Q&A: Larry Mathis (July 2007)

Real estate from a CEO’s perspective

LARRY MATHIS, FORMERLY OF METHODIST, GIVES HIS TAKE ON THE INDUSTRY

 

By John Mugford

Healthcare real estate professionals are always saying they’d love to get as many appointments with hospital and health system executives as possible.

And why wouldn’t they? Determining the real estate needs, desires and strategies of hospitals and health systems is a major part of the healthcare real estate business and a good way for real estate professionals to drum up more business and do more deals.

So when the opportunity came along for Healthcare Real Estate Insights^™ to interview Larry Mathis, an executive for 26 years with The Methodist Healthcare System in Houston, we jumped at the chance.

Not only does Mr. Mathis have plenty of experience as a hospital system executive – he spent his last 14 years at Methodist as the system’s president and CEO – but he is now involved in healthcare real estate.

In April, Mr. Mathis was appointed to the board of directors of Santa Ana, Calif.-based NNN Healthcare/Office REIT. The REIT was formed in late January by NNN Realty Advisors Inc., a commercial and multi-family real estate firm with an owned and managed portfolio of more than 32 million square feet.

Since its formation, NNN Healthcare/Office REIT has been very busy. Its portfolio – barring any new recent announcements from the firm – had a value of about $110 million as of late June.

As for Mr. Mathis, he certainly has quite a resume in healthcare. Under his watch, the Methodist Hospital received The Healthcare Forum’s “Commitment to Quality” Award. In 1994, Mr. Mathis was given a “Gold Medal” for lifetime achievement from the American College of Healthcare Executives.

Since his retirement from Methodist a decade ago, Mr. Mathis has not faded away. In fact, he’s currently on the board of Cheshire, Conn.-based Alexion Pharmaceuticals Inc. (Nasdaq: ALXN), and was on the board of the Swiss pharmaceutical firm Centerpulse AG.

In addition, he’s served on healthcare-related boards and organizations too numerous to mention, such as Greater Houston Hospital Council, the Texas Hospital Association, the American Hospital Association, and others. He’s also a nationally known speaker and TV commentator concerning healthcare issues and has written a well-known healthcare industry book called, The Mathis Maxims: Lessons in Leadership.

Because of his activities, Modern Healthcare in 2001 named Mr. Mathis one of the 25 most influential people in healthcare in the past quarter century.

In a press release from NNN Healthcare/Office REIT’s CEO and president, Scott D. Peters, stated that Mr. Mathis “is one of the preeminent authorities on healthcare in this country. He adds tremendous insight and value to our board of directors and we are very proud to have his counsel.”

We chatted one recent day by phone with the affable Mr. Mathis, who is often quick to point out his lack of real estate expertise. The interview took place a few hours after he finished a round of golf in the sweltering heat of a Houston morning.

HREI^™ : Being elected to the board of NNN/Healthcare Office REIT sure must be a new aspect to your career, after all of your years as an administrator with The Methodist Healthcare System in Houston. Can you talk about this a bit?

Mathis: It’s interesting that you would say that because it’s exactly that. I’ve been retired 10 years now from my position as CEO, and as a matter of personal policy when I was a CEO I did not join any industry boards, public boards or anything like that. It was my feeling that by joining a board they would expect your business in one way or another … and I didn’t want to compromise the institution in any way. But when I retired after my 14 years as CEO, I did start joining some boards to see other parts of the industry that I did not see before. The first one I joined was medical device … headquartered in Zurich, Switzerland, and they made artificial knees and artificial hips and those kind of devices. And so I got to experience that aspect of the business and when that company was acquired I left that end of the business. Then I joined a small pharmaceutical company and I’m still on that board, Alexion Pharmaceuticals, headquartered in Cheshire, Conn. It’s a good little company with a first product on the market that was a blockbuster drug, an endorfin drug. It’s been exciting to be a part of that. And so I got to see how the start-up aspect of the pharmaceutical industry works and that’s the kind of thinking of why I joined the REIT board. I hadn’t seen that aspect of the business and it’s been delightful for me to meet other directors and see how the company works.

