Putting Lauth on the healthcare map

TODD JENSEN WAS LEFT HAMMES CO. IN 2003 TO HEAD FIRM’S HEALTHCARE GROUP

By John Mugford

 

Prior to W. Todd Jensen’s arrival at Indianapolis-based Lauth Property Group in 2003, the real estate and development firm had only dabbled in healthcare. From its founding in 1977, the company had focused primarily on developing, constructing and managing mainstream commercial projects – industrial, office, retail, etc. Healthcare projects came long periodically, and Lauth was happy to provide services for a client.

But in recent years the firm got serious about healthcare and decided to launch a group to serve clients in the industry. As part of that effort, Lauth hired Mr. Jensen as its senior vice president of healthcare. He had been working with Milwaukee-based Hammes Co. when Lauth recruited him.

Mr. Jensen has certainly helped put Lauth on the healthcare map, as the firm had development volume of about $150 million in 2005 and about $125 million in 2006, according to Mr. Jensen. Lauth Healthcare opened six new medical facilities and began construction of 15 additional projects in 11 states in 2006. Lauth now has healthcare personnel in six offices throughout the country, concentrating on the Southeast, Midwest and Southwest.

We caught up with Mr. Jensen recently to talk about his firm and the industry. 

HREI^™: Tell us about your background and how you came to do what you’re doing now with Lauth?

Jensen: I’d worked with Hammes Co. in Milwaukee for eight years; the last position was as regional vice president in charge of the mid-Atlantic and the Northeast. Lauth recruited me from Hammes and I joined the company in September 2003. The idea was to bring me here to start a healthcare group. The company had done a few reactive medical office projects and wanted to proactively go about seeking medical building projects on a national basis.

HREI^™: Obviously, Lauth had seen that medical office was a growing part of the market.

 

Jensen: They’d decided to create a healthcare group as part of their strategic planning a year or two before I joined the company, and someone internally was trying to do this on a part-time basis at first. When they didn’t get the kind of traction that they wanted, they decided to hire someone to lead that initiative. We’re still relatively new in this area, especially when you consider some of the firms out there have been in it for 20 years. But I’m glad we started when we did as opposed to now – there’s no question the field is getting more competitive all of the time.

HREI^™: How much of Lauth’s overall business is healthcare now?

Jensen: It is now 20 percent to 25 percent – it was almost nothing when I started.

HREI^™: From what we’ve seen, developing healthcare facilities used to be, for the most part, a regional activity. Now, it seems that developers are going well outside of their traditional regions to do medical projects. Are you seeing that?

Jensen: What we’ve observed over the last couple of years is that there are more firms competing over each RFP (request for proposals) opportunity. It used to be quite a bit more regionalized. But now everybody is competing everywhere.

HREI^™: Did Lauth start out as a regional player?

Jensen: When I joined the company, Lauth already had regional offices in Charlotte (N.C.) and Denver. We moved pretty quickly to put healthcare-dedicated individuals into those offices and we’ve accelerated that even further, adding dedicated healthcare personnel in Orlando (Fla.), Dallas and Phoenix. That’s important because even if companies are invited to submit a bid on a national basis, clients still seem to prefer regional partners. I also think by having regional offices you know the market better and are more accessible.

HREI^™: As for the health systems and hospital clients, does it seem like they’ve become more institutionalized, meaning that their search for a developer is more structured than it used to be?

Jensen: I think that’s part of it, and I also think that 10 years ago or so there weren’t as many firms that served as intermediaries, or consultants, in our business. The hospitals simply went to the market directly. Now there are firms that are making a serious business out of helping developers advise and promote the advantages of utilizing their services. I think more hospitals are using and appreciating that kind of service.

HREI^™: Are you talking about firms with or without their own development capabilities?

Jensen: Some are developers and some aren’t. There are companies like Cain Brothers and Shattuck Hammond Partners who are not developers but who advise health systems on their developments. There are also program managers who are not developers, per se, but are not far removed from that either.

