BIGGEST RISK with Eli Karlin

Commercial Real Estate Pro Network

J Darrin Gross

I'd like to ask you, Dr Eli Karlin, what is the BIGGEST RISK?

Eli Karlin

It's a great question. I think we live our lives based on risk assessment, whether we like it or not. We all do it in this area. I think I'll break it down into two fundamental risks as it relates to the healthcare, real estate sector, right? Healthcare and real estate versus sectoral risk, right? Healthcare in that segment, I think there's, there's three main categories that I would, I would focus on and that keep us up at night.

One is the regulatory so all the regulatory changes, they happen very quickly and sometimes unbeknownst to just members of the public. And so we spend quite a bit of time focusing on regulatory changes within the healthcare sector, understanding what the government is doing as they're the largest payer in the US and most insurances follow what the government sort of process looks like.

So that's one in terms of financial risk. It leads into regulation as well the reimbursement cuts, I think that's been quite challenging for our sector, those reimbursement cuts in different sectors, especially long term acute care. Long term acute care throughout covid was a darling of the healthcare industry. They had ventilators. They were able to bring in those patients, and yet Congress cuts those reimbursements and the type of patient that visits as new or else to go. So financial risk is certainly one of those under the healthcare sector. And then lastly, change in delivery of care. We are in an environment where technology is moving very quickly. We chatted briefly on the primary care provider losing some of their practice in either through private equity or through technology and so forth, and reshifting of the healthcare environment. So I think the change in how care is delivered in this country certainly falls in that in that category. So those three under the sectoral components are where we focus and try to look ahead and see, how do we mitigate those risks, but transfer that? And so forth. And then in terms of real estate, you know, and certainly as it relates to healthcare, number one, obviously, tenant, tenant credit worthiness, right? Making sure that whomever we have, and you know, you asked a question earlier about leasing, we don't. We typically, in our acquisition strategies, 90% leased or above, right? Our portfolio today is about 98% occupied, so we try to mitigate that, that risk prior to an acquisition, whether we bring in a provider or what have you, through diligence or even prior to that. But certainly the credit worthiness is quite important in understanding where, how they're getting reimbursed. What is their their longevity? How do they work in the long term that they don't, you know, they don't falter, like we've seen many healthcare systems that stewards a great example, right? You had a lot of great outcome, you could say, in the past, and today, well, they're no longer early around, right? And a lot of bankruptcy. So that's a big one for us in terms of the real estate specific angle. And then, of course, the fragility of the business model for healthcare, right? It sort of backs into the financials again. It gets into things are changing. We're seeing that happen very quickly. Procedures are changing, as we discussed earlier, the pharma component. I mean, look at bariatric care. Bariatric care is slowly dying, right? I mean, with those mpig and all the other, you know, pharma components, bariatric care, is an industry that is, that is in decline, and so we need to be be conscious of that fragility of the business model. It's not as recession resilient as everybody would have imagined. It may be in some sectors, but healthcare and maybe better than others. But there is, there's risk there. And then, of course, the obsolescence of assets. That is from a real estate standpoint, probably the biggest one we look at is we're buying a building today. Will it stand the test of time in three, 510, 15 years? Will this asset be obsolescent? And as we discussed earlier, you bought a 10 years ago, a 30,000 square foot orthopedic asset that today is probably closer to eight to 10,000 feet with the same utilization. And so, you know, going forward, will a tenant renew? Why would they renew? Why not go somewhere else? So that's the third so those combined, I would say, are the, the big risk items that we look for. I realize not the not so pretty tied up in 111, word in a bow. But from our perspective, those are the those are the main focuses and the risks that we try to mitigate. Or, like you said, transfer.

Contact info:

Website: SphereInvestments.com

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