Reorganization is paying off for GE HFS

JOHN COBB SEES BRIGHT FUTURE FOR HIS GROUP AND THE INDUSTRY AS A WHOLE

 

By Murray W. Wolf

 

John Cobb is senior managing director of the real estate financing team for GE Healthcare Financial Services (GE HFS). A few weeks before GE HFS announced a whopping $1.4 billion agreement to acquire 186 skilled nursing facilities from Formation Capital, Healthcare Real Estate Insights^™ had an opportunity to catch up with Mr. Cobb in his downtown Chicago office. Here’s what he had to say about his new job, his reorganized group’s new strategy and what he foresees for the industry.

HREI™: Can you tell me a little bit about what you do here and what your role is?

 

Cobb: Back in November of last year, GE HFS decided to reorg its real estate corp. If you look at GE Capital in its entirety, it has really three major groups. It has a group called Capital Solutions, which is really equipment financing needs for smaller or midsize companies. You have GE Real Estate. You have GE Corporate Financial Services. HFS has aligned very similarly. We have an Equipment Finance Group based out of Milwaukee; we have a Corporate Finance Group and a Real Estate Group, and our Corporate Finance and Real Estate groups fall under one person, who is my boss, Darren Alcus (general manager, Commercial Finance). They combine long-term care, which is most of my experience, with also all the medical office buildings (MOBs). And now we have started to do medical properties. We’re up to a total of almost 70 people in all of Healthcare Real Estate. We’ve grown our sales organization from three, when I started five years ago, to over 22. We’ve grown our portfolios to almost $3 billion. We expect to be at $5 billion at the end of the year. (Editor’s note: The Formation Capital deal, which was announced after this interview, will put GE HFS up to more than $4 billion.)

HREI™: What services does GE HFS offer?

 

Cobb: We do a bunch of different products. We go to market five different ways. We call on direct senior housing companies, companies like Brookdale (Senior Living Inc.), for example, or Atria (Senior Living Group) or CNL (Retirement Corp.). So all the different senior housing operators are investors we call on. We do the same thing for skilled nursing. So, we call on the Formation Capitals, the Ensign Groups – all the other different people who do skilled nursing homes. We also call on medical office developers, which are Cambridge Realty Trust, or Lillibridge here in Chicago, and so forth. We also call on intermediaries like Cain Brothers (& Co. LLC), Holliday Fenoglio (Fowler LP) or Cambridge Capital – all those different types of people. Then we also have an equity platform and our equity platform is really starting to do equity. We’ve completed two transactions, about to go harder on our third, about to go harder on our fourth.

HREI™: Is that a fairly new part of the business?

 

Cobb: We’ve been trying to do it for about a year but the market is pretty competitive. My guess is that after the deals we’ll hopefully announce by the end of the week or early next week, we’ll be able to increase our flow there. We’re bidding on a lot of different transactions. I just told my boss yesterday, “I’m tired of coming in second.” But, we’ve made some really good acquisitions we’re very proud of and we’re going to continue to do that. That’s kind of how we’re broken up. It’s a very disciplined approach. Every six months we do something different. In November we took the medical properties team and broke them into two groups – one calling on just the MOB developers and another group really concentrating on what I call “the other stuff,” the non-tower medical properties.

HREI™: Why all the changes?

 

Cobb: Today, when you drive up to a hospital, it’s much different. When you walked up 20 years ago, you saw the great (inpatient) tower and you went to the big tower and that’s where you went. Today it’s much different. Something like 70 to 80 percent of surgeries take place outside the hospital, outside of the main tower. And today when you go into a hospital campus, it’s not the great tower you see. It’s the nine other buildings you see on the way to the great tower. And that’s the stuff we want to look at. Healthcare spending is going up 10 to 12 percent a year, and that’s going to need infrastructure at some point in time and that’s kind of what our big play is. We want to look at that infrastructure. And we have a lot of things that are great for us that make us strategic, and some things don’t make us strategic. We can do the equipment financing and we can do the corporate finance services or receivable-based lending, and now we can do real estate. It’s pretty much of a natural extension of all those different practices. We started that in November. We probably have close to $150 million that signed up that we’re working on closing right now. My guess is, between the two different groups, we’ll probably do over $400 million this year.

