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Cover Story: Partnerships: Powering healthcare real estate to the next level

By Murray W. Wolf

Partnerships are nothing new in commercial real estate. In fact, a partnership is probably the most common ownership model for most types of commercial property, including healthcare real estate (HRE).

But what’s different about partnerships in today’s HRE space is their rapidly expanding size and scope, as well as who’s doing the partnering – and why.

It wasn’t that many years ago that most HRE developers and investors relied on debt and their own capital, often augmented by equity from individual investors – high net worth individuals, family offices and physician investors. Some of the longer-established HRE firms occasionally attracted capital from institutional investors, private equity (PE) firms or publicly traded real estate investment trusts (REITs). But, more often than not, the typical HRE firm focused on developments or single-asset acquisitions, and relied on capital from smaller individual investors, nearly all of which were U.S.-based.

But, in a trend that has accelerated sharply during the past two of years, “partnership” has taken on a whole new meaning in the HRE space.

Rather than primarily one-off deals funded with money from “friends and family,” today’s HRE partnerships are often programmatic joint ventures (JVs) – partnerships between HRE firms and capital partners that are structured to facilitate to an ongoing series of investments in single assets or portfolios. And HRE firms are more often partnering with cash-rich PE firms and big institutional investors – and, more and more frequently, with new entrants to the HRE space, foreign investors or both.

During a session at BOMA International’s Medical Office Buildings + Healthcare Real Estate Conference in November, John Nero, managing director with the Healthcare Capital Markets team of New York-based Newmark Group Inc. (Nasdaq: NMRK), noted: “Two years ago at the BOMA (MOB conference) … we talked about how investing in joint ventures had become a much more prominent thesis in the sector. And it’s very clear, now … in the last 18 months, that it’s becoming an increasing trend.”

Plenty of capital

Part of what’s driving the partnership trend, of course, is private equity and institutional capital – and lots of it.

PERE (Private Equity Real Estate) magazine, which tracks the PE market, recently reported that U.S. private real estate fundraising was $175.7 billion across all product types in 2021, the third-highest annual total since PERE began tracking fundraising data in 2008. Of that, about $56 billion was raised to target specific real estate sectors, including about $1.2 billion targeting HRE.

Although $1.2 billion is significant, that number is almost certainly understated, and it only refers to private equity. The results of the recently released HRE Investor & Developer Survey from the U.S. Healthcare & Life Science Capital Markets team with Los Angeles-based CBRE Group Inc. (NYSE: CBRE) – which included responses from healthcare REITs, institutional healthcare investors and developers as well as private capital investors – came up with a much larger amount of capital allocated to healthcare real estate for 2022, and a sizable increase.

“In 2021, the total capital allocation provided by respondents in our survey was $10.9 billion…,” the survey states. “This year, the total capital allocation from those unique firms who provided a figure (65 out of 86 firms) totaled $17.1 billion, which represents a 57 percent increase…”

But the actual amount of equity to be deployed into the sector this year is probably closer to $25 billion, the report estimated, based on data trends “and CBRE’s knowledge of additional capital sources entering the market.”

Indeed, a big reason for the ongoing increase in demand for high-quality healthcare real estate, CBRE found, is due to “new funding sources actively exploring alternatives to traditional real estate products, such as office, industrial, multi-family and retail.”

These new entrants frequently have little or no HRE experience or industry relationships, so they look for a partner that does. As the partnership “sponsors,” established HRE firms bring their industry expertise, relationships and credibility, and are responsible for sourcing, acquiring and managing the properties on behalf of the partnership.

“That’s become a huge theme for the new entrants to come into this space, as when they write big equity checks they need an experienced operator as a partner,” Mindy Berman, head of JLL’s healthcare platform, observed during a panel session at last November’s BOMA MOB conference.

Although certain capital partners might also bring some degree of these attributes to the table, the main thing they bring is money. They also have hundreds of millions or even billions of dollars to deploy – and they want to deploy it fast.

What’s more. Rather than simply partnering with seasoned HRE firms to acquire assets that are actively on the market, the new entrants often initiate the relationship by recapitalizing, or refinancing, assets that are already in their new partners’ portfolios.