HREI^™ : As a CEO of a health system, did you have to be aware of the real estate aspect of the business? Or was it something that you didn’t have time to deal with?

Mathis: I would say right up front that I am not a real estate expert by any sense of the word. In fact, when I was approached to be on the REIT’s board I made it clear that having been a chief executive officer for 14 years I considered myself an expert in nothing. Our system is a large system, the largest system here in Houston … and we had lots of outlying hospitals and we developed hospitals of our own, as well as medical office buildings. But it was still a small part of my job, even though the projects were very large. We built a 26-story office building and a 13-story garage … but it was handled by real estate experts on my staff. So I guess I knew about those projects, but it was not the primary aspect of my job.

HREI^™ : From a CEO’s perspective, how important is real estate to the system?

Mathis: I’ll tell you what it is: For a not-for-profit system, it’s all about the relationship between the hospital and its physicians … they are the lifeblood of the corporation because it is through their capacity and (their) admitting of patients … that the hospital stays alive and keeps its mission on track. If you’re the hospital that is the landlord of those physicians, you have a different relationship than the sort of traditional landlord-tenant relationship. That’s the part that I always focused on – how were we relating to the physicians and were we meeting their needs? Were we supporting them with their research projects and all of that? So, in that context it’s very important and it’s what  I would still concentrate on today – real estate as a tool to building that relationship equation.

HREI^™ : As a former CEO do you see value in a firm such as NNN Healthcare/Office REIT, or another good quality firm, owning a hospital’s ancillary facilities?

Mathis: I think in some cases it can be very positive. Because, and this was not the case where I was at Methodist but can be the case at some institutions not as financially secure as ours – you can tend to get whip-sawed a bit by your physicians. But having someone else who can take the blame, if you will, in landlord-tenant issues can be very valuable. It allows the hospital to say, ‘That’s the landlord’s problem.’ My personal position when I was the CEO at Methodist was that we didn’t need someone to take us out of the capital position of the ownership of MOBs, and we didn’t feel like we had an unbalanced relationship with our physicians – we felt the power balance was about right. But I think that’s one of the reasons why this healthcare REIT wanted me to participate as a board member – because of my understanding of those relationships and how they play out – not because of my understanding of real estate.

HREI^™ : So what will your role be with the board of directors at NNN Healthcare/Office REIT? Do you see yourself having any contact with health systems or hospital CEOs?

Mathis: I certainly will not be the primary contact. My role will be as a director, and as a director they will get my experience as it pertains to real estate and they will get my experience as a CEO in the healthcare industry. And as a former chairman of the American Hospital Association they will receive my experience and my judgment. I would expect there might times when I would have some contact with a potential client, but it wouldn’t be routine. That’s not what I would expect they would want from their directors.

HREI^™ : Even though many healthcare facility developers and owners say they understand the needs of health systems, I suppose there is no substitution for actually having walked in those shoes? And I suppose that’s why the REIT brought you on board.

Mathis: I’ve seen so many people say they want to build a hospital or a physician office building and … it turns out to be a bust. Because the whole thing is not that you decided to build a hospital or a medical office building, but the first and most important thing is to get or build a relationship with the physicians that will occupy and practice in that hospital. Without the physicians and without them as tenants and as admitting physicians, you have nothing from a real estate point of view. So that is the perspective that I will bring to the table. Those are the types of cautions I will put up and the questions I will ask about those relationships – that would be my central contribution to the endeavor.

HREI^™ : And what do you think a hospital system and its physicians would expect a firm such as NNN Healthcare REIT to bring to the table? People in the industry talk plenty about the fact that the owner or manager of an MOB needs to act differently than the owner of a typical commercial office building, where the owner typically is most concerned about the bottom line. MOB owners and managers need to have an understanding of what its doctor/tenants need.

