Health Care Real Estate Advisor – Hall Render Podcast

As we reach the midpoint of 2024, it’s time to assess the health care real estate landscape. Did the bold predictions from analysts, brokers and other experts come to fruition? Are the trends aligning with the forecasts, or is it too soon to tell?

Join us for an insightful discussion as Hall Render’s experienced attorneys provide a comprehensive mid-year roundup of health care real estate trends.

Hall Render Attorney

Hall Render Attorney

Hall Render Attorney

Hall Render Attorney

Hall Render Attorney

Joel Swider: Thanks everybody for tuning in today. I’m Joel Swider with Hall Render, and I’m joined by several of my Hall Render colleagues, including Danielle Bergner, in our Milwaukee office, Libby Park, in our Denver office, Addison Bradford in our Indianapolis office, and Andrew Dick also here in Indy.

So at the beginning of each calendar year we often see brokers, advisors, and other commentators making predictions on what they view will be the top trends for the year in Health Care Real Estate, and, in fact, this year Hall render published our own predictions for 2024.

But now that we’re halfway through the year, we thought it would be interesting to revisit some of those predictions, see which ones have actually materialized and kind of talk through where things might be going. In the second half of the year.

By the way, if anyone listening does have comments or wants to share some other viewpoint, we’d love to hear it. So please do drop us a line with that. Let’s dive in

One of the predictions that we made in Hall render’s 24 forecast was that capital markets might improve slightly, but would mostly kind of continue to move sideways, and we saw a few articles at the end of 23, with the mantra stay alive till 25, essentially saying that 2024 is going to be another slow year in commercial real estate, driven particularly by high interest rates, at least in comparison with the recent past, and banks that are generally less willing to lend for investment properties, at least in the short term.

So on that point, Danielle. Maybe we’ll start with you. I know you do a lot of work on projects that involve health care. Real estate finance. Has this prediction been accurate so far. And where do you see things moving the rest of the year.

Danielle Bergner: Thanks, Joel. Yes, I think it has been accurate. I think the exciting part is really yet to come, and that’s going to come later this year early next, I think that you know, for commercial real estate markets, the bottom is probably pretty near which I actually don’t think is a bad thing. You mentioned stay alive till 25, the more cynical commentators would call that extend and pretend. So what’s been going on the last couple of years with interest rates in particular, you know, remaining pretty stubborn.

A lot of commercial real estate debt that has otherwise come due has been extended. It’s been incapable of being refinanced. Negative returns are persisting. And so what we’re seeing now in the 1st half of 24 are the numbers that are proving that out. And so, you know, we’re still seeing commercial deal volume significantly down in the aggregate. But in the 1st quarter of this year debt actually increased significantly, and you might scratch your head about that. But if you think about it.

It’s because all of the debt that should have matured, you know, in 23 or even 22, is just still sitting there on the books. And so we have this kind of interesting environment where debt is still increasing. Deal flow is down. And this year we have. You know, the big balloon issue. All of this debt at some point is going to come due. And so for some people, for some investors and owners. This is bad news for Banks. This might be bad news but for others, I would say, with capital waiting on the sidelines this might be the opportunity that they’ve been waiting for to capture that upside. I think the big question in terms of predicting just how painful the next year will be, particularly for banks and for pre pandemic investors is, of course, interest rates. Some investors believe we’ll see a rate cut in September which could be the Fed’s final policy decision ahead of the Presidential election in November. And to that I would say we didn’t really need another wildcard on interest rates. But the Presidential election is definitely throwing one. Markets are already assessing the impact of candidate economic policies and cautioning the investment community that they may have to be pricing in a considerable risk of higher inflation. If some of those policies were to be implemented, which could also mean that any reduction in interest rates we see in September could be quite fleeting.

What I’m keeping an eye on is whether we’re going to see a flood of refinance transactions in the 4th quarter of this year, and 1st quarter of next for borrowers and for Banks, who want to capitalize on whatever small interest rate relief we might see out of September.

Joel Swider: Yeah, Danielle, you mentioned, you know, potential interest rate cuts inflation. Andrew or others. I mean, I know you also have been active in this space. What are some of the pressures that health providers are facing right now in trying to finance these new projects? Is it really just the uncertainty that’s kept a lot of people on the sidelines.

Andrew Dick: Sure. Yeah, I I think some of it is the uncertainty. I think. It’s also really hard to source debt right now. And I know Danielle and I were talking about this a few weeks ago, specifically, in certain sectors of the health care real estate industry. We’ll talk about that here a little later today. But what Danielle and I were talking about was trying to source debt for new senior housing communities can be particularly challenging right now. If you don’t have just the right set of facts for the lenders to to review and to underwrite.

So I think it’s really subsector specific. But it is challenging, I would say, across the board based on those that we’re talking with, with health systems, developers and those who place debt. They’re all kind of telling the same story.

Addison Bradford: And I would just add, in my anecdotal experience. You all commented on a lot of the business terms, I think, on the legal terms. We’ve seen even more constriction by lenders to be more or to be more risk adverse, such that, you know deal terms or legal terms that may have worked 10 years ago for ground lease deal, for example, just aren’t working for lenders now. So trying to bridge that gap between lenders and providers is is a challenge at the moment.

Joel Swider: So another prediction that we had made for 24, and others. I think VMG had echoed. This as well, was the continued growth of the ASC sector as well as the behavioral health sector and the specialty hospital sector. I think we started seeing this trend in 2023. And so the prediction was that this trend would continue. Libby, maybe we start with you. I know you’ve done work in all of these spaces, specialty hospitals, behavioral health, and ASCs.

What have you seen of that trend so far this year? Maybe start with ASCs, but where are you seeing that trend?

Libby Park: Thanks, Joel. Yes, I. We have been seeing this continued trend of growth within the ASC sector, and the prediction has remained on point thus far, even amidst the financing challenges that the panelists just highlighted. In the 1st question that you raised Joel, there are a couple of unique factors within the ASC sector that contribute to its continued growth throughout the 1st half of 2024, and it’s expected to continue throughout the remainder of 2024 and onward primarily 2 reasons, the 1st being changes to state certificate of need laws, and the second being technological advancement within the ASC space. On the 1st point we’ve seen a loosening and even repealing of certificate of need laws in multiple states across the Us. And Com. Laws have historically been a major barrier to entry for ASCs. Coming into this space in, for example, the last year or so, South Carolina, Tennessee, Mississippi, and a few other States have largely rolled back their com requirements and a couple of points as state specific. What we’ve seen in connection with these rollbacks in both South Carolina and Tennessee, while there have been repeals and rollbacks of certificate of need requirements, those come with additional State licensing requirements and also requirements to provide that new ASCs provide indigent care or charity care to a certain amount of the population. State specific requirements vary, based on the amount of charity care that certain ASCs must provide, and South Carolina’s, for example, is a percentage of the ASCs. Adjusted gross revenue after 2 years.

Additionally, we’ve seen the State of Mississippi make certain revisions to their health plan, whereby hospitals can become more involved in in the ASC. Space.

In other States, including Georgia and Iowa, are also undergoing certain review and reform of their laws which it’s yet to be seen exactly how the legislature will move on that issue. A second critical factor that’s affecting ASC growth is technology. We’ve seen a real breadth of technological advancements within the ASC space complemented by payers being willing to fund these types of technological advancements. Certain technologies that we’ve seen are robotics to help surgeons perform less invasive procedures, software platforms related to EMR management solutions, scheduling business analytics, AI to support data processing patient wearable devices. And really, the data that we’re seeing is that technology is providing for better health care outcomes and insurers are willing to pay for it. So we think that will continue the growth trend as well.

Joel Swider: Thanks, Libby. Addison, I know you’ve done a lot in the behavioral health space. Where do you see us headed the remainder of the year?

Addison Bradford: Yeah, I think the trend will continue and that there will be increased investment and construction behavioral health facilities.

I think the free reason for that is first, I think the demand still there. I don’t think the supply is caught up with the demand when it comes to behavioral health services around the country. There are still lots of communities throughout the Us.

Where there are behavioral deserts or there just aren’t viable options for most people. So until that kind of supply demand curve levels out, I think we’re going to see you know, more investment in this space. And these projects are going to continue to be possible to because of the State and Federal grant funding that at least I’ve seen specific to behavioral health facilities.
Last month I saw that the State of Texas was investing 1.5 billion dollars in 7 behavioral health facilities, some of which were new build, some of which were rehab but just a huge monetary investment to make those projects viable, and I mean on smaller scales like I saw in last week this State of Washington was investing 7.5 million a lot less than 1.5 billion. But still, you know, significant amount of money in, I think, 5 or 6 of their existing facilities. To make sure that they continue to operate and don’t have to close down and create more kind of behavioral health deserts for their communities. So long as we see that funding and that demand, I I don’t see it slowing down in the interim.

Joel Swider: That it raises an interesting point is there? Do you anticipate that certain States will pull ahead of others in terms of investment. I’m thinking particularly about behavioral health, but I I think there might be other sectors at play here, too, particularly as it pertains to Co. N, or on the flip side of that sort of the grant funding piece. I mean, do you think that we’re going to see significant kind of distinctions between states in that area for development.

Addison Bradford: Yeah, I mean, I think likely. I mean, there are a number of state specific regulations and licenses that can dictate. For example, I mean one of the biggest barriers to the ASC. You know, construction of Acs is Co. N laws, which let me went into. So we’re the more. We see states, you know, and it seems to be redder states at the moment that are loosening their restrictions. I think in those states you’re going to see a lot more A/C development.
But you know each stay is a little bit different. So it’s hard to see if there’s, you know, red versus blue States or East Coast versus West Coast, whether you’re going to see more investment. But certainly state policies can affect the amount of development we’re going to see in different areas.

Joel Swider: So next topic, here is health care joint ventures, and health care joint ventures appeared in a number of the 2024 prediction articles. Some talked about them sort of on the fringe, or more or less in passing. Other predictions dealt with JVs more directly. Ankara, for example, had predicted that Hospital JV’s with what they called payers payer providers such as optum would really increase in 2024. Andrew, maybe we start with you. I know you’ve done a lot in the JV. Space is the prominence of health care JVs increasing, decreasing, leveling off. What do what are you seeing in this space?

Andrew Dick: Yeah, I we don’t have a lot of good data on joint ventures, and the term joint venture can mean a lot of different things to different providers. So when we talk about joint ventures, we often think it’s a true partnership, or 2 providers come together and form a new entity, and they own, you know, they split up ownership percentages. But that’s not always the case. Sometimes it’s different providers simply collaborating together, providing different services within the same building. For example, we’re seeing a lot of those type of JV’s in the oncology space right now and it seems like a lot of the big health systems are really interested in growing oncology. JVs, right now. And those can be really complicated. But I would just point our audience to the health facilities management. They had a 2024 construction survey, where they went out to their members, and which are primarily hospitals and health systems, and they surveyed those folks to say, what do you plan on building over the next 3 years? And if you look at that report, there’s some really great information. And the top 3 or 4 types of JV facilities that that health systems are looking to build our behavioral health hospitals inpatient and outpatient, I I should say cancer centers children’s hospitals and rehab hospitals.

We’ve seen that those deals come across our desk quite a bit, and all of those categories. But I just I just think right now we’re seeing a tremendous amount of joint venture activity across the board surgery centers, behavioral health that we talked about inpatient rehab hospitals.

We’re also seeing some really interesting joint ventures between government agencies and nonprofit health care providers and for profit providers coming together trying to figure out how they can better deliver care in certain markets and I think that’s really exciting. So I think there’s a lot of activity right now. I wish I had more data on the number of joint ventures, but just kind of what I’m seeing in the market and what we’re our group is seeing. It’s just an uptick in that kind of activity where providers are looking to come together to really deliver you know better services in these specialty areas.

Joel Swider: Yeah, thanks, Andrew. And one thing returning, I I didn’t notice until just now, but we did have a couple of questions that came in on the ASC topic, which I think is is still relevant for this JV question. But couple questions related to the size of various ASCs being developed, you know. Are they on the smaller side, larger footprint? What’s been sort of the? Are there any parameters? And if so, you know, what are they? And then the second question unrelated to that. But, you know, are we seeing more affiliated hospital network type ASCs or more independent ASC growth? I’ve got some anecdotal evidence on these, but wanted to see if anybody else had had been, seeing that in this space recently.

Libby Park: Hey, there, Joel, I can chime in on those first.st As to the size of ASC space, it depends. I’ve seen varied square footage depending on the location of the ASCs. The resources of the joint venture. Municipal requirements. For example, if space is limited in a highly urban populated area. I’ve seen something around, maybe 1,500 square feet to much larger ASCs in terms of square footage. If the area has the space has the demand and the geography to support it in terms of, if the ASCs we’re seeing are more hospital affiliated or independent providers, that also it depends, for example, in Mississippi the loosening of the certificate of need requirement really provided the opportunity for hospitals to get into the ASC. Space, either independently hospital operated, or connect in connection through joint ventures with physicians.

So it really is kind of a state by State analysis as to what the applicable certificate of need and State law requires, and kind of the demand and operation of ASCs is responding to each State specific law.

Joel Swider: Yeah, that’s been consistent, Libby, with what I’ve seen lately as well on both points. And in particular, I do think there’s a certain footprint that you almost need to have to make the project viable. Now, and I think to your point it probably depends on State law and a number of other factors as to where you draw that line. But I do think there may be some, and I guess it goes back to the financing question, too. Right? And then as to kind of the independent versus hospital affiliated, I’ve seen both as well and so I’m curious to see, you know, to see how that plays out.

Andrew Dick: I have one more comment on that. As I was listening to our group. Talk about challenges raising capital, you don’t, you know, for new projects. You’re not really seeing that in the ASC Space and I think it’s because they’re often a little bit smaller. Then, like a new inpatient facility in terms of you know, the price point may be somewhere between 5 and 10 million dollars, whereas a new behavioral health hospital may be 30 or 40 million dollars.

But the one thing I keep hearing from our clients is, there’s really they’re not having any challenges raising bank debt for those type of smaller ASC projects. And in some cases they’re just bringing all the equity. They’re just bringing their own capital and funding it with cash on hand. And I just find that really interesting, because we’re seeing a lot of construction activity. And it doesn’t seem like some of the challenges we talked about are popping up with new surgery centers. And my, my hunch is that it’s maybe because some of these smaller, local and regional banks are willing to make 3 or 4 million dollar loans, as opposed to, you know, coming up with 20 or 30 million dollars for a new specialty hospital.

Addison Bradford: Andrew, if I could follow up with a question to you on that. It seems like from the deals I’ve worked on, that there’s a lot of, especially with hot specialty hospitals. There’s a lot of education that has to go on with the lender as to like reimbursement. How ultimately these services are paid for. Do you think part of the kind of the more the more investment is ASC a product of just more lender understanding of that that market.

Andrew Dick: You know. That’s an interesting point, Addison. You could be spot on. It may be that that surgery centers have been around long enough, and they’re well, no more. Well known by the lay, you know, underwriter who’s working on these deals. I think. Yeah, that could be the case. I also think it’s just a smaller capital outlay for these banks and they just think, gosh! If I have a health system, and 20 different physicians investing in the surgery center. That seems like a sure bet is is, I think, what’s going on again. I think it’s it could be geography specific.

Joel Swider: So let’s dive into that a little further, because that was another prediction at the start of 24. With respect to capital projects and construction. At the beginning of the year both S & P and Price Waterhouse, PWC. They were essentially, I’ll say, cautiously optimistic. And S. And P. Had said that health providers would likely restart their deferred capital projects. They couldn’t put them off any longer, and would maybe start relying more on debt to support these projects than they have in the recent past PWC noted that private equity firms had a lot of capital on the sidelines, and would essentially be looking for opportunities to invest in 24, and that that might drive new development.

Maybe question for you, Danielle. What have you seen of these predictions? Have they been borne out so far in 24? And what do you see on the horizon in terms of these larger capital projects?

Danielle Bergner: Well, I think capital projects are, you know, largely this year moving forward, but much slower than people would like. I think many are. Still seeing significant delays due to the same combination of challenges that we’ve seen for the last 3, 4 years. Inflationary pressures supply, chain, skill, labor, shortage. But I would say, on the whole, we are seeing more construction, activity, moving forward. The key right now, I really think, is creativity. You know, the traditional health care finance box of using bond proceeds, or cash even to finance capital projects really just isn’t working right now for a variety of reasons, one of which includes the CFOs desire to preserve the balance sheet right which ties into credit rating.

So when you think about creativity, I think you know, like Andrew mentioned hospitals are increasingly looking at JV structures in particular, to capitalize on those private equity dollars. It definitely helps to solve a a significant portion of that of that gap in the budget or another example would be the charitable foundation lease, financing structure which allows hospitals nonprofit hospitals and health systems to finance projects without taking on the debt themselves. And so you know, what I would say is as recently as even a couple of years ago, I would say we weren’t seeing CFOs and project managers and executives as willing to look at financing structures outside the box, and now they are hungry for it. They are wanting to see all of the options, put it all on the table, and figure out how to get some of these projects moving forward. The demand is still there. The challenge is, you know, how to put the capital stack together.

Joel Swider: Thanks, Danielle, so I think this kind of leads us into the next prediction, which was at the end of 23, heading into 24 there were, I guess I’ll call it more of an outlook, because 2 of the 3 major credit rating agencies had issued a negative outlook for, and this was for the nonprofit acute Care hospital sector in 24 S. And P. Had issued a negative outlook, saying that
they saw health care demand remaining strong, but it was going to be weighed down by persistently high labor, persistently high operating costs, and essentially the payer mix would also weigh down the sector. They even said that they could foresee additional downgrades into the future. Fitch. The term they used was that the sector would remain deteriorating in 24, but they said, You know, we’re going to start to see some stratification that hospitals that could attract and retain employed staff rather than having to rely on external contract labor, which is typically more expensive, that those hospitals would be able to recover their deficits much faster. Moody’s was the only one of the 3 that revised its outlook from negative to stable, going into 24, and Moody’s predicted some modest volume increases, but they were expecting that negotiated reimbursement rates would increase and help the cash flow. Margins, I guess, Danielle, you know, continuing on in this vein, as you’ve observed the sector thus far in 24, and I guess particularly the inpatient hospital sector. But I think it’s broader than that. Who’s right? Is it negative? Is it deteriorating? Is it stable? And how does this play into some of the other developments and the creativity that you just touched on.

Danielle Bergner: So, in terms of the agency ratings, I would say that their forecast for this year, are playing out with some fair accuracy. What I’m a little concerned about is the bifurcation of financial recovery that we’re seeing between nonprofit hospitals and systems. What we’re seeing is like, you know, like the agencies predicted, those that could most successfully contain costs would recover more quickly. We’re seeing that the issue, in my view, is those hospitals and systems tend to be the most diversified and well-resourced systems.

In other words, the systems and hospitals, with the greatest level of resources, have been able to rebound on their margins similar to those pre pandemic. But the more modestly resourced hospitals and systems appear to be recovering at a much slower pace. So far this year many ratings have remained more or less unchanged. But 15 have been upgraded and over 30 have been downgraded this year already. Now the silver lining, if there is one, is that by this time last year nearly 60 had been downgraded, which at least suggests some level of sector level financial recovery, albeit extremely slow. So I think you know the agency’s references to persistent challenges. I think that’s exactly right. Of the 15 upgrades. The commentary indicates some mix of improved liquidity, notable improvements, and operating margin healthy payer. Mix other interesting factors that are kind of trending out of the out of the agency ratings is location. The higher growth markets, like Florida or Texas are realizing financial recovery at a much higher rate and more favorable state driven Medicaid payment programs also appear to be in impacting the bottom line in a material way. And then, of course, mergers are definitely, you know, impacting these outcomes going forward. I’ll just leave you with this nugget to think about. But going forward, I think we also have to keep our eye on technology, especially AI, and it’s potential to put even greater distance between nonprofit providers in terms of financial performance. Those that this technology is very expensive. So those hospitals and those systems that can afford to purchase this technology will be able to capitalize on it and those that cannot afford it will not be able to access the full potential of these tools potentially, you know, further, even expanding that divide between, you know the more resource and more modestly resourced hospitals and systems. So it’s not an issue that is being talked about expressly as of yet in rating agencies. But at some point I have to believe that technology is going to start moving the needle on the bottom line for a lot of our clients.

Joel Swider: Yeah, great point. And I know, Libby, you had mentioned that, too, in terms of the ASC sector. Let’s talk a little bit about the kind of some of the pressures that we’re seeing in the sector. So at the outset of 24 there were a number of experts that forecasted a continued struggle to recruit and retain a talented labor force, and that that would be one of, if not the greatest drags on health care performance across a number of sectors, inpatient, acute care, senior living home health. Addison. Maybe we start with you on this. I mean, where are we seeing the health care labor market go, has it leveled off this year?

Addison Bradford: Yeah? I asked. As many of you know, my wife works in nurse recruiting. I asked her this last night, and she just said, no that was it, and I think she’s right, and I’m not just saying that because she’s my wife, and she’s right about everything. But I think, more generally. I mean we we see it all over the place. We see, continued Burnout, among providers, that may, or that has continued since Covid. Now I think some of the burnout isn’t necessarily related to Covid, and it’s more related to staffing levels that are in turn affected by Covid. But you know you’re seeing I feel like strikes in in the news every other week or every week. With nurses and other providers striking because of staffing levels within their hospital systems. And you know, it’s interesting. I’ve also seen an uptick, at least in in the state of Indiana, with an increase in lawsuits, negligence, wrongful death, other types of lawsuits that arise from the failure to staff hospitals and other health care facilities at a certain level. So I don’t think in any way we’re out of the woods yet, and it’s been interesting. I know Libby and I were talking before this, that there’s been, you know, on the senior level side there’s intended there’s been some intent to try to fix some of those staffing issues, Libby. I don’t know if you can speak more to that.

Libby Park: Yeah, absolutely. I can. Thanks Addison. First, though, I second, that your wife is wonderful and incredibly intelligent. Great on the legal front of these types of staffing challenges. CMS. Has absolutely kept a pulse on what’s been going on, and as it relates to the long term care front. I wanted to flag to our attendees that CMS. Published a rule May 10th of this year, that is, was effective just last month, June 21, 2024. Regarding minimum staffing standards for long term care facilities and Medicaid institutional payment. Transparency reporting final rule. That is a mouthful. But in short, the rule requires minimum staffing standards in nursing homes and long term care facilities. The commentary that was included in the Federal Register relating to this Federal rule really echoed what Addison discussed, that
there are staffing shortages which result in or quality of care, staff, burnout, high turnover, which implicates the health outcomes of these types of facilities, and CMS’s goal in promulgating this rule was to hold nursing homes accountable for providing safe and high quality care for nearly 1.2 million residents that are in these Medicare and Medicaid certified long-term care facilities. A few of the key requirements that are included in the rule are an increase in registered nurse staffing requirements. This will require an Rn. To be on site 24 HA day, 7 days a week, with certain limited exceptions, as well as an increase in the hours per day of resident care, which is a combination of direct Rn. Care as well as direct nurses aid care, and the new requirement is 3.4 h per resident day. There are different time frames for implementation of the requirements set forth in the rule depending on geographic locations up to 5 years for rural facilities up to 3 years. For non rural facilities. However, all facilities need to take steps to implement a facility assessment update a general plan which most facilities already have by August 8th of this year. So CMS. Did roll out some aggressive timelines. But the initial deadlines should not be hopefully a large lift for these facilities.

Folks should know that there are also certain exemptions, exemptions in limited circumstances where a workforce may be unavailable, or if a facility is making a good faith effort to hire staff, but just cannot locate them. Other documentation requirements are also needed for the hardship, exemption, but they are available in limited circumstances in terms of estimated cost. Associated with these requirements for increased staffing. CMS. Estimates that approximately 53 million nationally will be needed in year one for implementation, with an escalation of up to 43 billion in year 10, and CMS. Acknowledged in its rule that there is uncertainties about how facilities will bear the cost of meeting these types of requirements, and they suggested a three-pronged approach that either the facilities one reduce their margin or profit to reduce other operational costs, or 3 increase prices charged to payers. So the prediction is that the costs will likely be shared between the facility operations as well as payers. On a final note, CMS. Did also announce that it is launching a new investment campaign of over 75 million 75 million dollars to launch a national nursing, home staffing campaign. And the goal here is really to incentivize nurses to work and nurses aid in the nursing home environment. Things like tuition, reimbursement, enrollment training, finding placements with job services are a few things that are included in CMS’s proposed funding for to support the staffing initiative.

Addison Bradford: Thanks, Libby, that’s helpful. If I could just add 2 more points on. This is, you know. I I think, in terms of looking forward further. I mean the turnover rate. I might think of my nurses last year improved like 2 and I. You know I would wouldn’t be shocked if it was 2 this year, and I think really, until we see a you know more supply of physicians and other providers, I mean, the met school classes are increasing, but they’re increasing very marginally, and our immigration system isn’t going to be reformed. It seems like anytime soon to allow more doctors from outside the country to work in our hospital. So you know, until again that supply keeps up with the May demand. I wouldn’t be surprised at this, we’re talking about the same issues next year.

Andrew Dick: Yeah, I know, I, I have one more thought. I don’t know if others have seen this. But I was listening to a podcast over the weekend that’s hosted by a Michigan hospital, CEO. And he said the State of Michigan tried to impose a similar staffing mandate on inpatient hospitals, and that bill was defeated. But I thought it was interesting that the hospitals are watching for similar legislation and the CEO and the podcast he said. You know we’re having such a trouble. Staffing our hospital, he said. If we’re forced to have minimum staffing standards that, he said, it’s probably going to force us to scale back the number of beds that we actually operate. And it was a really interesting discussion, not getting political. But if if anyone’s interested, it was on the rural health rising podcast really great, podcast hosted by a really dynamic CEO. So I thought that was interesting as well.

Joel Swider: Yeah, Andrew, that’s a great point. I’m Olivia. And you said CMS’s response to, you know, providers who were worried about the cost of these minimum staffing standards. CMS’s response was to reduce their profit. Margins. Right? But it’s like, you know, the Andrew, I think you know a lot of people have decried the sort of stratification in health care where you see some of the more wealthy areas getting the higher acuity and more specialty care while some of the more rural or lower population areas are forced to cut back. And you know, I think there’s an economic reality there. As much as you know, CMS or other regulators would love for everything to to be equal and to have you know, as much staffing as possible. It’s just, you know, not economically feasible in certain communities. And so I think there has to be some consideration for that, my personal view. But let’s talk a little bit about senior living and long term care going into 2024. The deal volume was down, and experts had attributed this to high interest rates, higher cap rates, slower recoveries and occupancy, and generally, like we’ve talked about increased operating costs primarily due to the labor market.

There were several sources that released their own senior living outlooks for 24, and those were mixed. Hilltop had said that the sector would probably move more or less sideways in 24 jll. Had anticipated that occupancy would continue to recover, particularly as the over 75 population grows and the Argentine forecast said that the Western and Southern US would see the most recovery while labor would remain a challenge across the country. Andrew, maybe we stick with you on this question, as you’ve observed, the senior living market so far this year. Who was right, and where are the growth opportunities for the remainder of the year?