Granted, the biggest single MOB portfolio acquisition of 2021, which closed in December, was made by a publicly traded healthcare REIT: the roughly $750 million acquisition by Physicians Realty Trust Inc. (NYSE: DOC) of a portfolio of 14 MOBs with about 1.43 million square feet of space from Landmark Healthcare Facilities LLC.

As a whole, however, private investors dominated MOB acquisitions last year, not public REITs. As recently as 2017, according to data from the HRE research firm Revista, 38 percent of total MOB acquisition volume was from private investors. In 2020 and 2021, that soared to 68 percent and 67 percent, respectively – the majority of which was driven by JVs with HRE firms.

In addition, many of those private investor acquisitions were recapitalizations of existing portfolios. Of the 19 MOB portfolio transactions that exceeded $100 million last year, at least 10 of those were recaps, according to information provided by the Healthcare Capital Markets team with Jones Lang LaSalle Inc. (NYSE: JLL) – prompting some in the industry to dub 2021 “The Year of the Recap.”

Like partnerships, recapitalizations are nothing new. But whether partnerships are taking the form of acquisitions of third-party portfolios, or recaps, there is no question that we’re seeing more and bigger JVs between seasoned HRE firms and private equity and institutional investors.

Responding to the ‘winds of change’

Many longtime HRE developers and investors have gotten along just fine for the past two or three decades without big capital partners. However, it may be telling that firms like Cornerstone Companies Inc. and Rendina Healthcare Real Estate – both of which have been in the HRE business for more than three decades and already had healthy businesses – last year entered into major capital partnerships for the first time.

In mid-September, Indianapolis-based Cornerstone announced that it had formed a joint venture (JV) with the KKR & Co. Inc. (NYSE: KKR), a well-known global investment firm based in New York, “to acquire and develop a portfolio of diversified healthcare properties across the United States.”

The partners kicked things off with the $215 million recapitalization of a 12-state portfolio of 26 MOBs and ambulatory surgery centers (ASCs) with a total of 713,705 square feet that were either developed or acquired by Cornerstone. At the time of the announcement, the partners stated that “the joint venture is positioned to acquire more than $1 billion in real estate assets over the next few years.”

About two weeks later, Jupiter, Fla.-based Rendina announced that it had formed a programmatic JV partnership with Chevy Chase, Md.-based Artemis Real Estate Partners, a large institutional investment manager that focuses on equity and debt investments in HRE across the United States. That venture was seeded with the $116.5 million recap of a four-state, six-MOB, 229,645 square foot MOB portfolio developed by Rendina. Like Cornerstone and KKR, Rendina and Artemis said at the time that they planned to grow a $1 billion MOB portfolio.

So what would prompt venerable firms like Cornerstone and Rendina to finally take on big capital partners after all these years?

In an October interview with HREI™, Richard M. Rendina, chairman and CEO, said, “We have traditionally reserved our equity for our core business of ground-up development. As our relationships have grown with the health systems over the years, we’re seeing more and more opportunities to add value to our health system partners and to the Rendina platform through acquisitions.

“Our joint venture with Artemis will allow us to respond to those opportunities more effectively during a time of big change in our industry. We’ve seen the winds of change that have taken place for several years now, and it goes beyond the impact that institutional capital and the debt markets are having on cap rates for acquisitions, but it has also been affecting development yields in recent years as well.”

In a September interview with HREI, J. Taggart “Tag” Birge, president and CEO, explained, “Prior to partnering with KKR, our acquisitions and development projects were funded by Cornerstone principals, family offices, physician investors and RIAs (registered investment advisors). Over the last decade, we were able to fund about $500 million worth of development and acquisitions in our syndicated private equity model. Utilizing this model, Cornerstone has completed six separate funds which typically have $50 million to $75 million of assets in each fund.”

Even so, Mr. Birge continued, the recap and partnership provide Cornerstone with an influx of cash that will allow it to continue to grow, giving it a much larger bucket of capital to tap into when making purchases and seeking development opportunities. For a firm like Cornerstone, he added, having such a large capital partner also means that it can be involved in deals that are perhaps at even high dollar values and lower capitalization (cap) rates, or first-year expected yields, than it has been involved with during the past.

