Podcast - Healthcare Real Estate and the Future of Outpatient Care

Morgan Ribeiro: Welcome to "Counsel That Cares." This is Morgan Ribeiro, the host of the podcast and a director in the firm's healthcare practice. On today's show, we will explore the deep intersection of business, law and healthcare strategy, as we always do, but today we're really going to focus on the complex world of healthcare real estate. And joining me is John Bryant, who recently retired after serving over 20 years as general counsel at Healthcare Realty Trust, where John oversaw tremendous growth and navigated some of the industry's most complex regulatory frameworks. So John, without further ado, welcome to the show.

John Bryant: Thanks, Morgan. It's a pleasure to be here with you and the Holland & Knight audience today.

Morgan Ribeiro: Great. Well, to get us started, I would love if you could just share a little bit more information about yourself and the evolution of your career.

John Bryant: Sure. I got an undergraduate degree from Trinity University in San Antonio, Texas, where I majored in economics. Worked for a year after that before starting law school for a software and consulting firm in Dallas. Went to law school at the University of Tennessee and had the great fortune to meet my wife there, who is also a lawyer for a not-for-profit healthcare system. I started my career in private practice at a fairly small firm in Nashville doing litigation. I also got into real estate transaction and leasing work with one of the firm's partners. I was there for about four years, and I will add as a side note that I have found the litigation experience that I got in those four years to be extremely helpful over the course of my career. A good friend from law school let me know about a position that was open in the real estate group at Baker Donelson. I was fortunate to be able to join their Nashville office in early 1996. Spent about six years there doing real estate and commercial lending work, including for the firm's client, Healthcare Realty Trust. And I joined Healthcare Realty in early 2002.

Just a bit about Healthcare Realty: It's a New York Stock Exchange-listed REIT, which is an often-used acronym for real estate investment trust. The company invests in outpatient healthcare real estate. It got off the ground in 1993 with an IPO led by the founder, David Emery, who was a real visionary in the business. There were a handful of healthcare REITs at that time, but HR was the first to zero in on the medical office sector, what we now define more broadly as outpatient healthcare real estate, but David saw the shift back then even in the delivery of care to the lower-cost outpatient setting, and that's been the wave we've ridden ever since. The company got off the ground with about $150 million in assets, around 30 buildings, and has grown to about 560 buildings, 33 million square feet and an enterprise value of about $10 billion.

Morgan Ribeiro: Wow, that's awesome. And I love what you pointed out, just sort of like different steps along your career path ultimately helped you out in your role as GC at Healthcare Realty Trust. And obviously you were a real key part of the growth of the company, too. And your career really spans an era of incredible transformation just in the industry as a whole. When you first stepped into healthcare real estate, that landscape looked very different than it does today. How did you, I mean, you mentioned this, obviously, when you transitioned over to Baker Donelson and started to focus more on real estate, but how did you first get involved in this very specialized niche of healthcare real estate?

John Bryant: I certainly didn't start out with any designs or a blueprint on doing that. I didn't know anything about it, had handled a couple of leases with dialysis providers and an urgent care facility for a retail landlord earlier in my career, but didn't know there was such a thing as the healthcare real estate business until I worked on my first medical office building acquisition deal for Healthcare Realty. I did a number of those and also development projects for Healthcare Realty as an outside lawyer. My predecessor, Roger West, was the company's first general counsel and one of three founders who was looking to step aside, and I got a call to come to a meeting which turned into, hey, why don't you come in-house with us. [I was] fortunate to have the opportunity to join as assistant general counsel working under Roger, and in November of 2003, he stepped back and I assumed the GC role. And when that opportunity came along, I certainly learned a lot more after I got there than I knew when I came, and it became evident that healthcare real estate is a lot more than brick and mortar, a lot of influences by healthcare policy, reimbursement and regulation that drive what goes on inside the box there.

Morgan Ribeiro: Certainly, and that's what we find here with our healthcare real estate group, you've got to have that appreciation of sort of the overlay of the regulation and how that can impact those transactions and the management of those facilities, so it's really a unique asset class. Looking back, what do you see as the biggest shifts in how healthcare systems manage their real estate portfolios today versus when you first started out?

