Good morning, everyone. As she said, I'm Greg Markler with Erdmann and The discussion we're going to have today and we really want this to be an open dialogue and discussion So, please stop us if you have questions comments But today's key points that we're going to be reviewing are building a data-informed strategy to determine what and where to build aligning practice with the real estate strategy Third leveraging practice assets for future expansion and fourth some common pain points and how to plan or navigate through them and And finally financing options that help optimize returns So before we get started here One of the questions that we'd like to air is how many people here are either considering? Expanding or have recently expanded if we could just see a raise of hands Great and right behind that how many of you? Engaged a market study to determine where to expand or how to expand Did you engage a third-party data analytics company if you just raise your hand? So we see a few hands. Thank you, right? So building that data-informed strategy Shannon's going to walk us through Her recent expansion at the orthopedic clinic and the steps that they followed when expanding Hi there, I want to give you a little overview of our practice, so we've been in business since 1961 So we have a very rich history of providing care to our community we've also been in the same building since 1961 so we knew that we needed to grow and expand and so our journey started about five years ago And we had a board retreat Was a full day We gathered a ton of data to really understand our internal and external market And those pressing factors what the hospitals do are doing what the patients were looking for what our internal team was looking to achieve We set our Organizational priorities, so we wanted to figure out how big did we want our group to be at that point in time? We were six physicians We knew that we needed to grow in order to be competitive in our market and saw our market expanding as well So we had set very realistic Goals for growth and size so we're currently 10 physicians will be 12 this summer And I anticipate in the next three to five years will be a group of 20 So we knew that we needed to grow in our footprint Along with the size of the group, and then we also looked at subspecialties. What subspecialties did we have where were the gaps in our market? What were the demands of our markets? And then really our ancillary growth So we looked at all of the surrounding areas in our market And we realized we needed to engage a third party so we reached out to Erdmann Because we didn't in our market We didn't have a design and development firm that really knew the healthcare space and could design an innovative patient experience for us So we did our due diligence we put an RFP out We narrowed it down to three Business partners, and we found that Erdmann was the most innovative so they helped us to do a really deep dive Into our analytics into our markets and actually it was very surprising the the answers we found and really modified our strategy and approach So we were focusing on some of the subspecialties hand and upper extremity foot and ankle trauma But what we found from our research is that 81% of the growth in our market was total joint replacements so we Modified our strategy when it came to subspecialty and we have an adult reconstructive surgeon joining our practice And we're in the search for another so this really this information really helped us Develop our strategy for growth particularly in the subspecialty area and we know more and more is moving to the outpatient setting So we chose a site we had built an ambulatory surgery center about six years ago So we chose a site. We were very fortunate the land next to it was still available So we bought the acreage right next door so we'll have a full orthopedic campus And we even had modifications to our ASC for future growth. We're currently four ORs We have the ability to go to six and Then what we wanted to do is understand our patient and the tapestry of the market What is our market made up of what are those individuals? What's important to them? So we looked at the tapestry segments and identified our target audience and Then from there we connected that Tapestry to the patient experience. So what are those individuals in our market that we serve? What are they looking for from a technology perspective? convenience service utilization price sensitivity and service Orientation so we really geared the footprint and the plan and design around this patient experience and Then we were trying to figure out what do we need from a size perspective? So we provided all of our historical data to the Erdman team And they were able to use software data to tell us when our peak appointment times were how many rooms we needed in each pod And that really helped us to design our space And then we did our patient experience. So we looked at what the customer expectations are What our current workflow process is and then how do we develop a workflow or patient experience? That would meet the needs of those customers So and then different advantages that would help us differentiate ourselves from others in the markets and Then we actually engaged our team. So we did a Company-wide survey to say what did they want? What are the pain points in our current workflows and our current operations that we need to fix in this new building? And really challenged our leadership team to look at the future of Our operations so we did a Erdman brought in some what do you guys call those the little blocks? when we built the Well, we had little blocks. So we got to design with that Yeah, so we got to design our space So literally the space and the floor plans that you see here were developed by our leadership team So we had a few different groups and so they took our design and concept and put it into fruition and Then we wanted to say how do we want the patients to experience us? We're in Florida. So we want it to be inviting intuitive quality practical Invigorating so we align these with our