Q&A: Joe Kurzydym of Lillibridge (August 2006)

By Murray W. Wolf

Joe Kurzydym is an executive vice president (EVP) and the chief financial officer with Lillibridge, a Chicago-based healthcare real estate firm that owns or manages 10 million square feet of medical properties for more than 250 hospitals and health systems in more than 40 states.

Headed by namesake president and CEO Todd W. Lillibridge, the firm is probably best known for its private healthcare real estate investment trusts (REITs), and has grabbed headlines in the past primarily for acquiring major medical office building (MOB) portfolios from Ascension Health, SSM Health Care System Inc. and others.

Since 2004, however, Lillibridge has expanded into fee-based healthcare real estate development, program management and advisory services.

In April 2005, Lillibridge announced that it had acquired Mediplex Medical Buildings Corp. (MMBC), a Plano, Texas-based fee-based healthcare real estate development firm. (Please see “REIT acquires developer” in the May 2005 edition of Healthcare Real Estate Insights^™.) MMBC principal Al Seeley stayed on as Lillibridge’s EVP of development and several development projects have followed. Most recently, on June 14, Lillibridge announced the opening of four-story, 92,800 square foot Celebration (Fla.) Health Medical Plaza, which it will manage on behalf of Seavest Inc. and several physician tenants.

In February 2004, Lillibridge formed Lillibridge Advisors to provide fee-based strategic real estate advisory services to hospitals and health systems. In March of this year, it announced that it had combined its existing Real Estate Advisory and Strategic Services practices and named SVP Margie M. McHugh to head the combined group.

On June 28, Lillibridge announced the hiring of senior executives James A. Young III, and Kevin C. Kirkhart as part of an expansion of its acute care program management practice. Mr. Young had been with Jones Lang LaSalle and Mr. Kirkhart had been with Duke University Medical Center. On July 12, Lillibridge announced the MedStar Health had selected the firm to provide program management services for a 350,000 square foot patient care tower on the campus of Franklin Square Hospital Center in Baltimore

We caught up with Mr. Kurzydym earlier this summer at Lillibridge’s downtown Chicago headquarters.

HREI™: Many people probably think of Lillibridge primarily as an MOB investor and property manager. But you’ve recently made a major push into fee-based development, advisory services and program management. Has your strategic focus changed during the past two to three years?

Kurzydym: I think it has. We have chased development deals since before I showed up on the scene in 1998, and we never had much luck because we didn’t have much of a track record. The providers love what we do with their physicians after we close and the fact that we’ve been managing that group of sort of homogenous tenants for so long. But the real issue was that we really didn’t have a track record in the development business. And so, when you’d present – although, again the providers loved our story as to what we do with the management and understanding the physician and the whole dynamic – when they peeked under the covers, they’d find that we really didn’t have the (development) experience. And so the choice between someone like us or someone that does this all day every day for a living was really the difference. But since we brought MMBC on, between Todd and Al, they have just been able to build a huge pipeline. It’s been very exciting. The other side of the coin is that the acquisition side of the business has slowed down. Pricing has gone to levels never before seen – not only on the healthcare side but also on the commercial side. And so, from our perspective, (development) is a place where we can actually make a few bucks.

HREI™: What’s making it more difficult for you to find good, right-priced acquisitions these days?

Kurzydym: I’m not sure that it’s coming out of the industry. About two years ago, I think we probably saw almost $1 billion of product come through the shop on the acquisitions side, where Ascension was actually selling its portfolio of assets, Baylor (Health Care System), Swedish (Health Services). There were a lot of big portfolios that were moving through the pipeline. But, we’ve seen maybe two major transactions in the last 12 to 18 months. We have a couple of deals that we’re working on now that were really sort of off-market deals – special situations. If we can pull them off, I think we’ll probably hit our numbers this year. We’d like to buy at least $75 million, which would be a good year for us.

HREI™: So you’re not seeing as many $100 million MOB portfolios on the market as you did a couple of years ago?

Kurzydym: Right. SSM was probably the last big one we saw.

HREI™: Is that because all of the major portfolios have already been monetized?

Kurzydym: I don’t think so. There’s still probably a lot of real estate in people’s hands. And one of the things that we’re finding through the development side is that we develop one and have the opportunity to buy what they have on their campus. So if they have that product and they need capital, and once you’re in there talking to them … it becomes a much easier transition into existing stuff.

HREI™: So your expanded development capability helps you to uncover acquisition opportunities. On the flip side, do relationships developed through acquisitions help drive more development business?

Kurzydym: Absolutely that is a factor. Again, not that we didn’t do it. We did some development before we put the two companies together. But, still, it’s a much different story today.