 

Mathis: From just a landlord position, doctors would expect that – once there is an intermediary – reasonable market-based rates, high-quality maintenance and building services, and a respectful relationship with their landlord. Where it can all go wrong is if the relationship between the doctors and the hospital goes sour and the doctors decide that it’s in their best interest to move to another hospital that will provide them with a different office arrangement and they all move out. That’s the important thing to look for: How stable is the relationship between the doctors and the hospital and is it likely to stay stable while Healthcare/Office REIT owns it. And, is it going to be a stable investment?

HREI^™ : How did this happen – how did you become a director of the REIT board?

Mathis: First of all, I really have to give Scott Peters, the CEO, very high marks. I’m sure it sounds like too much hubris on my part, but I think he showed good judgment in putting me on the board. In most appointments such as this, the CEO knows somebody or one of his board members knows somebody, and that’s how you get on the board. But in this case it was different. I did not know Scott or any other members of the board. One of the investors was talking to Scott when they were considering the concept of a healthcare REIT and this investor, who is a friend of mine, said you’ve got this great real estate expertise, why don’t you find someone who is sensitive to the health system and healthcare issues. And he recommended me. To Scott’s credit, he pursued that and arranged to meet me and arranged to have the other directors meet me. I find that somewhat unusual because it was not a crony deal. I am truly an independent director and believe me, with my views and my experience I don’t have any hesitancies to state my opinions. That’s an interesting sidelight about how I got on this board.

HREI^™ : What are your impressions of NNN Healthcare/Office REIT so far? I know you’re new there, but perhaps you’ve gleaned some things about the company.

Mathis: I’m very new, but I did go to the one meeting and did spend some time with Scott, our CEO, and the CEO of NNN Realty Advisors, which is our sponsor and our advisor, as it were, and I got to meet the other advisors, as well as the advisory team. You can sense how an organization works by how people react to you, how quickly they get things done, and how organized they are. And from all of the little signs, and the big signs, I’m very impressed.

 

HREI^™ : It’s pretty obvious that many of the issues that face health systems – such as government reimbursements – end up affecting the real estate as well. Aren’t the two intertwined?

Mathis: Absolutely. If you look at the hospitals and the real estate they own across the country, in many cases they are the largest employer in the little towns where they exist. Their deals concerning their office buildings are very prominent business transactions for those communities.

HREI^™ : Healthcare real estate is also considered to be less vulnerable to economic upturns and downturns – is that another reason why you got involved with NNN Healthcare/Office REIT?

Mathis: Well, I spent my entire career as a healthcare executive with the Methodist Healthcare System and during all of those years – I was there for 27 years total – everyone complained about how hard it was to make money because the government was cutting back on reimbursements. But if you look at the industry on a macro basis it’s huge and growing. But there are a lot of intermediate stresses – a lot of places do not do as well as the big systems financially. That’s why a healthcare REIT has a tremendous opportunity. A lot of the smaller systems need to cash out on their physician office buildings and some of their other surgery centers and facilities such as that because they need cash to continue their core mission. So this can provide them with a vital mission.

HREI^™ : What kind of issues are health systems facing today that could cause them some trouble?

Mathis: Quite a few years ago I was the chairman of the Texas Hospital Association and a few years back I attended a board meeting – after a 20-year or so absence – and I listened to what they had to say about the difficult issues hospitals are facing today. It was almost déjà vu. They were dealing with the same issues as I was 20 years ago. It’s just that the players are different today and there are a few different twists. First of all, they face pressure concerning government reimbursements … both Medicare and Medicaid. They say the hospitals are getting squeezed today. Well, they’ve always gotten squeezed. That’s No. 1. As for the No. 2 concern, it’s healthcare professional shortages – terrible nursing shortages. They ask where they are going to get the people to take care of patients. And No. 3 is malpractice. What is the tort system doing to us? What is it doing to the practice of medicine? What is it doing to us in terms of cost, in terms of what we pay for insurance and health insurance? Those are the big three; there are a lot of other little ones but those are the big three generic issues that have been around for a long time across the systems.

HREI^™ : Talk about some of the positives that will help healthcare continue to expand in the future.