corporate vision and strategies and We came up with a environment that meets our patient needs Any specific questions for me about our experience or what type of data Sure, sure You This one here, yes so what this we took all of our demographics and the software that our urban had and Do you want to talk in a little bit about the tapestry piece and how you guys do that? Sure. I mean, yeah just a touch on that. So We have demographers on staff and and what they do is they have They have data sources like Esri is one of the data sources But then they also study the local markets and pull the rich data as well as obtain the clients data to understand where are they drawing their patients from and So once they gain that information gain that data, it helps them determine a what does that tapestry look like? for the patients and It also identifies are there gaps in the market where the market isn't being served They also look at the trajectory the growth in those markets and by studying the growth and then studying the payer mixes It helps determine a you know The services you're going to provide what to plan for where to plan for that and then it also helps really determine As far as next steps, how do you design that facility? To be geared towards that patient audience and you know as you can see there's there's different tapestries, whether it's a silver in the gold the midlife Constance or the senior escapes and By identifying what that tapestry looks like it really gears also the design of the community. What does it look like? What does it feel like to make sure that you're really designing the community the facility around those patients? And like one of the things that this helped us with is we wanted to go completely digital almost get rid of check-in check-out And go digital while looking at this the consumers that we're serving the majority of them don't want that They want a high-touch environment. So it really helped us with the design and making those changes what we thought and what was reality and we actually had it was interesting because we actually created our These patients in real life and we named them and we kind of walked them through the experience so it was very interesting Yes We did yep, so we looked at our current offices we looked at competition in the marketplace we did a zip code analysis Where is our patient where our patients coming from now? We looked at the demographics of the age of our physicians in our community We worked with our economic development Organizations in both of the counties that we serve we worked with another outside entity to get data on The physicians and the profile of the workforce What was interesting in Florida is that 60% of our physicians are 60 or older and 12% of them? We're retiring in the next five years So that was a huge statistic for us and particularly with the growth in our community and the exit of some of the physicians our community that we knew we had it to grow and we knew we had it to Had to put a building in place that could accommodate our growth That's like a double-edged sword. Yeah, so actually, the information that they provided us was for the whole market. And we do have, we have five other offices that are similar to yours. So one's south of us, one is north of us, and we're looking west. So our next, you know, look will be a little bit more west. Yeah. Okay, so that was your decision outside of Minnesota? It was, yes. Yep, the board's decision. There's a large LPGA corridor right off 95 where there's a huge amount of growth. And we got in on that very early with land. So we're right in the main corridor now. Yeah, absolutely. Yes, right up. That's all we could fit, unfortunately. We really wanted to double in size and do eight, but we had some limitations on the land we purchased. So at this point in time, we can only do eight. And we do have one large room because we started to do a lot of total joints. So we have one large room for that. Great questions. Any other questions before we move on? Just a curious question about the room assignments. You said that each of your surgeons had the opportunity to weigh in on what their exam rooms, space configuration, number of rooms, layout of rooms. How did you manage all of the internal squabbling when you have all subspecialties? With data. Very different practices. Yep, so we originally, the physicians went in wanting eight rooms per pod. And we felt like that, yeah. So they were arguing, but with the data. And we provided, we use Athena Health, so we have some very robust reporting. And we could see the exam, like all the timestamps. And we provided that all to the admin team. And when they went through and said, the most you ever use at any one given point in time is six, they couldn't argue with the data. So we used the data to drive that and get consensus with the group. Great. Next we want to have some conversation regarding evaluating key investment decisions in physician-owned real estate. And the first question I have for the audience here is how many of you here have a separate opco or a separate propco from your opco business? Yeah, so I expected most people would. Do you require those practicing physicians to invest in the real estate? Is it really a requirement? Or is it an election or an option whether you want to? If I can have a raise of hands, how many require the physicians to invest in the real estate? Okay. So smaller majority here, smaller minority actually. James is going to walk us through some of the benefits of having those physicians owning the real estate, how it creates for greater alignment between the practice and the real estate, and then some pitfalls or challenges if there is not that equal ownership between the real estate and the practice. So James is going to walk us through this. So really, I think what we saw being done by Shannon and Herman and the team that was forward thinking was the fact that they really identified what the practice's needs were before going into a real estate investment. Whereas a lot of the times we see that the real estate can become