Andrew Dick: Yeah, it’s interesting, Joel. I’ll break down this sector in 2 different parts when we tend to talk about senior living. Sometimes you can that includes assisted, living, independent living, and then sometimes skilled nursing is included, that in that industry as well. But I really group assisted living and independent living together and then treat skilled nursing a little differently. We saw a lot of transaction volume in the 1st quarter of this year in the skilled nursing industry. I think, Joel, we featured in one of our updates one of the M. And a reports that covered the skilled nursing industry, and there was a huge spike in transaction volume in the 1st quarter. That that I don’t think anyone was expecting but based on all the data we’ve looked at. That transaction volume was driven by financial distress and skilled nursing industry where some of these smaller skilled nursing communities, or even some of the regional players who were under tremendous financial pressure were either forced to sell or merge with a stronger operator. And so I thought that was an interesting data point that I, personally wasn’t expecting. In the 1st quarter in the assisted living and independent living sector. I think certainly, construction, new construction is way down transaction volume, I would say, is down as well. What we’re really seeing is a repositioning of assets that were built maybe 4 or 5 6 years ago. It seems like what I’m hearing in a number of markets is that there was too much construction, too many beds and some of the operators are really struggling. And so they’re trying to reposition those assets by bringing in new operators or managers to see if they can write the ship and if they can’t they’re going to have to look for an exit strategy. Because, as others talked about on this webinar. Some of their mortgage debt is coming due. It’s maturing, and they’re under tremendous pressure to try to figure out how they can either increase occupancy or increase rent, and that’s really hard in the assisted living and independent living sector from what I’m hearing, and so I’m working with one operator right now who’s going in and helping a number of those underperforming communities really trying to figure out what they can do to get these communities and better financial standing in hopes that if they’re able to do that they can sell them maybe over the next 12 to 24 months. But again, what I’m hearing is, it’s really, really challenging. Right now, it’s hard to refinance the debt that was initially negotiated for some of these communities 5 6 years ago. It’s tough right now. At least that’s what I’m hearing. I’m curious. If others have I’ve heard the same thing, but that’s again of what I’m hearing from folks I’m working with.

Danielle Bergner: Andrew. That’s very consistent with what I’m seeing, too, with clients, and just in the market generally, I think the nonprofit operators of independent and assisted living are still able to access. You know, capital resources like HUD financing and tax exempt bond financing, and they’re still able to pencil out new construction or project rehabs. Whatever the case may be, the for profit developers and operators are really struggling. They’re, you know their capital options are extremely limited. I’m seeing very little bank capital with much of an appetite for senior living generally right now. So unless you’re willing to, you know, to access HUD the HUD, you know the HUD financing, which many are not willing to go down that road. I think it’s very difficult right now for anyone other than nonprofit operators to build new.

Andrew Dick: Good points. Danielle.

Joel Swider: Daniel, we had a question that came in, or for really for anybody a moment ago, and since you mentioned that dichotomy between the for profit and the nonprofit operating partners in in these JVs. The question is, you know, we’re seeing. So this this person wrote in saying that you know they’re seeing. An impediment in securing capital for new joint venture assets like behavioral health and erfs, as some JV operating partners are promoting lease guarantee burn offs based on operating profit, and you know the question is, do we foresee a change in this? Or do we? Do we think that nonprofit health system partners understand this additional cost that they’re being burdened with. I don’t know if anybody had thoughts on that, and I think it’s broader than just one particular sector. Any thoughts on kind of these lease guarantees, and the dichotomy between the nonprofit and for-profit partners.

Danielle Bergner: I’ll start, I’m sure Andrew has some thoughts on this, too. He and I had a lot of conversations about these JV guarantees. I would say, this topic is always difficult, and I I have not worked on a health system. JV. Deal where this has not been one of the short list of major business issues. And you know a couple of things that that we think about from the hospitals. Perspective is one is the guarantee pro rata. So are you guaranteeing the entire lease obligation, or just a pro rata share in relation to your JV. Partnership. That’s something we always consider, and then the burn off. I view that more as a business issue with the landlord and my argument with the landlord on that is typically, listen. You effectively have a credit tenant here. And when you know when you see X number of years of operating success, I do think it’s reasonable frankly, for the landlord to entertain burn offs. I don’t think that that’s an unreasonable request in today’s market. I would say we get burn offs more often than not getting them so I I actually don’t think that that should be maybe you’ve had a bad experience with some particularly stubborn landlords. But I haven’t. I haven’t been able to. I’ve never been able to not resolve that issue, I guess. Let me put it that way. The other point I’ll just make quickly is just always be careful about compliance issues with these JV guarantees because there are compliance considerations. And if your JV. Partners are referral sources, for example.

With respect to the portion of the obligations that you’re guaranteeing in relation to the overall benefit, so that’s always A topic for valuation as well.

Andrew Dick: I think Danielle did a great job of summarizing the kind of the issues we think about. Joel. I also think it’s educating the lenders and the investors on these deals, because we’ve seen a number of new players come into the industry who maybe aren’t as familiar with how, as Addison noted earlier even what a specialty hospital is and then understanding the business model. And from what I can tell, in many cases these joint venture specialty hospitals are quite successful financially. Once they get off the ground, which does justify a burn off of the guarantee, it’s just understanding what type of asset you’re investing in or making a loan on and that that takes some education because these are very specialized subsectors of the health care industry.

Joel Swider: Yeah. And I think, too, I mean, the one thing I would add is on the anti kickback statute piece that we often have to deal with is, you know, what’s the value of that guarantee? And making sure that it’s being taken into account in the pro forma so another prediction that all render had included in our outlook for the year was the continued increase in the tightening regulatory environment. In 2023 we had seen the FTC. Homing in on what it viewed was kind of anti-competitive M. And a activity. There were ownership, disclosure, requirements that went into play for sniffs. We talked about minimum staffing. We talked about the State Co. but the prediction, at the time at least, our prediction was that this kind of governmental oversight would continue to tighten the regulatory environment this year. You know, we had a couple comments come in as to the steward health bankruptcy, and whether that will potentially lead to future and increasing scrutiny from regulators. Addison, let’s start with you on this, as you look over the past 6 months of the year in terms of regulatory activity. What kind of a picture do you see?

Addison Bradford: A mixed back for sure. I mean you. You’re absolutely right. And you cited to the you know, some of the initiatives we’ve seen at the Federal level in terms of anti competition in terms of, you know, trying to get rid of non-competes we see certainly an increased focus on private equity and health care, both at the State level and at the Federal level.

But at the same time. You know, as Libby described earlier. There’s been loosening of State coin laws, and you know I mean, the ultimate room is, you know, the lower decision issued by the Supreme Court last month in which, you know, they essentially got rid of chevron deference. Which will, you know? We, we, you know, allow for potentially greater challenges to, you know, Federal regulations. So you know, it’s a really murky picture. Now, that’s only getting murkier because of the different. You know, the Presidential election that’s later this year in the, you know, clear difference and posture. As to the administrative state that the 2 parties are taking.

Joel Swider: Yeah. And Addison, could you? Just for those who aren’t lawyers on the on the line could you talk a little bit about the chevron deference, and what that, what the implications are, or could be for overruling that.

Addison Bradford: Yeah, no problem. So chevron deferences generally statutory interpretation to tool. So if there’s an ambiguous statute the courts are generally going to defer to a Federal role agency’s interpretation of that statute. and so what the Loper decision handed down last month said was that we’re not going to give deference to the agency interpretation, said, We’re, going to you know, look at it under our typical rules. Assess your interpretation whether it is reflective of the ultimate statue so we, you know, it’s been a month, so we don’t have a ton of litigation that’s really fleshed out on that. But again, the kind of deference that CMS and other Federal agencies have been given doesn’t exist anymore, such that there’s greater opportunity without, you know bar another legislation by Congress to challenge those rules.

Joel Swider: So in the last couple of minutes we have left here, Andrew. I know something you and I have talked a lot about is restraints on private equity, and I think it falls into this category of, you know, regulatory oversight. We’ve got at least 4 States now, with some kind of restrictions on private equity investment in health care real estate, particularly Minnesota, Connecticut, California, and Oregon and just a couple weeks ago there were 11 State AGs who signed a joint letter to the DOJ, FTC. And HHS. Basically expressing concern as to what they viewed was the adverse effect of private equity and its effect on consolidation in the health care market, I do think. And we saw a headline recently that the market is still only maybe 3.3 or something percent private equity owned. But there’s certainly been a lot of focus on this area. Could you talk a little bit about that, and how that’s either restraining or that our clients are being aware of that.

Andrew Dick: Yeah, it’s really interesting to watch the States propose legislation in this area.
Some of it is reactionary, like Massachusetts, where they have a bill that passed their State House restricting hospital sale lease backs, and it was really targeted at real Estate Investment Trust, which is awfully narrow and most of the headlines that I’ve read, and the stories I’ve read suggest that that bill was really targeted at what happened with the steward health care sale. Lease back with one of the major REITs. And I’m not sure that’s the right approach, because that seems awfully narrow.

But if you really dig deep. And if you look at what some of the State attorney generals are are really focused on, they’re worried about communities that have one hospital. I know we’re painting a broad brush by saying the regulation of private equity and health care. But what they’re really worried about are these communities that have one hospital? And if that hospital closes it could leave a community without critical health care services, and that can be devastating to a community. And so if you really dig deep. I think that’s really what’s brewing underneath here. But then some of the bills that come out cover even a broader range of health care services that could even include private equity transactions that, for example, roll up of physician practices which have a very different impact on the health care environment. That for most residents of their community. So I just think, we’re going to see more and more activity over the next 12 months, I think. Really driven by the steward. Health, bankruptcy! My hope is that things shake out with Stewart health care in a way that’s positive, and that the owners of the real estate are able to retent those hospitals. But I did talk to someone in Massachusetts a few days ago who said. You know one of their hospitals is in a in a rural community, and it’s going to be really hard to find another operator that’s willing to go in there because the margins and at that hospital weren’t very good, and so I can appreciate why, an attorney general or State legislator is trying to regulate some of the activity. I just think it needs to be thoughtful because there are some private equity providers, many in which that are, that are doing good things. We just need to make sure that we’re being thoughtful about the legislation.

Joel Swider: Well, with that we’ve reached the end of our time, thanks to everyone for tuning in today, and thanks to our panelists, a quick plug if you like this content. We have a weekly briefing that features the top 10 health care real estate stories from the week prior, and we’d love to add you to that list. So just reach out to us. We’re happy to do that.

Joel Swider sits down with Vikas Sunkari, Senior Managing Counsel at SSM Health, to discuss how a large health system handles the real estate component of M&A transactions large and small. Vikas illustrates the importance of timing, cultural fit, and handling compliance concerns in health care transactions.

Attorney, Hall Render
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Senior Managing Counsel, SSM Health
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Joel Swider: Hello, and welcome to the Healthcare Real Estate Advisor podcast. I’m Joel Swider, and I’m an attorney with Hall Render, the nation’s largest healthcare focused law firm. I’m joined today by Vikas Sunkari, Senior Managing Council at SSM Health. Vikas, thanks for joining me today.

Vikas Sunkari: Thanks for having me.

Joel Swider: SSSM, as we’ll hear in a moment, is a large health system with sophisticated legal and strategy departments. So, today I’m excited to learn more and to share with our audience about how SSM handles its real estate as part of its larger M and A transaction and alignment strategy. To start, Vikas, could you give me a bit more background on SSM as a health system?

Vikas Sunkari: Sure. So, SSM Health is a Catholic nonprofit health system. It was initially founded in 1877 by the Franciscan Sisters of Mary. They came from Germany to St. Louis in 1872. Their initial work was, I think, there was a smallpox epidemic going on in St. Louis. So, they were really focused, then, on serving a very vulnerable community. And that mission persists through today. It’s a large part of our identity, and our mission to serve the communities that we’re in, to be present for our communities and our patients. It’s exemplified in our mission statement, which is, “Through our exceptional healthcare services, we reveal the healing presence of God.” Today, SSM has 40,000 employees, about 11,000 providers, and that’s across 23 hospitals and several medical groups that are regionalized in nature in Missouri, Southern Illinois, Oklahoma, and Wisconsin. So, that’s our health system in a nutshell. There’s probably a lot more to say, but I think that encompasses a high level overview of what we do.

Joel Swider: Yeah. So, Vikas, how long have you been at SSM Health? And what was your path to your current position there?

Vikas Sunkari: Sure. So, I’ve been at SSM for about seven and a half years. When I came to SSM, just immediately prior to that, I was working in the telecommunications industry in an alternative legal role, if you will. There I was doing leasing and land use work for some of the telecommunications carriers, like AT&T, Verizon, companies like that, putting up cell towers and rooftop installations. So, it was real estate work in a sense. That was in Chicago. I was actually, for personal reasons, trying to relocate to St. Louis. I was trying to be close to my now wife. So, when I was looking for other opportunities, I think I wanted a shift back more into a traditional legal role, and I saw that SSM was seeking an attorney specifically to assist with their commercial real estate matters, commercial real estate contracts, leases, and whatnot.

So, to me, that seemed very well aligned with what I was doing and a natural progression to what I was doing in the telecom industry. It was similar nature, but also moving forward into the path of commercial real estate matters, which is something that I was pretty interested in towards the end of law school and through some other job opportunities I had in law school. So, I really was interested in that opportunity and I came on to SSM and jumped right in and have really flourished in that practice area and some others since I’ve been with SSM.

Joel Swider: That’s neat because I could have used your help the other day. I was helping a client review a cell tower access agreement for a hospital building. So, I wish I would’ve had your expertise for that. When you made that move, obviously, you mentioned some geographic reasons, but was there any fork in the road moment? I mean, obviously, there are some parallels for sure on the real estate side, but was there any fork in the road that made you realize that, “I want to move this direction with my career?”

Vikas Sunkari: Yeah, I think there was. So, in my old career, which I really did enjoy it, I really appreciated the organization I worked with, the people I worked with. It was a small business environment, which was nice, but I was getting more into the business side and less into the legal side of things, and I felt like maybe I wasn’t using the skills that I wanted to use. So, seeing this opportunity showed to me, I could maybe use more of the legal side of things. Not to say today, I do work extensively with our business people and still wear some of those hats, but I wanted to shift back more to the traditional legal type role. So, that was a big motivating factor for it.

Joel Swider: Sure. So, Vikas, your title is Senior Managing Council. What are your areas of oversight and expertise within the organization?

Vikas Sunkari: So, I have two counterparts that have the same role as me. We oversee a team of six attorneys who manage transactional work for the entire SSM health system. So, across regions. And our work, among other things, that primarily involves the development, drafting, negotiating of a variety of contracts, mostly physician contracts, whether those are with individual employed physicians or independent contractors or larger medical groups that are hospital based. Also, other clinical service agreements, and then of course real estate arrangements, whether those are leases or timeshares, development matters, construction, purchase and sale of property, among many other types of agreements.

But that really encompasses the bulk of what we do, and obviously a large focus of our work is to ensure compliance with federal healthcare regulations. So, stark and anti-kickback. Throughout that, as well, in addition to actually working on maybe new contracts or changes to contracts, we’re also giving guidance on various either transactional general matters or matters that are specific to a certain contract. If a dispute arises or there’s a question about interpretation, we work with our business people to give them advice and guide them to resolve any particular question or concern they might have.

Joel Swider: Well, thanks for that introduction, Vikas. And just to set out the goals for this particular episode, SSM Health has been involved in a number of large transactions, at least the ones that have made the news in the recent years. I’m sure there have been many other smaller transactions, as well. Things like acquisitions of hospitals, acquisitions of physician groups, and a variety of other partnership and alignment transactions, plus all the day-to-day real estate management activities that are involved with running a health system. And obviously, each of these transactions and scenarios is unique. But our goal today, my goal, is that we can try to uncover some common threads that our audience could apply more broadly when they’re dealing with healthcare transactions in the future. So, to that end, Vikas, could you give me an idea of what are some of the types of acquisitions and transactions that you’ve been involved with in recent years?

Vikas Sunkari: So, I’ve been involved with pretty much all the varieties of acquisitions that SSM will undertake. Those can be as small in scale as those that involve, I’ll give a couple examples. On one end of the spectrum, you have just a simple acquisition of maybe some pieces of equipment from a physician practice, or maybe we’re acquiring medical records, or we’re acquiring both and that practice might be closing. That’s one flavor of acquisition. No real estate considerations in a situation like that. Maybe the next level up is when you’re, similarly, acquiring assets, records, but maybe we’re taking over a lease because the practice is closing. That could be a lease that we’re taking from a third party, or we may be leasing space from a physician who owned a building. I know I’ve done at least one of those where we had to enter into a new lease with that physician.

Then similarly, we have situations where we acquire an entire business or the practice itself, like the going concern of that practice, and we fold them in to one of our medical groups. We employ all their physicians. You might have a situation there where you’re assuming a lease again, or you could be assuming multiple leases, depending on the size of the group. And then, just rising in scale from there. They look the same, but at least in concept, but then you could have larger acquisitions where you’re acquiring a practice or perhaps even another hospital or a large medical group, and then you’re assuming multiple leases and/or acquiring real property that that practice or that other hospital might own, and then the complexity rises from there.

Joel Swider: So, Vikas, in that variety of transactions, I’d like to think through what are some of the biggest challenges that you’ve faced, and how you got through them, how we can learn from that. Maybe starting with the due diligence phase, what are some of the challenges that you face? To the extent there are common threads there, what are some of the challenges that you face in the due diligence phase of a transaction like that?

Vikas Sunkari: So, I think for one, no matter the size, I guess even in a small transaction, we’ve got to figure out what property or what lease could be involved in this acquisition. If we’re acquiring the practice, we’re acquiring the assets of a small practice, do they need us to take over a lease? Or are we trying to take over space that they operate in, is one question. And then, if that is the case, that’s the first questions. Do we have a need to occupy the space that they were in? Do they own that space? Do we have to enter into a lease with the person we’re requiring it from? If not, who is the party that might own the space that we have to enter into a new lease with, or assume the lease that the prior owner of the practice, I should say, held.

And then, along with that, if there’s a third party landlord out there, we’ve got to figure out what is their status. Are they implicated by our stark and anti-kickback? Are they a referral source in themselves? Or they could be a lot of different possibilities. We could be entering into or assuming a lease from a referral source, or it could be a commercial landlord, or it could be one of our large institutional rate type landlords. And the same becomes true even in a large transaction. You’re just doing that at a greater magnitude. Instead of looking at one, you’re looking at possibly 10 or 20, which obviously increases the amount of work you have to do up front to both figure out what’s out there. I think once you figure out what’s out there, the next question is what do our business people who are managing this transaction or managing this acquisition, what do they want to take over?

So, let’s use the example of a larger transaction. If there’s, let’s say, 10 locations, we’ve got to figure out what leases are involved, and then what are the terms of those leases. And by a term, I actually mean the duration. How much time is left? Do we want to assume those leases or not? What compliance obligations do we have? What federal healthcare regulation compliance obligations do we have? Depending on those leases that we do intend to stay with, we have to figure out what our termination rights are in case there’s a different strategy about those spaces. Or maybe when you’re acquiring so many, there may be concerns of, over time, maybe we want to reduce our space or consolidate that space that this group or this other hospital was using with the existing space that we had. So, there’s a lot to wrap your arms around in the situation like that.

And a lot of thinking to be done on the business side of things, which really is a combination of maybe the individuals who are leading the acquisition who could be people looking at it from a strategic standpoint. If they’re not, you’ll want to have your strategic people involved to advise if this fits maybe in their vision. We need to get our facilities, our real estate team involved to figure out how do these properties fit with their goals. And usually, they’re already aligned. I mean, in our case, there’s usually already a cohesive vision about what they want. So, it’s not so much getting the people to talk so much. It’s more about everyone being able to understand what that vision is so we can accomplish it together.

Joel Swider: So, Vikas, you mentioned at the outset dealing with compliance concerns. One question I have on that front is suppose you go through your due diligence and you find, okay, there’s one or more concerns. Let’s say there’re leases. How do you, then, work with the business team to determine is this a risk we’re willing to take? How do we isolate the risk? Maybe it’s something so big that we wouldn’t close if that issue is still open. How do you go through that analysis and the interplay between the legal function and the strategy function?

Vikas Sunkari: So, I think it’s helpful to think about what the downside could be or what risk we’re really talking about assuming, and that’s that we could be acquiring a non-compliant lease. And I’ve seen it happen at least in cases where maybe the prior landlord-tenant relationship didn’t have the same stark or anti-kick back implications. So, I think upfront, let’s say, we were acquiring a practice or acquiring another hospital and then they had a lease, either as a landlord or tenant, with a referral source. And the first thing we’d want to see is is this lease in itself compliant? Or is the rent fair market value? That’s going to be probably the biggest thing to be paying attention for.

And if it’s not, or we aren’t able to obtain that confirmation, we have to let our business people know, before we make this assignment effective, ideally if that implication came up or that there was a concern about being compliant, we’d want to make sure we get our new fair market value opinion, for example, initiated to either support the rate or to give us, I guess, a negotiation point to say, “Look, we’re going to acquire this practice, we’re going to assume this lease with X landlord, and we need to make sure that the terms are compliant with stark and anti-kickback because of the nature of our organization and what our risk tolerance is,” and making sure that we can do that timely before the acquisition closes or before we would actually assume that lease.

And also, we got pushback, I’m sure at times. I don’t have a particular instance to think of, but people are usually used to thinking, “We’ve always done it this way.” And when you bring a new party in, we have to communicate we have a different tolerance for risk or have a different set of obligations. The prior parties may not have had to comply with stark or anti-kickback, for example. So, we have to really communicate that and get the timing right, especially, I know we’re going to probably talk more about that shortly, but the timing is an interesting factor of it because, let’s say, if it’s a small transaction, if you run into some real estate issues or some real estate FMV issues for example, since it’s such a big part of the transaction and it might be a smaller transaction, you have more leverage to, I guess, get that issue resolved before the acquisition closes, for example.

In a very large acquisition, the real estate’s only part of it. So, you’re really under pressure to get this piece resolved so it doesn’t delay the larger acquisition, which could have a lot of other moving parts. Real estate’s just one part of it, and you don’t want to jeopardize other aspects of it or hold up the rest of the deal to resolve this one component of it. But it’s still crucial, obviously, to get these in hand because you don’t want to end up with a bunch of compliance issues after you close either.

Joel Swider: Well, yeah, that’s a great point, Vikas. And let’s dive into that a little bit more because you mentioned the timing. Let’s say that we’ve gotten through our due diligence phase, everybody’s good to go, we’ve got the green light, and there’s a lot to be done between that time and the lead up to closing. What lessons learned or challenges are you facing during that period?

Vikas Sunkari: So, I think it’s a lot to essentially be done, and you can break it out into a couple different areas. So, one, you’ve got your due diligence of what leases are out there, what are our requirements in order to assume those leases if we choose to. And if, let’s say for example, there’s 10 leases, three of them are with referral sources. Then, we’ve got to make sure that we get all of our compliance matters in hand before the closed date. For the other ones, we just want to make sure they get signed by the closed date. And then, on top of that, you may have other real estate matters, like acquiring property, and then that adds another level of timing concerns. So, if there is an acquisition of property involved, then we’ll have to be doing our title work and our survey work and trying to make sure that aligns with the larger acquisitions close date.

So, we’ve got to really pay attention to the timelines and make sure that people are communicating not only from our business people and our real estate people talking to the other parties or, I guess, the other parties on the real estate side, as well as the larger transaction side, to make sure we can get all of our documentation in hand and complete all of our steps in advance. So, like I mentioned earlier, let’s take the example of if there’s an acquisition of land. I mean, in a pure purchase or just purchase or sale of land, if there’s some title issues that come up, the parties might say, “We’re not able to cure those.”

And then, the purchaser has the ability to walk away, and they can make a informed choice if they want to do that, weigh out the risks, and either decide to proceed or not. You lose that leverage in a larger transaction. You don’t have as much flexibility to say, “Should we walk away from this deal?” Of course, if there’s a major issue, it’s got to be dealt with, but you have less of that leverage to say, “Well, I’m walking away from it,” whether you’re using that as a negotiation tactic or if it’s the actual intention.

Joel Swider: Yeah, that’s a great point. The distinction that you raise between the pure real estate transaction versus real estate as a small part of a larger transaction, I can see how that would change some of your remedies or the leverage that you might have to get them to cure things. What other aspects, Vikas, should we be thinking about in terms of whether it’s a large or small M and A transaction? What other themes or challenges do you see cropping up time and again?

Vikas Sunkari: So, this hasn’t quite come up, but I could see how it would come up, for example. So, let’s say there’s an acquisition, and there’s a lease that the acquiring party would be assuming. It could be with a landlord that they already have a relationship with, especially if it’s a large breed type landlord. There’d be a question there of does the lease that is being assigned, or that we’re assuming, does it sync up with the deal terms we have with that landlord? If you’ve got a negotiated lease or template that you work with with a larger landlord, then you wouldn’t maybe want to assume another party’s lease. You might want to rewrite that lease on your template, for example. So, that’s a consideration. And also in a situation like that, come to think of it, if the rents inconsistent, that would pose an issue.

Maybe it’s paying rent at a nearby location that’s been negotiated. It’s been vetted either by fair market value or broker’s value opinion, for example. We want to make sure those are consistent for a number of reasons. Another consideration is that you could be acquiring a lease that is essentially with another one of your system’s entities. So, if you’ve got now intercompany leases, there’s a question of are they needed? In our case, we like to maintain intercompany leases because it’s a good way of for the parties to understand what’s out there. Just a good best practice. But we’ll want to make sure that those are captured, especially if you’ve got, let’s say, one entity is nonprofit, the other’s for profit. You definitely want to make sure that you have the lease in hand there. So, that’s another consideration. I mean, in other cases, though, maybe there’s an intercompany relationship that’s now being formed, and a lease is no longer necessary. So, that’s a step to validate. Let’s see.

Joel Swider: What about employment agreements, Vikas? Because I feel like, in the last couple transactions I’ve worked on, we’ve had some issues there in terms of timing. And, well, we need a go-live date of January 1st, but the parties aren’t ready to move on the asset acquisition side yet. Have you come upon any issues like that?

Vikas Sunkari: Yeah, yeah. And I think, luckily, we’ve gotten the timing lined up, but that often can be actually in a smaller transaction, for example, determinative of the deadline, if you will. X physician needs to start, or the practice we’re acquiring, that physician needs to become our employee on a certain date both because, well, I guess the initial step is that there’s certain paperwork. I think IRS paperwork that needs to be filed and other state paperwork that needs to be pretty precisely filed to change the employment status of that person. We’ve got onboarding concerns. There’s certain requirements, I guess, when someone would have to file their paperwork to show that they’re an employee, I think you can push that out. I don’t think you can pull it in. You can’t backdate an I-9, I believe. So, that can have a pretty strong effect on what is our timeline. And it’s also a matter for that practice’s patients, for example.

If they’re going to come over and join one of our medical groups, they’ve got to let their patients know, they’ve got to send a communication out, and you don’t want to change that date a whole bunch because some of the steps that are needed to complete the deal are lagging or haven’t been addressed. So, I guess another thing that comes up with employment arrangements, too, that was recently was brought to my attention was wanting to make sure that the terms of the employment agreement, if there are some, if there’s one or multiple, we want to make sure that those terms are compliant with fair market value on their own, and that goodwill from the acquisition isn’t being transferred through the employment agreement. Let’s say you acquired some assets, that all syncs up with your fair market value opinion, but if you give them an extra couple of thousand dollars and their employment agreement, that would feel a little problematic. It would be transferring the value that should have been captured in the asset acquisition that maybe wasn’t warranted and putting it in different buckets. So, that’s something to be mindful of, too.

Joel Swider: So, Vikas, these transactions, I know you may not be able to speak specifics on a given transaction, but a lot of these I could see being issues that arise on a large transaction, say. Are there meaningful distinctions between a large transaction and a small transaction? Or are they really equally complex, just different purchase price? How do you compare those to the extent that you’re staffing. For example, on your team, you say, “Well here are the expertise that the various attorneys and business leads that we need to be involved.” Is it largely the same? Or would it differ?

Vikas Sunkari: I think it’s pretty similar in concept. There’s a lot of the same moving parts depending on the size of the transaction. I mean, I think in a small one, you’ve got to account for the real estate, the employment matters, the equipment that might be involved. You’ve got to get a lot of the same type of paperwork or contract or bill of sale. You’ve got to get all these same types of documents involved. But just the scale of it. How many of those are you having to do? If you acquire a small practitioner, you’re doing one or two employment agreements. If you’re acquiring another system, you might be doing hundreds of employment agreements, and that’s a heavy lift.

So, I guess there could be other concerns depending on the size of the transaction that are just necessarily going to be more complex. With a larger health system, like there may be third party agreements, for example. If you’re acquiring another large practice or another hospital, they might have other arrangements with other medical groups or other healthcare entities or other businesses that are, maybe, not necessarily healthcare. I guess whether they’re providing or receiving the services. You’ll see that more in a larger transaction, certainly, than you will in a smaller one just because a larger entity’s going to have a lot more third party arrangements that they’re offering to various parties.

