical office buildings that are leased to large physician groups in secondary and tertiary markets looking for long-term leases. The key thing is single tenant. In single tenant properties, one of the bigger parts of that analysis is really understanding the tenant, understanding their business, and understanding their financials. They spend a lot of time talking to the tenants, and understanding their physician recruitment strategy, their position in their market, and if they have been talking to private equity groups. As Alfonzo says, they don’t just read the cover of the book. They read the whole book. If there is anything they think can help them make a more informed decision, they will do it. They do a lot of research online, find consultants with expertise in certain areas to help augment their understanding, and they leverage whatever resources they can. They do a lot of investigation on every property, and they want to feel like they have done exhaustive research on each property they buy.

One mechanism they have to offer their physicians is that they can exchange property for shares of their REIT. There are a lot of tax planning benefits to that. Physicians should consult with their advisors or estate planners, but that is often a very attractive alternative depending on circumstances. 

At a high level, they are buying the properties with the shares of the REIT. It could be an attractive option for physicians. Another thing they have explored in the past, but found it to be complicated to actually do, is to allow the physicians to retain ownership in the building. Given the fact that they are now $1.3 billion in size, entering into a JV for a (relatively) small clinic can come with a lot of accounting headaches that may make it problematic for them. Depending on the circumstances, however, it is something they will entertain if it makes sense.


[14:03] An interesting transaction story

They got invited to become a capital partner to a for-profit hospital operator based out of Southern California. They were in the process of buying a hospital in Dallas with 200 beds, for roughly $25 million. It turned out to be a very complex, high-pace process. There were a lot of parties involved, including large health systems. Global Medical REIT engaged a really good consultant for the project. It was a high-risk project and they spent a lot of time and energy on it, and in the week leading up to closing they weren’t sure it was going to go through.

The day before they closed the transaction, Alfonzo was in Disneyland. He had to be on a couple calls while he was literally on a roller coaster, and he thought it was so appropriate that a deal that was such a roller coaster ride from day one ended with him literally on a roller coaster.


[15:44] How the pandemic has impacted Global Medical REIT’s approach

The stay at home orders really froze things for everyone for the first few months, and then everybody was slowly coming back and getting back into the swing of things. Arguably, we are not there yet. It also depends on location, state by state. The pandemic has added a lot of complexity to everything. There are more hoops to jump through. Alfonzo observes that it makes it even more astounding that, despite the pandemic, transaction volumes and medical office in 2020 and 2021 have been running at near all-time highs. Even as early as May 2020, it became pretty clear that the pandemic was not going to impact transaction volumes for medical office. If anything, the pandemic made development even more attractive. 

As Alfonzo mentioned before, they try to be as exhaustive in their research and diligence as they can be with every transaction. They added asking how they fared during the pandemic to their acquisition process, in terms of inquiring about rent deferrals and business model changes. They have also had internal discussions about how the pandemic will impact healthcare going forward. He doesn’t think anyone has the whole picture on that yet.


[18:18] Alfonzo’s outlook for healthcare real estate 

What became pretty clear to Alfonzo at the beginning of the pandemic was just how important it is to have a functioning healthcare system. A big part of what funds healthcare are Medicare and Medicaid government programs. If anything, as a result of the pandemic, there is more support for those programs across the board. At a macro level, Alfonzo thinks there are great fundamental drivers for healthcare real estate investment. 

When you get down to the ground level, you have to be very thoughtful about each and every investment because healthcare is very local. There are meaningful differences state by state, and the dynamics in any market can be different. A new surgery center in Texas feels very different to Alfonzo than a new surgery center in Massachusetts. It speaks to the sort of inherent differences between how those states are organized in terms of the relationships between hospitals and physicians, commercial payers, and regulations. Texas has a lot more entrepreneurial doctors. So at a macro level, there are very strong fundamentals. At the ground level, Alfonzo suggests being very thoughtful about the impact to specific healthcare providers and specific sites.


[20:30] Alfonzo’s first job

Coming out of college, Alfonzo was an architect on Martha’s Vineyard. He lived there for almost a year, and he ate a lot of fish.


[20:58] What Alfonzo would be doing for a living if he was not working in healthcare real estate

Alfonzo has thought about this a lot, and he has decided he would like to be a detective. It speaks to the problem-solving he enjoys that attracts him to healthcare real estate in particular. Healthcare real estate is a very complicated industry. He did multi-family when he started his career, and he found himself somewhat bored after a couple years because it was more straightforward. So he thinks detective work would keep him interested.


[21:51] What Alfonzo is reading or listening to for news, information, or inspiration

Alfonzo cycles in and out of things, and right now he finds himself listening to a lot of podcasts. He often finds himself reading all day long, and he is trying to get into the habit of reading more books.


[22:45] What Alfonzo does for daily self-care

Alfonzo makes his bed first thing in the morning, so he starts off the day getting at least one thing done.


[22:59] Whether leaders are born or trained

Alfonzo sees leadership as a combination of training and opportunity. If you don’t put in the effort, there will be moments where you are challenged and you won’t know how to handle it. If you can realize when you are the best one suited to fix the situation, that is when you can most successfully step into that leadership role.

Links to resources:

Alfonzo Leon
Chief Investment Officer
Global Medical REIT

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