a driving factor and perhaps the physicians want an additional investment opportunity, but particularly considering during the period that we went through, the beginning was during the start of COVID. There was difficulty at certain times from the bank side because of the risk that COVID gave to the project. And I think that the fact that a lot of work had been done on the practice's side to really validate the need for the investment opportunity meant that when there were difficulties on the real estate side, there were justifiable answers. What we really see is that there can be some great advantages in getting alignment between the operating entity and the real estate entity. And one of the things that was really important as it relates to this project was, how do you create a process where the education to the investors is simple, understandable, and they really can see their entry and exit points? Probably the hardest thing about physician owned real estate is creating an opportunity that can continue to be attractive for new shareholders as they join, because it is an investment that grows in value over time. As the debt is repaid, the building appreciates in value. So, with the help of Shannon and their team, we really work to identify, well, what does that look like over a long period of time? And we go through some pretty key questions at the inception of the project to help make that happen. Our argument always to physician groups is if you can create continued alignment between the real estate entity and the practice entity, you really remove a lot of the real estate risks. You're not worried so much about whether the tenant is gonna renew its lease because you are in fact consistently the tenant. And some of the challenges that we see if that misalignment does occur, and a lot of groups can be aligned at inception, and then as time goes on, misalignment starts to creep in, perhaps new shareholders aren't incentivized to join the real estate investment. Conversely, physicians moving into retirement are perhaps not bought out of the investment. And suddenly you end up in a situation where there are haves and have nots. It's tougher to make decisions. And we've seen groups that, if that misalignment becomes significant enough, they make a decision ultimately that the practice doesn't wanna lease in that space that has been built 15, 20 years ago anymore. And suddenly you have all of those real estate risks that you really didn't have as an owner-occupied investment at the inception. So we think it's really important to kind of go through these steps and make sure everybody understands the entry points and the exit points before you move ahead and actually go forth with the investment. In the orthopedic clinics case, they had some existing real estate investments. And by virtue of the fact that they were able to create good alignment between the existing investments and the future expansion, they were actually able to leverage some of the value that had already been accumulated in those investments. And one of the things that was particularly advantageous about that is it allowed them to reinvigorate the investments that they already had. What we find a lot of the times as debt is repaid, the investment opportunity changes for the new shareholder coming in. A lot of the times when we sit down with groups and we ask them a simple question as they've paid down debt, well, if you didn't own the buildings that you own today and you were gonna repurchase them, what would you do? Would you go and put 50 or 60% of your own capital in and 30 or 40% at the banks? Or would you do what you did at the inception and put more of the bank's money in less of your own? And most of the time, the groups that we asked that question to would say, well, of course we would leverage our returns in doing so. We reduce our exposure, the amount of capital that we have in, we improve the returns that we're able to receive. However, that's exactly the opposite of the opportunity that's being afforded to the new shareholder. And even if you reduce the dollar amount that they have to come in with, they're still having to put a disproportionately larger amount of their own capital in relative to the bank's money. So we do see a lot of the times it allows, an expansion project allows the opportunity to revisit some of the hypotheses that were undertaken at the beginning of the process and see if there's a way for the investment to be reinvigorated and really allow you to be sustainable moving into the future. One of the really important components of that is making sure that when you run that analysis, your answer to would you reinvest in the building is in fact, yes. Because I think that there is no reason to leverage an asset that you don't have the intention to maintain an ongoing lease in. But for those buildings that you do have the intent to remain in, there can be some good advantages for that. Yeah. So the next portion here, we're going to talk about navigating common obstacles and also be discussing, how do you determine fair market rents? That's often a rather heated conversation is what is fair market value rents? A lot of times you can hire two or three different appraisers to determine the fair market value of a building and get three different answers. And the same is true on rents. So James is going to walk us through what are the different approaches to determining what the appropriate rent costs should be for your practice. And then again, how do you create some alignment between the physicians to determine and come up with a fair and equitable process for both the upfront rents that you're going to be paying as well as some exit strategies. Okay, so even though this is probably the hardest question when you're in fact a real estate owner, because you as the practice, the physicians are really setting your own rents. I think that the easiest thing to do is take a step back and say, well, what if we were not real estate owners for a second? And this is another reason why I think Shannon and her team did was a really thoughtful