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Cover Story: The ‘larger-than-life’ lender

Led by the 6-foot-6 Erik Tellefson, one of the HRE sector’s best-known personalities, Capital One is by far the biggest lender in the MOB space

By John B. Mugford

The Chicago-based Capital One Healthcare team includes (from left to right): Jim McMahon, Natalie Sproull, Katelyn Girod, Managing Director Erik Tellefson and Jonathan Buehner (not pictured). (Photo by Andrew Collings, courtesy of Capital One)

The COVID-19 pandemic hit with a thump in early 2020, causing a bit of a pause in most business sectors, including healthcare real estate (HRE). Included was a short pause in the providing of loans for medical office building (MOB) acquisitions, as most lenders needed time to figure out how everything would shake out, including where property valuations and pricing would settle.
As we all know by now, things shook out pretty well for MOBs, which came through the pandemic as one of commercial real estate’s shining stars.

An ever-widening array of investors became interested in acquiring the facilities in which tenants continued to pay their rents and occupancy rates remained well above 90 percent nationwide, according to a variety of data sources.

The product type’s popularity was evident in the total sales volume for the year, which topped $11 billion for the fifth straight year, according to information from HRE data firm Revista.

And when it came to lending capital for MOB purchases, it came as no shock that the MOB and life sciences team with Capital One Healthcare, part of McLean, Va.-based Capital One Financial Corp. (NYSE: COF), had another strong year in 2020. The team has delivered strong results for at least the past decade or so, dating back to a time when an earlier version of the team was with GE Capital and its Healthcare Financial Services business unit.

Capital One Commercial Banking acquired GE Capital’s Healthcare Financial Services lending business in late 2015, and that included the MOB lending team.

During the pandemic-ridden year of 2020, in fact, the Capital One Healthcare team, which since 2013 has been led by Erik Tellefson, closed 43 loan deals in the MOB and life science sectors during 2020 for a total of about $2.5 billion.

Although that figure represents a bit of a decrease from the previous two years, the drop can be directly tied to the pandemic, which as noted earlier, caused a pause in acquisitions and lending during the early part of 2020.

In the previous two years, Capital One’s MOB/life sciences team closed in excess of $3 billion in financing in 2019 and more than $3.4 billion in 2018. The past three years capped off quite a remarkable decade for the team, which closed loans topping $18 million from 2010 to 2020.

“Our $2.5 billion of volume in 2020 was down a bit as a result of the pandemic,” says Mr. Tellefson, one of the MOB sector’s best-known professionals, “but we were very happy with that result given the adversity in the marketplace and the slowdown of overall transactions in 2020. So far, 2021 looks to be significantly better than 2020.”

Those figures from the past three years put Capital One at the top of the MOB lending business, and it really isn’t close. According to industry sources, some of the other top lenders have reported, at various HRE conferences and the like, that they have provided total financing in the $150 million to $200 million range.
To put Capital One’s dominance in perspective, it looks as if the MOB/life science team was involved in more than 30 percent of all acquisitions deals that took place in, for example, 2020.

To show the math, Capital One provided $2.5 billion in financing in 2020, with acquisition financing accounting for about 90 percent of that number, or $2.25 billion. If the average leverage rate on deals was 65 percent, which is the average for Capital One deals, then the team was involved in acquisitions totaling about $3.5 billion, or about 32 percent of all deals, dollar-wise, that took place.

As noted, the leader of this ultra-successful team, which has been the top lender in the MOB space in recent years, has been Mr. Tellefson, who started his career in the 1990s working for a bank and focusing on commercial real estate prior to joining GE Capital Healthcare Financial Services in Chicago in 2006.

He was promoted to managing director in 2013 and has led the MOB/life science team, which now numbers five professionals – which it says is the largest in the HRE lending sector – ever since. Mr. Tellefson also leads the separate, but somewhat related, healthcare REIT (real estate investments trust) lending team.

In addition to Mr. Tellefson, the team comprises Jim McMahon and Jon Buehner – both of whom joined Mr. Tellefson’s team back at GE Capital – as well as Natalie Sproull and Katelyn Girod.
“The team came together organically, and all of us have very substantial experience on the risk underwriting side of medical transactions, and we all worked at GE Capital,” Mr. Tellefson says.