HREI^™: Has Lauth partnered with any institutional or other large investors on projects?

Jensen: As of today, we have not. Other than a couple of buildings in Ohio, we have financed all of our projects internally. We are open to working outside of this, but we really don’t feel a need to do it unless there was a special circumstance. For example, if a REIT (real estate investment trust) approached us and such an arrangement made sense.

HREI^™: Has Lauth done any medical condos?

Jensen: We have not, but we will be. A couple of projects we are working on now will be condos. Like everyone else, we’ve read all of the arguments against condominiums. But there are certain markets where physicians are familiar with an ownership model, so they tend to gravitate to that. There are also circumstances where it actually makes sense from the hospital’s viewpoint. It doesn’t make sense for an on-campus building because for a hospital to reclaim that asset, it would have to buy out all of the different condo owners. Invariably, there are going to be some holdouts … or those who want an obscene amount of money. We have a hospital client in Virginia that wanted to put a cancer center into a building. They’ve done a lot of fundraising to capitalize the cancer center and they want to own the center themselves. In this case, the hospital wanted to have the first floor be a condo that they owned, with the upper floor being a single condo owned by a pair of physicians. It was a case where the hospital felt strongly about owning their space.

HREI^™: Talk a bit about the emerging models of MOBs. Lauth seems to be developing some new product types.

Jensen: We are doing a lot of medical office buildings that we would call ambulatory care or outpatient care centers – buildings where there’s a hospital anchor tenant providing outpatient services like surgery, imaging, urgent care or even a freestanding emergency room. Then, there is medical office space included within the same facility. We’ve done outpatient cancer centers, a number of surgery centers within larger buildings, not freestanding centers by themselves – they make a great anchor tenant. We’ve also done specialty hospitals – in fact, we own a handful of LTACs (long-term acute-care hospitals). We’re really running the gamut in terms of products that we develop and own. We’re also doing a number of wellness centers now where a wellness center might be the anchor tenant within a larger outpatient building.

HREI^™: We’ve reported, and there is plenty of talk in the industry, about the evolution of the traditional MOB. What do you foresee as some new types of MOBs emerging in the future?

Jensen: I definitely see them evolving with more clinical services housed in an outpatient building, because it is simply a lower-cost platform. We’ve studied whether we can accommodate a small specialty within an MOB.  It’s a little trickier because of requirements for overnight stays and what that implies. A strictly MOB footprint is not always the best fit, operationally, for a hospital. We’ve looked at this possibility, but I don’t know that we’ve dialed in on the right solution there. I think everyone will continue to explore that. One of the advantages would be that you could build a more generic or reusable shell building so that if the hospital moves out for whatever reason, you would still have a general shell that is less special purpose. That way you can lower your risk profile and may actually lower the risk from the investors’ points of view.

HREI^™: Do you see anything new emerging as far as the needs of health systems are concerned as we look forward?

Jensen: Sure. Increasingly I think they’re looking for free-standing outpatient centers to establish a presence and claim market share in areas where they didn’t have a presence before. It used to be that hospitals had their own turf, be it on the east side or the west side of town, and the other systems stayed in their area. But now hospitals are adding free-standing facilities in each other’s marketplace as they compete for share – adding facilities is how they do that. Changes in technology and demographics all indicate there will be increased consumption in healthcare

HREI^™: Wasn’t Indianapolis a good example of a market where the systems respected each other’s turf for a long time? But now that’s changed, right?

Jensen: It was like that for many, many years. But now it’s becoming very competitive. For example, there’s a hospital on the south side of the metro area that’s talking to us about possibly adding a presence in our new MOB on the north side of town, right between two of their competitors. This is a classic example of how they’re all battling for market share.

HREI^™: Is Lauth considering expanding into other types of healthcare-related projects, such as bioscience?