The capital partners also benefit, according to Peter Sundheim, director in the real estate division with KKR, and Kevin Nishimura, principal, acquisitions and asset management, with Artemis.

For KKR, which was a newcomer to the HRE space, Mr. Sundheim told HREI™: “We have been evaluating entry points to the healthcare real estate space for some time. When we decide to go into a new space, we ask the question: ‘Do we need to build from the ground up or can we establish a partnership with an industry leader to help scale their platform?’

“When we met the Cornerstone team, it was immediately clear that there was an exciting opportunity to launch a venture with immediate scale and credibility alongside a best-in-class partner.”

For Artemis, which has more than 20 years of experience investing in the HRE space, the Rendina JV brings scale and an opportunity to invest in more development opportunities.

“We’ve acquired medical office both on a direct basis and with other partners.” Mr. Nishimura told HREI™. “When it came to forming this partnership with Rendina, we were looking to scale our investment in medical office and generally across the healthcare real estate sector.

“We have not been as active as we would have liked to be on the pre-leased development side and mostly focused on the acquisitions side. Rendina brings expertise on the development side of the equation. So, it was a natural fit.”

Billion dollar ambitions

Cornerstone and Rendina are some of the most long-established firms in the HRE business, but they are only two of numerous organizations that announced sizable new partnerships and recapitalizations in the past couple of years.

A recently formed partnership with 10-figure ambitions is a JV of Pensacola, Fla.-based Catalyst Healthcare Real Estate and Washington, D.C.-based National Real Estate Advisors (NREA).

Catalyst and National kicked off the partnership with $420 million of transactions involving two portfolios: one being a late 2021 recapitalization of a portion of Catalyst’s portfolio, with that portion of the $420 million deal comprising about 90 percent of the overall transaction; as well as a “net new acquisition that closed after the first of the year in 2022,” Catalyst CEO Chad Henderson told HREI™ in January.

“National has agreed to place a large amount of equity with us, but they’re a lot more than just deep pockets. Just as important is our similar view of the power of real partnerships in the sector, our alignment in valuing strong relationships, and our collective approach to a long-term investment strategy,” he said.

Overall, the two portfolios contain 40 properties with 1.2 million square feet of space in 13 states. But Mr. Henderson said that will be just the beginning.

“Based on our targeted leverage point and the current equity committed to the JV partnership, we expect to invest over $1.5 billion,” he said.

Nuveen’s fast start

One relative newcomer and capital partner in the HRE space has already made good on its efforts to invest more than $1 billion – and it accomplished that in just one year.

That firm is Nuveen Real Estate, one of the five largest global real estate investment managers, with about $142 billion of real estate assets under management (AUM), and part of Chicago-based Nuveen LLC, which is itself a wholly owned subsidiary of Fortune 100 financial planning firm Teachers Insurance and Annuity Association (TIAA).

Although it has been investing in MOBs since at least 2020, Nuveen Real Estate took the HRE market by storm last year. Not only was Nuveen the biggest MOB buyer of 2021, at $1.1 billion, according to Revista, it was also the largest capital partner in the space, fueling two of the largest portfolio acquisitions.

In August, Nuveen and NexCore Group, one of the most prolific developers in the HRE space, announced that they had teamed for the $620.4 million acquisition of a third-party portfolio comprising 29 assets spanning 13 states and totaling 1,165,173 square feet. That included $463 million in medical office buildings (MOBs) and $157 million in life sciences facilities. The seller of the MOBs was IRA Capital

Then, in December, Nuveen teamed with White Plains, N.Y.-based Seavest Healthcare Properties, one of the larger investors and development partners in the HRE space, for the recapitalization of a portion of Seavest’s portfolio for a total of $1 billion, according to the firms.

When the Seavest-Nuveen deal was announced in January 2022, the partners declined to provide HREI™ with additional details on the recapitalization, such as the value of the recap or how many properties from the Seavest portfolio were involved in the transaction. However, data subsequently gathered by Revista reveals that the recap involved at least 12 properties totaling more than 870,000 square feet, and that the deal value was at least $242 million.

