Why Medical Tenants Offer the Ultimate Stability with Trisha Talbot

Office buildings, especially if they have multiple levels, it just becomes a little bit more complicated.

Everything comes with a cost and you can price it out and you can try to value engineer, but apples to apples, it's a cleaner way to go and do a retail conversion versus general office.

Welcome to Truly Passive Income. I'm Neil Henderson.

And I'm Clint Harris. And today's guest is Tricia Talbot.

She's the managing principal at DOC Properties and a 20 year veteran who has closed thousands of medical offices and sale lease back transactions nationwide. She's known for turning empty big box stores into cash flowing clinics and for structuring physician friendly JV deals.

Tricia helps both clinicians and high net worth individuals build portfolios that are pandemic, Amazon and tech proof. Get ready to learn why healthcare real estate might be the most stable alternative asset you've never considered.

Tricia, thank you for joining us today. How are you?

I'm doing well, thank you. Thank you for having me.

Absolutely. Thanks for being here. All right, so excited to talk about this for a couple reasons.

As I mentioned, I've got a 16 year career background in medical sales. I was a sales rep in planning pacemakers and defibrillators and I spent feels like about half my life in clinics.

I had clinic days when I was checking patients. They had my device for the rest of their life. That was my patient and we would work and tweak those devices.

Then I had other days that were all surgery days.

Usually it was back and forth, bouncing back and forth along with the physicians going back and forth from their office to the hospital and that's just their life.

Now Neil and I do self storage conversions and we focus on buying old vacant big box retail buildings with our partners and converting them into self storage. So this is kind of a blend of those two worlds. I know you've done some conversions.

I know you work primarily with white coat professional and physician tenants. So tell us a little bit more about yourself, about your background and how you got started in this world.

Yeah, I kind of need to update that. I think I'm going on 25 years which is kind of scary.

So I got into medical office kind of, well like anything in in life that sometimes it, it gets you instead of you getting it. But I was working for a developer in house.

I started by doing a marketing report for a new development and then got hired in the leasing department and did that for a couple of years and they only did medical office development. So that's how I got my start. And then I went to third party brokerage. And I started dabbling in a little bit of general office.

Truly, I found medical office a little bit more interesting just because, you know, every kind of, every tenant was a little bit different depending on their specialty and whatnot. So I just sort of gravitated towards that. Also. I felt like, you know, the, the clinicians really needed me.

So like you said, they're constantly bouncing around and you know, sitting down at night trying to go through 50 emails, you know, within a real estate transaction of all of these little questions, you know, I was able to, you know, synthesize a lot of it and be like, you need to make this decision on this and this decision, here's the financial implications and sort of really, you know, so they have one email that they answer and then, or call me in the morning on their way to clinic or surgery.

And I, I really liked it because I also saw, you know, in general office, you know, I kind of predicted that, you know, kind of seeing this like, like if people don't need to be in the office, are they actually going to go with, you know, with computer power and whatnot and laptops and everything kind of going mobile and you know, the, with medical office, what I like is, you know, there's a, there's a purpose for them to be there. They need to be there. I mean not insurance, but paid, but they can do procedures outside of a clinic. But I personally wouldn't go to that physician.

So you know, they, the, the typical physician needs to do a procedure in an office setting or a surgery center or hospital. So, so there's a reason for the property to exist. And you know, as, as you mentioned, you know, Amazon can't take it away.

Like, you know, it has affected the retail market which is, you know, reinvented itself as a result.

General office, you know, some of those workers like you said they can, they can work from home and, and, and medical office has an essential reason for being there. So I, I really got drawn to that, felt that it was a good way to, you know, have a career in commercial real estate.

And it's not as sexy as some of the other ones. I know apartments have been sexy, industrial has been sexy with, with the last mile.

And, and it's kind of, it's not going to get like the huge highs and the huge lows, but it's a nice sex steady eddy product type. And for me personally, I like to sleep at night.

So you know, I think if you get a good tenant and you really vet them, they are going to pay their rent because they need to be there and typically they won't move.