Joel Swider: So, Vikas, last question at a macro level, and then I’d like to get into some quick lightning round. But taking a step back and just broadly speaking, how would you say SSM Health is able to leverage its real estate as part of its growth strategy?

Vikas Sunkari: So, I guess it depends. I mean, we’re always trying to get access for our patients. That lines up with that mission and what we’re all about. So, the real estate, if we can acquire a practice, whether that’s because that person wants to close up or they want to become part of us, that allows us to maybe take over space that they’re in or assume the space that they’re in and provide greater access in certain areas. We’ve been able to do that. Again, we operate in multiple areas. Some of our regions are more metropolitan areas. For example, I mean, I’m here in St. Louis and a lot of our reach in St. Louis is in the metropolitan area. But in other regions we’re in more rural areas, so that can have a pretty significant impact. I would say it’s maybe less about growth and more about that access. I think that’s the crucial part of it, and that’s what you hear people within the organization talking about and really valuing, being able to provide services to more people.

Joel Swider: Well, Vikas, lightning round. A few questions about you personally. What’s a fun fact from your childhood?

Vikas Sunkari: I thought about this, and I thought about what would be interesting. And I just looked around the room that I’m in, and I came up with something good, which is that I used to actually be a pretty diligent comic book collector. Not so much these days, but I still have a bunch of them from when I was young and trying to get my son into it a little bit. But we might have to wait a couple of years for that.

Joel Swider: Nice. Any great values that you don’t want anyone touching because they’re worth so much money?

Vikas Sunkari: No, nothing like that. I used to have stuff like that, and I didn’t have the good sense to keep any of it. So, nothing too valuable.

Joel Swider: What’s your biggest struggle right now, whether personally or professionally? What is it that you’re working on?

Vikas Sunkari: So, I guess one struggle is probably just there’s a lot that I’ve got to manage for the breadth of what my role is, both as a manager and as counsel to my organization. So, keeping everything prioritized, getting what needs to get done the most efficiently. But I think my biggest struggle personally, I think, is I have a pretty good work-life balance and that’s very fortunate for that. I’m very grateful for that. So, with that, it’s not necessarily a bad thing, but my struggle, I think, is trying to be a really thoughtful parent. I think it’s something that I’m always trying to learn, and my kids are getting older and I’ve got to grow with them and learn what they need and just try to give them what they need from a both mental and emotional standpoint. Just be there for them and learn with them and spend time with them. So, not necessarily a struggle, but something that I put forth a lot of effort into to try and be on top of.

Joel Swider: Yeah. Well, when you figure it out let me know because I agree. It is very, challenging.

Vikas Sunkari: I’m guessing it’s going to take about 50 more years.

Joel Swider: Right. So, Vikas, what’s your favorite way to self-educate?

Vikas Sunkari: So, when it comes to just maybe non-legal or just general topics, I mean, I guess lately, because I think so much of my job involves reading over things, I tend to listen to stuff more. So, I’ll learn more about history and whatnot or other things that interest me through podcasts, or listening to something is probably the best medium for that. When it comes, though, to learning more about what I need to do for work, what I need to do professionally, obviously attending CLEs or other programs. Maybe not so much CLEs, I guess more seminars that come up my way are a really good way to learn, a really good way to hear what’s going on out there. But also, on a more specific level, I think learning from more experienced attorneys has been the best way for me to learn.

When I first started off at SSM, I didn’t know a whole lot, and I have a good example of maybe the best way for me to learn in that. I think the first time I had to really deal with a real estate purchase, I didn’t quite know all the steps, and I bought a book. And I don’t think I even read through it. My father-in-law is a real estate attorney incidentally, and I ended up talking to him about it, and that was a lot more insightful to me than the book was. And then, since then, on the same note, I’ve worked with outside counsel a lot to have them walk me through things, whether it was, maybe, a general matter or giving me the framework to walk through something, or if it was actually a specific transaction. Maybe, at first, rely more on them.

And then, over time, I’ve been able to take the driver’s seat more on those. And also learning from peers, like yourself. I mean, I’ve brought up a lot of interesting and unique fact patterns your way to get your advice on, and that’s been really helpful for me to learn and also to share some knowledge with the rest of my team. And then, lastly, I think learning by doing. Sometimes, there’s really no other way just to put yourself out there, and sometimes you’ll make mistakes. But then, I mean, there’s plenty of times I think I’ve done things improperly, and I’ve had to fix them, or teach myself how to do them correctly. And it’s not always pleasant in the moment, but after the fact, you can look back and see that something that seemed completely foreign a couple of years ago is now very familiar.

Joel Swider: Vikas, since you started at SSM Health seven and a half years ago or so, what has been the biggest shift that you’ve seen during that time?

Vikas Sunkari: I guess the shift is maybe investigating, maybe, different types of arrangements. You see, maybe, more telemedicine, for example, more creative ways of partnering with healthcare providers or medical groups. I think that’s really stood out a bit. Maybe moving away from less traditional models, and then the whole emphasis on it is to have, again, a bigger reach to provide better healthcare to more people the best way possible. So, I think that’s one shift I think I’ve noticed. It’s still ever evolving, I think

Joel Swider: I noticed, by the way, I think it was just last week, SSM Health was honored as one of the top places to work in healthcare by Becker’s. So, congrats. One thing that I learned recently about SSM is that there is, I guess, I don’t know if it’s a policy or an approach to non-violent and inclusive language. I was wondering if you could give me any more insight on that.

Vikas Sunkari: Yeah. So, I think that was a policy that’s been in place for quite a while, and it was initiated by one of the former CEOs who was part of the Franciscan Sisters of Mary. It’s always been really important, I think. People really take it seriously, and I think, in everyday practice, it’s as simple as maybe not using certain words that could have a violent connotation. Even if they’re not something we typically think of as violent, certain expressions, “Kill two birds of one stone.” I mean, we try not to use examples like that even though they might feel innocuous. If you maybe don’t say that, you don’t say other things that could come off inappropriate, or maybe sends a certain message. So, I think, on one end, you have that from a simple everyday mindset, but it really flows into how people treat each other.

There’s a lot of respect within the organization for people at all levels of the organization. So, people in my experience, seem to treat each other with a lot of respect, very courteous. Even if maybe you’re dealing with difficult situation, I think there’s a culture of understanding. I’m sure we’ve all worked at places where people maybe thrive or are put in an environment where there’s yelling and you’re under pressure a lot, and I think our organization, really one of our big benefits is that doesn’t fit within our mission and it’s not how people treat each other. And I’ve seen that people get the same outcomes because we’re united in our overall mission. So, for me, I think I’ve noticed a pretty big benefit of it because I think the language aspect just builds it. It’s a way to build into just a general more overarching culture of respect.

Joel Swider: Vikas, last question. What’s your favorite strategy or work tool that helps you be the most productive?

Vikas Sunkari: So, I always make lists, and I do them a lot of different ways. But sometimes if I’m feeling really overwhelmed, I just make a list of here’s what needs to happen today, or here’s what needs to happen this week. And the practice of even doing that is a big stress reliever and a guiding tool to say these are the things that need to be focused on first. And then, I can just continually do that. So, I’ve got a couple, well, not a couple, but I’ve got an ever-evolving to-do list that really helps me stay on top of all the different things I’ve got to be mindful of.

Joel Swider: Well, Vikas, if people want to connect with you, what’s the best way to do that?

Vikas Sunkari: So, you can find me on LinkedIn at Vikas Sunkari. I’m at SSM Health, and then my email is just Vikas.Sunkari@SSMHealth. So, people can reach out to me there.

Joel Swider: Perfect. Well, thanks Vikas, for joining me. And thanks to our audience for tuning in. If you’re interested in signing up for Hall Render’s weekly healthcare real estate news briefing, and our other articles and content on healthcare real estate, please send me an email at [email protected].

Andrew Dick sits down the Yoni Kirschner, the founder of 1Konnection, an online marketplace for buyers and sellers of health care real estate assets.

Attorney, Hall Render
[email protected] 

Founder, 1Konnection
www.1konnection.com

Andrew Dick: Hello, and welcome to the Healthcare Real Estate Advisor podcast. I’m Andrew Dick, an attorney at Hall Render, the largest healthcare focused law firm in the country. Today we’re talking to Yoni Kirschner. He is the founder of 1Konnection, which is a senior housing marketplace, a bit of a unique marketplace for buyers and sellers, which we’re going to talk about a little bit later. We’re going to talk about his background, and how he decided to come up with this idea, and then launch a company. So Yoni, thanks for joining me.

Yoni Kirschner: It’s a pleasure to be here. Thanks for having me.

Andrew Dick: You bet. So let’s talk about your background. What did you do after high school? Did you go to college? What did your education look like? And then what did you do as your first job?

Yoni Kirschner: Oh, first job, that starts way before the end of high school. But no, I’ve been working ever since I was probably 12 years old is when I really had my first job. It was in waitering. Starting out in high school, I was really always trying to do something more outside of school, since I was never really too fond of school, and I never really excelled too well at that. Did okay, but got by, and always found a way to get by. Throughout high school, did waitering and then went to college at the University of Illinois at Champaign. While I was there, actually started my first business called Chicago Kosher Dinner, which was a kosher food delivery service at downtown Chicago. Kind of like Grubhub, before Grubhub since that was probably like 2011. Then as I was there, I was doing door-to-door sales, selling roofing and siding, getting up on 30-foot roofs, checking up hail, and wind damage, and all that fun stuff.

And then after I graduated from college, getting a degree in consumer economics and finance, I really didn’t know what I wanted to do probably as most people coming out of college. And I ended up getting connected to someone who worked at this company called Omnicare Pharmacy. I hadn’t heard of it. Apparently, my aunt even worked there, I had no idea. And I got a job offer from there doing sales. And the day I actually signed my contract with them was the day they got purchased by CVS Health. So immediately went into working for a Fortune 5 company, which was pretty interesting.

Andrew Dick: And so talk about that role. It sounds like you were pretty successful in your sales role and hit a number of milestones working for that company. Talk about that just for a little bit.

Yoni Kirschner: Yeah, definitely. So it was funny, one of my first weeks there was a national sales conference, and someone came up and introduced themselves to me. It was like a VP or exec at the company. And they’re like, “Hey, nice to meet you. What territory do you have?” And I told them, Chicago and the Chicagoland area, and they laughed, and they said, “Good luck with that.” And for me, I always find motivation in someone telling me I can’t do something or something’s impossible to do. And that, just right off the bat, I was like, “All right, here we go. Let’s get after it.” And in the first year I was there, I ended up being one of the top five sales rep in the country, selling pharmacy services, nursing home-owners, and operators across the country.

And then I got promoted to one of the youngest regional sales managers in the country, won one of 15 awards that were given out at the National Sales Conference for collaboration across the entire company. I was always someone that was really focused on, I’m not just here to do something for myself, but I’m here to help others win, because why would I pass up on the opportunity? It doesn’t always need to be for me, but if there’s an opportunity to help someone else, why not get after, and why not do that for someone that can actually be beneficial? So that was kind of my year and a half, two years at Omnicare CVS Health. It’s pretty exciting.

Andrew Dick: And so after that, you worked for another pharmacy company. Talk about that. What kind of work?

Yoni Kirschner: Yeah, so it was similar. I’m not someone that likes being limited in many ways since I’m someone that always strives to be the best version of myself. So, while I was at CVS Health, being at such a large company, there’s obviously a lot of red tape that goes into being with someone that’s so big. And I felt like I had kind of maxed out for where I was in my life kind of early on, 22, 23. My potential there, and I was stopping my personal growth and professional growth. So I went to a smaller pharmacy to be their head of sales. I doubled them in a year after they hadn’t really grown in four, selling over $8 million in new business in one year. And from there, I felt like I had kind of accomplished this next cycle of really proving out that I could sell at a higher dollar value, and these more complex sales, and really complete that flow of doing those types of sales for a company, and growing it.

Andrew Dick: Got it. And then you came up with an idea and-

Yoni Kirschner: I came up with an idea.

Andrew Dick: Talk about that, because even though you were selling to skilled nursing operators, your current company is a little bit outside of what you were doing.

Yoni Kirschner: Yeah, it definitely was. It was pretty funny. I kept going to larger conferences. As I got to that role within the smaller pharmacy where I was more high up, I obviously had more of a national reach on the capability to establish national relationships. So as I was going through that and going to larger conferences, I network with all the owners and operators of senior housing and healthcare real estate. Then he’d always ask me, “Hey, Yoni, do you know anyone selling a nursing home in New York?” Or whoever it was, right? X, Y, or Z doesn’t really make a difference. And I said, “Huh, why the hell are they asking me? I have nothing to do with this type of sales. Maybe there’s something here.” That kind of started the journey of 1Konnection.

Andrew Dick: And so, talk about 1Konnection, because it’s a very interesting platform. There are a number of different sales platforms for real estate in general. But this is a very focused online marketplace for buyers and sellers of senior housing. Talk about the vision and how it works.

Yoni Kirschner: Yeah. So before I even get into that, I think there’s a few key things I realized that really led to the foundation of 1Konnection. When you look at our industry as a whole, as I’m sure you’ve experienced and many other vendors in the industry, and even myself as a pharmacy sales rep, the only way I was successful at selling pharmacy services was because I was so persistent. The number of meetings that I had where people literally just met with me because they said You wouldn’t stop calling us, was astounding, and it was a lot. And these are multimillion dollar decisions. And when I was going through that process, I realized that why are these people meeting with me just because I’m persistent with a decision like this that actually affects the quality of people’s lives?

And the reason was, because these decision makers in our industry are so, I guess, overcome with 30 times a day. They get new vendors reaching out for something, whatever it is. And their main focus is improving the quality of lives of their residents and their patients. And they don’t have time to deal with vendors and make these educated purchasing decisions. So really, the whole concept of 1Konnection was to build this online marketplace for decision makers in our industry, to have them gain the capability and empower them with access and resources to make the best decisions for them with transparency that doesn’t exist. And right now, if you look at our industry, the same way I was successful in pharmacy sales, it’s all offline. It’s all word-of-mouth networking. But you look outside of healthcare and senior housing, and there’s so many other industries that have been more technology adapt, and more innovative, and actually utilizing that technology to improve the greater outcomes of the industries.

And I think senior housing and healthcare real estate, even though there’s so much technology and innovation between products and services, I think the industry as a whole is still lacking from innovation and technology. So when you look at 1Konnection, and what we set out to do, and what it was like to found it, the concept was if we can get everyone in one place, empower them with the tools and resources they need to be successful, that can actually create this greater ecosystem of success, improving the quality of care for residents, and also decreasing cost for the decision makers and actually creating this greater value for everyone in healthcare. So I know that long-winded answer to not actually, but…

Andrew Dick: No, that background was helpful. But talk about who is the target market for 1Konnection? Is it just senior housing? Does it go beyond that? Talk about the type of buyer and seller, and how it works. Go into a little bit more detail.

Yoni Kirschner: Yeah. So it goes beyond just senior housing, it’s healthcare, real estate. It’s really everything that encompasses that. The second thing I found to go back one step and I’ll come back with you, was that these deals have to be done confidential. You’re dealing with people’s lives and they can’t be listed on a real marketplace. So if we’re able to aggregate everyone by giving them access to what they wanted, which are these senior housing acquisition deals for buying and selling nursing homes, senior housing, answering that question, they came to me with, “Do you know anyone buying or selling?” We have the capability to build out this ecosystem of vendors that really supports their needs. So now instead of the vendors chasing after them like I was, they actually have the power to choose the vendors at the time they need them. And so the way we did that, the first step was let’s get everyone on the same page by giving them access to these deals.

So we created this acquisition marketplace for buyers and sellers, brokers of senior housing, healthcare, real estate, whether it’s assisted livings, we’re just getting into medical office building and starting to explore that since that really completes the whole thing. But behavioral health, everything from A to Z within healthcare, which at the end of the day, you would end up having the need for some sort of vendors for quality of services, for residents, or patients. So that’s kind of where we’re at today, is connecting these buyers, sellers, and brokers for these acquisition opportunities. And as we’ve been doing that, we’ve been seeing kind of this hypothesis, if you’d like to call it, or experiment of this ecosystem of vendors building itself naturally. We have owners and operators of senior housing, healthcare real estate saying, “Hey, 1Konnection, do you guys have vendors for X, Y, or Z?” And we have vendors coming and saying, “Hey, instead of pounding on doors endlessly and just networking to the people we need, you guys have access to everyone we need, and who they are, and what they need. Can you start making those introductions?”

So as we look at the greater vision of 1Konnection and where we’re going, it’s really to build out those next stages, and create this one-stop shop marketplace for decision makers in the industry, really giving them the resources they need to make the best decisions possible from acquisitions to operations.

Andrew Dick: Okay. So let’s take an example. We have an owner of an assisted living facility interested in selling. You’re right, it’s important to be discreet about the opportunity. What would they do? Would they create an account on 1Konnection, and describe their property, upload some photos? How does that work?

Yoni Kirschner: Yeah, so a lot of times the owners come to us with brokers representing them, which is great. We love working with brokers, since it just makes a little more… It makes the process a little more simple, because obviously, if you bring in the more educated parties, they know what to do and how to do it from the start, which obviously increases certainty of execution. So an assisted living owner might have a broker representing to them. They come to the platform, they give us high level overviews of the business, and we kind of operate like a matchmaker, like a Tinder or a dating app, if anyone knows those types of references. But it’s really, we keep these opportunities confidential, which is the core piece of this. It’s really more of a matchmaking platform, algorithm involved.

They give us a high level overview. We kind of put in certain fields as vague, and we match that up. Then if we have a buyer come in, the buyer comes in, enters their buying criteria. They give us company profile background, so we actually can start improving the quality of buyers. And then we match that to the potential buyers. We say, “Hey, buyers, we found you a new opportunity. Are you interested?” And we get them connected. And that’s kind of how we’ve been working to date. And as we look at the next stages, actually in the next few weeks, we’re launching an app and full platform from the feedback we got in the past year. And this is really a platform to empower the users. So how do we surround the technology and tools that actually helps them increase efficiency to get more deals done faster?

Andrew Dick: So let’s go back to our example, the assisted living facility owner operator, they have a broker. How does 1Konnection get paid? How does the broker get paid in the deal? Because I think that those are the questions that come up.

Yoni Kirschner: Yeah. So as of today, we take a 1% platform fee. Up to 1% on the buy side, so we don’t take anything from the brokers. It’s really based on a sliding scale. Since we’re not a broker, we’re just a marketplace like any other, so there’s success fees involved. And as we look at building out this next stage of value for users. And as you look at what the opportunity is here, if we could help, whether it’s a vendor or a broker get more deals done, because they have more capacity, they now have more resources, they don’t have to be spread so thin and how they’re spending their time, because they have technology empowering them, then we’re also increasing the value for them. They’re getting more money in their pockets. So we’ll look at with this next stage of evolution, what’s the right way to monetize to keep everyone utilizing the platform. And also help continue driving deal velocity for the industry.

Andrew Dick: Interesting. So talk about… I mean, be even more granular. Is this marketplace for all types of buyers and sellers? Or are you focused on smaller owner operators, or institutional owner operators? I mean talk about who is this focused on. Or is it cover the gamut?

Yoni Kirschner: Yeah, so it’s been interesting. It’s been a pretty long journey to get here. And you kind of see in startups who the early adopters are, and it’s really the people that are smaller to mid-size people, that are more willing to take chance, take risks. And then at the end of the day, after you prove it out with those people, then the larger institutional players who do things the way they’ve always done them, now start to say, “Huh, what’s going on over there? Looks like something might be happening.” And then they start to come. So when we started building 1Konnection, it was really the small and medium sized players. Over the past year, we’ve actually got some of the largest industry brokers on the platform. We went from kind of maybe a 50 million a year in total deal volume in 2020, to last year we had over two and a half billion dollars, and total deals come through the platform.

And we grew from 1000 to 6,000 users pretty quickly in just a year for just someone having an idea of being a pretty bootstrap team. So it’s really for everyone across the gamut, whether they’re owner operators at a small mom and pop, I’ve had those conversations, or some of the largest players in the industry. But the core audience, if you think about our industry as a whole, the largest players, and I think why they are the kind of the latter adopters, is those people already have access to everything they would need. And not just that, but they also have the resources to manage all of that. The people that really need marketplaces are the people that don’t have access. It’s the people that aren’t on the same playing field. They don’t have teams that can go do acquisitions or optimize operations. So it’s really for the small to medium players to start that don’t have access, that don’t have the resources, that don’t have the time to be as efficient as the people that have it mailed down to the team.

Andrew Dick: Very interesting. And congratulations on the growth, that’s tremendous over just a short period of time. Talk about the team, Yoni. I mean, I know that you started out really on your own, founding the company with this idea, have grown the business. Talk about what the 1Konnection Team is today. What does it look like?

Yoni Kirschner: Yeah, we’re pretty scrappy. Right now, it’s myself, head of sales customer success. And we’ve got a small outsource development team that we’ve been managing that’s actually been over in Ukraine since the start of everything going on. But we’ve been pretty scrappy. What I really try to do, I think, as an entrepreneur, is be pretty self-aware, and surround myself when in areas of weaknesses, or areas of people, areas of opportunity where I can bring in someone that’s more strategic, has more experience to supplement our growth. So it’s really been about finding some of these core pieces, whether they be advisors, or just friends, or whatever it might be, and consultants and surrounding us with a larger team of people that are highly skilled in what they do.

Andrew Dick: As we wrap up here, let’s talk about a couple things. Where do you see 1Konnection going in 2023? You’ve had tremendous growth as we talked about. Any key goals this year or milestones that you’re looking forward to?

Yoni Kirschner: Definitely. I think what we did last year with no established brand, no marketing was pretty incredible, really proved out here that there is a need for this. And people ask me, “Does anyone actually look for nursing homes or assisted livings online? And are these vendors interested?” And we saw that with over 500 vendors on our wait list, and thousands of owner operators signing up, and thousands of deals coming through the platform, there is a need. And that was really the goal of 2022. Is there something here? And with that growth we established, yes, the goals of 2023 are really to optimize now. Now we have everyone we’ve seen what works, what doesn’t work. Now let’s focus on improving quality and taking this to the next level to make all of this value that we’ve seen is potentially there come to reality and fruition.

So I think our goal is for 2023 are pretty simple. It’s to increase deal velocity right on the acquisition side and start getting into helping those vendors and the owner operators connect, whether it’s on the acquisitions or the vendor procurement of the actual operations, really starting to prove out this ecosystem and answering that next question of, “Hey, is there a greater marketplace here for the entire industry?” Because if you could lock in that piece, you have the opportunity to really revolutionize senior care and healthcare as a whole. Not just within the US but potentially globally, greater than 2023, four or five years down the line for the entire industry as a whole, which is a large opportunity to help a lot of people.

Andrew Dick: Well, I love the vision. I get excited about high growth companies like yours. How about providing some advice to folks who are getting into the healthcare real estate industry? I mean, you were working in a different area of healthcare, stumbled into healthcare real estate. What advice do you have someone who’s new to the industry, and what would you tell them to do?

Yoni Kirschner: Yeah, I think one of the most shocking things that I’ve found is, I’ve been selling stuff my whole life. Kind of like I mentioned. When it came to 1Konnection, the willingness of people around you to help like yourself, you were with me from the start. You always offered, “Hey, if there’s anything I can do to help, let me know.” I think it’s, don’t be afraid to ask the people around you for help. There’s so many people in the industry, and while some of it might be skewed by these outliers, I think when you’re talking about the industry as a whole, we’re all here for the same reason. And that’s because we believe in the industry. We want to improve the quality of lives, and we want to help the people around us, because that truly has an effect on real people. And I think a lot of people are bought in on doing that and willing to help each other get there.

So don’t be afraid to ask the people in our industry for help. Everyone will help. Not everyone, never say everyone. But people are willing to help. And that can make a huge difference in getting involved in the industry and kind of help take you from start to something.

Andrew Dick: Well, this has been a great discussion. Yoni, tell the audience where they can learn more about you in 1Konnection.

Yoni Kirschner: Yeah, LinkedIn. Or you can’t visit [email protected]. It’s the number one, in Konnection with the K. We’ve got an exciting launch coming up next week, so come check us out. We’d love to have you on there and happy to connect with you guys if you reach out directly.

Andrew Dick: Well, thanks to our audience for listening to the podcast on your Apple or Android device. Please subscribe to the podcast and leave us feedback. We also publish a healthcare real estate weekly update. If you’d like to subscribe to that, please go to my LinkedIn page and there is a link to subscribe.

In this episode, Andrew Dick sits down with Kim Kretowicz, Senior Managing Director, Colliers Healthcare Investment Services, to talk about her role at Colliers and trends in the health care real estate industry.

Attorney, Hall Render

Senior Managing Director, Colliers Healthcare Investment Services

Andrew Dick: Hello and welcome to the Healthcare Real Estate Advisor podcast. I’m Andrew Dick, an attorney with the largest healthcare focus law firm in the country. Today we’ll be speaking with Kim Kretowicz, a national healthcare investment services broker with the Colliers Healthcare Real Estate team. Colliers is a diversified professional services and investment management company with 15,000 employees in more than 400 offices in 68 countries. Today we’re going to be talking about Kim’s practice and her new position leading the South Florida Healthcare Investment Services team, her background and some of the trends in the healthcare real estate industry.

Kim, thanks for joining me.

Kim Kretowicz: Thank you, Andrew. Appreciated.

Andrew Dick: Well, Kim, tell us where you’re from and how you ended up getting into the real estate business.

Kim Kretowicz: So I’m from a small, somewhat, we call it town in New Jersey called Rumson, and I was raised in the real estate business with my father who was a land developer, residential land developer and residential brokerage firm. And with him I enjoyed seeing value being created from dirt. He’d drive around farms, meet with the farmers, and next thing there was a development of many, many homes. And to me it was amazingly interesting to see that. With that I went to college, I went to Marymount in Arlington, Virginia. And I was fortunate enough to have a visiting Georgetown professor teach our business classes and he was very encouraging with the women to encourage a career in business.

From that point I’m in DC and again, my love for real estate was transferred to taking a position, my first job was with Cushman & Wakefield and Leasing starting in DC and then ending up going back to New Jersey and starting my career in New Jersey, the Tri-state with Cushman & Wakefield.

Andrew Dick: So talk a little bit about handling leasing work for Cushman in New Jersey. I know you worked on a large project and that really started what would be kind of the growth of your practice.

Kim Kretowicz: Yeah. Yes. Back in the early ’90s Jersey City was significantly less than what it is, Harborside was the only true commercial development there. And I was tasked with leasing 101 Hudson, which at the time was a piece of dirt sitting amongst six flight walk-ups around it, small practices, small law law firms, and this piece of dirt. And I was tasked with bringing over significant back office, albeit with economic stimulants being offered by New Jersey and we were successful. Merrill Lynch, Lehman Brothers, we brought them all over and leased a million and a half square feet, 90% being leased before we broke ground. And if you go to Jersey City today, Goldman Sachs has their headquarters there, there’s over 50 million square feet of class A office space. It’s one of the more vibrant office sectors in the country, frankly.

So that was really exciting. From there though I did pivot, started to get more involved in investment sales. Again in the tri-state selling properties mainly in New Jersey office properties since I was versed with the office sector. From there, one of my clients represented and had developed at least 40 medical office buildings throughout New Jersey working and partnering with doctors. And they had asked me to start handling some leasing. With that I started to scratch the surface of my healthcare investment sales career and it exploded from there, frankly. Started to sell their buildings, started to represent other sellers of buildings, started to represent medical office developers as well as the actual healthcare sector representing the physicians who were doing sale leaseback. And it somewhat spiraled into a new career, a little ahead of the curve when healthcare wasn’t even a separate sector yet. There was no place to go to find comps on healthcare to where today I specialized specifically in the medical office healthcare sector in commercial real estate.

Andrew Dick: Got it. And so at what point did you make the transition to Colliers and talk about that transition?