“I had been the sole representative for medical office lending for several years, and then I hired Jim McMahon and Jon Buehner while at GE Capital and hired Natalie Sproull and Katelyn Girod when at Capital One. The internal risk-based hires have worked out extremely well for us and resulted in well-rounded lenders that have seen hundreds of transactions prior to going out looking for their own.”

What is it exactly that the Capital One team does?

Although the team has branched out into other property types, including life science properties, Mr. Tellefson says, “MOBs are currently, and have historically been, the predominant asset class we lend on by both number of transactions and volume of loan dollars.

“The ratio of MOB deals to the other types of lending we do has shifted from nearly all MOBs to probably 85 to 90 percent of MOB deals today, as our borrowers are branching out in other property types, with the largest recent shift toward life science transactions.”

Its primary loan type is for acquisitions, comprising about 80 percent to 90 percent of its deals.

“This trend has been in place for some time, as the MOB transaction market has grown substantially over the last few years,” Mr. Tellefson says. “We also do a fair amount of refinance debt, notably construction take-out and refinancing of maturing loans. We do some development deals, but on a percentage basis that probably accounts for less than 10 percent of our total volume. Our development debt is often focused on much larger transactions.”

Capital One’s lending on HRE transactions encompasses “both stabilized and value-add deals; we leverage transactions from 45 percent to 75 percent loan-to-value senior secured first mortgage, and can go higher in a uni-tranche facility,” he says.

“We have the ability to structure multiple advance facilities for future tenant improvements, capital expenditure and equity recaps for value-add deals, as well as stabilized transactions. This structure and flexibility has proven extremely helpful to our borrowers.”

Why the rise to the top?

In a sector that includes many strong lenders, why does Capital One, which has been the leading lending firm for a number of years, consistently rank at the top of the list?

Several professionals familiar with the team and its capabilities have some ideas.

“It’s very simple. Erik and the Capital One team have very loyal clients because they make life easy for their customers,” says Christopher R. Bodnar, vice chairman of the U.S. Healthcare and Life Sciences Capital Markets team with CBRE Group Inc. (NYSE: CBRE), one of the top MOB and life science sales brokerage firms in the sector.

“In a lending world that’s driven by computer automation, it’s very hard to get a human on the phone these days that has any authority,” Mr. Bodnar adds. “Capital One is different. If you have an issue, Erik and team are a phone call away and have the authority to make decisions quickly no matter if you are in the application process or your existing loan is nearing maturity.”

James Schmid, chief investment officer and managing partner with Media, Pa.-based Anchor Health Properties, one of the most prolific buyers and developers of MOBs in recent years, adds: “The Capital One team has been the most consistently active lender in the sector since this sector’s most formative years.”

Mr. Schmid says the team, dating back to its days with GE Healthcare, has always had an understanding of “healthcare operations and tenancy, which made it easier for them to lend on an asset without a lot of liquidity at the time and a lot of asset nuances. Developers in particular liked working with them because they would provide 100 percent ‘good news’ financing for tenant improvements, capital expenditures, which helped juice internal rate of return.”

Back when Mr. Tellefson and his team were with GE Capital, “they were never the most aggressive on spreads, but they could do small or big deals and offer up to 75 percent leverage in some instances. They’ve also been easy to work with over the years both before and after closing. They’ve always done a good job of marketing themselves and sponsoring events through the years, which made them a well-known commodity. Plus, Erik is a larger-than-life personality and is always very approachable.”

Mr. Schmid adds that since the team joined Capital One, it has continued to do what it has always done well, but “once they were acquired by Capital One, they got the additional benefit of a much lower cost of capital they didn’t have at GE Healthcare.

“Plus, their scale is so much further along than all of the other lenders in the market, which means if they really want to pursue a big deal they can, and no one else can really compete on that level. They can be somewhat selective on what deals they can get aggressive on.”