Yeah, there's actually a lot of of movement in the healthcare industry over the last decade pre Covid and since COVID That really makes this a stable asset class. Now that I'm thinking about it, like there's this big push, especially when Covid happened.

Technology had been trending towards being able to do a lot of things remotely. And I'm not talking about telehealth, that's a small part of it. But like we used to implant a pacemaker or defibrillator in a patient.

They would spend the night in the hospital. We come back, we check them first thing the next morning, eventually later that day.

They've been observed long enough and you discharge them home and then a week later they're going to follow up in the office.

It got to the point where we had the technology through home monitoring that their device could send a report every few minutes and if one of the leads inside the heart moves, you know about it immediately. It wasn't really until Covid happened that we started using that technology the way that we could use it, which is same day discharge.

We started getting patients out of the hospital because they had a higher risk of COVID infection in the hospital than if we could get them out.

So we started doing surgeries on patients, watching them for a couple hours and sending them home, monitoring through their remote monitoring and just having them follow up at the office. At the same time.

There was a huge push to start taking same day procedures that were done in the hospital and for census purposes, push that out into the offices.

So you have offices that are increasing their procedures that they're doing in the office as well as something called an asc, the ambulatory surgical center, which is a surgical center outside of the hospital that can be done for a fraction of the cost of the procedure in the hospital. And the patients are typically in and out the same day.

So the patients get a significantly lower bill, the insurance company gets a lower bill, the physician gets higher reimbursement, and the patient satisfaction scores go through the roof as well. The only people that don't love it are the hospital.

But if it's a hospital that's at census already, they're starting to allow it to happen because they need the room. So healthcare has always been a pretty stable asset class. A lot of times these are 10 or 15 year triple net leases.

I'm curious to hear what you're seeing on that, Tricia. But it's a Very stable asset class. And now you're having growth, which something we didn't really see.

Usually you would have gross in a medical sale office when you had census growth, when the population would grow and you're adding partners. But what they've been doing for the last decade is adding services and adding procedures.

And that can mean increased footprint, an ambulatory tory surgical center taking exam rooms and adding a ventilation system or adding a sink so that you can do like loop recorder implants or generator changes and things like that.

Now this is the deep cuts here.

Well, as the, as those services are increasing, we're starting to see the footprint go out and it's better for the patients. It's better for everybody but the hospital. But the hospitals are so full that they had to start allowing it.

So now that I'm really wrapping my head around what's been happening on the medical side of things, it makes me realize that this is a really robust space if you're going to lean into that. And I love what you said earlier about these are people that they're, they know a whole lot about one thing, right?

And they know a little bit about a lot of things, but they're really looking for your guidance here. So this is, there's that rare combination of the white collar physician that's also got the high business acumen and they're out there.

But there's a lot of those guys that are just like, look, I just want to take care of my patients, give me the office space to do that, tell me what I need to know. And you're educating those people and they want to be in one spot for the next 10, 15 years.

I'm assuming that this is relationship based with you and you've got clinic tenants that have been with you for a long time. Is that the case?

Absolutely. And you know, I mean, I, I like working with physicians. I. Because they are really smart and the only thing that they're lacking is bandwidth.

So, you know, if you, if I've gone to school for the amount of years and invested the amount of dollars that they've had to and sacrificed a lot because, you know, it's not a glamorous, you know, being trained as a physician until, you know, you're out of residency and you know, either an employee or private practice, but they just lack the bandwidth. You know, it's not that they can't understand it, it's just that, you know, they only have 2:24 hours in a day.

They some at some point need to sleep if they Have a family. I'm sure they'd like to see them.

So you know, once they, they are done with their work, at the end of the day, you know, I mean plus you know, being a surgeon in particular, I mean you're on your feet. I mean they are literally dealing with life and death. It's like, do you really want to go and, and sift through real estate minutia?

I mean, I don't, maybe they do, but I don't, I don't know that that's a personally something you want to do at the end of maybe a 12 hour day. Who knows. You said a loss. I'm going to try to unpack a little bit. So you know the value of, of healthcare real estate.