Kim Kretowicz: So very recently and just a few months ago in October. So on a macro level, I belong to Colliers USA Capital Markets as well as Colliers National Healthcare Services Group. And in October I was promoted and joined the South Florida Investment Services team and I’m partnering with Mark Rubin and Bastian Laggerbauer to lead a healthcare investment sales division. What we are doing, again, working with Colliers National Healthcare is we’re bringing the national exposure and connections to Florida with the Colliers National Healthcare Service Group. And it’s been very exciting. There’s just so much going on. The activity has been immense.

Andrew Dick: So it’s pretty exciting. Spending more time in South Florida, great place to be right now. Talk about South Florida in particular, what’s the medical office environment like down there? Is there a lot of activity? I know investors love assets that are in Florida. So talk a little bit about the market.

Kim Kretowicz: So the markets really interesting right now. So we have investors on a national level looking at markets that weren’t faring well during the office market plunge, during COVID and so forth. So markets like San Francisco, Austin, Charlotte, Raleigh, New Orleans, it’s unprecedented what is happening right now. In Florida, we all pick up the paper and we hear about the population growth in Florida, which is really been focus on Miami Dade, Palm Beach Counties with the office, economic sectors all moving to those counties.

What’s really interesting and most current is the most significant growth in Florida at this moment is actually Polk County. It’s a county that sits between or part of Tampa and Orlando. And actually Orlando has the most significant growth in any city right now in Florida. So yes, it’s South Florida with Central Florida. And to be clear, we’re representing all of Florida. So we’re working with the other brokers in Florida, collaborating with our capabilities from the healthcare sector, working with the locally based specialists to leverage those relationships. It’s a great formula. So, the Orlando, Tampa, Polk County market is so affordable comparatively to say Miami. So there is a lot of development for homes, a lot of development of medical office buildings, a lot of doctors wanting to locate there, a lot of health systems wanting to locate there. So, the activity is immense.

Andrew Dick: Got it. And talk about the national investment market from what you’re seeing right now. I know the capital markets right now are going through a bit of a evolution, but talk about the investment market and the capital markets in general for healthcare assets.

Kim Kretowicz: So it’s one of the reasons why I was happy to say goodbye to January. It definitely was a sit on the sideline, wait on the rim month as we left 2022 and entered 2023. A lot of investors in any sector including healthcare, a lot of them paused to see where the direction and to see how the healthcare sector would fair, to see how the tenants would fare, to see how lease up would continue. And on the positive it’s all doing well. Leasing is a little bit slower than it was in 2022, however, the absorption rate is still positive and the vacancy rate is still extremely low. You’d be hard fetched in most markets define anything under a low 90 occupancy rate. So with that, the investors are back, the investors continue to pour capital into healthcare, medical office buildings, and as reference there is certain cities with a huge focus on Florida to continue to invest in trade in the medical office, healthcare sector.

With that said, with that pause there was a reevaluation of the value of properties with the interest rates. Interest rates increased almost 5% from where we started 8 months ago. So with that we needed to reevaluate, the sellers of properties needed to readjust expectation of value and the buyers needed to feel more comfortable with perhaps the loan to value that the capital markets were looking for was different, depending on the property. There’s still a lot of capital that’s very comfortable with healthcare. So activity is great. Cap rates have definitely increased. I’m going to say across the board it’s one point. So with a property at one point was selling for a five cap today it’s probably closer value to a six cap. And if a property was valued at a five and a half, five and three quarters cap, it’s probably closer to a six and three quarter, seven cap. That would be more in a less core property, in a less core market. So we definitely see a change in the market, however, we continue to see significant interest in healthcare on a national level.

Andrew Dick: Well, Kim, talk about loan to value ratios for a minute just at a high level. Have you seen a significant change in what the lenders are requiring in terms of amount of equity that needs to be put into these projects? Give me a sense of what you’re seeing.

Kim Kretowicz: So it’s very building specific, market specific and buyer specific. So if you have a buyer that’s being backed by a hedge fund or a buyer that’s being [inaudible 00:12:15] that LTV, they have confidence in that buyer, they tend to have confidence in the market they’re buying into and they have confidence in the property and the tenancy. So with that, your LTV they’re still able to achieve a higher pausing with whether we can stretch it to a 70%, but was depending on, again, all of the above, you possibly can still achieve at LTV.

Go to a different world where we’re talking multi-tenanted, no credit, a not tertiary market but not necessarily core market, you’re looking at 60% LTV. Again, the capital is still confident with healthcare, they still feel they’re going to stay, the tenants are going to stay, it’s a necessity. So it’s nowhere near what the office market is, the pure office. In a medical office they still have that confidence where they’re willing and wanting to lend money on this sector.

Andrew Dick: And that that’s very helpful. I just read one report from the Mortgage Banker’s Association that said that the traditional office market has really impacted the overall commercial real estate market. Do you think that investors sometimes still misunderstand healthcare real estate or has the healthcare real estate asset class really proven itself and the investors in the industry understand that it’s a more resilient asset? Talk about that for just a minute.

Kim Kretowicz: So yes. If you and I, five years ago even were talking about the healthcare sector again, people were still merging it with office. Those that specialized in it and those REITs and private equity groups that were just starting to invest, they understood the difference. And again, our greatest underscore was COVID and with COVID it proved the resilience of medical office. So the people, the companies, the health systems, the healthcare investors, they’re there for a reason and they understand that the pure difference. Again, we have office space throughout the country 50% vacancy, where we have healthcare, medical office buildings with 95% occupancy. So right there is just impacts the significant difference between the two sectors.

So I think that line is no longer blurred. I think you pick up Globe Street and you have your company and the specialty in healthcare has clearly been defined, it’s very different than it was even a few years ago.

Andrew Dick:

Got it. Couple more questions, Kim. It seems like a lot of the healthcare real estate investors over the past 24 months have also started to look at life sciences assets. Are you seeing that with the investors you’re working with? Because historically life sciences has been very separate and distinct from healthcare real estate, but I’m starting to see investors crossing the lines back and forth. What’s your take on this kind of shift in how investors look at life sciences assets and healthcare real estate assets, which I always thought were very different?

Kim Kretowicz: So I agree with you. I think they are very different. However, with somewhat of the medical connection, there are quite a few of investors and specialists who focus on both. I still think they’re very different, but there are investors who like both sectors. Last year the life science was doing very, very well. The cap rates had crept down very, very low. And today there’s actually more of a pause in life science than there is in healthcare. So yes, they tend to overlap in that investor who’s investing in both. But I do agree with you that they’re very different. Again, they’re certainly not valued the same. They’re a different product. They tend to be traditionally single tenant, significantly larger footprints in more core cities with cap rates that tend to be significantly lower than the medical office.

With that said, there was a overpopulation, everyone kind of elbowing each other to get into that market and it drove the cap rate so low that they too took a pause and the market is not as vibrant as it was even a year ago. It’s still doing very well. It’s still going to be a very driven market and it’s still will go hand in hand with healthcare. But they are a very different beasts in how they’re being valued and capitalized. And most of the investors do have both pockets, but they’re very different people looking at them.

Andrew Dick: Yeah, I think that’s spot on Kim. I’ve also heard one investor that’s focused on life sciences assets say that underwriting those assets is very different than underwriting like an MOB or a senior housing asset or something like that.

Kim Kretowicz: Yes.

Andrew Dick: So I tend to agree with you.

Well, Kim, you gave us a little bit of information on what you’re seeing in early 2023 in terms of the healthcare real estate market. Any predictions for the rest of this year as we finish up January?

Kim Kretowicz: So Fed’s are highering rates this week, we think. They’re anticipating it would probably be a quarter of a point. So not as shocking as the other rapid fire interest rates that we had last summer. Inflation is curbing, it’s a little bit better and we’ve all readjusted to, hate using the word the new norm, but the new norm of where cap rates are and interest rates are. So I think you will see, and I’m starting to see an explosion of activity with, as opposed to the fourth quarter, which was considerably slower than the year before, I think 2023 moving forward, Q2, Q3, and Q4, I think it’ll all be very, very active, more so than we saw last quarter.

Andrew Dick: Good to hear. And I tend to agree with you there as well. I think that a lot of the industry was, is feeling better about where the Feds at and hopefully things seem to level out in terms of inflation. So I hope we’re both right.

Well, Kim, as I wrap up, any advice you have to a young professional who’s getting into the healthcare real estate industry? You’ve been doing this for some time. What would you tell someone who’s trying to break into the industry, any advice?

Kim Kretowicz: My advice is just to work really hard. None of this just happens. You need to learn, educate, speak to people, read. And also most important, as you know, you have to learn to pivot. When the world changes and the world changes drastically with many events that we never would’ve predicted, you need to learn to pivot and exactly what that means depends on the situation. But just remember that most important is to just show up. No matter how bad it seems, no matter how bad the market is, it will turn. So most important, whether it be in your career or life, is just show up and it’ll all work out.

Andrew Dick: Good advice. Kim, where can our audience learn more about you and the Colliers Healthcare team?

Kim Kretowicz: So you can see my profile on LinkedIn as Kim Kretowicz, or you can go to our Colliers’ main website, Colliers national website, or you can email me at [email protected].

Andrew Dick: Terrific. Well, Kim, I enjoyed our discussion. I want to thank our audience for listening to the podcast on your Apple or Android device. Please subscribe to the podcast. We also publish a weekly healthcare real estate update that is available on my LinkedIn profile. Thanks everyone for listening.

Joel Swider sits down with Matt Ghanem, CEO and Co-Founder of National Breathe Free Sinus & Allergy Centers, to talk about the meteoric rise of the ENT practice model Matt established with Dr. Manish Khanna. Matt discusses his approach to site selection, actual vs. theoretical risk, and how the right clinical model can be a net positive for both physicians and patients. Along the way, Matt explains the parallels between running a medical practice and running a restaurant (spoiler alert: it’s the quality of the service, not just the caliber of the product).

Attorney, Hall Render
[email protected]

CEO and Co-Founder
National Breathe Free Sinus & Allergy Centers
[email protected]

Joel Swider: Hello, and welcome to the Healthcare Real Estate Advisor podcast. I’m Joel Swider, and I’m an attorney with Hall Render, the nation’s largest healthcare focused law firm. I’m joined today by Matthew Ghanem, the CEO and co-founder of National Breathe Free Sinus & Allergy Centers. Matt, thanks for joining me today.

Matt Ghanem: Thanks for having me, Joel. Much appreciated. Looking forward to it.

Joel Swider: Likewise. So before we delve into Breathe Free and your business model, which has been very successful, I’d like to hear a little bit more about your background and the experiences that prepared you for where you are today. I know you grew up in the DC suburbs in Rockville, Maryland. Did you ever think at that time that you’d end up in the healthcare industry?

Matt Ghanem: That’s a good question. Rockville’s a good 20 miles outside of DC. And no, I didn’t. I didn’t have any family members or anything like that in the healthcare industry. And we interview mid-level providers, meet with doctors, nurses, things like that, and we say, “Hey, how did you know wanted to be in healthcare?” It’s almost always I’ve known since I was five or I’ve known since I was a kid, my mom’s a nurse or whatever that looks like. For me, that wasn’t it. When I was a kid, although I’m 5’11 now, I was 5’11 in middle school, I thought I was going to be an NBA player, clearly not in the cards unfortunately. And then after that, after I blew my knee out in high school, I actually wanted to be an attorney.

I interned at a law office, I did some mock trial stuff in the summer, and my minors in political science, I thought I was going to go to law school and then probably midway through college I had another internship in a law firm, and I don’t know, it didn’t seem like a great fit for me at the time. So no, definitely did not think I was going to be doing this. So that’s a good question.

Joel Swider: Matt, I know you hold a bachelor’s degree in communications and political science from the University of Pittsburgh. You earned your MBA from the George Washington University in DC, at that point, fast forwarding in your history, what was your career aspiration at that time?

Matt Ghanem: I finished business school I think at the end of 2012, so that was about a little over 10 years ago. At that time, I had just started in medical sales, actually just started at the ear, nose and throat company that got acquired by Stryker in 2018, and that six-ish years or so prepared me to an extent for what we’re doing now. My career aspiration was to grow and continue to manage people, which is what my experience had been in before, just in a different industry, and eventually become whether it’s a national director or VP of sales or ultimately even maybe a CEO of a medical device company. So at that point, I had been in medical sales for about two years and I only did it for about another six months before I got into management. And then I got moved all over the country and things like that.

But I moved up quickly, but at the same time I knew that I was more of a self-starter. And as these companies get bigger and they get acquired, there are these systems, and it’s not like the federal government or something like that, but it’s a lot harder. You can’t be nimble, you can’t move quickly, you can’t react to the market and make changes that are best for the business because there’s processes and things in place, which, of course, obviously in a lot of these cases have been successful. But for a startup, moving quickly and being able to react and help customers in my old life was super impactful, and that’s something that I just enjoy. So the thrill, I suppose, or the challenge of a startup is something that I really enjoy. So I knew once I got into where I thought I was going at that time that it probably wasn’t something I was going to do long term, but I knew that there was still a lot to learn.

Joel Swider: Sure. At what point then did you meet Dr. Khanna, the co-founder of National Breathe Free?

Matt Ghanem: This is always a good story. I started in March 2012 with this company that is now Stryker ENT. The ENT, for people that don’t know, is ear, nose and throat. So he was one of the only customers that the company at the time had. He’s a fellowship trained rhinologist, which essentially means you go through residency as an ear, nose and throat doctor, or an otolaryngologist technically. And then you do a one to two year fellowship, which means you do specialized training. And as it relates to Dr. Khanna, rhinology is skull-based sinus surgery, which is more advanced cases where they’re doing a… I don’t want to get too technical, but a lot more advanced techniques up and around the skull base. So there’s only a small handful of folks that are comfortable with that and have trained that way.

So when I started, he was the first customer we had, he taught me a lot about ENT, he taught me how to read a CT scan, showed me abnormalities on the imaging that would lead towards someone that would need a procedural intervention of their sinuses or their septum, or their turbinates, which those two are the main factors in your breathing. So I learned a lot from him. It’s interesting, he grew up in Rockville as well. He’s seven years older than me. So when I moved out west of California about a year and a half later, and then Vegas and ultimately Arizona, I would still come home for the holidays, I would see him, we were friendly, I’d meet him in Vegas and stuff like that during the NCAA tournament, and we were friendly. And obviously we kept each other in the loop on what was going on in ENT. So it’s a full circle that we started to practice in 2018, when just six years before I literally had no idea of anything as it relates to ENT, and he taught me a lot of it. So it’s a pretty cool story.

Joel Swider: That’s neat. You never know where those relationships are going to take you. Matt, in less than five years, Breathe Free has grown from one location in DC to 17 operational sites across eight states, with, sounds like, the 18th opening next month. Congratulations on that. You said you have 225 employees, 17 clinics, about 500 patient encounters a day. You all employ 20 ENT surgeons and 37 mid-level providers, PAs and NPs. Obviously you’ve developed a formula that is scalable across a variety of geographical locations. Can you tell me more about the Breathe Free business model?

Matt Ghanem: I appreciate that. It’s been a pretty cool ride just in a short amount of time. Obviously four and a half years ago or so feels like a lifetime ago, but it’s been something that has just been a great ride so far. One caveat to your question I suppose is that most of the physicians we work with are partners, just in case they’re listening. But I understand where you were going there. What we look for essentially is ENTs a really small specialty to begin with. I believe there’s nearly 10,000 ENT physicians in the country. A few years ago some data came out that showed physicians in their 70s and 60s versus physicians in their 40s and 30s, and there was way more ENTs that were going to be on their way out than on their way in, so it’s already underserved to begin with, and I think that’ll be something that continues to trend in that direction.

Also, a side note, it’s generally one of the top three hardest residency programs to get in, so you have to be super smart and you have to really want to do it. And the people that have the highest scores and interview the best have the opportunity to be able to be an ENT. And what that means is you have a quality of life, you’re working pretty close to a nine to five, and you still have a surgical day or two where you’re performing surgery, so it’s the best of both worlds. But from a business model standpoint, we look for folks that want to perform office-based procedures. A lot of ENTs go to the hospital, there’s added cost to patients, risks with anesthesia, et cetera.

And that’s how ENTs were trained, to be candid, just to do sinus surgery in the hospital. There’s long turnover times and difficulties with the administration. So docs that are like, “Hey, I don’t want to take call anymore. I don’t want to go to the hospital, I want to do things in my office, I want to control my schedule, but maybe I can’t figure out from an infrastructure standpoint how to do that. I have a busy practice, but my staff can’t really get aligned and help me grow this office-based practice so that I can step away and spend more time with my family instead of spend time in the operating room.” So we find physicians like that and we provide an ecosystem for them that allows them to be doctors and just do what they do. So if there’s any single thing that the physician doesn’t have to do, whether it’s taking a call from an insurance company, or dealing with payroll, or a staffing issue, or dealing with a landlord, or anything like that, we essentially take that away from them and they only do what a doctor can do.

So if it’s a procedure, or if it’s reading a CT scan, or a patient that’s scheduled for a procedure has some questions, that want to talk to the surgeon, they do those types of activities during their day. And candidly, if they only have a few procedures, and the mid-level providers are comfortable and they’re trained well and everything, they’ve been there a little bit, they just go home. They don’t have to sit there and see 30 patients in the afternoon, which is what they would normally do. So I don’t know if I answered your question, but we just essentially let surgeons be surgeons.

Joel Swider: That makes sense. And one question I think that begs is do you think this model would work in other surgical specialties?

Matt Ghanem: Yeah, the surgeon’s most valuable time from a ROI standpoint and from a patient care standpoint is to be doing things that only they can do. For example, in the ear, nose, and throat, a post-op visit with a mid-level provider is very simple, especially in an office-based minimally invasive procedure. So if you were going to have someone come back in, let’s say, it could be something in pain or spine or orthopedics, orthopedic surgeons spend two and a half or two days a week operating, and then two and a half days or so in the clinic, whether it’s seeing someone that has a torn ACL and telling them how they can help them, or seeing somebody that is having a pain injection or something like that, that’s pretty simple, why not have someone that can do that, do that, and then you just operate four days a week or five days a week? And then we take the call away from you.

If there’s a call with a post-op nose bleed, which is standard in a procedure that we do, we have a nurse or someone that takes the call and we pay them a little extra, but it takes that off of the doctor. So there’s plenty of scenarios where this would be beneficial, even in non-insurance based things like IVF, or even plastic surgery and things like that, because the surgeon’s time is best spent doing these revenue generating procedures, but also procedures that people need. And so if you’re booked out six weeks because you can only do one day, or a day and a half in the operating room, or whatever you’re doing, we can make it so that you spend four and a half or five days doing that, and patients get in faster.

Joel Swider: And Matt, that leads me to another question, which is it seems like there’s a clear value proposition for providers. What’s the value proposition on the consumer, on the patient side? You mentioned scheduling maybe much easier. Are there other things from a marketing and just value proposition that you can think of?

Matt Ghanem: Yeah, so it’s actually interesting. It’s one of the only times, maybe in life, but definitely in medicine, where essentially what’s best for the practice from a business standpoint is also what’s best for the patient clinically. And every insurance carrier, outside of one or two isolated small Blue Cross Blue Shield plans cover the procedure. So the insurance companies see the value in it, that it works clinically obviously, but not only that, it saves them money, because as we know, the CEO of UnitedHealthcare, obviously his or her job is to deliver shareholder value return. And how do you do that? Obviously you add companies to your policies, but then at the same time you have to make sure that we’re doing things that make sense from a business standpoint while allowing the right treatments for patients to have. So an office-based procedure, even though it pays the physician way more than they would make in the operating room, it can save up to 75% or more depending on the site of service that they’re taking it to.

Because ambulatory surgery centers that are standalone, something that a doctor might make two to 400 bucks on, the surgery center would make nearly $10,000 from that patient depending on what specifically the doctor’s doing. So even though the doctor only gets paid a couple hundred bucks, the facility’s getting the entire thing. Whereas in the office, the doctor gets the entire payment that is less than the $10,000, and it’s a like treatment. But then if you talk hospital, the reimbursement in a hospital is significantly higher than a freestanding ambulatory surgery center. And obviously there’s added cost and things for hospitals, but if that same procedure gets done in a hospital, it might be 15 to $20,000, whereas in the office it could be 5,000 to 7,500 depending on what exactly the doc’s doing. So the insurance company saves money.

And if you’re a patient with, let’s say, a thousand dollar deductible and 20% co-insurance, that thousand dollars deductibles the same, but the 20% co-insurance is significantly less in a office-based setting than it is in a facility based procedure. And added cost for anesthesia or anything like that you don’t incur because it’s done under a local, like getting a cavity filled, so there’s a huge value proposition there.

And then not only that, lastly, at the same time, if you were going to have your sinuses done at a surgery center hospital, in nearly all cases they’re going to call you and say, “Hey, your estimated responsibility is 1800 bucks, please bring it the day of surgery.” And if you essentially don’t, they won’t help you. Whereas we can be flexible and set up payment plans and tell them, “Hey, you know what…” You could pay $300 a month for the next six months or whatever it is, we don’t need to take that upfront. Obviously we’re required by insurance contracts to try and get payment or collect payment from patients, we can’t just say, “Hey, don’t worry about it,” but we can be flexible. So that’s another value proposition.

And on top of that, if the doctor’s operating in the office five days a week, you have a large amount of flexibility. Let’s say you don’t have help for your kids three days a week and you know that if it’s on a Tuesday, it’d be way easier for you to have it, but in the operating room, the doctor’s block is only on Thursdays. So what do we do then? We have ultimate flexibility. We could even do cases on Saturdays if a patient can only do that, or do it at night, or super early in the morning, or whatever it might be because it’s pretty quick. So it just provides the ultimate level of flexibility for patients.

Joel Swider: Matt, when we were preparing for the episode, you mentioned to me that you were involved in running several restaurants after you graduated from college. And speaking of this value proposition, both on the provider side and on the patient side, really the intersection of those, you mentioned to me that running a medical practice has a lot in common with running a restaurant. Could you elaborate on that? I thought that was really an interesting analogy.

Matt Ghanem: It is interesting. It’s something that I never actually thought. So when I was running restaurants, I never thought that it would really prepare me for anything. And to be candid, it’s really hard work, it’s a lot of hours at times of the day when most people don’t work, obviously, Because you’re serving people that aren’t at work, so it’s really challenging. And a lot of times people didn’t look at it favorably on a resume, so I never thought it would really help me. But it’s interesting because you have a lot of transient employees in restaurants, and take the providers out of it, the physician assistants or nurse practitioners, or even RNs at that, and obviously the physicians, everyone else, if you had a job at a front desk, it’s like you’re the hostess at the restaurant. If you don’t like something, you could just go find another job, there’s tons of them out there.

And so you’re essentially in both scenarios, not always lowest paid employee, but a lot of times the employees with the least amount of experience and the ones that tend to be the most transient in a restaurant and in a medical practice are the ones that if you want to come in, you talk to, they’re the ones that almost ultimately decide when you come in, they’re putting your appointment on the schedule. If they’re friendly, you’re more likely to come. If they’re not, you’re more likely not to come. And so that’s another thing that’s interesting is the physician, and also the physician is like the chef. So they’re in the back, your favorite steakhouse, you don’t see the chef, they’re making sure everything’s done correctly, that the food’s cooked the way it’s supposed to be, presented the way it’s supposed to be, and that’s the same as a doctor, or even a PA.

They’re going from room to room, they’re taking calls, they’re busy, they’re answering emails, they don’t know what the front desk person’s saying, they don’t know what the medical assistant that’s rooming the patient is telling the patient, they don’t know if there’s a patient, or if someone drawing blood, what’s happening there, is that getting put in the right place, and that’s the same as the restaurant. The chef, a lot of the times if they don’t have super competent front of the house help in a restaurant, a dining room manager so to speak, or whatever it might be, to make sure that the bartender’s doing the right thing in the front desk or the hostess stand is being friendly and letting people know the right wait times and things like that. So there’s so many parallels just in medicine, it’s a service business, but they don’t see it as a service business in most cases.

It really is though because consumers have choices. A lot of plans now you don’t need a referral, you can go wherever you want. If you don’t have a great interaction, you can essentially just make a new appointment. And so one other thing, the doctor can be great, but if the staff is rude or the office isn’t well kept, a lot of the times you’re going to lose that patient. Just like a restaurant where if the food’s great but the staff’s rude, not a place a lot of people want to go. On the flip side, if the staff’s great and the food just wasn’t up to par that day, you may try it again. And that could be the same for the doctor, maybe the doctor ran an hour and a half behind, but the staff was great and they kept them engaged, and let them know, “Hey, this is what’s happening. We’re going to take care of you. Here’s a coffee or whatever it might be that we have. We’ll make sure your next appointment is a super favorable time for you.” Take care of them.

Obviously in a insurance based medical practice, you can’t give anything away to a patient for free that you’re required to charge for. Sometimes we’ll give away Starbucks gift cards if people are waiting a long time, but we can’t say, “Hey, we’re not going to charge you for your visit,” but we could do that. In a restaurant, you would give their food for free. So all of those similarities, there’s so many parallels that exist between the two of them, and I didn’t realize that being competent and comfortable hiring hourly employees or people that are going to work, or how to evaluate when you put a job up on Indeed for a medical assistant, you’re going to get hundreds of applications in the same day in an urban area, how do I look through those resumes when you’re not really looking for experience, you’re looking more for the person because we know we could teach them that stuff, and that’s the same in a restaurant, how do you manage 300 applications for a serving job?

So it’s the same skillset, and then obviously it’s people. So you’re getting comfortable with that, but the actual the way they run, if a well-run restaurant, if you transitioned or translated that to a medical practice and a medical practice became that well ran, it’s not the norm. You would probably go to your primary care doctor and wait 30 to 45 minutes and see them for five minutes. And so we also don’t do that either, but there’s just so many parallels. This is a question we could probably talk about for the whole episode honestly.

Joel Swider: Well, Matt, I love that analogy because I think you’re right, I think a lot of times, and I’m speaking mainly from the patient perspective, but there’s not as much focus on the service aspect, but of course it is a service industry, the medical industry. And obviously that’s something that when you’re looking to partner with a physician be able to say, “Look, you can do your job the best in the world,” but part of the value, I would imagine, that Breathe Free is bringing to the table is we’re going to surround you with the front of the house type people that are going to further promote that good level of service and quality. How do you screen for that from an employment perspective? Do you have certain metrics that you like to use, or how do you do that?

Matt Ghanem: It’s interesting, when we only had one practice and I was doing it, I can tell you how I would do it, and then obviously anytime you expand and grow, it obviously becomes harder for quality control. Same with anything else, like Starbucks, if there’s 10 Starbucks in your town, it would be perfect, but there’s not, so it’s harder. So it’s all about people as we grow. Actually one of the jobs that I did was for a corporate restaurant company, and it was my second job out of school, I did a management and marketing job at a full service restaurant at first, this was a little more of a quick service restaurant, but my job for the first year that I worked there was to approve every hourly hire, every hire besides the managers, that any manager, and there was 15 units in the DC area at the time, wanted to hire.

And all I was looking for was did they smile, did they show up on time, are they engaging, are they friendly, because those are the things you can’t teach. I can make someone show up on time if I pressure them and things like that. You can’t make someone be friendly. You can make them say the right words. And there’s plenty of people that aren’t friendly that say the right words, they’re just not welcoming, they’re not saying it in the right way, they’re not smiling, they’re not making eye contact. So those are so important. And obviously you need to screen as well for someone that seems relatively with it, and they want to learn, and they’re engaged, and they want to grow, because obviously those types of people are always going to do better in an environmental where they’re learning. But I can’t teach someone to be friendly, you just can’t do it. So we’re always looking for that.

There’s a couple other things. There’s a really cool test that you can do. This is one of my favorite restaurant tests that probably no one does. It’s to test sense of urgency. This is a really cool one. So what I would do, and we’ll do this, and I’ll have someone that’s coming in for an interview sit in the farthest corner of the office, and I’ll show you exactly what we do, but in a restaurant you would sit them in the right side of the dining room and say, “Hey, wait over here, I’ll be right with you.” Then you walk over there and say, “Hey, we’re actually going to chat over here. It’s a little loud,” and you walk in a pretty quick pace to the other side. And when you get there, see how far they are behind you.