HREI™: So your focus personally is on long-term care?

Cobb: I focus on all healthcare real estate. There are always those deals that fall on the fence, whether they are corporate or real estate or a traditional real estate versus healthcare real estate. But most of what falls under me now is all the healthcare real estate. So it’s been exciting for me. It’s been great to learn the MOB space, which I had already known from my previous work. What I find neat is the hospital-related real estate, which we’re pushing into. It’s very, very complicated, very interesting, very relationship based. It makes my day exciting.

HREI™: Can you talk about some of the “other stuff” you mentioned that you’re seeing out there?

Cobb: Ambulatory service centers (ASC) – or ambulatory care centers (ACCs). That’s where they marry a bunch of the stuff. They have an ASC, they have an MOB, they have a wellness clinic, they have a diagnostic imaging center section – backed by major hospitals. So, they’re anywhere from 120,000 to 200,000 square feet – a little bigger than a Target. So, it’s a pretty big building, but it has all sorts of stuff in it. I think that’s going to become the latest trend.

HREI™: What kind of deals are you seeing these days? What’s the hot healthcare category within all these different healthcare products you’re looking at?

Cobb: They’re all hot. The beauty of this market is that everything is really exciting. I’ve been doing long-term care for 10 years and today is more exciting than it’s ever been. You saw (the May 12) announcement of Brookdale buying ARC (American Retirement Corp.). And, usually, when you buy a company – a large public company – your stock price goes down. Brookdale’s is up 13 percent for the year. It’s really great for our industry. (There are) very strategic acquisitions going on which we’re trying to help facilitate. We recently closed a $70 million acquisition loan for Brookdale. We did $175 million refinance for Sunwest (Management Inc.). So we are doing pretty well there. It’s pretty exciting doing large deals with current customers that we’ve had for a long time on the long-term care side. In the area of MOBs, we’ve been doing a lot of forward takeouts. (We’re also) looking at all this different hospital real estate, which is really, really neat for us. We’re looking at a really cool hospital deal right now, which, hopefully, we’ll have approved in a couple weeks.

HREI™: Do you typically work through developers on those? How do you get involved in those MOB deals?

Cobb: The MOBs are primarily through the developers. So the hospitals have pretty much given those to the developers and the developers run them. So, we work exclusively with the developers there. The other stuff is a little more complicated. The hospitals are involved at lot more. So, we’re dealing with the hospitals and the developers and walking that fine line. But, it’s been pretty interesting. The equity side, for me, has been great. We’ve closed on two deals. We just closed our first nursing home deal – five nursing homes down in Texas. So, that’s been really exciting for us. We’ve looked at all the big deals happening in the market right now.

HREI™: A year or two ago, the thing we heard about most on the senior living side was continuing care retirement communities (CCRCs). Are you hearing as much about those?

Cobb: We’re looking at that space. You know historically, GE is not a bank. GE hasn’t really done construction. That’s not what we’re good at. And one thing I love about this company is when you’re not good at something, you don’t even try it. When we try to do something, we want to be great at it. It’s taken us a long time to get around our hospital strategy, or “other medical properties” strategy. It takes a long time to get there, but when we do it will not be $50 million a pop, it will be a $400 million, $500 million, $600 million business. We will be there very quickly. And that’s our goal: To figure out something you’re good at it and do it.

HREI™: What do you think are the biggest issues in the industry that affect your business?

Cobb: I think on the long-term care side, I don’t know if there are a lot of issues. We’ve done a lot of work on supply and demand and looking at different markets and construction and so forth. And we really believe, corporately, that the market is going to get better. We really believe that. There’s very limited new construction and demand is going up every day. Back when I started 10 years ago, you looked at a big graph and senior housing was a no-brainer investment. On the 30-year horizon that’s exactly right. But, if you looked out five years – even if you looked out five years today – demand’s going up, occupancy should increase if construction stays where it has been the last three years. Occupancy should go up half a percent to a percent a year – and we believe that. And with that, with all the rate growth, you really see increasing in values in senior housing. Now, unfortunately, that attracts more capital, which attracts more debt financing, which makes my job a lot harder. But, that’s OK, too, because we’re not afraid to be competitive. It’s more of a competitive challenge because more and more people are doing it.