As you said, you know, they typically do 10 year leases. The reason for that is because a lot of these clinicians look for the landlord to fund a large amount of their tenant improvements.

And so in order to get that back, the landlord needs you know, a long, a long lease. They are now mostly triple net. The annual increases are typically high. They're, they're typically 3%. I have been a lot of things that I've.

Well, I'll go through this and then I'll, I'll go back.

You know, the lease rate is typically higher than, than general office again because of the amount of dollars put into the tenant improvements that's required and the retention rates are, are typically higher.

So from an investment standpoint, you know, those things being sound, it's, it's a really good place to park your money and just, you know, let it grow.

The problem I'm seeing right now in the market is people are trying to offload medical offices with you know, like five years or even three years or two years in some instances. I see a lot of things on the market at 2% and I think these are coming due just because of mortgage maturities.

But uh, I see a lot, I mean a lot of them come through my desk and I can't even, I don't really even look at them because you know, gently let give feedback to the brokers if there, if it is an on market deal and just say hey, you know, this is why I can't take a look at this. I mean I can't with a Walt of 1.9, you know, I, I can't for medical office. It's just too risky.

That means that I have to factor in the dollars of putting tenant improvements in if this tenant does leave and they're like, well they have like, you know, two options. And they've been here for 20 years.

And it's like, well, that means that tells me that this could be at the end of this person's career and at the end of this term, they may not renew. So when I look at those and I find those to be kind of more.

Either people are just throwing stuff against the wall or people that have gotten into medical office but don't really understand it, because I do see, you know, it is priceless after Christmas. And everyone goes to all these cocktail parties where people call and they're like, hey, I want to like, start investing in medical office.

And I'm like, okay, so, you know, how did this come about?

And they're like, oh, well, you know, my friend at the cocktail party over Christmas and the holidays, you know, told me that this is a great way to go in. If it's an owner, I should convert my op. My. I should just only do medical leases now. And I said, well, what do you have?

And he's like, well, it's been general. You know, it's a general office building. And you're like, okay, well, is everything separately metered? Do you have an elevator? Yes. Is it gurney size?

No. I mean, it's just like the amount of expense that you would have to put in. I just don't think you would get the return for all of them.

I mean, there are some general office buildings that are being converted. But one thing that I think is interesting that you said is about hospitals.

So right now, statistically, 50% of procedures are done in a hospital and 50% outpatient. And even the hospitals are building their own outpatient because the hospitals, you know, I don't know if the hospitals typically care too much.

I guess it depends on the market in the hospital. But they really want to be acute care trauma centers. You know, they want to get people to stabilize situations and.

And out of the hospital, they actually get paid more in reimbursements by the less time people stay in the hospital. So they have built their own ambulatory surgery centers to handle kind of routine, non. Like routine procedures that aren't life threatening.

So I do think, you know, inevitably sometimes the conversation goes to, well, you know, how do you solve the healthcare industry? I'm like, well, I'm not in the healthcare industry. I'm in the healthcare real estate industry.

But I would say trying to lower the cost of overhead, of which, you know, real estate becomes part of, can reduce the cost of overall care for anybody. And that can help probably in the long term, solve Some of these problems that we're facing. But.

But yeah, I find it interesting because I think hospitals are. Are actually trying to be part of the solution in a lot of markets.

Yeah, I agree with that. One thing you mentioned is the high risk of buying a medical office building that only has a couple years left on the lease.

And there's potential that, you know, if they leave, the expectation is the next person's going to have very specific things that they're looking for, which is going to be a very expensive upfit potentially. Right.

So the risk is if they've only got a couple of years left on the lease, you have could have really high turnover and vacancy of six months, a year, whatever, before you find the next tenant. And now I know that a lot of hospitals are operating in a hub and spoke model where they've.

They've got the mothership and then they've got typically an office for, you know, orthopedics and, you know, cardiology, ophthalmology, you know, general surgery, ob gyn. Right. Right around there. But they also operate these satellite clinics. Right.