According to a news release announcing the recap, Seavest and Nuveen have done business together in the past, stating: “The transaction extends Seavest’s and Nuveen’s existing relationship in the medical office building and outpatient medical facility sector.”

Andrew Pyke, head of healthcare real estate at Nuveen, noted at the time that the “transaction is a great addition to Nuveen’s healthcare real estate portfolio, and we are excited to expand our partnership with Seavest.”

Also in December, Nuveen partnered the Nashville, Tenn.-based healthcare REIT Healthcare Realty Trust Inc. (NYSE: HR) on the $42.3 million, three-MOB, 118,993 square foot acquisition of Sonterra Medical Park MOBs I, II and III in San Antonio from Dallas-based Stream Realty Partners.

Between the NexCore and Seavest recaps and the Sonterra acquisition, Nuveen made a total of $1.1 billion in 2021 acquisitions, according to Revista.

This year, Nuveen has picked up right where it left off. In March, the firm partnered with Healthcare Realty to acquire a portfolio consisting of 10 properties totaling about 436,000 square feet at a price of almost $230 million. The seller was Harrison Street Real Estate Capital LLC.

Something old, something new

Speaking of Harrison Street, the Chicago-based investment manager is one of the industry’s more seasoned capital partners, having actively partnered with HRE firms since its inception in 2005. The firm’s name frequently pops up as the capital partner in one-off acquisitions with many of the best-known companies in the HRE space, including Media, Pa.-based Anchor Health Properties and Walnut Grove, Calif.-based Meridian, who source the one-off deals Harrison Street helps to fund.

Harrison Street is also a major investor in the recently launched MedCraft Investment Partners (MIP), according to MIP executives. MIP is a dedicated investment platform established in 2021 by MedCraft Healthcare Real Estate, a longtime HRE firm based in Minneapolis.

Harrison Street was the third largest buyer of MOBs in 2021, with total acquisitions of $944 million, according to Revista.

In January, Harrison Street also acquired the 11-building, 500,778 square foot Ryan Companies Portfolio, but that transaction, brokered by Newmark, appeared to be a direct investment and an outright sale rather than a partnership and a recap.

Like many capital sources, privately held Harrison Street tends to be fairly tight-lipped about its activities. So it is not clear, beyond its MIP investment and the one-off acquisitions, if the firm currently has programmatic JVs in place with other HRE developers and investors.

But whether it does or not, the firm’s name is liable to keep popping up, as it recently closed fundraising for its eighth U.S. opportunistic fund, Harrison Street Real Estate Partners VIII LP, which reached a hard cap of $2 billion in equity raised. With an additional $510 million in co-investment vehicles, Harrison Street says, the fund has a total buying capacity of more than $8 billion, although only a portion of that would target HRE and life sciences real estate.

Speaking of funds reaching hard caps, Milwaukee-based Hammes Partners recently announced the final closing of its third closed-end value-add fund, Hammes Partners IV LP with $739 million in capital commitments.

Everybody’s doing it (almost)

Along with the aforementioned Anchor Health Properties, Nashville, Tenn.-based Montecito Medical Real Estate was one of the largest buyers of MOBs and other outpatient properties last year. Montecito was also involved in two major recapitalizations of its portfolios in 2021.

The first recap, dubbed Project Lighthouse and facilitated by JLL, was a $245 million recapitalization of a 31-MOB portfolio with 545,813 square feet in 10 states, part of a programmatic JV with Boston-based AEW Capital Management.

In the second recap, Cornerstone’s JV partner, KKR, announced in December that its KKR Real Estate Select Trust Inc. (KREST), a new non-traded REIT formed by KKR & Company, had “acquired” the Southern Core Medical Office Portfolio, a 12-property portfolio with 16 MOBs and 400,298 square feet of space for about $200 million. The seller was Montecito and an undisclosed financial partner. However, in a news release announcing the deal, it was noted: “The transaction will recapitalize the portfolio with Montecito Medical retaining its interest in and operational responsibility for the properties.”