If they’re right up on top of you, they have a good sense of urgency and of course you’re getting the best version of this person, just like any new employee, the best version they’re ever going to be is how they are in the beginning. So that’s a good sense of urgency test. So I’ll do that. And I’ll come to the door, open it like you’re going to call a patient back and say, “Hey, we’re going to interview straight down the hallway over here in the back,” and I’ll hold the door open, right when they get to the door, I’ll take off, and then see if they keep up with me. And that’s just one way to gauge sets of urgency. And that’s important. If you want to learn, and we’ve figured out that you’re friendly and you have a sense of urgency, there’s a great chance you’re going to be successful, at least in my book, because all these jobs, whether it’s a restaurant or in a medical practice that aren’t provider specific and you don’t need specific training, we can teach you any of it.

So we just want people that are going to learn. And the other thing is we also don’t hire a lot of people with medical experience for these roles. We hire people with customer service experience that understand sense of urgency, understand being friendly, understand that it’s not the patient’s going to wait for us because we’re the doctor. That traditional medical mentality that you’ve probably experienced and I’ve experienced as a patient is just not okay in my book just because we’re humans, it’s not okay to treat anyone like that, but also if you’re trying to run a business, you need to provide an environment that is going to allow for not only repeat customers or patients, but word of mouth. And that’s the strongest thing. If you can create someone going home and going, “I went to this doctor today, and what an experience it was. They were friendly, they spent a long time with me, they ran on time.” Nobody does that. And if you can do that, then obviously you’re going to be successful. So I hope I answered the question.

Joel Swider: I love that. Matt, our audience for the podcast consists of both people who are interested in the healthcare field, but also those in the real estate arena. What can you tell me about your real estate strategy and how that complements your broader business strategy?

Matt Ghanem: It’s a good question. So when we partner with existing practices, a lot of the times we’re stuck with what’s there because they have a lease and they have space and parking, and all those things. But about half our practices, we started from scratch, whether it was a doctor leaving a practice and opening a new one, or even moving across the country. So in those scenarios what’s really important is where it is in relation to highways and access, because we’ll run TV and radio ads in a lot of these places. We focus a lot on SEO in certain parts of the areas too, where it’s dense, so there needs to be appropriate parking, it needs to be easy to find. But not only that, if you look at, for example, let’s say in the Valley, in Phoenix, for example, you have the 101, which is 495 in DC that runs around the city, you have the 10 that runs across, and then you have the 17 that runs =south. I think I got those.

So if we’re going to put one office in the city, you either want to be at the intersection of the cross-section of the two that run vertical and horizontal or you want to be where one of them touch the big circle essentially. So that way that if you hear a TV ad and you live 20 minutes away, and it’s only 20 minutes on a highway, it’s not that big of a deal. But if you’re navigating through the city and you have to deal with parking and it’s hard, that’s so important to us. So from a real estate standpoint, it doesn’t necessarily need to be in a medical building or anything like that, because in most cases you’re not going to get walk-ins.

You can build a relationship with a referring practice in the building, but at the same time, it’s just like any other type of sales, you go in, you tell them, “Hey, this is what we do, this is why we’re different, here’s how we help people,” but if they’ve been referring to another ENT and are happy for the last 10 years, odds are you’re not going to get that referral base anyways unless something changes. So as long as you’re in a dense area and you’re around where it’s easy to get to, that’s paramount. Parking in an urban area is paramount. In our DC practice, there’s only three or four medical buildings in the west end of DC, the parking’s terrible, it’s hard to get to, we didn’t really know what we were doing but it’s in the medical area, so people are used to dealing with that, which we didn’t really know.

And that’s okay. If you stay longer than an hour, you’re paying 20 bucks for the parking. We’re near the metro, which in an urban area is important too, but it just needs to be accessible. So we can get there by Uber, you can get there by bus, you can get there by Metro, and obviously we have parking, but there’s some medical buildings that don’t have parking. So the fact that we have it is better. For example, we opened a practice in LA, we spoke to our marketing, the guy that does our TV and radio, hey, in your experience, obviously there’s tons of traffic in LA, so if somebody hears an ad in West Hollywood, they’re probably not going to go to Thousand Oaks or go to Long Beach.

And the problem there is when you advertise, the net that you’re casting is so big, so people might hear your ad in Temecula if it’s TV or radio, and you’re in Burbank where we are. So what we learned is there’s two highways that run across and one that runs down. So if you’re going to be in LA at all and you want any level of accessibility, Burbank was it. So it was going to be Burbank or Glendale. So we’re right by the Burbank airport, and the highways, I can’t remember which ones they are. I’m sorry about that. But that was the best one to be able to capture people, because if you go out into the other side of the burbs, I suppose, like Thousand Oaks or Simi Valley or something like that, it’s isolated.

And then you can go to the west side, but nobody’s really traveling through the west side of LA because there’s so much traffic, it’s really hard. We’re about to partner with a practice that has an office in Marina del Ray and in Long Beach, and just trying to go from one of those to the other in the middle of the day is pretty difficult even though it’s not very far. So just considering all of those thing, I know that sounds probably like a cookie cutter answer, but they’re important. And a lot of people don’t think that. Most doctors will go, “I want to be over here because it’s near my house or it’s near where I work out, it’s near where my kid’s school is, it’s near where we hang out, or whatever that might be,” and that might not necessarily be the best place. Maybe there’s a place five minutes away that if you live 20 minutes away it’s way more convenient for you to go, “I’m going to go here versus I’m going to go over here.” So just all things to consider I suppose.

Joel Swider: Matt, once you have the site selection then completed, which I think is very interesting and I don’t think is cookie cutter, it sounds like you give a lot of thought and consideration to that, how do you then decide is there going to be a personal guarantee, whose name is going to be on the lease? Is there going to be a corporate guarantee? How do you go through some of those business analyses if you’re leasing, for example?

Matt Ghanem: That’s a great question and a challenge a lot of the time. In our first practice we had to do a personal guarantee. Pretty much, Dr. Khanna and I leveraged everything, and so we had to do whatever they wanted. But now we haven’t given a personal guarantee I don’t think in maybe after the first couple practices we haven’t had to, which is great. We have really strong financials that have a few different practices, specifically capital, so we’ll do corporate guarantees on those a lot of the times, and that’s okay with me because you don’t want that much, I don’t want to say built up risk. And when I look at risk, there’s two different types of risk that I don’t think people realize. There’s theoretical risk and there’s actual risk. So I’m going to give a little side before I go there.

So I’m scared of heights. This is actually really great. I’m going to give Dorian a shout-out here from Prepare to Roar and the riverbank group there. She’s based in Atlanta. She did a lot of behavior style profiling for us at her old company. We actually had her at our first meeting and taught about different behavior styles and how you communicate to somebody that… For you, for example, if I’m sitting and looking at your desk and you have pictures facing out to me, that means you’re probably someone that is engaging, and wants to be friendly, and wants everyone to be in harmony as they would say, so I would ask you questions about those. But if you were someone that sat down and I could only see the backs of your pictures because you’re looking at them, then you’re somebody that’s more closed off like me to the point, doesn’t probably want to have small talk. So things like that.

So we went on this thing, I think we were in Belize, and we had to propel down into the sinkhole down a wall. You’re essentially hooked up to not a bungee cord, but you repel down the wall. And I’m terrified of heights, this is my worst nightmare, and she talked about theoretical versus actual risk. We were with people that trained, people that jumped out of planes, and did this for the military, so the risk is only theoretical. They’re experts. They’re helping you. It’s not an actual risk. Drop off the side of this mountain essentially and go down. I try to think of things in theoretical versus actual terms. And so if you fast forward to is Capitol Breathe Free going to corporate guarantee the Frederick Breathe Free office, which is in Frederick, Maryland, about 90 minutes away. The doctor’s been there, established, he’s leaving the hospital, his wife’s a primary care physician, she’ll be able to drum up some referrals in her practice depending on what their rules are with their ACO, which is essentially a referring group.

And he’s been there long enough and has a good enough name, and we know that we can market there, we know that Zocdoc, which is something that we use in our more urban markets, works well because DC is Zocdoc’s second biggest market, New York’s its first. So we know that we have all of these things in favor. So it’s a theoretical risk to corporate guarantee that. So I guess that’s how we look at it. There’s other ones, there’s a couple ones that we did where we had to have… Instead of that we did a letter of credit through the bank where it burns down for the first three or four years, and so that’s easy because all you have to do is have that money there, which we have a line of credit, so we use a letter of credit that burns down, there’s really no cost to it outside of generating a letter. So that’s preferred in some cases.

But we definitely just tell people now we’re not doing a personal guarantee. We have enough history. You can see the financials from every single one of our practices. We’re not going to do that. And I know for solo practitioners or new practices without a history that’s probably the reality. And then obviously if you’re a really well established landlord versus we’ve looked at buildings where it’s owned by the doctor that has the suite on the right side, and he’s leasing out the suite on the left, that’s always going to be tough I’m sure you know. I’m sure you’ve experienced it. There’s obviously no TI involved and no free rent, and you just need to take it as is, and you need to guarantee it, and I want your wife’s guarantee and all that stuff. So it just depends on also, as you know, I’m sure people listening know, what kind of landlord you’re dealing with and what their appetite is for, I don’t want to say risk, but I guess theoretical or actual risk. So I think that depends. I don’t know if that answers it or if there’s a side question that you have that you might want some clarification on.

Joel Swider: That makes a lot of sense, Matt. Thank you. So switching gears a little bit to maybe it’s real estate, maybe it’s not, but over the past four and a half years since you founded Breathe Free, what’s been the biggest shift or the biggest hurdle that you’ve had to surmount?

Matt Ghanem: There’s a lot of them. One of them is physician selection, because we made some choices based on more necessities sometimes in the beginning where it’s who’s willing to take the leap with us because we don’t have a ton of history, we don’t have a ton of proof that’s more theoretical of what can happen than what’s happened in the past. So we started in the end of 2018 and we thought by this time we might have a couple offices, but it’s grown like wildfire, so that was one, how do we pick the right people. And now we’ve learned a lot. Now we’re really good at that, but in the beginning that was tough, COVID was tough. We started our second office in Dallas, Texas, it was a well-established practice in Fort Worth, and then we have a satellite office that was in South Lake, now it’s in Irving, which is essentially near the DFW airport essentially, more towards the city though.

And we started February 1, 2020. And so after March we couldn’t travel anymore. Well, I was still traveling, but I was on airplanes with two people from DC to Dallas, literally two people. It was crazy. So there’s all the uncertainty, what’s going to happen, are we putting ourselves at risk? And then we loaned money to the practice there, it was what we normally do, so that the doctor doesn’t take a hit while we’re adding infrastructure and things. And we didn’t have any money then. It was just Dr. Khanna and I, we didn’t have all these practices, so that was a personal loan essentially. And then the Texas Medical Board forced them to close and made elective procedures, you couldn’t do them whether they were in the office or not. And so that was challenging. What we didn’t know at the time is that was going to push more people our way.

The next two offices we opened were physicians that were employed by either a hospital or a group, and they were significantly limited by the hospital or the group. For example, one of them is in Virginia, and they’re essentially most of their pay came from their RVUs, which is relative value units, essentially how procedures and physicians are paid based on their work, and most of that comes from the operating room. And Virginia didn’t allow elective procedures for most of 2020. So the doctors were literally making no money and they had no control over it. Whereas in a private practice, it’s all risk so you could decide what you want to do. So the next two practices, I don’t know if they would’ve happened without COVID, and now that you have four, that jump doesn’t feel as big. But navigating that was hard.

And then once we got through 2020, we realized that, all right, as long as we have precautions and things like that, we’re probably going to be okay for most folks. But we still obviously had to do tons of things in the office to make sure people felt comfortable, and that everyone was safe. But what it felt like in March wasn’t what it felt like in January of the following year. So that was a huge obstacle to deal with. And most practices moved to telehealth only, and calls only, and things like that, so that was really challenging. And we stayed in person in DC, that was our only practice essentially. And we did three days on, two days off for all the staff because we had way less patients coming through, of course, and we paid everyone the whole time, didn’t lay anyone off. It’s funny because the doctor’s mentality always is we should close, we have to lay people off, this is a scary time. And that’s what happened.

But my mentality was what happens when they turn this thing back on? What do we do then? So I go to my dentist who I loved, the only dentist I’ve ever liked, and she’s like, “I just have no help. We laid all of our staff off. They all went and found other jobs. I can’t hire anyone.” And it’s just I’m so glad that we didn’t do that. We kept everyone because we knew. And not only that, one other concern that I had personally was if we make this decision to close, it’s March 21st, we decide to close, what if the city on April 15th mandates that we close, now how long are we closed for? What happens then? Let’s just be safe, do everything we can, clean the rooms, have air purifiers, masks, gloves, whatever, way less people.

We can’t have multiple people waiting in the waiting room, clean the waiting room every hour, all the things that we did, put the plastic up around to protect the staff, and all those things. And any of the procedures that we did, honestly, for probably six months it was just me and the doctor. We didn’t have any of the staff do any of that. So I assisted in all those. And obviously if we’re going to do that, that’s a decision that we had to make. And we didn’t want to put anyone at risk. So we didn’t do a lot of them, but we still did some, and that’s probably challenging for every business. And it was sad to watch all my favorite places around DC and that area, there’s not a lot of residents. All the restaurants and bars, and things like that closed, and it was just a really challenging time in general. So I’d have to say that’s probably the biggest hurdle.

And now obviously it’s passed for the most part, but I hate to say that it helped us, but it did. I don’t know if you have any follow-up questions to that, but that was something that was a big deal in ENT. Actually one of the biggest ENTs [inaudible 00:41:16] say biggest, one of the most prominent ones wrote a paper about how nasal endoscopy, which is something that’s standard care in nearly every nasal visit that you have, which is a little telescope going in your nose, how that essentially activates all of these spores or whatever where COVID lives and how dangerous it was to do, and things like that, so it was a really challenging time. And a lot of ENTs, we have a few different practices that were like, “We would’ve went out of business if it wasn’t for working with you. 100%, there’s no doubt in my mind we wouldn’t have made it through.

Joel Swider: So I think that’s, I can imagine, very satisfying to say, “Look, we came through this stronger because of the model that we had in place.” And trusting the system is incredibly courageous. I think that’s really cool. So Matt, I know you travel a lot. What does work-life balance look like for you right now?

Matt Ghanem: That’s a tough one. We used to have these courses and you could read books about the CEO mindset, and how to do all these things in the morning. And I want to say I subscribe to that, but I just don’t. I think when you’re running a business that’s growing, you have to be available. And then when you have people on Pacific time, you have people on Eastern time, you have people in the Middle, when I’m out here in Arizona, half the year it’s Pacific time. So if I wake up at 06:30, it’s 09:30 on the East Coast, and I’m going to have a million phone calls and emails. And so the first thing I have to do is make sure there’s nothing emerging. So what I’ll do is look, and if there’s nothing emergent, I can let it be and do what I need to do.

But that’s one thing. And then also as it relates to if I’m out East, the West Coast is going until eight o’clock. Luckily for us, there’s not really a lot going on the weekend, so I try to disconnect a lot. I try to disconnect, but I try to be available. And maybe this isn’t the right thing to say, because a lot of people don’t really believe that they should always be available, but I don’t want people to think that they’re ever bothering me. I don’t want someone to feel uncomfortable. It doesn’t matter who they are, how long they’ve been with us, what role they’re in. It’s an open door policy across the board, whether it’s positive or negative. I always want people to reach out and be able to contact me. Of course, there’s things that I’m better at delegating at now, which when you start a business where you’re like, “I don’t know when my next paycheck’s coming,” because we didn’t essentially take any money from the practice, I didn’t receive a paycheck, so to speak, for nine months part.

That was from when I left my job and moved to the East Coast, and we didn’t start the practice for a few more months based on some things that you learn about signing leases and things like that, which I’m sure you’re familiar with. But I just want to be available. So I try to disconnect at night. I’ll do things like leave my phone if I go to dinner with my wife or something like that, put my phone in her purse or something like that, and just nothing could really be that important, but I’m going to be more available than most. And I know work-life balance is important, but I don’t want to say we’re running a sprint, but it feels like a sprint so I want to be available. So that’s a really tough question to answer, and that’s one of my personal challenges is each year goes by like, “Where can I find more time to disconnect?” If anyone listening has any great strategies or philosophies, or maybe something that they’ve read or subscribed to, I would definitely love to know.

Joel Swider: Thanks. Well, Matt, thank you so much for your time and sharing your expertise. Speaking of availability, if listeners want to get into contact with you, what would be the best way to do that?

Matt Ghanem: There’s a couple things. I’ll throw my emails out there. If you go to nationalbreathefree.com, you can click I think request information, that goes directly to me, but I have two emails. They’re both Matt, [email protected], and  [email protected], and that’s Capitol like the Capitol Building with an O, so capitolbreathefree.com. I think my cell phone might even be on my LinkedIn. You could text me. I don’t know if I should give my phone number. That doesn’t matter to me. (202) 423-7825. So shoot me an email, text, give me a call if you have any questions or some ideas on work-life balance. That would be awesome.

Joel Swider: Great. Well, Matt, thanks again, and thanks to all our listeners. Have a great day.

Matt Ghanem: All right, thank you. Thank you so much for having me.

In this episode, Andrew Dick sits down with Matt Coursen, Executive Managing Director, Mid-Atlantic Healthcare Lead, to talk about his role at JLL and trends in the health care real estate industry.

Attorney, Hall Render

Executive Managing Director, Mid-Atlantic Healthcare Lead, JLL

Andrew Dick: Hello, and welcome to the Healthcare Real Estate Advisor podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare focused law firm in the country. Today we’ll be speaking with Matt Coursen, the Mid-Atlantic Healthcare lead at Jones Lang LaSalle, JLL. JLL is a Fortune 200 commercial real estate advisory firm with a robust healthcare real estate practice group with over 2800 professionals across the country. We’re going to be talking about Matt’s background in the industry and the group that he leads within JLL. Matt, thanks for joining me today.

Matthew Coursen: Thanks, Andrew. Happy to be here.

Andrew Dick: Matt, before we talk about your role at JLL, let’s talk about your background. Tell us where you’re from, where you went to college, and what you aspired to be.

Matthew Coursen: Sure. I was born and raised here in the suburbs, just outside Washington, DC, actually about less than a mile from where I sit right now. Early in my life, I think I had an indication I would be in sales in some form. But after graduating from Washington and Lee University in Lexington, Virginia with a degree in journalism, I went to work for USA Football, which is a JV between the NFL and the NFL Players Association. I thought I wanted to be in the sports industry and work in that sports marketing world and use my communications degree. But after a couple years, I realized I wasn’t using all of my skill sets to my advantage. So I had some friends in real estate and they suggested I take a look at that industry, and I did win an interview with a small real estate firm called Swallowing and Fly, and very shortly thereafter we were acquired by JLL, and I’ve been there ever since. That was about 17 or 18 years ago.

Andrew Dick: So Matt, how did you end up in the healthcare real estate business. When you joined that smaller firm, were you thrown into healthcare real estate assignments, or did your work evolve?

Matthew Coursen: No, it evolved over time. Most commercial real estate brokers get into the business as generalists. You’re really trying to close any deal you can, and so you’re learning quickly about different industries. It wasn’t until about six years into the business when I started working in the healthcare side, I started out doing technology companies and some government contractors and cybersecurity was hot back then. So really became a generalist. And in 2011, I led the team that pursued and ultimately won the Children’s National Hospital business. And we were hired to help them with strategy and lease administration and transaction management and project management, and really a whole host of real estate services because they didn’t really have a real estate department.

So for a number of years I was their defacto real estate director, which was a trial by fire. I got my 10,000 hours in healthcare real estate over that five or six year period, helping them with over 70 transactions and helping them deal with property management issues and things that just popped up as being their go-to person in real estate. So that really gave me the background, the subject matter expertise in healthcare real estate that I needed, and that’s what propelled me into the business I have today.

Andrew Dick: Got it. And Children’s National, talk a little bit about that organization and their footprint just briefly.

Matthew Coursen: Yeah, they’re the 25th largest employer in the region. In their campus, they’ve got their main hospital campus, downtown DC. Then they’ve got a research and innovation campus further up into DC at the Old Walter Reed Army Medical Center. They’ve got about in total there about three million square feet, and then they have about a million square feet of ambulatory real estate out in the community. Pediatric offices, specialty offices, primary care, and those are about 70 or 75 of those locations. So they’ve got a fairly large footprint for a small nonprofit hospital.

Andrew Dick: Got it. So talk about your role today at JLL, because I know you used to be the boots on the ground, now you’re leading a team. Talk about that. What does the team look like and talk about your role.

Matthew Coursen: Yeah. Back in 2017, after working with Children’s for a number of years, I realized that this industry is massive. We consider the healthcare real estate industry to be a trillion dollar market. And so I realized that we had really strong market share locally with working with hospitals and health systems, but there was a lot of unplowed ground when it comes to other healthcare organizations we could be working with. So I went to the leadership regionally and put together a business plan to really put some emphasis behind the healthcare business that we have here, put some leadership behind it, some resources, recruit some folks to join the team and really expand the business.

So in the last four or five years, we’ve more than doubled the business, and we’re working with more hospitals and health systems and private equity and venture backed healthcare groups like US Radiology, US Dermatology, Carbon Health, and it’s been a great expansion of our business over the last five years or so.

So I lead that team and I’m responsible for growing that revenue across all of our businesses, not just brokerage, but also property management and project management and capital markets work that we do. So that’s my leadership role, but I still do run multiple national accounts for the firm of clients that I’ve sourced over the years. And so that’s what we do, and we’re trying to grow it all over the country. We’ve got a healthcare practice that’s national, but it’s not in every single market. So we’re trying to expand and make sure we’re covering as many markets as we can.

Usually if you go into any town or a city, one of the largest employers is the hospitals. So it’s 20% of our economy and it’s growing every year, and it’s only going to get bigger. So at JLL, we’re very bullish on industry specialization in general, but especially with healthcare and life sciences, we’re very, very bullish on the growth of those businesses.

Andrew Dick: Got it. So talk about some of the venture capital or private equity backed healthcare providers that you’re working with. Because I know Matt, we’ve talked about that before, the growing area of interest for private equity and venture capitals healthcare, that takes a lot of different shapes and sizes. Talk about what you’re seeing and the type of work you’re doing in that niche area.

Matthew Coursen: Yeah, it’s a great topic because it is growing like crazy. There’s a big, almost a gold rush to try to harness the opportunity that’s in front of us to take technology and a lot of money that’s out there in the economy right now that’s waiting for deployment and trying to put some horsepower behind healthcare because a lot of people believe healthcare is fundamentally broken. It’s more sick care than well care. And there are a lot of organizations out there trying to do a couple things.

One, they’re trying to use technology to solve a lot of the challenges we have in healthcare business. And the other is they’re trying to reach the consumer in a more direct way. They’re either trying to solve the value-based care challenges that are out there, or they’re trying to win the consumer facing healthcare game that’s out there.

So we work with a lot of private equity groups. So not just the firms themselves, which we do a lot, we’ll help advise them on any acquisition they’re looking to make, any investments they’re looking to make, and we evaluate the real estate footprint of that healthcare company for them. But we’ll also help post acquisition and we’ll go actually work with the individual company like a US Dermatology for instance, and help them build a real estate strategy using data analytics.

So we at JLL have also responded to our industry and said, “We need to level up for our clients, and the best way to do that is to get data.” Is to go get big data, harness that, it’s expensive, and then put it into a software that’s really user friendly and that can enable a really thoughtful data driven real estate strategy.

So what we found is that our private equity backed, venture backed healthcare clients are really compelled by that software, by that analytics that we’ve built, because number one, it helps with business case formation. So whether they’re looking to acquire another business or roll up another healthcare business, a lot of the maps and the images and the visualizations we create can be used for building that business case for creating decks and leadership presentations and things.

But also, we’re able to use the platform to help the actual business scale and grow and improve their EBITDA margins, which is what those private equity groups care about. And so it’s a really powerful predictive model, and we’ve been building it for the last 10 years or so.

The key is the data that you put into it. At its core, it’s just the RGIS platform, the Microsoft platform, it’s something that we’ve taken and we’ve really added a lot of horsepower to through data and the data’s expensive. We’re talking about claims data, we’re talking about procedure codes, and ID nine and ID 10 codes that we can layer in. We have a latitude and longitude for every healthcare provider in the country. We’ve got payer mixed data, we’ve got all the demographics and psychographic data. We’ve got of course, real estate data. So we know where all the real estate options are, and we put it together in something that’s really, really powerful.

And the two main things we do with our clients, not the private equity firms themselves, but the actual healthcare providers, is we’re helping them, one, really diagnose the portfolio they have and make sure that we are optimized there and that there’s no waste in the healthcare real estate part of the business.

And then we’re also helping them future, forward looking and thinking about growth, because growth is the name of the game, and they either want to enter new markets or they want to potentially acquire another group in another market to enter the market that way. And so we use our analytics platform to do that for them, and it’s a great partnership. And ultimately, when it comes time to do the real estate deal, we’ve done all this great strategy work and all this analytics work, and it really makes the site selection process very, very straightforward, very simple, and at least the better outcomes for them and their patients. So we’re excited about it and it’s something that I think that sets us apart.

Andrew Dick: Got it. So talk about some of the concerns that providers are raising when they’re looking at selling their real estate. Things like continuity of ownership, some other trends you and I have talked about before. Let’s dive into that a little bit because it seems like there is quite a bit of interest in sale lease backs over the past few years. What’s your take on those type of opportunities?

Matthew Coursen: That’s probably not a whole lot unlike what you’re seeing with your clients. Whether they want to sell or buy or lease or refinance their real estate, our advice is pretty straightforward. We want to first build a strategy, figure out with them what exactly it is they’re trying to achieve. Different organizations have different goals. We’ve seen hospitals buy back real estate that they had previously leased or done a ground lease with the developer on. So we’re seeing a little bit of everything these days when it comes to buying and selling and leasing.

We were just talking to a big healthcare about advising them on selling a large portfolio they have in this region, and they ended up deciding to put that project on hold despite they’ve got a pending loan maturity here coming up and they still aren’t ready to sell because the capital markets are in a major upheaval at the moment, and things are pretty frothy. So they’re not going to end up pulling the trigger on that sale yet.

So everyone’s got different challenges, but the first thing we want to do is help them think about the strategy and then build that plan for the tactical moves that help them think about control, compliance and succession planning. Those are the three big issues at the table most of the time.

What we see is that the control of the real estate is something that either the organization doesn’t care about at all, they’re fine being a tenant, they don’t have to own the real estate, and other organizations really care about ownership. They don’t want to be a tenant, they want to control it. They want to get the value of the appreciation of the land or the building or both. And so that’s a big thing. We just have to align with what their goals are.

Another thing they care about is compliance. You got a lot of healthcare provider owned real estate. So a private equity back group will come in and buy a practice. Well, oftentimes the doctors will own their real estate and whether it’s a condo or it’s a standalone building, and so the PE firm has a choice. They can either buy the business and the real estate or they can just buy the business. Oftentimes what we see, they’re just buying the business. So the real estate then is still in the hands of the provider, but they no longer own their business. And so now you have a potential start compliance issue here. You got to make sure that your clients have arm’s length transactions, their fair market values are in line. And so that’s something that’s a big concern. So we’re careful to advise them there.

And I think those are the biggest ones, the biggest issues that are at the table. But succession planning goes into that as well. Sometimes you’ll have providers that want to retire. They want to monetize the real estate to fund their retirement, but the private equity backing or the organization that’s invested in that business doesn’t want to buy the real estate. So then we can come in and try to help them in that way, which is another party there. So there’s a lot of nuance to it, but that’s what we’re seeing out there right now.