HREI™: Are you seeing secondary market deals start to come along where maybe a health system sold an MOB portfolio to an investor and now the investor is ready to sell?

Kurzydym: We’ve seen some of that. There was also a period of time where we went though some of those. But those owners, if they want to stay involved, they’re really not looking to sell to people like us because they would like to continue to manage and have the ability to develop new stuff. So they’re looking more for financial partners than they are for folks like us. If they’ve been doing the development, then they want to keep doing it – unless they’re calling it quits. But we haven’t seen that yet.

HREI™: What about the big institutions, the pension funds and the life insurance companies? They usually partner with a real estate company anyway, don’t they?

Kurzydym: They do.

HREI™: Is that leading to shorter holding periods for MOB investments?

Kurzydym: Most life insurance companies are really more on the debt side – the financing side. The pension funds, on the other hand, usually have longer-term horizons. The deal we did with our first portfolio when we recapitalized it with CalSTRS (the California State Teachers’ Retirement System), they’re a long-term holder. And we’re talking to capital sources even overseas – Australia and Europe – that are literally looking at 30-year holds. So it’s longer term.

HREI™: How much MOB interest are you seeing from investors, foreign or otherwise?

Kurzydym: Every week, I get a call from somebody who’s interested in the medical office space. It’s a good time for us. When we started back in 1999, we had a young guy who used to do a lot of our financial analysis. He and I would sit across the street, over a beer, and would say, “Man, it is so hard to raise the money and to get the financing.” But I said, “One day, people will be knocking on our door. It will be the other way around.” And, at least today, so far, it has been the case. There’s a lot of capital. There’s a lot of activity.

HREI™:  Has the surge in capital led to more competition for MOB investments?

Kurzydym: Yeah, but again, when we started, some of the major systems just never even considered (monetizing their MOBs). And so we spent a lot of time educating and really convincing them to sell us their real estate, whereas today, they’re much more open to it. It’s happened. Properties have changed hands. The doctors are still there. So a lot of those concerns have faded.

HREI™:  As investor interest in MOBs has grown in recent years, several new publicly traded healthcare REITs have been formed. Why has Lillibridge always structured its portfolios as private REITs?

Kurzydym: When we started, we really didn’t have any assets. We were really born out of service company. We did a lot of property management. We did a lot of advisory work. But we didn’t really own anything. As a result of that, we really started with nothing. So, as we raised our capital, initially the thought was that we would buy $250 million to $300 million of real estate and then enter the public market. But, when we did this in late 1998, early 1999, the capital markets were going through some horrendous times. In fact, our financial advisor, Lehman (Brothers), recommended that we not go forward. And, of course, we said, “Well, that’s too bad. We have deals that we have to get done and we need money.” Because of that, the whole landscape of the capital markets changed for us in terms of financing and how much equity we needed. And that the common thought was in order to go public you really need to closer to $500 million to $750 million in real estate – which we were obviously a long way away from. But, from our perspective – at least mine – our private partners have actually been very good to us. I’ve never had issues of being able to do transactions or not do transactions. We obviously don’t bring every deal to them that we see. But the ones we think are worthy, we do, and they’ve agreed with us and it’s worked out pretty well for both of us. To be a publicly traded entity today is something I don’t relish, and it’s very expensive. And I think you have less control over your destiny.  I think you’re always out there sort of in play. Your view is more towards the short term than the long term. Not in every case. But, nonetheless, we still believe we have a long way to go to grow this business and maybe one day that’s the right exit for us. Especially over the last several years, as capital – private capital – has gotten a lot more available to us and actually has gotten cheaper and return hurdles have decreased. It really seems like a much better place to be from our perspective.

HREI™:  The healthcare real estate market remains quite fragmented. But some have speculated that the planned acquisition of CNL Retirement Properties by Health Care Property Investors Inc. (NYSE: HCP) is some sort of watershed event, a sign that there is more consolidation ahead. What’s your opinion?

Kurzydym: CNL has actually done that in almost every sector they’ve gotten into. The prices they were willing to pay sort of drove the market. And when they came into the MOB space, a lot of people said, “Oh my, here we go again.” But that actually wasn’t the case. (Senior living) is really not something we get all that involved in. I’m cognizant of it, but don’t really pay that much attention to it. But the MOBs that they acquired… we looked at all those portfolios and it wasn’t our kind of stuff. We have a very focused investment strategy. We like to be on the campuses, investment grade, larger, suburban. We don’t like the urban settings as much as the suburban markets. We aren’t buying off campus stuff that isn’t sponsored by the hospitals. We’re very close to the hospitals, and that’s always been the strategy from day one and has continued to be. So a lot of those assets and a lot of the assets they trade today … they’re not our kind of stuff. So I still think that, for our investment strategy and focus, we’re pretty happy. I’m not sure that stuff will make a difference. HCP has not been all that active. They’ve done a fair amount over the last five or six years. More recently, we haven’t seen them that active. And they’re under a whole different microscope in terms of risk and what they can do. But, again, they’re in a much different business, they’re much more diversified business than we are.