And that's their way of reaching out into other counties and trying to draw that population into their hospital and they're expanding their footprint. So I see that model work as well. To me. Talk to me about the conversions that you're doing, because that seems very high risk. Right.

Versus an existing office building that somebody's had success there for a long time. Yes, there's only a couple years left on the lease, but going and doing a conversion, I'm curious to know that hap how that happens.

We, when we do a conversion, we take like an old Kmart or grocery store. We're running a feasibility study, and I'm assuming you're doing something that's similar, but probably way more complex.

And are you getting the tenant in hand saying, hey, we want to go to this county over here, find us a location. And you're like, here's this building. This is what we can do. We can put this elevator in. We can cut the doorways to this for wheelchair health.

There's no way you're just finding the building, building it out and be like, now let's put a tenant in there. Right? Like, that's got to be too high risk, I would imagine. Educate me.

So I personally, if I was looking at. To do when I so a conversion to medical office, I know that they're, you know, because of the COVID effect of.

On the office market, there's a lot of landlords that are just you know, out of survival saying, hey, I'd like to consider converting this to medical office. You know, if you have deep pockets in a long time, you know, anyone can do that. I actually like what you guys do with, with retail. One parking.

So, so parking is usually never a problem in retail. It's a box.

So once you clear out all the FF and E, you've got a blank slate, which is kind of the best thing when you're looking at medical office because you don't know what tenant is going to go in there. You don't know what their needs are going to be. You do know that they're going to need plumbing most likely depending on the use.

They need upgraded power.

Depending on the retail user before that the power might already be in there because these equip, this medical equipment, these big diagnostic machines, I mean they're just requiring, they're getting more and more sophisticated, but it requires more and more power to retrofit an office building. One, the parking is usually the parking. You can't, you usually cannot create a ton more parking.

I mean you might be able to restripe it and get a few more parking spaces out of it, but not necessarily to the, to what you need for medical. Like you said, you know, going into a, like a retail conversion, it's usually windows or like, you know, a basic wall that you can cut in.

I mean sometimes office buildings, depending on how they're built and configured, you know, you could, I don't know, it could just be a really cost, cost prohibitive.

But you know, an office conversion also, you know, I think it's easier from the H Vac standpoint from a retail because again, you can clear out the box, you can, you know, do a drop ceiling and distribute the H Vac.

A lot easier sometimes in office buildings, especially if they have multiple levels and whatnot, you're, you know, it just becomes a little bit more complicated.

So I mean obviously everything comes with a cost and you, you know, you can price it out and you can try to value engineer, but apples to apples, I think it's a cleaner way to go and do a retail conversion versus a general office typically.

So you, I'm going to dig into that just a little bit. You once converted a shuttered Walmart into a multidisciplinary clinic.

What underwriting or design lessons can investors borrow on that for future adaptive reuse plays?

Yeah, so that was a client of mine was looking that they needed high, they needed a lot of power.

So in particular this was a Walmart was Trying to do like a neighborhood footprint, which is kind of a smaller, kind of a normal grocery store footprint. And I think they shuttered the idea and that's why they all became available. But it had the power that they needed.

Their highest cost is typically upgrading the power. And when you have to get the power company involved and all of that, it just becomes really expensive.

And all the landlords wanted to push it onto them, obviously. So I found this and they, they did part of it as a clinic. They did part of it for some back office administration because it was huge.

So, you know, they were able to cut it into a couple of different things, but.

And then they had one, a part of it they actually created for a repair shop for their diagnostic equipment because they always had to like ship it out and it took too long. So they were able to take that in. So they really kind of made it kind of a mission critical property for, specifically for their practice.

And they actually, it was so big they were able to cut up all of these things. But when you went into the clinic, you didn't real, you didn't feel like you were in this, you know, massive big box.

I mean, they dropped the ceiling. They made it look like a clinic.

But then the rest, I mean, they did a drop ceiling in the admin part, but the rest, like the repair center, they didn't really have to do much because it's a repair center. So other than, you know, creating stations for different things, it really needed to be open to fit the equipment.

So I think they made it work really well for their needs. And if in the future they decide that, you know, they want to get rid of the repair, I mean, they can easily. It makes really.

