Pioneering HRE firm’s EVP and CIO explains how TST has adapted to a changing market
By John B. Mugford
BIRMINGHAM, Ala. – The current environment for investing in healthcare real estate (HRE) assets, including medical office buildings (MOBs), is not an easy one, especially for firms that have been in the business for a long time and are not prone to “overpaying.”
A myriad of new investors with plenty of capital to spend have driven up pricing and pushed capitalization (cap) rates down to well under 6 percent for most of the highest-quality, health system-affiliated assets.
Yet even in this environment of historically high HRE prices, Birmingham-based The Sanders Trust (TST) still manages to uncover opportunities. The firm — which had its start in 1989 as Starr Sanders Properties, named after legendary NFL quarterback and commercial real estate investor Bart Starr and attorney and HRE pioneer Rance Sanders – has continued to find enough HRE acquisition and development opportunities to invest between $100 million and $200 million annually.
TST does so by getting creative in looking for investments in the $10 million to $200 million range at cap rates above 6.5 percent, often making investments with frequent joint venture (JV) partner Harrison Street Real Estate Capital.
As an example of that approach, the company earlier this year entered the 27th state in which it has done business by acquiring the 85,971 square foot Bakersfield Heart Hospital (BHH) in Bakersfield, Calif.
Healthcare Real Estate Insights recently caught up with Steve B. Hewett, Executive VP and chief investment officer, for a Q&A. Mr. Hewett, who joined the company in 2010 after accumulating 14 years of commercial banking experience with AmSouth Bank, with much of that focused on the healthcare industry.
Here is a shorter version of an exclusive interview with Mr. Hewett that will appear in an upcoming edition of HREI.
Why and how do you think TST has remained successful and in business all these years?
We think we have been successful for a number of reasons. First, it’s all about staying within your core competencies. We have always had a team of people that have had solid experience in business first, healthcare real estate as a core focus, and a desire to be the best we can be in serving our clients and at same time delivering superior returns for our investors. Our strategy is really the same today as it has always been. Do your best work, treat others how we would want to be treated, be truthful in all business dealings and strive to remain cutting edge — keep learning and listening to all relevant subject matter expects in our field and apply what you learn.
With all of the capital coming into the MOB space, it looks like TST has been flexible in the product types it looks to acquire or develop. What have these included?
We invest in MOBs as well as ASCs, inpatient rehab hospitals, specialty surgical hospitals, hospital parking decks, behavioral health facilities that include drug and alcohol treatment, eating disorder and psychiatric centers. We do not invest in senior housing because we view that as its own specialty segment and one that is not one of our core competencies.
What do you think the future holds for HRE? Will this sector still provide opportunities for third party firms that prefer owning healthcare facilities? Or, could certain obstacles cause some difficulty for firms such as yours?
One thing is constant about healthcare is that it is consistently inconsistent. We have all heard for years that the sky is falling, but this has not happened. ObamaCare happened and the industry still exists. Healthcare is like turning a huge ship; it doesn’t happen fast and you want to be out of harm’s way when it does. Healthcare reimbursement will always be an issue, but the solutions to better healthcare are, in my opinion, clearly not going to be advanced by more government involvement. “Medicare for All” is an absolute fantasy and is unaffordable. No government has proven they can manage healthcare well, provide excellent service and generate desired patient outcomes at a reasonable price. Innovation in those government-run systems tend to be nonexistent and care is rationed more than it is delivered. The U.S. system clearly needs major improvements, but I have confidence in more consolidation taking inefficiencies out of the industry and health systems/doctors being incentivized to practice along evidence-based guidelines that produce the best care while managing costs.
I suppose many in the TST office, being that it is headquartered in Alabama, are big Crimson Tide football fans. Is that true?
We certainly have several Alabama fans here including Rance Sanders and myself. However, we are a very diverse group that includes one Ohio State fan, an Ole Miss fan and several Auburn fans as well. We are all looking forward to college football season and I want to see Alabama redeem itself for the crushing loss to Clemson in the last title game. I was there with my family and that was tough to watch. On the positive side, my family was also at the 2015 National Championship game in Glendale, Ariz., played in January 2016, in which Alabama beat Clemson 45-40. That was a battle for the ages. If you believe the pundits, Alabama and Clemson both should have good teams again this year. My son starts at Alabama tomorrow. “Roll Tide Roll,” says the proud papa.
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