Another firm that is a relative newcomer to the HRE space is Atlanta-based Invesco Real Estate, part of Invesco Ltd. (NYSE: IVZ). Invesco made what was believed to be its first HRE investment in 2018, as a major investor in an equity investment fund launched by Caddis Healthcare Real Estate, a Dallas-based owner, developer, property manager and owner of healthcare facilities.

But Invesco has risen to prominence in the HRE space during the past four years. Revista data indicates that Invesco was the ninth largest buyer of MOBs in 2021, with $571 million in acquisitions.

So far this year, it was announced in February that Invesco had partnered with North Palm Beach, Fla.-based AW Property Co., a longtime buyer and owner of healthcare real estate (HRE) facilities, for a $170 million recap of a 13-MOB portfolio in various Florida markets with a total of 478,000 square feet.

According to Revista data, during the past 12 months – prior to the recap with AW – Invesco acquired 36 healthcare facilities for a total of about $465.1 million. Included was a 2020 recap with Toledo, Ohio-based Welltower Inc. (NYSE: WELL) in which Invesco acquired an 85 percent ownership stake in 20 MOBs for $402 million.

Another relative newcomer to the HRE space first made a name for itself in mid-2018 when it partnered with Catalyst for the acquisition of 21 MOBs totaling 530,182 square feet across eight states. The identity of Catalyst’s capital partner wasn’t disclosed until early 2019, but it was Boston-based Bain Capital Real Estate, which was formed in 2018.

Moving beyond that portfolio deal, Bain went on to partner with Denver-based Evergreen Medical Properties LLC, which was launched in 2019, in a JV to acquire, renovate and operate “institutional quality” healthcare facilities. In October, Evergreen and Bain
announced they were the acquirers of the 12-asset, 573,000 square foot I-95 Portfolio, so named because of the portfolio’s heavy concentration of square footage along or near U.S. Interstate 95 in Greater Providence, R.I. Although the price was not disclosed at the time, industry sources tell HREI that the price was about $158 million.

In October, Easterly Government Properties Inc. (NYSE: DEA) announced that it had formed a 53 percent-47 percent JV to acquire a 1,214,165 square foot portfolio of 10 properties 100 percent leased to the U.S. Department of Veterans Affairs (VA), for a purchase price of about $635.6 million. The partner was not disclosed, but was described by Easterly as “one of the preferred leading global investors” and “one of the most sophisticated real estate investors in the world.”

An increase in foreign capital

The push to partner has not only prompted longtime independent HRE firms to get in the game, it has also ushered in new sources of capital, including investors from overseas – particularly the Middle East.

In December 2020, Wafra Inc., an affiliate of a Kuwaiti sovereign-wealth fund, and Welltower Inc. (NYSE: WELL), a healthcare REIT, announced a $550 million JV partnership between Welltower and “certain vehicles managed by Wafra.” The venture comprised a portfolio of 24 MOBs in Texas, Florida, Minnesota, the Carolinas, Tennessee, California, Pennsylvania and Washington, among others.

The portfolio was previously wholly owned by Welltower. Through the JV, the Wafra vehicles acquired an 80 percent economic interest and Welltower retained a 20 percent interest, and continued to serve as asset manager and operator for the properties.

Wafra acquired its interest in tranches, the third and most recent of which closed in March 2021.

In February 2022, BG Capital, a Philadelphia-based real estate investment and development company, completed the $77 million acquisition of Constitution Health Plaza, a 295,000 square foot MOB/office at 1930 S. Broad St. HRE data firm Revista indicated BG Capital acquired the property in partnership with Morristown, N.J.-based The Hampshire Cos. and Arbah Capital of Saudi Arabia.

In April 2022, Big Sky Medical Real Estate, a Dallas-based HRE investment management firm led by well-known industry veteran Jason L. Signor, announced that it has formed a $1 billion JV with “an off-shore, new-entrant, institutional investor.” The identity of the investor was not disclosed. But HREI™ has learned that it was Manama, Bahrain-based GFH Financial Group, previously known as Gulf Finance House.

The new Big Sky-GFH venture, which seeks to acquire MOBs and ASCs, was seeded by a $400 million-plus MOB portfolio that was aggregated by the Big Sky Medical platform during the past year.

But Middle Eastern investors aren’t the only ones getting in on the act.