Mr. Tellefson confirms Mr. Schmid’s thoughts about the Capital One team’s scale, noting: “I think that’s a great comment and that dynamic likely exists in most lending organizations, but with the scale we have achieved we can definitely push for deals when warranted. We are and have been a relationship-based sponsor lender, so the dynamic described fits our model very well.”

Larger-than-life leader

As noted earlier, Capital One’s Mr. Tellefson is one of the MOB sector’s best-known professionals, in large part because he leads the team so many investors use when seeking and landing acquisition financing.

In an example of his stature in the sector, Mr. Tellefson was chosen in 2016 as the Healthcare Real Estate Insights™ Executive of the Year, an honor voted on annually by the 30 or so members of the HREI™ Editorial Advisory Board, a group of industry professionals who represent most of the sector’s leading firms. As a board, the group gathers each year to discuss the sector, to advise the publication on a variety of topics and to vote on the HREI Insights Awards™, which includes individual honors as well as awards for the year’s best HRE development projects.

Upon receiving the honor, Mr. Tellefson told HREI, “I am honored to have been named this year’s Healthcare Real Estate Executive of the Year. This industry is home to many innovative, trailblazing professionals, and this recognition by HREI magazine and my peers is very special.”

The fact is, many of the EAB members, as well as others in the sector, consider Mr. Tellefson to also be one of the sector’s “innovative, trailblazing” professionals. Although every member of the team at Capital One certainly contributes to its success, Mr. Tellefson has put the team together and provided it with the framework, as well as the leadership and some of his personal business beliefs to achieve that success.
For instance, Mr. Tellefson believes someone on the team should respond to a client, or potential client, as soon as possible.

“Immediate response is important to me,” he said back in 2016. “If you’re able to respond the same day – or the same hour – that helps.”

When asked if he still believes in providing an immediate response, Mr. Tellefson says, “I do indeed strive to get back same day. Given the influx of emails we receive it’s the only operating model that works for me and the customers.”

As Mr. Schmid of Anchor Health Properties noted earlier, Mr. Tellefson is considered by many in the sector to be a larger-than-life figure in the MOB space.

Part of that persona has to do with his team’s success, but it also has to do with Mr. Tellefson’s physical presence. At 6-foot-6, Mr. Tellefson grew up in Rock Island, Ill., and after high school went on to play college football at Western Illinois University for a year before moving on to Truman State University, from which he graduated.

After graduation, he earned MBAs in finance and real estate from DePaul University in Chicago, and then worked in commercial real estate for a bank before joining GE Capital Healthcare Financial Services in Chicago in 2006.

During his early years at GE, Mr. Tellefson was focused on “operating assets,” which led to his interest in working with “leased assets.” That interest opened the door to getting involved in MOBs, which ultimately became his specialty.

He rose through the ranks at GE Capital rather swiftly, including roles as VP Medical Office Risk Management, where he was a risk team member in underwriting and structuring medical office real estate loans; VP Medical Office Loan Originations, where he led medical office and medical properties loan originations in the eastern United States; and senior VP Medical Office Loan Originations, where he assumed leadership for medical properties loan originations nationwide.

If Mr. Tellefson and his team are well known in the HRE space, it’s thanks to a strong marketing plan, reliable performance and a visible presence.

Mr. Tellefson and members of the team are familiar faces at virtually all of the HRE conferences put on by various organizations, including BOMA International, the InterFace Conference Group and others. Mr. Tellefson often serves as a speaker on discussion panels, and for much of those conferences the team has meetings lined up with current and potential clients.

Although Mr. Tellefson leads the Capital One team, each of the team members has the autonomy to do their own deals and drive business.

“I think our team believes in all of the things that everyone involved in business should do: be punctual, organized, provide an immediate response, have strong customer events and do whatever we can to work with the customers on their business plans,” Mr. Tellefson says.

“As for our team members, they have very broad capabilities to reach out to borrowers and have conversations and work through deals,” he adds. “I approve the structure and then we collectively take it to the credit committee, and the responsibility for the group is ultimately mine.

