The editorial team at LevinPro HC attended BOMA International’s Medical Real Estate Conference last week and sat down with Katy Lincoln, an experienced commercial real estate professional and licensed broker at Lincoln Holdings. Below is the Q&A of the conversation covering the medical real estate market.
Q: Can you provide a brief summary of your background and the work you do at Lincoln Holdings?
A: I spent 8 years as a broker at CBRE working across all property types, including general office and retail, but I eventually moved into healthcare real estate development and acquisitions. Prior to starting Lincoln Holdings, I spent three years as the SVP of Real Estate and Operations for a healthcare real estate development firm. At Lincoln Holdings, I focus on collaborating with other investors in acquiring medical outpatient buildings (MOBs), sometimes taking the form of a joint venture structure and sometimes as a GP/LP structure with Lincoln Holdings as the GP/deal sponsor. This structure allows accredited investors at the individual level to participate in high-barrier investments in the healthcare real estate sector. I currently focus on smaller deal sizes, something that might fall beneath the minimum deal size threshold of a large institutional player. I customize each deal stack, working with the different investors to fit their preferences and form an individual LLC as owner of each investment. Contrary to a fund that might be working against a deadline to place funds, this structure allows my investors and I to be patient and wait for the right deal.
Q: You’ve worked across multiple industries in real estate. What’s the biggest differentiator in healthcare real estate?
A: There are naturally more regulations for these types of properties you must be versed in, such as STARK and anti-kickback laws that a healthcare system must comply with if dealing with a referral source on the opposite side of the transaction. Also, in retail and general office, there is an abundance of move-in ready space in most markets. In healthcare, there is less supply, and most tenants will require remodeling to make the space functional for their specific use, which can be costly. But I think the big difference between healthcare real estate and other property types is physician ownership in the real estate. Oftentimes, doctors want to own their real estate outright or come into the deal stack as an equity partner to experience the benefits of property ownership without dealing with the day-to-day nuances of owning real estate. Some health systems even offer physician ownership avenues to doctors, which can be an effective tool for recruiting and retaining physicians. This is not common in other property types.
Q: What markets are you focused on right now?
A: I’m focused on the Southeast primarily Alabama, Georgia and into Florida. And for the right tenant, I’ll look beyond that footprint. If we’re looking at a property, we look at the hospital’s or physician groups’ credit rating, the terms on their lease, likelihood of renewal and/or options to backfill. There is capital available for quality locations, tenants and deal terms.
Q: There are a lot of headwinds in the market right now, especially interest rates. How is that affecting the dealmaking process and the terms?
A: Deal-making has slowed down compared to about a year or two ago, both on the acquisition and development side. I did a deal two years ago, and I bought at an 8% cap rate with a 3.85% interest rate. Today the same deal with an 8% cap rate would have around a 7% interest rate, meaning no cash flow. Many deals today are still getting done at lower cap rates (around 6% in some cases) to investors who are all cash buyers or willing to take a gamble on negative leverage. I don’t expect that pricing to continue, and I am positioned to buy deals when cap rates shift upwards.
Q: What changes do you need to see happen in the market to make deals easier?
A: We definitely need to see lower interest rates, but I also think we need to bridge the gap between buyer and seller expectations. If interest rates remain high, property values will need to come down to meet that target cap rate needed to make a deal feasible from the buyer’s perspective.