This was an actual box, which I like retail too, I think. Retail. You know, I like the box because they're like clean line.

So, you know, their clinic isn't just in one, but then the rest of it is designed so that it's future proof if another user, like a clinic user wants to come in. It's a nice clean rectangle that they start with.

I think that, you know, in medical office efficiency, especially now where the doc, you know, there used to be like an MA station and then a doctor had like, you know, three or four exam rooms around them and they just sort of went and saw them. And then if they, you know, had multiple physicians, they kind of had nearer MA stations with, you know, offices around.

And when you're seeing patients every 15, 20 minutes, you know, especially if you're a surgeon and it's Just pre or post op, and it's just a few minutes and questions and checking a suture or whatever you do.

You know, I think it offers efficiency, which, you know, when you're talking about seeing as many patients as you can a day, the way that the office is set up either adds or subtracts from your efficiency of being able to see that.

Yeah, totally.

Well, listen, I don't want to pigeonhole you just to medical office conversions because I. I know there's a lot more to talk about and I want to talk about DOC properties and investor returns and that kind of stuff. Before we do, I do have one more question about conversions, and it's a selfish question.

So our partners have a local grocery store called There's Lowe's Foods here in Wilmington, North Carolina, which is where we're based, that they have under contract. It's a beautiful building in a very desirable side of town, right near Wrightsville Beach, a very high dollar area.

And we bought it with originally looking at intent to convert it to storage. We're self storage conversion operators. My partners are the GCs.

We build everything from the ground up, you know, in terms of our projects that we take on with vertical integration.

So they picked up this property a little price was a little high to do self storage conversion and they immediately have had other tenants coming at them for the space. There's a gym that wants half the building. I think it's something like 40 to 50,000 square feet.

And they keep circling back on this idea of it's probably 15 minutes from the local hospital, but it's on a side of town where several different groups have been looking to place a satellite office. It's perfect for office conversion specifically because of the long triple net lease that typically comes along with that.

We don't know where to get started with something like that. We can talk to the local broker. They say they know, they don't know.

There's a few brokers that specialize in helping medical professionals find office space, but not when it comes to building out a new facility and the feasibility study that goes along with it and the ground up development. Is that the type of project that we could bring to you and be like, hey, Tricia, take a look at this. How do we navigate this?

What's the best and highest use of this property in terms of putting it together, finding a tenant like everything like that from the deal level, grassroots level up. Is that something that you could help with?

Sure. Yeah. All right, thanks.

Thanks for bounding on that. Let me get a word in edgewise here, Trisha.

No problem in that. I would need that.

We'll talk, we'll talk about it offline.

I didn't know if you're traditionally like your people ter tell you where they want to be and you're going to go find a location in that area for them versus people that have interest in getting into this type of tenant. Is this something you can help them with nationwide?

So with medical office, it's interesting. I so definitely the better part is before you buy something to make sure that it's something that physicians want to be. So it's location.

And so, you know, like I'd have to take a look at the location and see and it's interesting because I was just in New York helping another group and there was two, two spaces that they were deciding on and one was where doctors would want to be. The other was in a great location for probably other people. But you really need to be where the physicians want to be. So.

So they ended up leaning towards, you know, in their mind, some like a lesser location in their minds. But I said, well have to fill it with the physicians.

The physicians are the tenants and you know, they want a little bit of convenience selfishly for themselves. But then, you know, they also want to be where patients typically are used to or easy to get to. You know, is is part of the equation as well.

But they usually know that. But if you can't get the physicians in there, that's kind of a problem. So it, the better way is to go forward.

But you know, I can take a look at the property and give you some feedback and give you some pointers on how to do it backwards because there could be.

Yeah, we can connect on that offline. It's on the side of town where all the physicians live. So I'm there. It keeps them from having to go all the way to the hospital.

But we'll talk about that later. Thank you for that.

Talk to me about DOC properties and if most of your properties or a 10 to 15 year triple net lease, what does an investment look like?