Andrew Dick: Great. Thanks for the insights, Matt. So let’s move to the state of the industry in general. Give us an idea of where you see the healthcare industry at large going in the healthcare real estate industry. How will that be impacted in the future?

Matthew Coursen: I think the consolidation of hospitals and health systems will continue. I don’t think that’s a novel idea, but I think that’s going to continue. More than half of the hospitals out there reported negative margins over the last couple of quarters. So I think we’re going to see a lot of consolidation, and that’s going to lead to a lot of real estate opportunities in the healthcare of real estate space because there’s just so much opportunity there and a lot of facilities that are going to need to be repurposed or sold or bought or leased or what have you. So a lot of opportunity there because of consolidation.

I think number two, we’re going to continue seeing PE and VC investment in these digital health companies. They’re only getting bigger and trying to solve bigger challenges. And so I think that’s going to continue. And it may not have a big impact on the real estate side, but it just depends on how much virtual care, telehealth, reimbursement rates change. But I think brick and mortar healthcare is here to stay for sure, but I think the VC and the PE investments is going to keep churning and that’ll create some opportunities.

And then the third is big corporations are going to attempt to solve the value-based care challenge as it relates to a direct to consumer model. So think about Amazon potentially acquiring One Medical, which is a primary care platform. Or think about Walmart partnering with UHG. Whether it’s through M and A or genovo growth, I think there’s going to be a lot of real estate opportunities as a result of those types of partnerships and mergers. So that’s going to be exciting from a healthcare real estate perspective.

Andrew Dick: Yeah, I think you’re exactly right, Matt. I was looking at some of the trends this morning and Walmart recently announced they’re going to open 16 more clinics in Florida, some of the major metro areas like Tampa and Jacksonville. And these big companies are all trying different models, trying to drive down cost. I think we’re going to see more competition from some of the nontraditional providers, which is really interesting.

Matthew Coursen: I totally agree.

Andrew Dick: So where do you see the opportunities right now? We talked about digital health, venture capital, private equity, and what they’re doing. Where do you see the big opportunities in terms of healthcare real estate right now and in a pretty unique market, I would say?

Matthew Coursen: Look, the return to office movement is still really early days. Cap rates for office buildings are not where they need to be. So that is not an asset class people are excited about at the moment, but MOBs are still attractive. Cap rates aren’t where they were a year ago of course, but the MOBs are a much safer bet right now when it comes to sales and recapitalization. So I think that’s going to continue being something to look at.

So I like the MOB side of things right now. Hopefully the capital markets will open back up next year and it’ll get even better. But it’s certainly a safer place to be right now than office.

On the leasing side, I think the retail push, the consumer facing push for medical is going to continue. And so hopefully the healthcare world will continue to buoy the retail world. It’s not going to absorb all of it. Not every big box store is going to turn into a hospital, but I do think we’re going to see a lot of that happen, especially in some of those secondary tertiary markets where you don’t have a lot of great strong national anchor tenants everywhere.

And then the third is really the project management side of things. The building out of healthcare facilities is so expensive and it’s so specialized that I think that’s going to continue growing. It’s a big part of our business at JLL. Our project management side in healthcare is really, really strong. We’ve got great specialists in that area, and it seems we can’t hire these people fast enough.

I just saw a budget a few minutes ago come in through from a hospital client of mine that you wouldn’t believe, Andrew. $580 a square foot to build out a primary care clinic. And now that includes furniture and fixtures and equipment and things, but that’s an all in number, but that’s a very, very big number. And a few years ago, you could have built a whole building for $500 a foot.

So I think with costs on the rise, it’s going to be important that these healthcare groups work with firms that can help them manage these projects, manage these costs, take advantage of economies of scale, and buying power that firms like JLL have. So I think that’s another trend we’re going to keep seeing.

Andrew Dick: Interesting. That cost per square foot, that’s a huge number.

Matthew Coursen: Huge number.

Andrew Dick: Really interesting. I’m hoping at some point we’ll see construction costs go down, but it just seems like they keep going up or those costs keep going up.

So at the end of each interview, Matt, I typically ask my guest what advice you would give to a young professional who wants to enter the healthcare real estate business. What would you say?

Matthew Coursen: I would say now is a great time to get into the business because it is the bottom of the market. It’s a trough. It’s a challenging time. And if you’re young and hungry and you’re able to get in there and really roll up your sleeves and learn, this could be an excellent start to a career in commercial real estate. But I think it’s a lifestyle choice to do what we do. You have to really make sure that it’s something you personally want to do with your lifestyle, that it suits that level of effort and that level of commitment.

So I really advise people a lot, younger people, find something that’s personally rewarding to you about your skill sets, something that you feel good about excelling in, and then find some interest. Whether it’s real estate or it’s healthcare or it’s anything else, try to marry those two things up. I think a lot of people use the word passion a lot, but I don’t think passion’s something that’s there day one. I think passion is there after you’ve had some success, you’ve had some failures, you’ve had some learnings over time. So I think it’s really just focus on where you’ve got a skill set and interest and try to pair those. Real estate could be one of those things, but it’s foundational to understand self-awareness and understand who you are and what makes you happy, and then what you’re interested in first.

Andrew Dick: That’s great advice, Matt. I heard Mark Cuban recently, someone asked him a question about where should you focus your efforts as a young professional? And he said something very similar to what you said. Not follow your passion necessarily, but follow your effort is what he often says, which goes to your interest and what you’re willing to put your time and energy into. So I think that’s great advice. Matt, tell us where the audience can learn more about you and JLL.

Matthew Coursen: Yeah, we have a pretty healthy presence on LinkedIn and also on JLL.com. We have an industry section where we can dive into the healthcare side of our business and find people, professionals you can contact, learn about our services and some of our clients and case studies are on there. So I would drive people to JLL.com and my LinkedIn page.

Andrew Dick: Got it. This was great, Matt. Thank you for doing this.

Matthew Coursen: Andrew, thank you for having me. love doing it. And let me know if I can help you with in the future.

Andrew Dick: You bet. Well, thanks to our audience for listening to the podcast on your Apple or Android device. Please subscribe to the podcast and leave us feedback. We also publish a weekly update on healthcare real estate matters. To be added to that list, please go to my LinkedIn page and you can subscribe to that. Thank you.

Andrew Dick sits down with Michelle Mader and Mark Furgeson from Ankura Consulting for the second of a two part series to review hospital and health system financial performance to date and staffing challenges and the impact on the physical footprint of hospitals.

Attorney, Hall Render
[email protected]

Managing Director, Strategic Advisory Services at Ankura Consulting
[email protected]

Senior Managing Director Healthcare Real Estate at Ankura Consulting
[email protected]

Coming Soon.

In part one of a two-part discussion, Andrew Dick sits down with Michelle Mader and Mark Furgeson from Ankura Consulting to talk about the current financial performance of health care providers and the implications of the shifting regulatory environment on real estate decision-making. Stay tuned for part two of the discussion where Michelle, Andrew and Mark will cover the effects of financial micro-variables, such as staffing, on the future of health care real estate.

Attorney, Hall Render
[email protected]

Managing Director, Strategic Advisory Services at Ankura Consulting
[email protected]

Senior Managing Director Healthcare Real Estate at Ankura Consulting
[email protected]

Andrew Dick: Well, hello and welcome to the Health Care Real Estate Advisor Podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare focused law firm in the country. Today I’m joined by Michelle Mader and Mark Furgeson from Ankura Consulting. I’ve had the opportunity to work with Michelle and Mark offline on a couple of discussion points. I’ve read some of their thought leadership pieces and thought it would be great if we would have a short discussion about what they’re seeing in the healthcare real estate industry and the capital planning industry. They also do a fair amount of strategy work for hospitals and healthcare systems. And so I thought today would be a perfect time to catch up with them, see what they’re working on. So, Michelle, Mark, thanks for joining me. And why don’t you take just a minute to introduce yourselves?

Michelle Mader: Sure. Thanks, Andrew. So my name’s Michelle Mader. I’ve been a healthcare strategist for the last 25 years. I’ve worked with a number of healthcare providers, both nationally and a little bit internationally as well. Really I focus on service line optimization and distribution and really how we generate revenue and how we control costs. And the other thing that I really have been focusing on lately is looking at and evaluating new and innovative care delivery models for healthcare providers as we’re seeing shifts between the outpatient and inpatient world significantly increase post COVID.

Mark Furgeson: I’m Mark Ferguson. I lead the healthcare real estate team at Ankura. I’m an architect by training and my 30 year career is focused on strategy for healthcare’s physical footprint, the future of care and how policy impacts healthcare buildings.

Andrew Dick: Terrific. Michelle, Mark, thanks for joining me. Really looking forward to the discussion today. I thought we would focus our discussion on two points today, financial trends in the healthcare and hospital industry, and then regulatory trends, because I’ve had discussions with both of you on both of these points. You’ve also written at least one, maybe two articles on some of these points and thought it would be good to catch up. So this will be part one for our audience of a two part discussion that we’re planning with Michelle and Mark.

Andrew Dick: So let’s tackle the first topic, financial trends in the hospital and healthcare industry. The pandemic had a significant impact on hospitals in particular. Let’s talk a little bit about the data. So Michelle, Mark, what are you seeing in the industry? How are hospitals and health systems performing? What type of impact has the pandemic had on their financial performance?

Michelle Mader: Yeah, Andrew, thanks. So it’s been an interesting couple of years as most of ours listeners have probably understand or know, right? The healthcare industry’s been on the front lines of the COVID pandemic and working through that since early 2020. And so as we look at what has happened over the last three to four years, it’s been an interesting ride, mostly because it’s been a combination of what economically has been challenging with COVID as well as the federal government foreign CARES Act money into the industry, right? To buoy it to make sure that we continue to provide access, that we continue to provide services, particularly emergency services and ICU services to the general population.

Michelle Mader: But if you look at sort of this year, which is what I want to concentrate on, Kaufman Hall does an annual report, their National Flash Report. And their June report, which looked at May of 2023 numbers, was very interesting. Basically it’s showing that volumes, which is how the industry essentially gets paid, they’re increasing, but on a slow, steady pace. In other words, what happened was when the pandemic pretty much cascaded out of the, and it’s not all gone, but has cascaded out a majority of the hospitals, you would expect this backlog and people rushing for care, right? All this [inaudible 00:04:22] care. And what we’ve seen is that’s really not happened. It’s been a slow elevation back to 2019 levels, particularly on the ED. And so as we look at those rising numbers, they’re not like an avalanche. It’s not like a tidal wave. They’re just slowly coming up, which means that revenue for hospitals isn’t just coming back in floods, right? They’re just not regaining what they lost during the COVID years. They’re having to try to keep the steady space.

Mark Furgeson: Yeah. And ED volume is especially interesting because so much of inpatient volume is driven through the emergency department. So we still see those volumes down, but of course, behavioral health volumes are significantly up to complexity of those cases. The general complexity and the ED has still kept the ED full.

Michelle Mader: Yeah, I know. Absolutely. And to make things more interesting, length of stay, which is basically how long a patient stays in the hospital from the time they enter the door until the time they’re discharged, the healthcare industry kind of gets paid on a DRG basis or one lump sum for that length of stay. So the shorter our patient stays in a hospital, the more essentially money hospitals make in theory. And what we’ve seen is that the length of stay or the acuity, how sick patients are, is increasing. And it’s actually up five and a half percent from last year, right? So we’re seeing actually sicker patients in the hospital than we were even last year. And last year wasn’t at the height of COVID.

Michelle Mader: On the surgery front, which we always find interesting because it’s the economic engine for healthcare providers, their minutes are not really fluctuating. In other words, the number of surgeries and how long the surgeries are going on is only a 0.1% since last year, which means that this backlog of people not having surgery because they didn’t want to come into the hospital, we’re really not seeing that come back and/or that’s already passed us and we’re kind of leveling out. But that’s the economic engine for most healthcare providers. It produces the most revenue on that front.

Michelle Mader: Now on the flip side of that, right, we’ve been talking about hospitals, is that outpatient revenue is up significantly year over year. Almost 10%, 9.4%. So we’re seeing this shift, right? You heard me talk a little bit about what’s happening at innovative care deliveries in my introduction of this shift from inpatient care going to a hospital, to going to your neighborhood, urgent cares to your neighborhood providers, to your neighborhood CVSs for care. And so we’re really starting to see that as well.

Mark Furgeson: Yeah. And this increase in length of stay in the inpatient side has really added to the complexity of planning for healthcare facilities. We’ve got a client in the Midwest that finished a new hospital in 2019, used all the benchmarks that we have been using to project bed numbers. And they have significant capacity issues because their length of stay is up by almost 50%. And the real trick here as we plan now is trying to project what post COVID two years out, three years out may look like related to length of stay. So we’ll continue to track those things.

Michelle Mader: Yeah. And there’s some other metrics. Revenue is a big deal, right? Top line revenue is what a lot of people look at even in their commercial businesses or in general economic terms. But the thing that everyone, even us who are parents and family members and just general community members, is the rising inflation, escalation and expenses we’re seeing across the country. And the healthcare industry isn’t immune to that. And so they’re really seeing expenses rise which is putting a lot of pressure on operating margins, particularly around labor. They’re over month over month. And there’s been a lot of news and press releases around travel nurses and we’re paying all this money for people to travel around the country to substitute for staffing who aren’t coming back to the hospitals. And that’s generally true, but most providers have gotten a handle on those contracts and are trying to push those labor expenses down.

Michelle Mader: But just to kind of give you an idea, the surge year to date, and this is from January to May, so you’re talking essentially five months or so, labor is up 13.5% and it’s just tremendous in those five months. So when you hear about services closing or access or waiting lists or things like that, a lot of it has to do with staffing and not necessarily their ability to provide services long term. When you look at all of these, so kind of slightly slowly coming back volumes. When you look at the rising expenses that we’re all feeling on a day to day basis, from gas to groceries, the operating margins of the healthcare industry isn’t great right now. And it hasn’t been great and it’s been buoyed by the CARES Act for a number of years.

Michelle Mader: And so we’re starting to see that downturn unfortunately. But year to date, we’re down. From last year of May of 2021, the operating margins are down 45.6%. That’s like almost half. What? They were a year ago? Now again, we’re seeing the slowing and trickling in of CARES Act money, but providers are just… Between the expenses and the slowly rising revenue, they’re just not making it up. And so the operating EBITDA margin from last May is also down 36.1%. Those are double digit huge numbers for the industry. So we’re watching this very, very closely as it relates to what sort of we think is going to happen in the next couple of years.

Andrew Dick: So I want to touch on two points that both of you made. So Mark, you said you were working with the health system in the Midwest, worked on a project, currently used the metrics at the time that were appropriate. Fast forward to today, the hospital doesn’t have enough capacity. What is the advice to that health system? Do you look for expansion options or do you wait and see how things shake out over the next 12 to 24 months, given that we’re still living through a very unique time coming out of a pandemic?

Mark Furgeson: Yeah, we are living through a unique time. And the risk is higher than it was in this last planning cycle because we’re routinely seeing $800 a square foot for construction cost in healthcare. So we will continue to look first towards decanting services to purifying inpatient facilities to inpatient volumes as best we can being conscious of the efficiencies of equipment and things like that. But we will have to look at an option to expand that hospital. And it’ll just come after we’ve looked at ambulatory options.

Michelle Mader: Yeah. And the trick of that is really on the sort of the staffing side, right? Because we’ve got clients who have opened up buildings, who have opened up additional floors not to be able to put patients in there on day one because they just don’t have the staff. So yes, the capacity is at some level in some markets, particularly urban growing markets like Florida and Texas, those capacity issues are what we call beds in a head, right? Or heads in a bed. And so that is very true. But the issue is if we can’t staff them, it doesn’t matter how many beds we build. They’re just going to sit empty. And that’s a capital cost sitting on the books with no revenue generation to support it. And that’s risky. So this balance between the expenses and the staffing and meeting the capacity and purifying the hospital is going to be tremendously important in the years to come.

Andrew Dick: That’s right, Michelle. I mean, I’ve worked on a couple projects on the east coast recently. At least one was put on hold because the health system said, “Even though we’re in a growth market, we can’t find the staff to provide the services in this new to be constructed building.” So I think you’re spot on. It’s a huge challenge.

Andrew Dick: Michelle, I want to hit on another point you brought up as well when you talked about some of the financial data. You talked about the growth in outpatient services. What type of advice are you giving to health systems that are seeing that growth and profitability in outpatient services? Do they continue to double down on those services whether it be urgent care or ASC type services?

Michelle Mader: Yeah. So planning outpatient environments is kind of a little tricky business and mostly because as you would… Most common people or most of the general community thinks that every physician makes a ton of money, right? I mean, everybody wanted to grow up and be a lawyer or a doctor when they were in school, right? Because those are the professions back in the day that made a lot of money. And the reality today is, given the current reimbursement and the current expense structure, a lot of healthcare providers lose money every time they employ a physician practice in primary care. Now that is not the case in specialty. So your orthopod, your neuro, all of some of those subspecialty, they still make what we consider a tremendous amount of money in the industry. And so they’re very profitable. So yes, the healthcare providers are looking at doubling down in some of those key services in order to fuel and to back fill some of what they’re losing on primary care.

Michelle Mader: But what we’re really seeing to shift to outpatient is not only from the hospital to an ambulatory or neighborhood environment, but also from the neighborhood environment into telehealth, right? And those payment structures, the federal government hasn’t… They’re starting to look at them coming out of the pandemic. They’ve solidified them and they’re going to keep them rolling, but we’re not getting anywhere near paid if you go in to see your physician versus if you call them on the video, right? I mean, it’s a delta of almost 3X difference between the two. So we’re still incentivizing providers at some level to continue to push in-person visits to their practices financially. And to some metrics, it’s needed from an outcome and from a patient service standpoint because telehealth financially hasn’t caught up with the rest of the industry to make it more profitable.

Andrew Dick: Interesting. Those are great metrics. Let’s switch gears and talk about private equity and how private equity firms are moving into healthcare and the impact that its had on different markets that you all are working in. Michelle, Mark, what are your thoughts at just a macro level?

Mark Furgeson: Yeah. And we’ll only touch briefly on this today, because let’s face it, this could be a whole podcast in itself. But part of the reason that we’re tracking private equity investment is that we’re concerned at some level that the types of companies and the changes that these companies are making in healthcare could disrupt the pathways by which many of our legacy clients are generating volumes, tracking volumes, projecting volumes. And those are the tools by which these companies balance their for-profit services with the things that are more mission focused. So what we’re seeing, it’s of course I think everybody knows that we’re seeing a tremendous increase in investment by private equity in healthcare. From 2015 to 2019, almost a 300% increase investment. Every year since then double digit increase.

Mark Furgeson: But what’s really interesting to us is the types of companies that private equity is investing in. Initially, these were hospitals under the theory that we had an aging population in America. And then it was on kind high margin, unregulated services, somewhat argue that almost single handedly created the No Surprise Billing Act. But what we’re seeing now is a recognition by private equity that their investment focused on capitated care, healthcare advantage, value based reimbursement. Reimbursement has long term valuation gain. So that started with buying up primary care physicians. We’re now seeing private equity play in the consumer enabling space. And again, all those kinds of things can impact these relationships with physicians and with consumers that legacy healthcare providers have depended on for years to generate volumes, to control volumes, again, to balance the financial side of what they’re doing.

Mark Furgeson: So we’re tracking companies like Babylon that is in the consumer enabling space. It has some really interesting technology that they’re playing in. DispatchHealth has been a fascinating company to watch, a little bitty company in Denver that started in 2013, operating in two or three markets, some private equity backing that came in 2018, 2019. Within a year or two, DispatchHealth was in 19 markets in 12 states. I checked last night and they’re now in 41 markets in 25 states. It’s extraordinary the accelerant that private equity dollars can push to scalability like we’ve seen doing in so many places. So we’ll continue to watch this, Andrew. Again, we want to make sure that we can guide our traditional and legacy clients in a way that will help position them best for success going forward.

Andrew Dick: Yeah, those are great data points, Mark. And I agree that private equity has had a significant impact on healthcare services. Just a few years ago, we saw private equity heavily invest in home healthcare. And just as those companies are looking to exit, it looks like the big healthcare insurers are buying up those companies, really going all in on home healthcare services. Really fascinating to watch.

Andrew Dick: Let’s switch gears again and let’s talk about the regulatory landscape. Both of you co-authored an article titled How To Claim Healthcare Market Share on the Verge of Certificate of Need Irrelevancy. A really, really good article. A timely article. It was published at the end of May, caught my attention because I’ve been tracking the regulatory landscape and changes in the CON laws. Let’s talk about at a high level the regulatory landscape and the certificate of need laws in states and how it’s changing. In your article, you talk a lot about the landscape across the country. Mark or Michelle, just give me your thoughts at a high level. Is COM relevant today? What’s going on across the country as these laws evolve?

Michelle Mader: Yeah. Thanks, Andrew. So this is an area that I’d like to just… CON is certificate of need. And just for our listeners who may be not understanding exactly what we’re talking about, it is a state based law or subtle laws that basically govern healthcare providers, people who provide healthcare services with their ability to expand their ability to provide better access to services or put new services in new markets, et cetera. So originally, historically CONs were put in place to enhance access, making sure that everybody had true healthcare, that they could access services in their local communities. It was really to reduce duplication, right? Let’s not have two MRIs sitting five miles from each other in the same market increasing cost. And then historically, your state legislatures have been looking at making sure that your role, those areas that we don’t have, a lot of infrastructure and your local providers continue to be viable, right? That they weren’t essentially putting each other out of business.

Michelle Mader: And so that’s essentially what CON at a state level. And so right now there are 35 states plus Washington, DC who have some type of CON law, but they very really dramatically across each of the states. And during COVID, about 24 of those states either suspended or permitted emergency exceptions to their CON process, meaning that they said, “Okay, we’re in a pandemic, right? We want to make sure that everybody has everything they need when they need it. And we don’t want them to have to jump through regulatory hoops in order to access the needed infrastructure.” And so they really significantly reduce those.

Mark Furgeson: Yeah. This has been… Excuse me. This has been an interesting thing to watch. This discussion has been bubbling around on the value of not-for-profit healthcare in America for years. COVID was kind of an accelerant to this discussion. We had a lot of the CON legislation, the hurdles were brought down so that we could access care, look at alternative care sites and the things that went with that. And what immediately came out of that really before we had a chance to analyze the data was a discussion as to whether we needed CON at all. And that’s kind of fascinating when you think about it and not all that assuring to me personally, but that’s the situation we’re in.

Michelle Mader: Yeah. And so a lot of policy makers are considering CON reform or elimination in at least 18 states in this past year. So we had 24 that suspended. Out of the 24 that’s suspended, 18 of them have gone, “Well, do we need these at all?” Right? They worked just… The healthcare industry was able to move forward just fine during the pandemic. We removed barriers that were there historically. We’ve not seen us… And to Mark’s point, we haven’t had a chance really to analyze the data on the long-term effects. But they’re looking at this.

Michelle Mader: And so in the last year or two, there have been 10 states such as North and South Carolina that have looked at bills that are either fully or nearly fully repealing their previous laws. In other words, they’re looking at complete elimination or almost complete elimination. But some states are saying, “Oh, hold on one minute. First of all, the jury’s out. We don’t know the long term effects of some of these reductions or these exceptions. And so let’s carve out some sections of the CON that we know that are maybe not applicable in today’s world.”

Michelle Mader: And so for instance, like for cardiology procedure, so a cath procedure or something like that, they’re moving to the outpatient setting in a hurry, right? Just technology and medications are allowing patients to have these procedures in true outpatient settings and not have to go into the hospital to have their heart looked at or to look at a stent or a balloon put in from a vascular standpoint. But some certificate of need in some states have prevent a cardiologist from going out to ASCs. And so we’ve got this momentum that says, “Hey, we can do it in a better care, better outcomes in a cheaper setting. And it’s much more convenient for the patient.” But the state’s going, “Well, wait a minute, you can’t do that.” And everybody’s going, “Okay, what’s going on?” So there are some parts and pieces of the CON law that they are releasing or eliminating that makes sense based on where the healthcare industry is headed, but it’s been fascinating to sort of watch what has been accelerated in the last two years.

Mark Furgeson: Yeah. One of the things we focused on in the article is kind of the levers to partial CON repeal. And I think that might be the most likely scenario that will get states that will focus on health equity or will get states that will focus on the cost side and the cost metrics or creating better pathways to healthcare for rural environments. And that’s something we’ll continue to study because I think again we’re going to see that in an individual state basis.

Michelle Mader: Yeah. And just, everybody is looking at, “Okay, what’s the data going to tell us?” And so, where everybody right now is watching Florida. So back when Florida removed their CON in July, I think, or the summer of 2019. So before the pandemic, a good six, nine months before the pandemic, we’ve seen this huge flood of service development in the state. The number of zoning and building permits have increased dramatically in the last three years and general construction in that state. Now, this is not healthcare specific, but general construction in the state of Florida due to the economy, the COVID backlogs, tremendous demographic growth, I mean, people are pouring into Florida from a state based population, it’s up 31% in the first half of this year, of 2022. So tremendous amount of growth in a state that released their CON. And a lot of that is healthcare to be honest. People are opening new hospitals, new ASCs, new urgent cares, but you have the prime demographic for healthcare, right? And aging retiring population moving there in mass because of the weather and because of their state laws regarding income and things like that.

Michelle Mader: So we are watching. We saw this in Texas several years ago. Texas has had very little regulatory overview in the past decades. We’ve seen them really explode in services. And then capitalistic markets doing what they do, which is regulating demand eventually. But that’s in eventually a couple of years. And I think we’re still several years out from seeing that in Florida.

Mark Furgeson: Yeah. And we’re seeing some interesting things on the real estate side too. I think in both Texas and Florida, we’ve seen things like land banking. I think we bring tools to this as well, but systems know in growth areas where they should be and where their competitors are. So buying up that intersection, looking for opportunities from a regulatory perspective to kind of carve out opportunity to build in places. That’s part of the reason we’ve seen a rise in freestanding Eds, which when you think about it, you couldn’t think of a more operationally expensive model, but it is our flag in the ground to a lot of these fast growth areas.

Michelle Mader: But what we’re saying, the CON is extending into other markets. And so when you look at the overall regulatory mindset right now of the Biden administration and of our current CMS and at the attorney general and at the state level, everybody is looking at healthcare. And the reason is, one, it’s been in the news nonstop, right? Since the pandemic. So it’s on first of everybody’s agenda. Two, it’s a very personal issue, which we all know from an individualistic perspective. But then also it’s one of the highest growth areas of cost for employers, right? They have been seeing for decades that their premiums just increase over and over again. So everybody is focused on healthcare and the cost reduction in healthcare. So we’re seeing a lot of M&A scrutiny as we look kind of moving forward.

Andrew Dick: So let’s talk about that, Michelle. Lots of M&A activity over the past few years. When I’ve had discussions with you and mark about this in the past, it seems like there’s not only been a lot of regulatory oversight, but the results of the M&A activity have been mixed depending on how you look at these larger transactions, in particular big health systems emerging with other big health systems. The question always comes up, is it really good for the patient or consumer in those markets? What are your thoughts?

Mark Furgeson: Well, I think the data would say… In fact, if we asked the justice department, I don’t know that they would quantify it as mixed. They would say consistently, “We have not expanded care. We’ve not lowered cost.” The original idea of certificate of public advantage, those metrics haven’t necessarily played out the way we hope they would. And I think that’s part of the reason we’re seeing a kind of a competition forward administration putting tools in place to limit competitions at least in a horizontal way.

Michelle Mader: Yeah. And they’re being very bullish about it, right? They’re not even trying to hide sort of what they’re doing behind the scenes. They’re just kind of straight out there front. And so as of June of this year, so we’re sitting here the 1st of August, but as of June of this year, nine healthcare systems deals have been called off this year alone based on the FTC, right? Based on the DOJ or the FTC coming and going, “Guys, we don’t really like this look. You’re going to become a monopoly in a market. We haven’t seen the data that says you’re going to be able to pull off what you are promising to the communities. And so we are going to either fight it directly, which they’ve had in some instances, or we’re going to disprove of it so strongly that it’s not worth the expense for you to fight it.”