Mathis: Demographics and attitudes. First of all, the population of the United States – in contrast to European countries – is growing, and not only through immigration. Second is the fact that our population is aging. And third is the attitude of Americans, who continue to pursue life, liberty and happiness. They really don’t want to retire and sit at home for six months and die. They want to be playing good tennis into their 80s. In fact, I played golf today in a threesome and I was the young guy at 64. I was riding in a cart with a guy who is 84, and the other member of the threesome was 86. And those guys are out there in the Texas heat playing golf – that’s the attitudinal piece of this. People want, and will pay for, a healthier life, a more active life. People right now pay out of their pockets – with no insurance – for alternative treatments, vitamin supplements … It’s those kinds of things, the demographics, the growth of the population, the aging of the population, the attitudes of the population that makes this a blow-away opportunity in the industry.

HREI^™ : Have there been any new emerging healthcare real estate trends since you left your post at Methodist?

Mathis: The main development I’ve seen is the ownership piece of the real estate. In so many cases, when the pressure came on doctors, from governments and other payers that limited their payments, they had to find another source of revenue. And so, what had traditionally been the province of the healthcare operator – the hospitals – in the building of cath labs and G/I centers and surgery centers, well, the doctors saw that hospitals made money out of these things and they said, ‘Okay, we love you and we’ll continue to admit our patients to you but we’re going to build a surgery center, we’re going to build a cath lab or medical office building.’ So, the doctors have gotten into the real estate now. There’s a lot more physician ownership, and that’s an opportunity in this business.

HREI^™ : NNN Healthcare/Office REIT has expressed its preference for on-campus medical facilities. As a former health system CEO, do you foresee a strong and continuing need for on-campus MOBs?

Mathis: Doctors have only their time to sell. Any minute spent driving, or parking, or any other hassle is not good for their small business. Having their offices attached to or very close to where their hospital patients are or where their outpatient surgeries are is critical. So I think it will remain very important.

HREI^™ : At Methodist, you had what you referred to as real estate experts in house. But what about smaller systems – do they value firms that can come in and own and operate their real estate and give them some real estate expertise?

Mathis: Sure, it depends on kind of what the size and complexity of the organization is, as well as their own ability to attract expertise. Some big systems have the attitude that anything they can outsource they definitely want to outsource. In my particular case, we had the attitude that the need for executives was for them to manage stuff. So my attitude was that if we were outsourcing all of our managerial functions to others to manage, why would they need us. Our people were in-house people. We hired people to manage our office buildings, we hired people to be our real estate people – we hired nurses, we didn’t hire nursing services. But that was during my time and my place, and that’s not necessarily the way it is across the industry.

HREI^™ : There is talk of medical office buildings playing so much more of a role in terms of hospitals providing services, perhaps as a way to reduce overhead costs of building a new hospital. Does that go back to your days as CEO at Methodist?

Mathis: Without question. The largest tenants in our medical office buildings was Methodist Hospital … we put all of our outpatient services in the physician office buildings because the physicians are right there, the patients are right there and we do the tests on them right there. In fact, in many cases when the physicians wanted to go on their own to developer their cath labs or their G/I labs we partnered with them and kept them right there in the physician office building. So, you’re right, I would guess in many cases the key tenant is the hospital and their outpatient services – at least if they’re smart that’s what the hospital would do.

HREI^™ : I’ve heard about your playing golf, but what about any other hobbies?

Mathis: I enjoy golf because I enjoy being outdoors and a golf course is a very pretty place to spend some time. And, you’re typically with people you enjoy for four hours, so score doesn’t matter too much to me. Besides that, one of the principal things I like to do is be on a variety of boards. I’ve been on two public company boards and now on the REIT board. When I’m not doing that, my wife and I like to travel, we travel extensively. We typically travel 100 to 140 nights a year and we’ve been to all seven continents.

HRE^I™ : Tell us a bit about your family?

Mathis: My wife, Diane Peterson, owns her own hospital consulting business, called Peterson & Associates. I’ve got three children and seven grandchildren and I enjoy that part of my life very much. q