process was because instead of looking at the real estate investment, they turned around and said, what is the practice's needs? How much do we need to lease? What does that lease look like? And by doing that due diligence, first of all, it allowed them to say, well, if we take a step back and we say, well, what is it going to cost us if we ask a third party to go up and build that space, the space that we need, what lease rate is that third party going to require of us in order for us to enter into that space? They were able to get a really concrete assessment of what the market is dictating for that new space that they're going into. The challenge that we've seen recently is construction costs have risen pretty significantly and interest rates have risen pretty significantly. So when drawing comparison between rents that are currently in place for buildings that were built four or five years ago, it's really an apples and oranges comparison relative to the cost of renting space in a new building that really suits the needs of today. So during the process with Shannon and her team, we really went through that exercise and said, okay, let's understand what the market is dictating if you were to go out to a third party. The actual attractive thing about doing that process a lot of the times is that the cost of capital for private physician groups, when they're going and borrowing on owner occupied opportunities is typically lower than what a third party developer is borrowing for when they're looking to put a project in place for the group. And that actually means that you can end up as a physician group that owns the building with a better return than the third party developers are looking to achieve by virtue of the fact that you've borrowed that debt for cheaper than they're able to borrow. Particularly during the period that we were going through, there was some of the development partners that are in our industry that were really struggling to even source capital, let alone source capital, the kind of loan to values and terms that were able to be achieved by the clinic in Daytona. We think it's really important, actually now is kind of an interesting time from a financing standpoint to have options when it comes to funding a real estate investment. In Shannon's case, there were actually I think three different banks at different times that were front runners because we saw various changes in liquidity. It was a couple of year process kind of getting to the point where permits were available and the project was moving forwards. And having the ability to pivot, not only put pressure on each of the lenders that were being worked with, but also meant that if there were changes, there was no stagnation of the project because of the financing. There was always the awareness that there were options available to be able to move forwards with. We're experiencing right now because short-term rates have risen so quickly and actually long-term rates are lower than short-term rates. There is a huge discrepancy in the kind of terms that are being provided by different banks. We've seen some regional banks be affected more significantly than some of the larger banks as it relates to the SVB crisis. So I think that now more than ever, it has been important when going through these real estate projects to have options. So you may have a great relationship with your incumbent lender, but they understand that you're running a business and you need to be able to be confident that if you're going ahead with an expansion project, you have the ability to pivot if that's something that you need to do. So this is really the rent discussion which we've been talking about. We've been talking about the rent discussion and this is really the rent discussion which we've already covered. Who in the room when completing an appraisal process has always been satisfied with the outcome? I'm gonna guess almost nobody. The challenge with appraisals is that in nature they are subjective and really they're one individual's opinion on a given day as to the value. And they do have some good methodologies to be able to derive that value. But we see time and time again, there is variability in that process. In Shannon's case, we recognize that. However, it's a requirement of the banks, they're regulated to make sure that they receive a bank ordered appraisal as part of their financing process. So they have to go through these FIREA regulations, they have to do a blind bidding process. It's very organized. So a lot of the times the question that we get back is, well, it's really out of our hands. We can't influence the outcomes of that appraisal. My answer to that is yes and no. You can't directly influence the outcomes of that appraisal. However, we've seen that if you can do things like provide the appraiser with all of the information that they are looking for in a timely fashion. If you can make sure that it's a hands-on approach when the appraiser comes round and really looks at all of the facets of the building, make sure that they get into every single component of the building. If you can put a budget together that really includes things like capitalized interest and the contingencies that are really needed in order to make the project. And that budget really is thorough and takes into consideration everything that is needed for the project. Those elements oftentimes can really result in the best possible outcomes. And while you can never guarantee that the value is gonna come back in line with everybody's expectations, you give yourself the best possible chance. And we really do see that groups often handle that in different ways and don't realize some of the impact that that can have in the appraisal process. We were really fortunate in Shannon's case where the appraisal came back in higher than the budget initially. So it really allowed us the opportunity to finance as much of the project as possible. And I think that it was helpful going through that process and giving the appraiser all of the information. Probably the last thing as part of that is