Birmingham, Ala.-based Medical Properties Trust (MPT) Inc. (NYSE: MPW), a publicly traded REIT focused on owning hospital facilities, announced in March that it had completed a previously announced recapitalization of an eight-hospital portfolio valued at $1.7 billion. MPT’s new JV partner was Macquarie Infrastructure Partners V, a private fund managed by Sydney, Australia-based Macquarie Asset Management.

And, according to media reports, Sweden’s largest pension fund, Stockholm-based Alecta, has invested at least $780 million in U.S. healthcare-related real estate in recent years. In addition to a $300 million investment in the Blackstone BioMed Life Science Real Estate fund, Alecta has reportedly made two investments in the HRE space with Chicago-based Remedy Medical Properties and its frequent capital partner, Boca Raton, Fla.-based Kayne Anderson (KA) Real Estate, who together are believed to be the largest privately held, non-hospital affiliated owners of MOBs in the country. KA Real Estate is the real estate private equity arm of Kayne Anderson Capital Advisors LP, which manages $32 billion in assets (as of Feb. 28, 2022) for institutional investors, family offices, high net worth and retail clients.

In the first transaction, in December 2019, Alecta struck a $230 million JV agreement with Chicago-based Remedy (then known as MBRE Healthcare), Kayne Anderson and Physicians Realty Trust. Alecta did not provide further details. But this would appear to be the so-called “PMAK Joint Venture” that Physicians Realty Trust reported in its fourth quarter (Q4) and 2019 year-end earnings news release, which involved a 61-MOB portfolio totaling 2.91 million square feet in 19 states.

In mid-2020, Alecta reportedly committed $250 million as an additional co-investment in the JV together with Kayne Anderson and Remedy in an MOB and senior housing real estate portfolio, consisting of about 1.5 million square feet of MOB space and 2,032 units of senior housing in 17 states. That transaction included 27 MOBs across the United States and seven senior housing communities in Florida, all acquired from Welltower, according to a subsequent news release from Kayne Anderson. The price for the MOBs, which closed in tranches, totaled about $675 million, with the third and final tranche closing in July 2020.

Partnerships breed more partnerships

Despite its length, this article isn’t intended to be comprehensive, and there are other partnerships and recaps that could be mentioned.

However, we do want to spotlight one more partnership because it was a different twist on the partnership model, and because of what it says about the current state of HRE partnerships.

In that transaction, Dallas-based MedProperties Realty Advisors LLC not only partnered – it partnered with competing investors. MedProperties, Remedy and Kayne Anderson recapitalized 23 MedProperties assets in 11 states with a total of more than 1 million square feet for upwards of $350 million. Remedy-Kayne partnership acquired a majority interest in the portfolio, according to Remedy executives, but MedProperties retains an interest and will continue to provide asset management services.

Darryl E. Freling, Managing Principal of MedProperties explained to HREI™ at the time: “Aside from pricing, one of the primary reasons we elected to transact with Remedy was the positive, long-term working relationship we had with the firm and its principals. It was that relationship, and the mutual trust, that proved instrumental in navigating the complexities of a transaction of this size to a successful conclusion.”

At the outset of this article, we included a quote that HRE partnerships and JVs are a growing trend. And when competitors start partnering, that speaks for itself.

However, although partnerships appear to be good thing for the HRE space in many ways, there is a downside: all of the new institutional capital has driven returns to historically low levels.

Ironically, though, the historically low capitalization rates resulting from the massive influx of capital are likely to make partnerships even more important, HRE experts say.

Stefan Oh is the executive VP of acquisitions for Irvine, Calif.-based American Healthcare REIT, a diversified real estate investment trust (REIT) formed in 2021 by the merger of Griffin-American Healthcare REITs III and IV. Commenting during a HREI™ Editorial Advisory Board Zoom call last fall, Mr. Oh said, “MOB pricing is at a level that I never could have imagined it would get to.

“And I think in order to continue to invest in the space, at least for higher quality MOBs, (HRE firms) are going to have to find ways to lower your cost of capital. And we’re seeing many do that by the formation of partnerships (with large capital investors). Without doing that, it will be very hard to compete for acquiring MOBs.” ❏

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