Michelle Mader: And so we’ve seen this with the for-profits and the not-for-profit. There is no favoritism in this perspective as it relates to the healthcare system. And so it was interesting. I was reading an overview of this in a journal not too long ago. The FTC said this in a statement when they put to bed essentially the Steward Health Care, which was in Utah was going to sell five of its hospitals to HCA. And then RWJBarnabas Health dropped its plan to purchase the New Jersey based St. Peter’s Healthcare System. So when all of this was happening and these examples, the FTC came out and said this, “These deals should have never been proposed in the first place. And the FTC will not hesitate to take action to enforce the antitrust laws to protect healthcare consumers who are faced with unlawful hospital consolidation.”

Michelle Mader: So they’re calling it straight out, right? “These deals shouldn’t be put together to begin with. We don’t want hospital consolidation. We are out here to protect the consumers and the patients, and we want lower costs.” And so we are seeing this everywhere. And it’s not just at the federal level, right? That’s the FTC at the federal level sitting in DC. But also at the state level. So our hometown is Charlotte, North Carolina. And just this last week, our eternal general asked our own in the North Carolina Department of Health and Human Resources to deny HCA Healthcare owned Mission Hospital’s application to expand in Buncombe County based on the lack of competition. So it’s the attorney general in our own state here in North Carolina even in the last week had said, “No. Mission is already in Buncombe. They’re the only player there. We don’t want them adding 67 beds. We want other competition in that area.”

Michelle Mader: And for those of you who don’t know where Buncombe County is, it’s out there by Asheville and it’s in rural North Carolina. We’re not talking about a metropolitan city. We’re not talking about a dense area. It’s rural healthcare, but they want competition even in rural healthcare, which kind of flies in the face of what CON in North Carolina has tried to ensure for years, which is that those rural healthcare providers are viable long term.

Michelle Mader: So when you look across this, they really are scrutinizing and trying to ensure lower cost access for healthcare on a horizontal basis. So anything or of a hospital system, acquiring or merging or doing it with another health service system in the same market, everybody’s coming out and going, “No, if you’re going to create a monopoly, if you’re the only player in town, we really want to discourage those practices.” But that’s not necessarily the case when you look at vertical integration.

Mark Furgeson: Yeah. I think we’re encouraging our clients to look at vertical integration, both because we think it’s good business taking a page from what private equity’s doing. But if they are focused on horizontal mergers, we think it really takes a special focus on the data, a special focus on how they’re going to improve healthcare in the market. Why are they specifically the best player to do it and how are they going to improve equity? How are they going to improve the lives of people in many rural environments who don’t have access to care, have transportation issues? What are they going to bring to that will speak to the FTC and address the issues and concerns they have?

Andrew Dick: Yeah. You’ve all hit on a number of hot topics that we’ve been tracking. Really if I had a headline, it would be the rise of the state attorney general around the country where they’ve taken a more active role in regulating healthcare. Couple points on the east coast. We know that in states like Rhode Island, there seems to be more oversight of nonprofit healthcare systems selling to for-profits for fear that the for-profit health system may sell assets in connection with the sale lease back and then somehow the community may lose control of valuable healthcare assets. And then I know that I had a discussion with both of you about Mass General in the news. Maybe one of you could talk about that. They had very grand plans to expand in their markets. It sounds like the state AG stepped in and started asking some questions. Maybe you could hit on that just briefly.

Michelle Mader: Yeah. And that’s been in the national headlines for… I think we’ve been tracking this almost a year now. It was the first big… And this wasn’t a merger. So for those of you who are listening, this isn’t a consolidation of healthcare systems or a vertical horizontal. This is just them expanding their own system. So they basically proposed… Mass General proposed, which by the way is the largest healthcare provider in the state of Massachusetts, they proposed a $2.2 plus billion expansion plan. It really consisted of about four major projects, four or five major projects depending on how you want to break them down. And then when they proposed this, the state came back and said, “Well, well, wait a minute.” It wasn’t the AG office out of the get-go.

Michelle Mader: It was really Massachusetts health policy commission that they got set up, that they came back and said, “Wait a minute. We want to know a performance plan. We want to see from your performance plan on how you spending all of this money in the state is actually going to decrease healthcare costs that give people more access, and more importantly, make yourself more efficient, right? We are funding through Medicaid and Medicare the portions of your revenue all the time. So we need you to prove to us through a performance plan that you’re going to be able to improve healthcare overall for the state.” So months went by and they put together a plan. Essentially what happened is, ultimately they greenlighted two of those four to five projects that were huge expansions. They’re going to be a billion plus dollar expansion towers essentially that are going to be created. And then the health system took off the plate some of their ambulatory environment or ambulatory for projects. They were going to do two or three ASCs out in the community.

Michelle Mader: So what happened is this health commission essentially cut their proposed expansion by half by saying, “You can’t prove that what you’re proposing is ultimately going to be in the best interest of the Commonwealth. And so therefore we don’t want you to do it, and we’re going to discourage you to do it.” But the amount of expense, the amount of due diligence, the amount of political PR that went into this for months has been tremendous. But it was the first one that we saw where really the state stepped in heavily and said, “No, it’s not just M&A. No, it’s not just monopolies and markets. We don’t want you spending our precious public dollars that you get by being a not-for-profit in in profitable or only focusing on certain aspects of access. So that was really something different.

Michelle Mader: And I think other states are going to do the same thing. I think we’re going to continue to see that these large traditional healthcare providers who have billions of dollars and who control state-based healthcare are going to find more and more scrutiny at the federal level, at the state level, but also at the local level. So I was reading an article not too long ago where Saratoga Hospital in New York, they wanted to rezone 16 acres, right? This isn’t small. This isn’t a $2 billion project, wanted to spend $14 million on expanding the hospital and rezone 16 acres and the local community and the local government came back and said no. Right? “Our healthcare’s already expensive. You can’t prove to us that this is going to make our access and our outcomes any better. It’s just going to be passed along to the consumer and into our employer/payer based and increased premiums, et cetera. So, no, we don’t want it.”

Michelle Mader: And I thought, whoa, that’s taking it to the local community level. So there is enhanced scrutiny and attention at this, for this in the healthcare providers across all levels of oversight.

Mark Furgeson: And I think that as there are healthcare pundits that would say, “Well, that’s just Massachusetts or that’s just New York,” but we see a fairly good consistency with priorities on both sides of the aisle on this issue. This intention to lower the cost of care to prove that not for-profit care is an advantage to Americans, I think it’s something that is not just an administrative specific thing.

Andrew Dick: Yep. Michelle, you hit on something that we’ve talked about in the past. Local planning and zoning authorities stepping in based on feedback from the community. I was talking with one of the major health systems in Florida. They don’t have a certificate of need law to deal with anymore, but what they found is they’ve received quite a bit of resistance in certain communities at the planning and zoning level. So that’s a new hurdle that these health systems historically haven’t had to address in the past. It was always there, but not so much. These planning and zoning bodies are taking a more active role in shaping healthcare, so to speak.

Mark Furgeson: That’s frightening.

Michelle Mader: And it tells us that we aren’t… I’ve been doing this for 25 plus years. And for a long time, there was a subset of the population who really understood healthcare, right? Who at the consumer level who understood their costs, who could decipher an EOB when you get it from your payer and from your insurance. And I think COVID has accelerated the general consumer’s attention on this issue. It has highlighted wellness and behavioral health and mental health sustainability and has also taught people to access lower cost of care. And all of a sudden they said, “Well, I’ve got a sore throat. Instead of going into the ED where it’s going to cost me $2,000 or $3,000 for store throat, I’m going to call telehealth. Or I’m going to go to my urgent care because I don’t want to go to the ED because I don’t want to catch COVID,” right?

Michelle Mader: It wasn’t because of cost to begin with. It was because they were scared. And now that they’ve seen the benefits of that, we’re starting to teach huge population bases on how to navigate the healthcare system because they were forced to do it during COVID. They were forced to look at alternative sites of care and now they’re realizing the financial benefit. And I don’t think that tide’s going to swing back anytime soon if ever. And so COVID really accelerated the teaching of both at a state level, at local levels, at your local community and even within your families on how to navigate healthcare in our system. And I think that’s a benefit to everybody, but it’s changing how we plan. It’s changing how we look at strategy and it’s changing how we’re going to move forward as an industry for sure.

Mark Furgeson: Yeah. And that might be kind of the big takeaway. I think you combine some of the consumer choice changes that we’ve seen that technology’s been an accelerant to. And put that with the double digit impacts of some of those financial metrics we talked about and hopefully we’ll be moving towards new pathways for care, more efficient ways to do healthcare and get the better advocacy.

Michelle Mader: Absolutely.

Andrew Dick: Terrific. Michelle, Mark, this was a great discussion. Thank you for being on the podcast today.

Andrew Dick: Just to remind our audience, this is part one of a two part discussion. Our second part will be focused more on staffing and labor related issues for hospitals and healthcare systems that will be released soon. I want to thank everyone for listening today on your Apple or Android device. Please subscribe to the podcast and leave feedback for us. We also publish a newsletter called The Healthcare Real Estate Advisor. To be added to the list, please email me at [email protected]. Thank you.

Mark Furgeson: Yeah, our pleasure. Thank you.

The New Markets Tax Credits (“NMTC”) program is available to non-profit hospitals and Federally Qualified Health Centers (“FQHCs”) to assist in the financing of facilities located in qualified low-income areas.  This podcast explains how the NMTC program works, how hospitals and FQHCs can access the program, and how the program benefits the advancement of health care initiatives in low-income communities.

Attorney, Hall Render

CEO, Hope Community Capital

Danielle Bergner: Hello and welcome to the Health Care Real Estate Advisor Podcast. I’m Danielle Bergner, a real estate attorney with Hall Render. And today we will be speaking with Carrie Vanderford Sanders, CEO of Hope Community Capital, on the topic of New Markets tax credits for hospitals and federally qualified health centers, or FQHCs. Good morning, Carrie.

Carrie Vanderford Sanders: Good morning, Danielle.

Danielle Bergner: Carrie, maybe for those not familiar with Hope Community Capital, could you maybe just start by telling us a little bit about your organization and what you do?

Carrie Vanderford Sanders: Yes. Thanks Danielle. My name is Carrie Vanderford Sanders, as Danielle identified, and I am the CEO and founder of Hope Community Capital. We are a national community development finance consultancy. We work with projects across the nation that need to access interesting tax credits, other public subsidies, also impact capital to develop and operate high impact community facilities.

Danielle Bergner: Wonderful. Before we dive into the application of the New Markets Tax Credit Program to hospitals and FQHCs, I thought it might be helpful if we just talk a little bit more broadly about the New Markets program, it’s underlying policies and objectives and just basically how it works. I think that would be a good foundation for our listeners today. Maybe Carrie, from your perspective, just explain a little bit, how does the New Markets Tax Credit Program work? A lot of people have heard of it, they’re familiar with the term. But what I find is a lot of our healthcare clients aren’t intimately familiar with the program and what it’s really intended to accomplish.

Carrie Vanderford Sanders: So Danielle, the New Markets Tax Credit Program is section 47d of the IRS code. And it was originally envisioned in 2001 and is currently administered through the US Department of Treasury through the Community Development Financial Institutions office. The point of the program then and still today is to provide a federal tax credit to investors for investing in a qualified project in a qualified census tract, through an entity called a community development entity that has been granted or awarded rather allocation authority for new market tax credits. So what this would look like is a again, often it is our bigger banks or often will have tax credit syndicators that are out to, or have an interest in a mission and a financial focus on investing in the new market tax credit. And what they will do is they will work with the community development entities that have applied for an award of new market tax credit authority.

Carrie Vanderford Sanders: I should mention that these community development entities are qualified by the US Department of Treasury through the Community Development Financial Institutions office annually apply for an allocation of the five billion in new market tax credits that is appropriated for this program annually. So we have five billion that these community development entities apply to the US Department of Treasury annually. The average allocation of authority to these community development entities in the past year was around 50, $51 million. So back to what does the investor do? The investor works with a community development entity that has been awarded the new market tax credit and the community development entity says, “Hey, I’ve got, in this case, let’s use a federally qualified health center located in a qualified census tract.” Meaning it is qualified on the basis of poverty, median, household income and unemployment. One or all of those three, as well as some other secondary criteria may come into play.

Carrie Vanderford Sanders: But nonetheless, the CDE in my scenario has a federally qualified health center that is in a qualified census tract and the federally qualified health center is engaging in activities, which we all know, I hope on this audience, what a federally qualified health center does, that qualify as an active business for new market tax credits. And the investor says, “Great.” So the CDE says, “I am allocating 10 million of our allocation to this wonderful FQHC project.” And the investor says, “Great. I would like to buy those credits.” So the investor receives 39% of that $10 million investment as a federal tax credit, taken over seven years. So that is the summary, Danielle. I can certainly go into much more nuance, but that it is an incentive for investors to invest in qualified projects in qualified census tracks.

Danielle Bergner: Which are generally low income communities or communities experiencing high rates of unemployment or poverty type conditions. Is that accurate?

Carrie Vanderford Sanders: Yes. And exactly you called it, a low income community. And that is exactly the designation that the US Department of Treasury and the CDFI fund calls it a low income community based on poverty, unemployment, and median household income. Right? And so there are certain benchmarks within those that help it to understand if this is a qualified census track from a geographic perspective.

Danielle Bergner: I think that’s really important policy issue to understand at the outset of the conversation, because we get phone calls frequently from healthcare clients that hear of this program and they hear it’s really great and a great way to help finance facility improvements and capital projects. But a lot of our clients who call don’t understand at the outset that the program is not intended to create subsidy or incentive in every community around the country. It really is the policy underlying this program is to direct investment, to incentivize investment in fundamentally low income communities. And so I think that’s an important thing to understand. And Carrie, you and I have worked over the years on many New Markets projects and one of the things I like about the New Markets program is it’s not an urban program, it’s not a rural program. It is a program that incentivizes and helps with facilitating capital projects in urban and rural areas around the country, so long as they meet the qualified low income standards for that community.

Carrie Vanderford Sanders: Absolutely. And often I say, it’s a geography program, right? That is the first conversation I have of once I say, “I’m intrigued with the impact of this project and I can see what you’re doing for the community here, let me get that address.” And immediately, I map it and that’s where we start in terms of whether or not it will have access to this New Markets Tax Credit program.

Danielle Bergner: So one of the things you just said piqued my interest, and it’s one of the things I really enjoy about working with you when you said you when you’re talking to somebody about a project and it piques your interest in terms of it’s fit for the program, you act as somewhat of an intermediary between the CDEs and the parties that are ultimately looking to secure the investment for their project. And so what are the things that you look for as a consultant when you’re evaluating, is this project a good fit or not a good fit for the New Markets program?

Carrie Vanderford Sanders: So I will say for our firm, our specialty truly is on community facilities. So that does include, I believe what your audience is very focused on as well, which again, is the hospitals, the health clinics, the federally qualified health centers, and on. So what I am looking for in terms of impact really mirrors what those community development entities that have a allocation authority. What they have said to the US Department of Treasury that they will do, and the impact they will create with the allocation, if they win it. Right? So these community development entities have a business strategy, they have a community impact focus. And my job between, as you said, the community development entities and the actual project themselves seeking the tax credits, my job is to understand the business strategy and the impact strategy of these community development entities and see if there is alignment in what is happening at the project.

Carrie Vanderford Sanders: So for health related facilities, let’s call it, we are looking for number of patient visits. We are really looking at that. We are really looking at payer mix. So why we are looking at payer mix? We are trying to understand how many low income patients are being served. So those are two main things. We are looking for expansion of, let’s just say behavioral health. There’s no behavioral health, we want to use New Markets Tax Credits to do behavioral health at this particular hospital. Let’s say we want to do reproductive care. That is another expansion. It’s what can we, if we had access to this New Markets, what sort of impact could we make? Could we serve more patients? Could we offer more services? Could we bring in more healthcare providers? These are the impacts that are really important to the community development entities to understand.

Carrie Vanderford Sanders: And so, as I mentioned I believe earlier, these community development entities, when they apply for an allocation of this tax credit authority, it is highly competitive. It is subscribed, I believe four times more than what the five billion is available to allocate from the federal government. So when they go in, these CDEs, for these allocations, they want to have the most competitive projects and most high impact projects. So they’re saying, “We can do this.”

Carrie Vanderford Sanders: And so when they win that allocation, they are going to be very, very impeccable and meticulous with regard to alignment in terms of, are you putting the allocation into this FQHC over here in a rural community that is medically underserved? Is that, in my example, is that aligned with what they told the CDFI fund they would do with their allocation? And I will say, in my experience, and I’ve been doing this I think 17 years now Danielle, projects that are serving low income communities that are providing greater access to healthcare, do very well on the impact. And I don’t need to tell your audience about the impact, but I will say that this is a very strong alignment for the program.

Danielle Bergner: Yeah. That’s great. That impact piece, I think, is really important to understand, because it does guide which projects these CDEs ultimately choose. It’s a competitive process, right?

Carrie Vanderford Sanders: Correct.

Danielle Bergner: Let me ask this question. At a federal policy level, it seems to me, the federal policy has swung back and forth a little bit over the years in terms of the types of projects that CDEs have been successful, or I should say the types of strategies that CDEs have been successful securing credits with. For a number of years, the New Markets allocations were heavily skewed towards CDEs that we’re focusing on more pure economic development job creation, going to CDEs that had missions that were very focused on job creation and economic development. But it does seem to me like that pendulum has swung back a bit more towards community development, healthcare, social determinants of health type of issues. Is that perception correct, on my part?

Carrie Vanderford Sanders: Yes. And something that I find just amazing pretty much on a daily basis getting to do this work is the diversity of projects that get done using New Markets Tax Credits. So yes, is there a focus on jobs? Absolutely. I cannot tell you, there must be at least five or six CDEs that are very focused on one thing and one thing only, and that is rural manufacturing. And that is jobs. That is what we are talking about there, is quality jobs. But there are also a handful of CDEs that are 100% focused on health, education and other social determinants of health. In fact, there is at least one CDE that is solely focused on investing their tax credits into FQHCs.

Carrie Vanderford Sanders: Yes, Danielle, I believe that there’s less of a focus on jobs for some CDEs. But what I am really excited about and what I have noticed is just the diversity of projects that can get done, because think about it, the criteria is, as far as the IRS code goes, they don’t talk about community impact in the IRS code. Section 47d does not say anything about community impact. That’s what the industry has created, which is a good thing in my opinion. But the code says you’re in a qualified census track and you’re a qualified active, low income community business. That’s what it says. But I agree, I think we’ve gotten very sophisticated. I’ve seen social determinants of health. The UN development goals as well are things that tend to come into impact as well.

Danielle Bergner: Can you help us to understand how the subsidy associated with the New Markets Tax Credit program works?

Carrie Vanderford Sanders: I have worked on the several FQHCs throughout the country, and I’m not going to name names. But in each of those cases, what they have come to me with is that our operations will… We’ve done our community health planning. We know we need to add dental, let’s say. Dental is big here in Wisconsin, big time need. I’m sure that’s not unlikely in other places as well. So we need to add dental. We need to add a rural dental clinic to our FQHC. We have very thin operating margins. We are not able to take out a lot of debt. We’ve also raised some capital, some private capital, but we’re missing about 20% of our capital stack to finish this dental clinic project. And the need is so desperate, but we have exhausted our resources, financially, to get this done. We need 20 more percent.

Carrie Vanderford Sanders: And that is where I say, okay, where is this thing located? Let me understand if it’s a low income community and let’s see what your total project cost is. So it’s a 10 million dental clinic expansion. They have figured out how to bring eight million to the table, we’re missing two. And I’m saying, let’s go find 10 million in allocation, which will generate $2 million in low cost equity to the project. What happens at the New Market Tax Credits in very broad strokes. It is a seven year compliance program. And so when you close on the financing on day one of the closing of the financing of the 10 million in financing, which is financed through the New Market Tax Credits, you have access to that full 10 million of financing. The investor pays in advance for that credit that they’re receiving, right? They’re receiving a credit, that’s the whole point of this program. They pay in advance for it. You get to access to that money to build out your dental clinic.

Carrie Vanderford Sanders: And at the end of the seven year compliance period, the investor says, “Well, thank you so much. I’ve received the tax credit that you said I would. And I paid $2 million for that tax credit.” So I’ve got my tax credit. You’ve got your $2 million that you’ve used to build this thriving dental clinic. So I’m going to leave that $2 million… I mean, there’s a whole lot of legal documents. It’s not just to leave the two million. But Danielle can help you with those legal documents.

Carrie Vanderford Sanders: But they’re going to leave that two million in the project and exit the transaction. So what you have done then, as the FQHC, is because of the New Market Tax Credit financing, you have financed a 10 million project, but really have only had to repay and, or raise capital for eight million of that 10 because of this wonderful New Market structure. And the thing is with my dental clinic expansion scenario there, the idea is that, yeah, maybe the clinic would’ve raised that $2 million eventually, but the critical need for serving those patients with dental services was so great that they can’t wait. They can’t wait to raise another $2 million. Who knows when or if that will come. So the New Markets accelerate that last piece of capital and makes the project happen when the community really needs it. Hope that makes sense.

Danielle Bergner: It does. It does. So in a nutshell, for people who have that question, the answer is it’s really a way to access a low cost equity investment, and a way to realize at the end of seven years, this subsidy value to the project, which is roughly equivalent, to your point, there’s a lot of legal details and calculations that are necessary. But rough numbers at the end of seven years, the project, and in this case, the FQHC or the nonprofit hospital realizes the value of that new market’s tax credit equity investment. When the investor exits the project, exits the investment and leaves their $2 million in the project.

Carrie Vanderford Sanders: Correct. And I would just add one detail to that, which is that just to reiterate, you have access to the full 10 million on the day of closing, to fund those construction costs and such. That funds on the day of closing. So what you’re really doing is you’re not repaying your investor at the end of the seven years. That money is in the project and it doesn’t come out, thanks to New Markets.

Danielle Bergner: Carrie, are there opportunities to payer New Markets Tax Credit equity investment with philanthropic commitments? Because I work with a number of clinics that have a really strong donor base from various sources, but they aren’t always sure how to… But maybe those philanthropic commitments, they’re not enough. They’re not enough. To your point, they would get there in three to five years. Right? In the meantime, there’s a need. The community has a need for dental services, for behavioral health services. Is there an opportunity for either nonprofit hospitals or FQHCs to couple philanthropic commitments with the New Markets Tax Credits equity structure?

Carrie Vanderford Sanders: Absolutely. So I mentioned in my $10 million example there, that you could count on two million after all is said and done, two million coming from your new market tax credit subsidy. But where’s the rest of the eight million? Often, I see cash at closing. So maybe you have capital campaign or donor receipts that you actually have as cash on day of closing. We’ll put that in to kind of fill our $8 million bucket. And then you’ll have some that may come in over three to five years, in which case the project would probably seek a bridge loan, from a financing institution. And the repayment source for that bridge loan of course, is your pledges receivable. And so that comes in. And then the other source that I see, I do actually think I’ve seen HRSA grants also as part of that $8 million bucket of sources.

Carrie Vanderford Sanders: So other sorts of grants that maybe public grants can be part of that bucket as well. And then permanent debt can also be part of it. And then also, I will just see sometimes just the cash of the organization. Maybe they’ll put in a half a million in our $8 million bucket that is their net assets that they have been reserving for some time. And it’s like, well, this was for an expansion and here we go. So we can fill that eight million of the 10, many different ways. And that’s another part of New Markets that’s so exciting to me is because it’s so diverse in how you can do that. But you do need to figure out the eight million and it all has to be there. I should say this, the whole 10 million has to be counted for on closing day. Just note that the two million of that 10 is derived from the New Market Tax Credit equity.

Danielle Bergner: Right, understood. Carrie, one question I have for you. It’s a very relevant and timely topic, which is behavioral health specifically. We’re actually preparing to issue an article within the next week or so regarding the status of behavioral health and in particular, the lack of facilities currently existing to meet demand in the community. And I’m wondering from your perspective, because you are on the front lines of so many, you’re seeing so many projects, some of which will go, and some of which will not. I’m curious if you’ve seen an uptick in behavioral health related projects in particular?

Carrie Vanderford Sanders: I have. And to add a little nuance to that, what I am seeing is telehealth. So I’m seeing maybe there is a hospital system or an FQHC system that maybe is based in, let’s just say, Madison, Wisconsin, since that’s where I’m calling in from today and that they may have rural affiliates that are medically underserved, lack of medical professionals in those communities and on. And so I am seeing an uptick in, and I’m sure this is no surprise to any of your listeners here, an uptick in telehealth as it relates to behavioral health. And can we use New Markets for that? Absolutely. That’s what I’m talking about with how diverse and exciting the New Markets funding can be. At least it’s exciting to me, Danielle, I don’t know.

Carrie Vanderford Sanders: I’m seeing more telehealth and especially to reach our rural communities.

Danielle Bergner: Give me an example of how New Markets is being used in the context of telehealth.

Carrie Vanderford Sanders: Okay. So I have a current project right now, which again, will remain nameless, but it is in Wisconsin and there are going to be five small offices in rural communities in a five county area. So five offices, five counties. One of the major health systems in Wisconsin is going to be the main collaborator here providing the telehealth. So they will have an office there, they will have the technology in each of these communities, but they will not see patients face to face. They will still be seeing patients from a telehealth perspective. So there is the need to finance the cost of this space. There are other collaborators within this space, including other social service organizations, and I’ll just leave it at that. But they’re coming together in probably about a 5,000 square foot space in five communities, in five rural counties.

Carrie Vanderford Sanders: And this hospital system is kind of setting up and organizing the financing structure, because there really needs to be a lead to organize the financing structure on all of these New Markets to build the space, execute the collaboration agreements with the other partners in the 5,000 square feet and to market and build, I guess you can say, the telehealth business or outreach, I suppose is the better way of saying that. And that is in those five communities, 5,000 square feet, that is a 13 million New Market Tax Credit project. And it’s very interesting because we’ve got lots of different partners and five different communities. So that’s an example of how that would look like.

Danielle Bergner: That is really exciting. And it reminds me of an article I read recently in the Modern Healthcare magazine, which had a really catchy subheading, which was clicks and mortar is the future of behavioral health. And it caught my attention because the type of project you are describing right now is exactly the type of project that this label, clicks and mortar, is talking about. That it’s not one or the other, the solution is a mix of the two types of delivery facilities, both telehealth and a bricks and mortar location for people to access those telehealth services. Right?

Carrie Vanderford Sanders: Yeah.

Danielle Bergner: The collaboration aspect that you talk about is really interesting too.

Carrie Vanderford Sanders: I like that, clicks and mortar.

Danielle Bergner: I know, I liked it too. I thought it was catchy. Well, Carrie, this has been really enlightening, really interesting. I’m sure that our audience will find it of great interest. Before we close out, let me ask you, if a nonprofit hospital or an FQHC is starting to think about a project or they have a need in a low income community that likely qualifies for the program, what would you suggest as a good starting point for them?

Carrie Vanderford Sanders: Yeah, first off let’s understand if it is actually in a low income community. Secondly, let us understand the entire project cost, so really understanding the uses of the financing. What are we trying to do here? And it can be in broad strokes, of course. But understanding what are we doing here, from a financing perspective. And then we also of course, want to understand what are we doing from an impact perspective here? And that gets back to again, patient visits, on and on the things I mentioned earlier about impact. So we want to understand again, location, what are we financing and what are the impacts of this project.

Carrie Vanderford Sanders: From there, you call Danielle and you say, “Danielle, I have something. Is this a Mew Markets deal?” And Danielle can resource you to her partners. Feel free to give me a call, Danielle. And we can see if it’s a fit. The other thing, as part of our business philosophy is that we are not going to engage a project just because it is in a low income community and there’s a way to use the 10 million. We have to make sure that there is actually a community development entity out there that has alignment with their business and impact strategy to what is being presented by the project sponsor, as we call them. Because it is complex. That word has not come up yet, Danielle, about New Markets on this call. But it is not the easiest or right way, in my opinion, to raise 20% of your capital stack. It is not. However, it is a very powerful way to raise a part of your capital stack when you have exhausted other less complex options. And so it works very, very well though for hospitals health clinics and on.