HREI™:  Is it going to stay that way? Are you going to continue to focus on medical office?

Kurzydym: We’re actually looking at maybe doing some (inpatient) stuff with hospitals. With all the development that’s going on, we started a program management business about a year and a half ago. We actually got our first contract with MedStar in Baltimore to build a $175 million dollar facility. We’re looking to grow that business. So whether that will lead to (inpatient real estate) ownership someday or not, I don’t know. But we can certainly help finance. We know the players in the financing markets, so we can certainly do that.

HREI™:  Do you think third-party ownership of inpatient space will grow in acceptance?

Kurzydym: A lot of the for-profit hospitals don’t own their facilities. Health Care Property Investors, Healthcare Realty Trust (NYSE: HRT) were really spin offs of the Columbias and the HCAs (NYSE: HCA). Ventas (Inc., NYSE: VTR) was spun off of Vencor (now Kindred Healthcare Inc., NYSE: KND). And they all own inpatient facilities. And our lenders do that as well, so they finance for Tenet (Healthcare Corp., NYSE: THC) and Triad (Hospitals Inc., NYSE: TRI). It would be another step for the not-for-profit side of the healthcare world to (allow third-party ownership of inpatient real estate), but it’s certainly done every day on the for-profit side.

HREI™:  On the development side, has the integration of MMBC been pretty smooth?

Kurzydym: It has. We didn’t have much of a development staff when we started and so it wasn’t an issue. There weren’t turf issues between the two companies. And, interestingly enough, even though Al had done a lot of business – primarily with the not-for-profits as well – we had very little overlap. We had different approaches to the business. He did a lot of stuff with some of the smaller regional systems and single hospitals. We always started – at least the theory was – we started from the top and tried to work ourselves through a system. And so there was actually very little overlap in terms of clients, but the same philosophy. They’re a very good group of people. We have the same culture. We’re both hardworking, dedicated. We sort of have a passion for what we do. And that makes it a lot easier to put two organizations together. At the end of the day, that was probably one of the biggest considerations as we looked not just at them but at several others as well. At the end of the day, it really came down to the fit – the cultural fit.

HREI™:  Do the former MMBC personnel still maintain their office in Plano?

Kurzydym: They do.

HREI™:  Do they still call themselves MMBC?

Kurzydym: No. In fact, we really didn’t buy the company, we just bought the business. They call themselves Lillibridge.

HREI™:  In March, you also announced the reorganization of Lillibridge Advisors, combining your existing Real Estate Advisory and Strategic Services practices to provide fee-based strategic real estate advisory services. What was the thinking behind that move?

Kurzydym: We’ve expanded that. We’ve probably doubled the size of our human resource capacity here and we put Margie McHugh, who has done all of our healthcare-related advisory work, at the head of that group. (We have) big plans – trying to be able to help hospitals actually put the joint ventures together with their physicians, both in the real estate as well as in the operating partnerships with surgery centers, imaging centers, all of those kinds of things. For example, one of our clients recently hired us to help them to figure out how to do a physician joint venture with their physicians. They don’t necessarily want us to invest; they don’t want our capital. But they’re hiring us to help them to put the transaction together.

HREI™:  Physician investment is certainly a hot topic right now, isn’t it?

Kurzydym: It is. I don’t know how long it will last. But it’s been a great run on the real estate side and it’s been a pretty poor run on the equity side if you look at the stock market. Once the next (stock market) boom hits, I’m not sure physicians will be interested in putting their money in their facilities. But, nonetheless, we welcome (physician investment). In every transaction that we do, we offer it. The physicians seem to be more interested on new developments than existing facilities. In all of the acquisitions that we’ve done over the years, we’ve had one physician invest with us. He did very well, actually. But, nonetheless, that’s a huge part of the focus going forward – that and the program management, the inpatient side. Those are probably the two big things that we’re focusing a lot of energy on.

HREI™:  One last thing. When you’re not leading the financial team at Lillibridge, is it true you keep busy by leading Boy Scouts?

Kurzydym: I have four boys. The oldest is 13, and my twins are 10, and one sort of in between. I’m an Eagle Scout. Actually, Todd is an Eagle Scout, too. So I’m sort of reliving my childhood. I’m very involved in the troop and the committees, and the boys all play sports. I’ve been married for 15 years and I have a great relationship with my wife. But we spend a lot of time with the boys. You almost can’t help it. (Laughs.)