John Bryant: Yeah, sure. I would say that healthcare systems have gotten a lot more sophisticated in their management and thinking about real estate. I think that's been coincident with the rise of healthcare REITs and other institutional investors in healthcare real estate over the last 20 to 25 years. There have been lots of folks knocking on the doors of hospital systems wanting to buy their MOBs (medical office buildings) or monetize them as the term came to be known for a while. The shift in delivery of care, as I mentioned, from the inpatient to the outpatient setting has also had a lot to do with thinking about real estate in strategic ways. The on-campus medical office building was sort of a hospital afterthought, but systems have really had to focus on how and where to provide for outpatient care and how that drives their mission.

The regulatory environment has been a driver as well for REITs and other healthcare real estate owners. You know, hospitals can offload a lot of Stark and any kickback compliance risk by not being a landlord to their physician referral sources. So, you know, that's been one of the things that we have consistently messaged in, in dealings with hospitals. You know, the bed towers and other core inpatient assets were more the focal point. And now outpatient sites of care, both on and off hospital campuses, are really viewed as critical strategic assets. We had a running joke that every hospital system had a facilities director named Bob, who was in charge of operating the MOBs and also ran food service and security and probably had to make sure that the internet was working.

Morgan Ribeiro: There's probably some truth to that joke.

John Bryant: But those systems are a lot more intentional and thoughtful about real estate, management decisions around real estate these days, and those real estate management roles have gotten to be much more important and you see really skilled and savvy people in those jobs, and it made our lives a lot easier in dealing with health systems to have skilled people on the other side who could interact with you and understand the workings of a transaction or a lease or whatever it may be. You know, another big shift that we saw over the course of my career, not so much recently, but in the last 10 or 15 years or so, was the growth and demand for outpatient healthcare real estate away from the hospital campus. The campus setting was really the focus for HR in the early days and continues to be, but developing medical office buildings closer to where patients live has become essential for market share and consumer acquisition by health systems. And so, we have shifted in our thinking as well, about off-campus real estate and its value and it can drive the on-campus strategy as well. Sometimes we saw systems or a local developer plant an MOB flag in a growing, underserved part of town, that then grew and became a full-scale hospital campus.

Morgan Ribeiro: Great, right. I think that "retailization" of healthcare has changed everything. And during your tenure, Healthcare Realty Trust grew significantly and executed some pretty major market-shaping mergers. What did those massive scaling moments teach you about risk management?

John Bryant: I certainly did learn some lessons there, and we had, I would say, varying degrees of success with growth through corporate-level M&A activity and large MOB portfolio acquisitions. And this is a lawyer talking, but I would say generally our business was done better and risk was more effectively managed by growing our asset base at the real estate transaction level, you know, one or two assets at a time. The corporate-level M&A and portfolio deals take much more stomach, I would say, for risk. The real estate transaction approach takes more time. It requires more patience. It doesn't necessarily line up with Wall Street growth expectations and timelines, but you do have much greater ability to underwrite in those circumstances. The large portfolio deals are usually run like auctions and can often be exercises in overpaying and taking on assets in a package that you've got to figure out how to offload before a lease expires or something else blows up on you. So that was one of the lessons.

I think another, David Emery started out as a developer and multifamily in-office before starting Healthcare Realty. And so, we had that development in our DNA and really viewed it as an ability to manage risk and mitigate risk to some degree. The newly developed assets were generally the highest quality things we had in the portfolio. We knew about the construction, we knew about tenant base, we knew everything there was to know about those things, and I would say as a whole they have performed better than things that we bought just as a general proposition. When you scale at really high velocity going back to the sort of corporate-level transactions, your risk profile multiplies, and there are more things that can and will go wrong. It's kind of the law of gravity with that type of transaction structure.

Morgan Ribeiro: For sure, that reality is exactly why healthcare systems and REITs rely so heavily on legal counsel. Given your years of managing large legal teams and hiring law firms, both managing internal teams and outside legal counsel, what advice do you have for those sitting at law firms looking to effectively support your in-house teams?

John Bryant: Sure, I mean, the outside lawyers that we look to over and over were practical business partners. I led a small but highly cohesive and effective in-house team, but we had to rely on lawyers who said, hey, here's the legal risk, here's the operational probability of it happening, here are two or three actionable paths to mitigate it, so you can close the deal or resolve the dispute or whatever the situation may be. Another piece of practical advice I would offer, which I know dates me, is pick up the telephone. There are obviously times when things have to be communicated in writing, but I don't know how many times I was a CC party on an email thread where our counsel and opposing counsel were hotly debating one thing or another that could have been resolved in a short phone conversation and then confirmed with an email. So, just a practical tip there. And if circumstances allow you to meet in person, all the better, especially if it's your client. That is vital in getting to know who your client is, understanding the business, learning what's important.