Danielle Bergner: Carrie, thank you so much for joining us today. Thank you to our audience for joining us. If you would like to learn more about any of the topics you heard in today’s episode, please visit our website at hallrender.com, or reach out to me at my email address [email protected]. Thank you.

Carrie Vanderford Sanders: Thank you.

As housing costs have continued to skyrocket nationwide, many middle-income hospital and health system team members have found it increasingly difficult to find high-quality and affordable housing options. The lack of available housing has exacerbated the staffing challenges for many hospitals and health systems. This strain has impacted employee recruitment, retention and the overall health and well-being of health care employees.

Hall Render attorney Danielle Bergner discusses various strategies that hospitals and health systems may consider to address housing challenges faced by their team members.

Attorney, Hall Render

Moderator: Thanks so much for joining us today. We’ll get started in just about one minute. (silence) Thanks so much for joining us today. We’ll get started in about one minute. All right, well hello and welcome to today’s webinar. Thank you so much for joining us. My name is Julie Senesac and I’m the digital marketing manager here at Hall Render. And I’ll be here in the background answering any questions. Today we’re presenting housing strategies to improve employee recruitment, retention and overall health, presented by Hall Render attorney Danielle Bergner. Just a little housekeeping before we get started. If you have any questions during the presentation, please go ahead and type them into the Q&A box in your Zoom control panel. We will have some time towards the end for questions. Any questions we don’t have time to address today, we’ll make sure to follow up with you via email. Now I’m going to turn things over to our presenter, Danielle Bergner.

Danielle Bergner: Thank you, and thank you everyone for joining today. We have great interest in this topic as I’m gathering from the registrations for the program today, I hope we all find some great information. Let me advance my slide here. First, just a little bit about Hall Render, Hall Render Advisory Services, and myself. I have actually worked in the housing industry for about 17 years now. Most recently here with Hall Render, advising hospitals and health systems nationally on a range of real estate issues, including housing strategies and action plans. Hall Render, and Hall Render Advisory Services, we like to say we focus our services as an extension of your in-house team. We have lawyers and non lawyers who partner to coach and advise our clients through real estate challenges with pragmatic objective and conflict free advice that has earned us the trust of hospital and health system clients nationally.

Danielle Bergner: I’ll start with a brief program overview. We’re really focusing today on housing as it impacts the issue of employee recruitment, retention and overall wellbeing for hospitals and health systems. This is the second in our housing as healthcare series. And we are focusing today specifically on employee housing, because it has become such a critical tipping point issue for so many of our clients around the country. So first we’ll talk a little bit about, what is the problem? Well, how does this dovetail with other staffing challenges that healthcare is facing right now? We’ll talk a little bit about how this is a two-pronged problem, lack of affordable housing versus lack of available housing. Which are two distinct issues that we have to understand at the outset of developing any strategy. And then we’ll finish the program today with a summary of actual strategies that hospitals around the country are using and have been using for quite a period of time now in some cases.

Danielle Bergner: We will focus today on the concept of permanent housing options for employees. I emphasize permanent because there are other temporary housing strategies, some of which I’m sure many of you are familiar with. Things like renting rooms and hotels with surplus capacity, trailer type housing accommodations. Those are topics we will not be covering today. Today’s focus is really on the concept of permanent housing solutions for hospital and healthcare employees. So first, we are, as an industry in a crisis, in a letter written to Congress this month actually, the American Hospital Association states that the workforce challenges facing hospitals are a national emergency that demand immediate attention from all levels of government and workable solutions.

Danielle Bergner: They note that hospitals have seen a decrease of nearly 105,000 employees since February 2020, which has resulted in an increased reliance on contract labor from healthcare travel staffing firms, which of course as many of you know, are charging hospitals exorbitant rates for labor driving up overall expenses at every level. In other words, setting aside housing as a contributing factor, healthcare is in crisis as it pertains to providing adequate levels of critical staffing.

Danielle Bergner: So how does housing contribute to this problem? Here is just a collection of recent headlines. In preparing for this program I searched just the last five months and came up with several dozen headlines specific to the issue of housing contributing to staffing problems for hospital and health systems. Headlines like, housing for hospital workers called a crisis. Florida hospitals say potential staffers cannot find affordable housing. The housing crunch means Montana hospitals cannot find or keep workers. These headlines are just indicative of the geographic range of the problem. This is no longer a market specific issue, this is now a national issue. And increasingly we are seeing hospitals and health systems developing proactive strategies to address the housing shortages in their communities.

Danielle Bergner: So what do we have here? Well, I call it a perfect housing storm with two prongs, lack of available housing and lack of affordable housing. On the available side, the reality is available housing inventory has decreased nationally in most markets. In some cases we’re seeing peak inventory at less than 40% of what it was two years ago. In other words, demand for housing is far outpacing supply. This has been going on for a number of years and what we’re seeing now is the result of underbuilding for the better part of the last decade. The second prong of the perfect housing storm is lack of affordable housing. Housing is considered affordable if it costs less than 30% of a household’s income. So you can see how with constrained supply, escalating material costs, a prolonged period of low mortgage rates, record inflation and other pandemic fueled factors such as remote work and the increase of second homes have created a perfect storm for the current housing market. So we have constrained supply, we have demand that cannot be met, and we have costs that have been increasing dramatically in recent years.

Danielle Bergner: Here I say hospitals are innovating because the problem is unfortunately only getting worse. The graph here is showing the relationship of median home price to household income over the last 20 years. And what you can see here is median home price is far outpacing the increase or I should say, lack of increase in real median household income nationally. And as you can see from the chart, the divide is only growing wider, which means housing is getting less and less affordable for the average American.

Danielle Bergner: I inserted kind of a colorful quote here by Shawn Tester the CEO of Northeastern Vermont Regional Hospital. He says, on the topic specifically of providing housing for hospital employees, he says, “When you’re haying and the baler breaks and there’s a thunderstorm coming, you got to figure out how to fix the baler and get the hay up in the barn.” In other words, when he was asked, why is Northeastern Vermont Regional Hospital getting into the housing business? His response basically is, because we have to. We don’t have a choice anymore. We are unable to recruit and retain employees in our market if we don’t do this.

Danielle Bergner: So transitioning from kind of a general overview of what the problem is, which I know many of you are familiar with. I want to really dig in now and talk specifically about different strategies that hospitals and health systems are using around the country. As an over view, we’ll touch here on the concept of direct benefit programs, a master lease housing model, housing acquisition and development, community land trust partnerships, public housing authority partnerships, and regional housing initiatives. This is by no means an exhaustive list of how hospitals and health systems can or are engaging in solving housing issues in their communities. But I do think it’s representative of a range of strategies that hospitals and health systems may want to consider at the outset of thinking about how they may want come at housing. I do note here, there is no one size fit all approach. A successful housing strategy often involves layering a number of different approaches depending on what the issues are.

Danielle Bergner: So first let’s talk a little bit about direct benefit programs. Employer assisted housing programs have been around for a long time. They have been used in the healthcare and non-healthcare contexts for many years. Basically assistance in an employer housing program can be provided in a number of ways, typically through financial assistance, sometimes in the formal of a down payment grant or a loan and rental subsidies. Sometimes those are forgivable loans, sometimes they’re not. It does require internally at the hospital level, the development of formal policies that address eligibility, repayment and forgiveness terms. And education and credit counseling are also typical components of a direct benefit program focused on housing assistance. One example that I saw recently was in South Carolina where the Beaufort Memorial hospital is offering a $10,000 home buyer assistance program for its employees. Another interesting example that I want to point out, which is not financial assistance per se, but I thought it was a creative tool.

Danielle Bergner: St. Luke’s Health System in Boise recently launched an online portal right on their website that connects hospital employees with area landlords and invites landlords to connect their available units with hospital employees. So it’s a way for the hospital to connect its employees with housing, to connect landlords with hospital employees without necessarily offering a direct financial benefit. Although I do note St. Luke’s also has financial investment in housing strategies as well. And then just a footnote on this concept of direct benefit programs, I think it’s, one of the trends that we are seeing nationally is healthcare clients looking more globally at their suite of employee benefits to include not just housing support but non housing support work. Things like childcare, tuition assistance, mental health programs. So maybe sometimes if a hospital or a healthcare system is thinking about housing, I would also encourage them to think about these other potential options for benefit programs that would enhance the overall wellbeing of employees.

Danielle Bergner: So transitioning now from the direct benefit model, I want to talk a little bit about the master lease model. The basic mechanics of a master lease housing model are this, the hospital master leases homes and apartments, and then subleases them to hospital employees. Often with the assistance of a contracted residential property manager to ensure that all of the various residential regulations are being complied with and so forth. And also because, one of the things we’re keenly aware of is housing is not healthcare’s core business. And so the more that hospitals and health systems can get themselves out of the day to day of leasing and managing residential real estate the better, because it is very difficult to build an internal competency specific to residential rental practices. So here the hospital master leases homes and apartments, subleases them to hospital employees. And then the benefits of this type of model, master leasing housing allows a hospital to better control the inventory that’s available in the market over time.

Danielle Bergner: It ensures to the greatest extent they can that units are available for hospital employees when needed. A master leasing strategy can also be a fast way for hospitals to secure housing inventory. And that is assuming housing inventory is available, which in many markets today that is one of the challenges. I also note on the benefits side that a master lease model can also be very appealing to landlords because it offers a reliable revenue stream. And so what you have here basically is the hospital or the health system serving as a guarantor of sorts to a residential landlord. That is obviously a very valuable benefit to landlords as opposed to underwriting each individual residential lease based on the credit of an individual tenant. The challenges with a master lease model, and I say challenges, but I would say it’s probably better characterized as realities.

Danielle Bergner: The master lease rents can be higher than what hospitals can recoup through subleases, which does require financial subsidy when that’s the case. This is typically the case in very high rent markets. So I note an example down at the bottom, the Vail Health organization has actually master leased many units for the better part of two decades now. And they just recently renewed their master lease at that development and they’re actually expanding their master lease program. And if you think about it, that makes sense.

Danielle Bergner: Vail is a high rent district. It has been for a very long time. And so here, what you have is Vail Health basically subsidizing the rent through this master lease program where they master lease at the market rent, but then ultimately when needed they sublease at more affordable rents to keep the rents affordable for the people that live there. It is in a way, if you think of about it this way, it’s kind of a rent control program that’s achieved through a master lease model. The challenge of course is that in some markets and today, unfortunately, many markets there may be no inventory available to master lease.

Danielle Bergner: The next strategy I want to talk about is what I’ll just call generally housing acquisition and development. This is, I would say a more permanent solution in the sense that the focus of a program like this is really to create more high quality affordable housing units that will be available potentially to hospital and healthcare employees, but also potentially to the wider community depending on the program’s goals and objectives. So increasingly hospitals and health systems are purchasing land for future development for residential purposes. They’re purchasing existing housing units, rehabbing them and helping to finance the construction of new affordable housing units as a strategy to create and support again, permanent housing options. I cite a couple of examples here. One being Atrium Health in the Charlotte area of North Carolina. Atrium has been very active in recent years with a robust DNI and community investment strategy with a heavy focus on housing.

Danielle Bergner: This one example I point out is a partnership that Atrium did with a local nonprofit organization and a developer, which called for the creation of 341 affordable apartments with 20% of the units, quote unquote, set aside for hospital employees. What that means is Atrium basically made a financial contribution to this project and in exchange 20% of these 341 units will have a rental preference attached to them for hospital and health system employees. Another example I notice here is the Martha’s Vineyard Hospital, which recently purchased 26 acres of raw land for future housing development. I pulled this one out as an example because Martha’s Vineyard Hospital is a critical access hospital. Again, in a high rent district, and recently devoted, I think $3 million of their budget specifically to housing issues.

Danielle Bergner: And a lot of the hospital and health system leaders say, “Would we like to ideally put that $3 million to other uses? Yes. But if we don’t put the money to this use, we’re going to increasingly have difficulty recruiting and retaining staff, which means we will not be able to meet our core business objective.” And so I don’t want to say it’s reluctant. I think a lot of organizations are embracing it, but it is a little bit of a curve in terms of healthcare stepping into the housing space and recognizing that, the fact is the market and government have not kept up, they’re not keeping up and they’re probably not going to keep up going forward.

Danielle Bergner: And so I think healthcare is recognizing this is a problem that healthcare has to address for healthcare and we probably can’t lose much time doing it in most markets. I also want to note with housing acquisition and development that what you often have here is a development partner that really does all of the, most of the heavy lifting in terms of the financing and development of the project, the ownership and management. The hospital’s role tends to be more passive, typically financial support, possibly a land donation. And then also the employees set aside component, which is usually what I see hospitals and health systems getting in an arrangement like this.

Danielle Bergner: Another concept to touch on here is, and it’s kind of an outgrowth, I would say, of the acquisition and development model, is models that involve the use of what’s called a community land trust. A community land trust is a legal mechanism, often a nonprofit that ensures the long term affordability of housing. They do this through the recording of deed restrictions, which restrict the long term conveyance and pricing of the property, or in some cases, the community land trust actually retains ownership of the underlying land to accomplish it. The end purpose is the same, which is that the land that the house is on is basically permanently rent restricted or purchase price restricted, creating a long term, again, more permanent solution to an affordable housing problem in a community. I note here a couple of examples. On one end of the spectrum is the Maggie Walker Community Land Trust, which was funded in part by Bon Secours Mercy Health.

Danielle Bergner: This organization is very active. They buy, rehab and sell homes at a reduced price subject to permanent restrictions on resale value. I would characterize this as a community investment strategy. The Maggie Walker Community Land Trust organization is not focused specifically on hospital or healthcare employees, but the work that they do certainly benefits the employees of the health system working in the area. Another example, which is on a much smaller scale would be a hospital partnering with a community land trust on a smaller project, perhaps involving the donation of hospital owned land to the community land trust for development, subject to long term affordability restrictions and potentially a right of first opportunity for hospital employees. Which means that the hospital employees would have a first opportunity to buy those homes at the reduced purchase price before they could go to the open market for sale. This is a more hospital centered strategy, not as much of a, quote unquote, community investment strategy. But again, accomplishing the same thing, which is creating long term permanent affordable housing for hospital and healthcare employees.

Danielle Bergner: The next model I’d like to talk about is the public housing authority partnership model. I use this model because I like to remind people that public housing authorities are really powerful entities. They are governmental entities, often mission aligned with hospitals when it comes to advancing the affordable housing needs of a community. Public housing authorities also possess unique financial resources and often an abundance of knowledge that can be helpful in advancing in affordable housing development. One example I cite here is a recent project in Denver with Denver Health. Here, Denver Health partnered with the Denver Housing Authority to repurpose a surplus hospital administrative building for 110 units of housing. Financial sources for the project included the low income housing tax credit, which was facilitated largely through the public housing authority and a ground lease financing which was provided by the hospital system.

Danielle Bergner: I like this example because it layers a number of different strategies and achieves a number of different objectives. Denver Health here had a surplus building like many hospital systems do around the country. And fortunately this one was well suited to a residential conversion and instead of selling or donating the land outright, here Denver Health structured their land contribution as a ground lease financing. And so ultimately Denver Health will retain the land in perpetuity, but will essentially subject it to a long term ground lease to facilitate the development of these affordable housing units. I thought this was a really creative, a really thoughtful example of some of things that hospitals and health systems are doing around the country. And also a good example of how to leverage the tools that a public housing authority can bring to the table.

Danielle Bergner: And here my last strategy slide is focused on regional housing initiatives. One of the dynamics that we’ve become very in tune with around the country is there’s a very big difference between housing initiatives in urban areas and housing initiatives in rural areas, and rural meaning much less populated areas. And how you approach your housing strategy really depends on whether you are urban or rural. In less populated areas what we see is a successful strategy will often require a regional approach or even a statewide approach, depending on how rural the entire state is to incentivize development of new housing units. Here the challenges are a little different. In an urban area there’s no shortage of buildings. There’s no shortage of developers. There’s no shortage of capital. All of the parties who want to be involved in a housing development project are in place.

Danielle Bergner: In a rural area you don’t have those pieces necessarily in place. There may be no developers willing to come into the area because it’s not worth their time. There may be no contractors willing to mobilize a team to build anything in a rural area because it’s not to scale to make it profitable for them. And so in these types of circumstances, it’s a unique planning exercise because you often need to bring the resources and you often have to get the project to scale to get the right people interested in doing the project. So one really creative example that I’ve come across in recent months is with the Southeastern Colorado housing initiative. This initiative was led by a number of nonprofit economic development agencies in collaboration with the state and with some federal funding, some ARPA funds. And basically in this model, the regional agencies essentially led the RFQ process.

Danielle Bergner: They led the contracting process. They identified a developer. They identified communities, counties, local governments that were willing to participate. Here there was one hospital district participating where they donated land essentially to the economic development agency. The economic development agency contracts with the developer for the construction of the house. And then when the house is done, the hospital district purchases it back from the developer for an agreed upon market price. And so it isn’t the simplest structure, but I will say it was awfully creative. And it really impressed me in terms of how it brought all of these parties together to tackle a housing issue that for many, frankly for decades had kind of plagued the region and they didn’t know what to do. And now they have 63 houses going up over the next six months. And so the good work is getting done. It’s not always easy to do, but there are models out the there that can help hospitals do it.

Danielle Bergner: And then I’ll wrap up here to talk a little bit about how hospitals and health systems may want to approach a housing strategy. At the outset let me say, it can be overwhelming because it’s not part of a hospital’s core business. You’re working with parties and concepts, and ideas that are maybe not particularly familiar to those inside of your organizations. And so, one of the things I recommend when we start working with a hospital on a housing strategy, is I say, “Okay, don’t bite off too much at the outset. Let’s just take this in pieces.” And what we talk about is a phased approach to a housing strategy. Phase one being the establishment of a clear vision, goals and identifying assets for the endeavor. So we start by talking about, well, what are the hospital’s primary goals?

Danielle Bergner: What is the vision for this project? How are we going to make those things measurable? The next part of this phase one process is identifying land, building and financial resources that the hospital can bring to the table. Sometimes this is surplus land. Sometimes this is the acquisition of dilapidated homes around the hospital. Sometimes this is just straight financial assistance. Sometimes the hospital says, we don’t want to donate land. We don’t have land to donate. We don’t really want to rehab houses. What we’d like to do is write a check and we’d like someone else to do these things. And we can work with hospital systems to help them develop those strategies as well. And then the other really important part of the phase one work is identifying stakeholders and partner resources.

Danielle Bergner: It’s very difficult in housing to have a big impact if you are not bringing multiple stakeholders and partners to the table. The other concept I really spend a lot of time thinking about when I look at these projects for our clients is the concept of leverage. I would like our hospital client dollars to be leveraged on a housing project to the greatest extent possible so that the value of that hospital investment is multiplied because we have other stakeholders at the table. Other stakeholders might be governmental agencies, they might be housing agencies, they might be the philanthropic organizations. They might be developers who are bringing a private investment to the table.

Danielle Bergner: And so the goal when I look at these projects is not always, how is the hospital going to solve this problem? What I look at is, how is the hospital’s investment going to leverage the greatest possible impact by bringing other people and other dollars to the table? Phase two then looks like, what I call organizing the team and developing the plan. Engaging those stakeholders, getting their buy-in, and then developing the plan and the program, whether it’s a direct benefits plan and coordinating that with legal or an HR. Or it is a wide scale housing development project and it’s coordinating the development and financial partners. It’s really heavy on organizing the parties to make this happen. And then phase three is implementation. It’s the contracting, it’s the land acquisition, it’s the program implementation. And so I kind of take a little time to go through these phases with clients, because sometimes what I find is people get a little overwhelmed at the magnitude of taking on a housing project. And the reality is you can, reduce it to more bite size pieces if you’re thoughtful about it.

Danielle Bergner: And just a few practical takeaways before we open it up for questions. First, always understand the problem in your market. Just because affordability is a problem in the other county it doesn’t mean that’s the problem in your market. You have to understand, is our problem that we don’t have the inventory? Is our problem that it’s not affordable? Or is it a combination of both? And then recognizing that there is no one size fit all solution, multiple approaches are often needed for a successful overall strategy. And then third, consider a phased approach to make strategy development and program implementation more manageable for your teams. I invite everybody on the program today to stay connected with Hall Render healthcare real estate insights. We publish a podcast. We have a weekly real estate briefing that you can subscribe to and we often publish articles and blogs. In this slide are links to the various resources, which you will receive after the program today. And with that, I’d like to hand it off to Julie.

Moderator: Thanks Danielle. Did we want to take some time to go through any of the questions?

Danielle Bergner: Sure.

Moderator: Okay. We’ve got one here. Are the costs of subsidizing housing costs allowed to be included on cost reports for critical access hospitals?

Danielle Bergner: That’s a great question. The answer is sometimes. That is actually a question we explore with our clients in typically that phase two analysis, where we really start digging into program planning and implementation and how we might be able to structure it to achieve the best possible tax related outcomes. So that’s a great question and the short answer is yes, sometimes.

Moderator: Great. Here’s one asking about experience with tax-exempt bonding finance model, when funding housing projects. Any pros and cons you could share about this model?

Danielle Bergner: Yes, no, that’s also a good question. We do have quite a bit of experience working with tax-exempt bond financing for housing, although that’s typically facilitated through a private sector developer not by a hospital. Not that it can’t be, but again, it really goes to the question of whether the hospital wants to be on the front line of developing, owning, operating the property, or does the hospital prefer to be more in the financing seat by donating land, donating money, donating resources. Pros and cons just generally with tax-exempt bond financing for housing, one you have to have scale. So tax-exempt bond financing is not feasible if you’re building 12 units. Tax-exempt bond financing is feasible if you’re building 200 units. And so bond financing, tax credit financing, these more sophisticated finance vehicles for housing really require projects to be to scale.

Moderator: Great. We’ve got one here. A question about the Atrium example. How does the hospital determine who gets housing? How do you decide who gets the subsidized home? What’s the criteria?

Danielle Bergner: Right. That’s a great question. So here in the Atrium model, which is very similar to a lot of models around the country, Atrium is not in an active role as it pertains to the evaluation of potential tenants. So Atrium basically has a program to refer their employees to these housing opportunities. But once they’ve been referred, the evaluation of that tenant is done by the property management firm that’s overseeing the management of that property. And that’s done to ensure that all of the, for example, fair housing laws and other regulatory requirements applicable to a project are being satisfied. The hospital itself in this case is not doing that itself. They’ve essentially … They refer their employees to the property management firm, the property management firm evaluates those tenants the way they would any other tenant. And then if they qualify, they get the unit and if they don’t, then they may not, even if they are an employee.

Moderator: Great.

Danielle Bergner: That’s a good question.

Moderator: Yeah. As a follow-up to that, someone asked, how do you begin to measure the success of something like this? Is it against like a traveler agency costs?

Danielle Bergner: Yeah. So that’s a really great question. It’s one that gets asked all the time. So in all honesty, I think it’s very difficult to measure it in hard dollars. How do you measure the cost of not attracting and retaining employees? How do you measure the cost of losing employees because they don’t have a place to live? These are hard of things to do. I will say though that one metric could be, with permanent housing that you don’t need as many travelers. So is that a metric that a hospital may want to track if it goes into a housing strategy? Yes.

Danielle Bergner: Are there studies that have been done, longitudinal studies that have been on the financial benefits of housing programs for hospitals? Not really. There’s a really good study that was published a number of years ago in partnership with Bon Secours Mercy actually, where they studied and developed a formula essentially for measuring what they coined the social return on investment, which measures not just financial, but the broader social impact of these programs for hospitals. And that is, I will say a theme that I hear frequently with hospitals that are doing this, that they view it not just as a tomorrow bottom line type of issue, they view it as a larger community investment issue.

Moderator: Great. We’ve got one here. Can you speak to the income tax implications for individual employees who receive hospital subsidized housing?

Danielle Bergner: Yes. That’s a great question. So the short answer is when anyone who receives housing for less than market value is receiving that it’s possible they will have a tax implication. The caveat being, if this is structured as an affordable housing development where the rents are subsidized in a way and the residents are restricted to certain income levels, it’s possible that that income would not have to be recognized. But that is something that has to be thought through as part of the program analysis.

Moderator: Great. That also kind of links to someone who asked, how does this work if the employee quits?

Danielle Bergner: So that goes back to, for example, the direct … So let’s talk about a couple different things there. The direct benefit program, let’s say there was a loan made for somebody to buy a house and that employee quits. That goes back to that issue of having to have programs and policies developed around, when is a loan forgivable? When does it have to be repaid? The short answer is hospitals can set those programs up any way they want to so long as they’re being administered fairly. And so the answer is, it depends on how a benefit program is set up for that. In the context of something like a person renting an apartment who got the apartment on a preferential basis because of their status as an employee, that would be more difficult. So would you be able to evict somebody who’s no longer an employee? I would say that’s very difficult in the rental concept. I think that that issue probably comes more into play when loans have been made by the hospital to the employee to subsidize housing needs.

Moderator: Great. One here. I would love to hear if you have any examples specifically or recommendations for small rural critical access hospitals, in addition to the Martha’s Vineyard examples, specifically those with limited financial resources for their housing work.

Danielle Bergner: Yeah. That’s a good question. So one I mentioned in the program is the Kiowa County Hospital District in Southeastern Colorado. This is a very small hospital, very limited financial resources. They had one piece of land that they could donate for this project, which ultimately made it go. It did involve an investment on their part, it’s not free. But there’s a good example of a very small critical access hospital that without this duplex being built they literally have nowhere for recruits to live.

Moderator: Yeah. Someone asked, how do employees feel about working and living together?

Danielle Bergner: Yeah. So there are things that have worked and things that have not worked in that respect. I think one of the issues that has to be thought through specific to this question is, what does this place feel like when it’s built? So does it feel like employees are living in a dorm? Because that’s a good example of where employees may not like the arrangement, it may not be successful. Or does it truly feel like they’re living independently in a nice apartment building where they are truly living separately? So there are, I would say there’s case studies of things that have worked, things that have not worked. And generally what has not worked are designs that look and feel more like a dorm type of setting as opposed to market rate apartments.

Moderator: That makes sense. We’ve got a few more here. I’ll just go through a couple more and if anyone wants to submit any questions in the Q&A panel, we’ll make sure to get back to you via email after the webinar. So we asked, how are healthcare organizations balancing the housing needs of their employees with those of their patients in terms of their investment of time and resources?

Danielle Bergner: Yeah. So this is why it’s challenging because housing is not healthcare’s core business and there is a balance, and some organizations are large enough that they can absorb a lot of housing capacity in their internal staffs, others are not. And that’s where I will say, that’s a role that we’ve been playing increasingly with some of our clients where we’re kind of filling that gap for them because the core business is healthcare and that is never going to change. Regardless, there is a certain level of staffing support that has to be committed to any housing endeavor. You can’t avoid that. But I do think that selecting and working with the right partners is what makes all the difference.

Moderator: Yeah. Last question here, before we wrap up. We’re wondering if you can touch on eligibility and selection criteria considerations for hospital employees offering housing subsidies, childcare, transportation assistance.

Danielle Bergner: So the answer to that question is, it’s all over the board. It really depends on what the hospital wants to accomplish with it. It depends on what the specific challenges of their employees are. We do have internally some examples of what clients are doing, but it really is, it would be hard for me to summarize one particular set of eligibility selection criteria because they really are all over the board. I will say one common thread tends to be need based. And so there has to be some component to the selection eligibility process that evaluates bonafide need.

Moderator: Great. Well, thank you so much Danielle. This has been really great. And thank you all for joining us today. Just so you know, we will be sending out an email with a link to a recording of today’s presentation, as well as a link to download the slides. If you’re interested in learning any more about any of the topics we’ve discussed today, feel free to reach out directly to Danielle, her email and phone number is on the screen. Or you can always find more information on our website hallrender.com. Thank you as always for joining us and we hope you have a great day.

Danielle Bergner: Thank you.