Jensen: We’ve done some pharmaceuticals – not very recently. But for the last three years our practice has been focused on the healthcare provider, hospitals and physicians. Bio is an area that we would be interested in, and we’re beginning to look at the potential of senior housing and assisted living.

HREI^™: Here’s a freebie – go ahead and promote your firm. Where do you think Lauth really shines?

Jensen: There are a couple of things that differentiate us. One is that we offer speed to market. We are aggressive in our underwriting of projects and as a result we often have a competitive edge in terms of our pre-leasing requirements. So, we start sooner. We’re also both a developer and a contractor – we call that vertical integration – and we can work faster.  In terms of speed to market, we are faster than most folks in our business. The second thing is our willingness to accommodate physician ownership of the facilities that they occupy.

HREI^™: Aren’t most firms offering that now?

Jensen: Sure, I think most firms are trying to accommodate that. Obviously, the larger institutional REIT-type of owners and developers are having a harder time with it. The entrepreneurial firms are trying to find ways to offer it, including new ways that can accommodate the physicians even better.

HREI^™: How do you work with the physicians regarding their needs?

Jensen: Bringing physicians to a project involves a lot of participation in which we try to understand how they can gain efficiency in the design and development of their suite, as well as their preference on the ownership side and how they ideally would like that structured. Sometimes we help introduce physicians to other opportunities within the building that we develop that could include investment in the operation of a surgery center, or an imaging center, etc. I think this is an emerging trend during the last three to five years and it’s becoming more prevalent … doctors are always looking for ways to capture greater share of services being provided. Doctors are increasingly feeling income loss and more and more headaches – their reimbursement is always being threatened with loss and they are looking for other ways to make up for this loss in the future.

HREI^™: Where are your most active markets?

Jensen: Most of our activity is has been in the Southeast and Midwest now, but I think we will see most of our future activity in Florida and Texas. We opened our Orlando office about two years ago and have done three LTACs in Florida and plan to be more active in MOB development there. We have a couple of projects in Texas that we are excited about, one in Atlanta and we’re starting to get some traction in the west, such as in Denver, where we have a couple of projects under construction, and we’re hoping to have a couple of project in Arizona and California.

HREI^™: Do you do most of your work for health systems, or do you provide services for other clients as well?

 

Jensen: We do. We’ve done some projects without a health system; we sometimes start without a health system and, in some circumstances, one will ultimately they join in. An example is in Denver, where we were interested in some land across the street from land owned by a health system, Exempla, in Littleton (Colo.). We started talking and decided it made a lot of sense to collaborate instead of having two projects compete there.

HREI^™: What was the driver of that project?

Jensen: We’d done a market analysis and found an area that we felt was underserved and we started in and the health system joined us because they felt the same way. Exempla was one of the first systems we’d approached and they’d done a similar analysis and had come to the same conclusion; that’s why they had land under contract across the street. We did a thorough analysis of what it would cost to develop on our site compared to their site and it turned out that our site was going to be less expensive and could be developed more quickly.

HREI^™: What size of facility are you developing there?

Jensen: First building is 64,000 square feet, and then we have a second building planned on the same site that would be about 45,000 square feet. And Exempla has acquired land that’s adjacent to our site in case they want to do a future expansion as well. We have a very capable planner here, Mark Ishimatsu, who used to be with Kaiser Permanente, and he is very adept at determining just what an area really needs in term of healthcare. 

HREI^™: Let’s talk briefly about your life away from work. Could you talk a bit about your family and what the Jensens enjoy doing for fun?

Jensen: I have two daughters, 6 and 2, and we spend a lot of time in the water, swimming, having fun. When I’m away from work I spend a lot of time with them, and they like going to the beach. I’m looking forward to skiing with them some day. I haven’t done that with them yet and that’s one of my favorite hobbies.  My wife, Heather, is an attorney. I’ve never even skied with her, even though she was a very serious skier as a junior. We just haven’t had the time to do that together but I’m hoping that will change in coming years. q