Morgan Ribeiro: Right. I mean, it really boils down to communication and how best to communicate and be efficient in those matters but also building that trust and that relationship with the client. So I think it's such a vital distinction. As outside counsel, our goal sitting here at Holland & Knight should always be to solve the business problem and not just spot a legal issue or tell you there's an issue, but to help solve for the problem. What is a common pitfall you've seen outside firms make when working with an organization like Healthcare Realty Trust?

John Bryant: I would say from a very general perspective, it's simply not executing timely. And I'm well aware that lawyers are on call 24/7 and constantly dealing with tight deadlines, but as much as you can, you've got to deliver when you promise it, which makes you look good, makes your in-house lawyer client look good. When I've got to follow up two or three times on the status of something, you can be assured somebody else is chasing me about it, asking, hey, where's that purchase and sale agreement draft, that lease, that memo, that whatever it may be. So the fundamental rule, not specific to Healthcare Realty or the legal practice even, but very important.

Back to what we talked about just a minute ago, I think it's also about taking the time to figure out what your clients' specific needs are, what they care about and don't care about. And that requires some background and legwork and just relationship building to get to that point. More specific to our business, you've got to have an understanding of ground lease structures, which are a common way that on-campus healthcare real estate is held by investors. The hospital use restrictions that go along with those things, tenancy controls, the clinical practice types that are in your building and how that might align or not align with the system's mission with exclusive uses that have been granted. MOBs just don't necessarily function like general office or retail real estate, and boilerplate documents there are not going to be particularly helpful.

Morgan Ribeiro: Yeah, I mean, I think it's really about, not just understanding, you know, healthcare real estate and that business, but understanding the company and the client itself, right? Because every company is going to operate a little bit differently or what your business objectives are, but also just the culture and how things work and who, you know, you as general counsel are having to answer to others in the C-suite, and so understanding kind of how we ultimately can make you, you know, look good and make your job as easy as possible. Looking to the future, what do you see as the biggest challenges and opportunities for the next generation of healthcare real estate leaders?

John Bryant: Sure, there's, you know, certainly lots of opportunity for folks coming up in healthcare real estate, on the business side, on the legal side, all kinds of sides. The demand drivers are so powerful. Aging demographics ensures a steady need for all types of healthcare real estate, you know, medical office, ambulatory surgery centers, senior living, skilled nursing and inpatient facilities. And we've been saying that for a long time, you hear it all the time, but it's true and it's really coming to bear in a big way. You know, I think some of the statistics you see are 10,000 people are turning 80 every day at this point. You know, the over-80 population is going to double from around 15 million to about 30 million in the next 20 years. In the last few years, there hasn't been much new development of healthcare real estate assets compared to the 10 previous years. And so there's certainly some catching up to do there.

Challenges to doing that have been costs of construction and debt capital and making deals work at rental rates that can be sustained by physician practice groups or hospital outpatient departments. And there's almost always an unfavorable comparison when you're looking at rental rates for new development versus something that's already there. So that's a longstanding problem that won't go away, but one of the big challenges in delivery there. And I think the folks that come up with better and cheaper ways to build healthcare real estate and adapt it for delivery are going to be the big winners. There's some technology going on there, but that I think is an area right for disruption, if you will. One of the things that I'm struggling with is, is this telemedicine and technology wave going to really materialize? I've got aging parents, and I know for them, you know, dealing with an app or Zoom or something like that in terms of approaching a physician, healthcare provider, is not really effective. So I think there's going to be in-person healthcare for the foreseeable future, and has been an interesting development, though, since the COVID era.

One other thing I would mention that's sort of unique to healthcare REITs, is in the political arena. In the last couple of years, we've seen some high-profile health system bankruptcies and a backlash of sorts against private equity investors in healthcare and REITs in healthcare real estate. We've seen legislative efforts at both the federal and state levels to ban REIT investment in hospitals and healthcare more generally or to put it through attorney general-level scrutiny that operates effectively like a ban. Those efforts have been largely unsuccessful so far but could get more traction after the next election cycle. I'd say the examples that have led to this kind of backlash are not representative of the business generally. And healthcare systems need more ways to access capital and services for growth and development, not fewer. So hopefully that will not take off.