“As a result, the folks on the team get significant authority as well as the benefit of my relatively deep experience in structuring these asset classes for a long period of time over a significant number of transactions, in addition to the internal knowledge and influence for the approval.”

Ben Appel, a sales broker and a managing director with the Healthcare Capital Markets team with Newmark Group Inc. (NYSE: NMRK), another of the most active brokerage firms in the MOB space, says the success of the MOB/life science team with Capital One is tied to the “size of their balance sheet, their tenure and expertise within the sector, as well as their loyalty to deep sponsor and borrower relationships.”

As far Ms. Sproull of Capital One is concerned, the success of the team stems from a common philosophy that entails working “closely with our borrowers to align our debt to their business plans and deliver a superior customer experience. All originators have authority to structure debt terms and work collaboratively with Erik to ensure a streamlined execution on our deals.”

A look at some deals

According to Mr. Tellefson, the Capital One team provides loans ranging, for the most part, from $10 million up to unlimited.

Although it “almost certainly does not” provide the lowest interest rates on loans, “fortunately medical office debt is a direct relationship product and given the niche asset class, our borrowers have other priorities aside from rates,” Mr. Tellefson says.

“Our total debt, including the healthcare expertise, structure and flexibility, on balance sheet relationship lending, risk adjusted pricing and most importantly certainty of close, are all very important components of the overall loan.

“All that being said, we have very competitive spreads and structure; however, we are often just not the lowest priced provider.”
An example of one of its deals from 2020 included a $257 million financing provided to Chicago-based Remedy Medical Properties and its longtime joint venture partner, Boca Raton, Fla.-based Kayne Anderson Real Estate. The loan was for the partnership’s purchase of a 24-asset MOB portfolio.

The Capital One MOB/life sciences team has “executed more than 50 transactions with the Remedy/Kayne joint venture since 2012.

“Our experience with Erik and CapOne is longstanding and we continue to be very active and pleased with them. Over the last 10-plus, we have completed $2.5 billion-plus of loan volume with the team, dating back to its GE days, and we intend to lean on their expertise for the foreseeable future,” says Peter Westmeyer, CEO of Remedy, adding that the first deal the investor ever did with the team was for $5.8 million for the purchase of an MOB in Conyers, Ga., in 2011.

“Since then, we have worked with them with increasing frequency,” Mr. Westmeyer says. “That’s because they are phenomenal to work with. They know healthcare as an industry, understand the nuances of medical office buildings, ambulatory surgery centers, specialist centers of excellence, and the whole clinical healthcare real estate space in general.”

Not only can the Capital One team provide a wide array of loan types, but Mr. Westmeyer says, “they often customize pragmatic solutions that fit our business objectives, whether it be a value-add lease up play or a stabilized core facility with lower leverage.”

As for Mr. Tellefson, he is an “excellent listener in this regard, and he is also great at suggesting loan structures and products that he sees may coincide with our plan. We always welcome his suggestions.”

Further, Mr. Westmeyer adds, “the whole team’s execution track record speaks for itself. When we have a term sheet from Erik and the CapOne team, we have the utmost confidence they will show up on closing day. Erik communicates risk sensitivities and issues he may have with a deal early on in the process so that we are not surprised throughout the process.”

When Mr. Westmeyer was asked whether he can remember a particular deal in which the Capital One MOB/life science team had to “think outside of the box” to provide a solution, he answered: “It’s hard to single out any particular deal, because CapOne always does an exceptional job of that, as all deals have some twists and turns. But I can assure you, there are numerous instances where I was thankful to have Erik and CapOne as our lender. The cadence between our two firms is exceptional and I cannot overemphasize the importance of our partnership with them.

“Deals do not sleep, and our industry requires a strong and collaborative work ethic, and Erik and the team are always available to address the inevitable issue that will arise in any deal.”

Mr. Tellefson notes that his team figures out the best solution for borrowers, depending on a number of factors involved in each deal.

“Borrowers spend a considerable amount of time and energy finding and negotiating deals that are accretive for their business, and we strive to mirror their business plans in lieu of fitting every deal in the same box,” he says.