HREI™: Can you give me a sense of what level you have to be at to compete these days?

Cobb: You have to be good at everything right now. That’s how hot the market is. You can’t just get away with being the cheapest. You can’t get away with being the nicest. You can’t get away with (having) the best service or (being) the friendliest. Today, you have to be in front of your customer all the time, you have to offer a very competitive loan product, you have to close it on time with execution, without a single doubt in the borrower’s mind. And then when you fund that deal, you have to be a great portfolio management company. The part where we probably struggle the most is the price. We’re in front of our customers a decent amount. We have over 80 customers today. We have a great track record of doing a $10 million loan, growing it to a $20 million loan, growing it to 50, to 125, to $300 million. Once we get customers, we do very well at growing them. With that… we have a great portfolio management account. GE does this thing where we survey our customers. Our feedback is very different from most people’s feedback. We have people commenting on our underwriting team, our legal team, our portfolio management team. Normally they say, “Oh, my friend at XYZ bank, he’s the guy or gal who did my deal.” Our (situation) is that they know the whole team, and they like the whole team. And that’s a great selling point for us. Now it’s hard to sell that to a customer, but, our customers, of course, help us sell. On the pricing, we’re fairly competitive. You have to be in the upper 100s (over benchmark interest rates) for senior housing today, and it depends on leverage. But if you’re going to do an 80 percent loan, you have to be less than 200 over (benchmark). If you’re doing skilled nursing, you need to be less than 275, 250. For MOBs, you have to be in the mid-100s today to do a deal.

 

HREI™: The capital you lend or invest on the equity side, is it all GE’s capital? 

Cobb: It’s GE’s capital. And that’s what GE Real Estate has done. GE Real Estate’s over $38 billion in size and approximately 50 percent of that is investments. Our equity deals are typically done in joint ventures.

HREI™: Are you worried at all about another bubble like we had in the ‘90s where there was overbuilding of senior living facilities? Do you see any signs of that? 

Cobb: What I have learned is that talk is cheap. There’s a lot of talk today that people want to build. But if you want to build an assisted living facility in Chicago, you’re going to start in two years and it’s going to take you three years to build it. By the time you fill it, it’s going to be five years from today. The market’s going to be different in five years. There are people building, and you see that. But it’s nowhere near (what it was). We were up to 30,000 units being built in 2001. Last year it was less than 10,000 in assisted living. It’s a much different market. I was speaking at the American Senior Housing Conference last January… back in ’99 or 2000, if you asked, “How many people are developing more than 10 properties?”, you’d have a half-dozen people raise their hands. I ask now, “How many people are building over 10 properties?” and I had one person from Sunrise (Senior Living Inc.) raise their hand… Of course everyone wants to build 10 properties right now because the market is so great, and the dynamics look so great for us. But you really don’t see that. You don’t see a plethora of construction lenders out marketing this product. We’ll lend it to our existing clients that have done this before and have a proven track record. You don’t see the merchant builders. You don’t see people having those programs to do that.

HREI™: What was your take on the May announcement by Healthcare Property Investors Inc. that it plans to acquire CNL Retirement Properties? Do you see that as a sign of consolidation in the marketplace? Do you think that’s going to have any impact on the industry as a whole?

Cobb: That deal – which is a great deal for both parties – will cement valuations once people get their arms around what the numbers are. And there are questions about what they are. But, I think that cements in our mind where valuations are on good, high-quality assets. Brookdale/ARC gives you a better idea of consolidation today. I’m not sure that’s a trend. I think that was more of a trend in REITs (real estate investment trusts) in general. There’s a reason the REITs are doing this. It’s more of a REIT trend then a senior housing trend, in my opinion.

HREI™: What does John Cobb do when he’s not busy trying to drive the continued growth of GE HFS?

Cobb: My wife and I are trying to find hobbies. (Laughs.) My wife and I love to cook – and we love to watch TV. I’m an avid TV and movie junkie. But, I’m pretty good at work-life balance. What I’ve been trying to do here is to create a great work environment for my employees and create a team here. I do not have kids yet. I do have a dog. (Laughs.) q