appraisers are often guided by comps. So if you do have comps of similar buildings, even if they are not in your direct geographic market, it can be hugely impactful in terms of creating the best possible outcomes for that appraisal process. Okay, so we would like to leave some room for questions. Why would I do that, just to give someone an equity? Wouldn't it be better to have a new investor give back money to an existing investor? Every group's in a slightly different scenario. So you've got two, I would say, conflicting elements to that. Your cost of financing is, as you say, increasing. So the interest expense that you would ultimately be paying is increasing. However, when you look at the return on equity, because the return on equity is derived from a calculation that looks at the amount of equity that's in the building, the vast majority of the time, you're actually improving the return as it relates to stripping out some of that value, even at a higher cost of capital. You know, we have different groups that are in different situations. So some, even though they're aware that they can create that kind of improvement, they might say, well, I'm gonna wait until a strategically advantageous period of time to go and do an event like that. So they may do it when they believe that interest rates are more consistent with where their current financing is. But we still see many groups that look for opportunities outside of just the rate. It might be triggered by the fact that it's costing a certain amount for a new partner to be able to buy in, and that just is hindering recruitment. So oftentimes we will investigate, well, what does it actually look like even at the current cost of borrowing? I think right now, a lot of the times, groups are surprised how inexpensive it is to borrow relative to what expectations are, because everybody is hearing in the news where the Fed's hiking, the Fed's hiking. Short-term rates are really expensive right now, but long-term rates, since the SVB issues have actually come down about a percentage point and probably not as far out of line as you might imagine. this would be not in a scenario that you raise rents. This would be keeping the rents exactly the same. Because typically rents are a function of the value of the building. They're somewhat related to the value of the building. So you're not gonna be leveraging above the value of the building, but perhaps higher than you currently are. So even at the same rents, we often see that the return can be enhanced as it relates to employing more leverage. So in our scenario, we had existing properties that we had refinanced probably about seven years ago and did a shorter term loan so that we could pay down that debt and use that equity to refund the project. So we were very strategic from the time we knew we were gonna enter into this project that we did our due diligence and financial plan from the very beginning. So we refinanced all of our buildings with long-term. So it actually brought our costs down. And we, knowing our growth plan, we wanted to double or triple in size. We knew that shareholders couldn't afford to buy in at $800,000. With all their student loan debts, buying to the practice, we have an ASC. So what we tried to do, as we had said here, is really kind of make it affordable for those new partners to buy in. So, I guess the interesting thing right now is because of the difference between short-term rates and long-term rates, the index with which that debt is being reset becomes really important because, you know, getting 10-year money versus 3-year money, for example, carries some significant differences in cost. I think that any reset provides the opportunity to investigate, okay, what are my options for refinancing the debt? Is that something that makes sense given where you're currently at? So I think it's probably a case-by-case situation, but that's perhaps how we would look at it. And the other piece is when we engaged CMAQ, they did an RFP for us. I think we had initially had 12 people, 12 lenders respond, we narrowed it down to three, and they were all incredibly, incredibly competitive, better than we can do on our own. So people, the lenders out there want your business, so don't settle. We were able to negotiate terms and conditions, so we were able to release all the guarantees for our shareholders, and we were able to really develop our own terms and conditions with a bank for the loan, so. It's kind of a surprising period of time because banks are really tightening right now, particularly in industries that they see as being more risky. However, by virtue of the fact that they look at private medical practices as kind of the creme de la creme, there has been more of a push for their capital to move into those areas because they want investments in less risky portfolios during times that there's volatility. So we haven't seen the same kind of removal of capital as a lot of the other industries have seen. And that's really a testament to the fact that banks believe that physician-owned practices are an attractive proposition, and have continued to believe that for years now. So as Shannon mentions, there are options out there, typically. Yeah, I would highly recommend create options, creating additional options on financing lowers your cost of capital in almost every scenario that I've been involved in, and highly encourage, like Shannon said, don't just accept what the banks are putting in front of you, but go out and shop other opportunities, and don't be afraid to share with your lender that you're doing that. Thank you all. Thanks everyone. Do you want to put that code up again? How do I do that? I'm sorry. And the code for checkout is 175, oh you were going to do that. You go ahead. I walked ahead. The code for checkout is 175 860 and if you need AAPC credits, that is 84699 LGN. Thank you all. Enjoy the conference.

data-informed strategy

real estate strategy alignment

practice assets leveraging

common pain points

financing options optimization

market study findings

physicians owning real estate