“Whether it’s for a single MOB for a private investor or for a portfolio deal over a billion dollars for an institutional customer, we strive to put together a bespoke lending transaction that reflects their business plan.”

Other deals executed in the last year or so include two in which Atlanta-based Invesco Real Estate, a global real estate investment manager, acquired large ownership stakes in MOB portfolios from Toledo, Ohio-based Welltower Inc. (NYSE: WELL).

The first was a $382.5 million loan to finance the acquisition of a national portfolio of 31 MOBs in 15 states. The second was a $211 million transaction for the acquisition of 20 MOBs, including medical centers, outpatient centers, neuroscience and heart centers, in five states.

In a news release, Paul Nelson, managing director of investment management with Invesco, said, “Capital One’s execution of this loan supports our goals to expand in the healthcare space and enhance our portfolio. This acquisition enables us to grow our presence in new markets and continue to serve the medical community.”

Capital One described its role in the transactions as being able to use its “healthcare expertise, structure and flexibility, and our certainty of close to complete two large, complex transactions on compressed time frames in 2020 with the adversity of the pandemic in the background.”

In another 2020 transaction, the team provided $349 million to refinance 10 single-asset loans with Milwaukee-based Landmark Healthcare Facilities, a longtime investor, developer and owner of MOBs with whom the Capital One MOB/life science team has been working with since 2011.

“The team worked with Landmark to provide a bespoke solution, aligning the debt structure to their business plan and operating agreement requirements,” according to a news release from Capital One. “The Landmark transactions represent a private sponsor and their unique requirements around the debt, and our ability to solve multiple, very complex loan-related issues and truly align our debt to their business plan.”

What does the future hold?

As the MOB and life sciences team with Capital One looks to the future, Mr. Tellefson sees good things ahead.

He sees a sector that will continue to grow and prosper in the post-pandemic world, as well as, for the Capital One team, an expansion into other HRE property types.

“The pandemic, relative to our MOB/life science lending, did not cause a tremendous amount of difficulty for us,” Mr. Tellefson said.

“Our portfolio, similar to most medical office buildings, was largely unaffected. Similar to many lenders, we had to adapt to market uncertainty and doubled down on supporting our clients during the shutdowns. Fortunately, we ramped up our lending throughout 2020.”
As for the future of the team, he foresees a “combination of growth and staying the course, and we are branching out into other medical property types in pooled or portfolio settings, as well as making a concerted effort to grow in life science lending while maintaining our market position and continuing to grow in the medical office sector.

“We’re doing that through our various debt instruments, including pooled loan structures as well as the strength of our capital markets team and emphasizing to borrowers the fantastic job our underwrite, risk, legal and asset management teams provide on our transactions.”

To remain successful, the Capital One team is going to continue to build and enhance its relationships with borrowers.

“In the medical office business, relationships are paramount,” he says, “and we are very fortunate to have excellent borrowers and other folks in the industry. I think our level of success encompasses starts with relationships and ends with certainty of execution. In the middle are our other value adds – such as healthcare expertise, structure and flexibility, on-balance sheet relationship lending and risk adjusted pricing – essentially aligning our debt to the borrower’s business plan for the assets.”

Mr. Tellefson also gives credit for the team’s success to the parent organization, Capital One, for its “support of our lending as well as our internal partner groups in underwriting, legal, closing and portfolio management. As a dedicated MOB lender with years of experience, we have seen and mitigated virtually every potential issue with respect to medical office lending and it shows throughout our process.”

Being the top lender in a sector focused on such a strong property type, one that has come through difficult economic times – including a world-wide pandemic – with shining colors, is also a good reason for the team’s success, he notes.

“The industry has changed a fair bit since I have been working in it, and I expect it will likely continue to change in the future,” Mr. Tellefson says. “One constant has been that our borrowers in medical office have continued to find success despite of, or even as a result of, the changes that take place in healthcare and the sector.

“I continue to be impressed with our customers’ savvy and pragmatic solutions and pivots to growth during multiple market conditions,” he continues.

“Medical office has gone from a largely single middle market asset class to one where large portfolios are traded multiple times a year. And we’re going to be here to help them with what they need.”

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