Morgan Ribeiro: Yeah, I mean, I know we've had separate podcasts on this topic alone, but it is definitely something that we see a lot of our clients dealing with. And it's very – many states have looked at this and we're seeing a lot of activity and many states focused on healthcare REITs or private equity investing in healthcare and how to limit that and, you know, very few bad actors. I think every industry has some bad actors here or there and definitely doesn't represent the whole, which I think is reflective of what you're saying. But how do clients, those in the REITs space or the private equity space sort of get in front of that and message the good that happens? Because I think it's oftentimes the bad that gets the spotlight. But unfortunately, it's one of those few things that is getting some bipartisan support. So I think that there's a lot to focus on there.

And just on your point on telehealth, you know, it's interesting because I think it certainly impacts the healthcare real estate space. There's a lot of good that comes of telehealth, but how do you sort of balance that with, you know, folks like your parents who really prefer to see a physician and benefit from seeing a physician in person and having that face-to-face interaction and sort of human-to-human interaction. Oftentimes, you know, things are cyclical, too. It's funny how house calls have become, you know, and seeing a physician at your house or concierge medicine is becoming more popular at the same time that telehealth has risen. So the pendulum sort of swings back and forth for sure, but all very interesting trends there. You know, talking about your career and just looking at sort of the evolution of the industry, what types of things did you learn that you wish you had known at the beginning of your career? Hindsight's 20/20.

John Bryant: Yeah, certainly lots, and it's debatable whether I was ready for the general counsel job when I got it. I was with a small public company, relatively simple business, not in the spotlight, so it made things easier to learn on the job. I didn't have an accounting background, I didn't have SEC disclosure and regulatory experience, so I picked up a lot of GAAP accounting on the way. For a public company, the importance of accounting and financial reporting outcomes can't be overstated. And with a fairly small company as well, smaller things are material and have to be discussed. And so, trying to deal with the things that came our way in terms of asset impairments and write-offs and things like that, which are somewhat distasteful but have to be addressed. That was certainly a learning point for me. The SEC reporting stuff, I was able to pick up along the way, had lots of good help from folks at Holland & Knight and predecessor firms, Waller Lansden (Dortch & Davis), as well, and my successor, Andrew Luke, who is just a superstar, did a great job for the company on that that front.

You know, REITs are creatures of the tax code, and so learning the basics about REIT tax was another thing I wish I had known from the beginning. There are all sorts of rules about what your income sources and your assets can be, and that was a good learning point for me. Dealing with the board and board committees. Auditors as well, we had some interesting experiences with auditors over the course of my career, and fortunately, the lessons learned, we didn't have to relearn. Executive compensation and stock-based comp, also another big area of learning over the course of a lot of years and Andrew and I joked that we would probably start an exec comp consultancy at some point, haven't done that, but we feel like we've got the tools at least. Human resources and employment law is also another area that I had supervisory authority over, but not a whole lot of experience and picked up a fair bit of that along the way. And I would say that maybe last but not least, the art of drafting minutes was one of the things that I picked up over the course of my career there. And how much do you say, how little do you say, lots of thought put into that to get to something that's presentable for approval. So a handful of things there for sure.

Morgan Ribeiro: All good tidbits. Well, your legacy in the industry is certainly profound. As you enter this next chapter of retirement, what are you looking forward to most?

John Bryant: Well, I've been a few months into it, and I might be wearing shorts and flip-flops right now on a Wednesday morning, and I'm tackling a long list of things to read and mundane projects to complete, finally getting around to doing some of that. One of the simple pleasures has been Sunday evenings without the next week's mental overhang and have been enjoying time with family and traveling without an eye on the inbox. Still doing a little consulting with Healthcare Realty as I can be helpful.

Morgan Ribeiro: That sounds like a perfect blend. I definitely am envious of the constant eye on the inbox, or as they call it, the "Sunday scaries," not having to deal with that, but also just spending time with your family and traveling and doing all the things you're supposed to do in retirement. So you have certainly earned that, and we've really valued our relationship with you and appreciate you joining us on today's "Counsel That Cares."

John Bryant: Well, thank you very much, Morgan. I've enjoyed the conversation.