So from our listeners that are LP investors, limited partners interested in medical sales especially, a lot of them are white coat professionals and physicians. So what better thing than to be your own tenant, right? If you can invest in that type of asset. So what kind of return profile does it look like?

What's your recapitalization strategy and what kind of return offering is coming with these 10 to 15 year triple net leases?

So I know a lot of people love that, but I Mean the return, it depends on the property. But obviously it doesn't make sense to do an investment without, you know, like 12% cash on cash. 20 ARR.

Just from a sponsor standpoint, nobody makes money. But you know, for, from an LP standpoint, you know, they should be looking at investing their money for at least 10 years.

I mean I, you know, my goal is after three to five years to sell it and go on to the next one.

But again, if we get in a market like we are right now and I've got a 10 year loan, I'm not going to sell it just because the three to five year mark came.

I mean I need to sell it in the proper market in order, you know, not to lose anyone's money because my money's in there too and I don't want to lose my money. So, you know. But they do need to, to expect to be on a 10 year time horizon just for market fluctuations.

Sometimes people do, sometimes tenants do do five year options.

And so if, you know, in the next year, if there's a couple options coming up, I'd rather get those options cemented so that it, you know, there's a longer walt on the property for an investor and, and you know, obviously I can lower the cap rate that way as well too. So I don't want to ever be forced to do something if the market doesn't offer the, the ability to get the, a higher return.

Yeah, totally. So, yeah, just have the autonomy to sit on it if you need to.

Sometimes maybe do a refinanced if the market tried to get capital out or something like that.

Yeah, well, the goal is to refinance, you know, every few years if you, if the, if it. But right now, I mean, I feel like the capital markets are kind of locked up and, and refinancing could be a horrible idea if you don't have to.

Right, yeah, just hold on as long as you can and you know, just keep cash flowing and paying down the, that's the thing.

I mean these, these are all income producing and so you do get cash flow during the time and then, you know, you get the, the proceeds when you sell.

Absolutely. All right, well, Tricia, one last question. This is a question that we ask everybody on the show.

It doesn't have to be a favorite, but if there's a book that you find yourself recommending to friends and colleagues or referencing yourself in your life more than others, what would that be?

Oh gosh, that's a great question. And I have no idea. I've Read so many good books. I like Simon Sinek a lot. I just really, I like his approach.

And so just when I read his books, they, they speak to me. I do like something about your why or how to find your why or what is your why?

Because if you don't know why you're doing something, like if you really don't understand the goal, then you know, it's hard to stay motivated. I remember I was asked, I was at a conference and someone was like, well, what do you do with your money?

And I said, well, I invest in my retirement, I invest in my kids education and we just bought a piano for my kids because they are taking piano lessons. And he's like, oh, that's kind of interesting.

And so I mean, if you don't know, you know, I guess if you're making money and you don't know what to do with it, you know, it kind of, then I don't know. I mean, I think having a goal and knowing what you're going to do or what you want to do next helps keep you grounded.

I could not agree more. Neil and I, you know, we have the conversation often, my wife and I especially talk about we don't want to die with a bunch of things.

We'd rather die with a stack of pictures of things that we did in beautiful places with people that we love and everybody that's going to look different for everybody. But everybody, we, we all need to know why we're doing this.

Right?

I love that. Well, Tricia Talbot with DOC Properties, thank you so much for being here. We appreciate your time.

If anyone wants to hear more about you, the projects that you're working on or more about DOC Properties, what would be the best way for them to do that?

So email is a really good way. You can always call me, but sometimes I get on the phone, my email is T Talbot T, T A L L B O T at Doc Properties, which is doc properties.com.

I have no doubt that you're very busy. Well, thank you, Tricia. Thanks so much for your time. We really appreciate you being here.

Thank you.

Thank you so much for listening and watching the Truly Passive Income podcast.

If you liked the show, if you think it would be useful for someone else, the greatest compliment that you could give us would be to share the episode, leave a comment down below or leave us an honest review. If you have any questions, don't hesitate to let us know down below.

And remember, with truly passive income comes freedom of time, place, and the freedom to pursue your higher purpose.