KKR (NYSE: KKR) is quietly becoming a force in the real estate sector. While it doesn't have the name recognition in real estate investing as other major private-equity players like Brookfield and Blackstone, KKR has made several notable real estate deals this year.
Its latest move is launching a joint venture with Cornerstone Companies focused on health care real estate. Here's a look at this partnership and why KKR is getting into healthcare real estate.
A healthy partnership
KKR is partnering with Cornerstone Companies, a leading healthcare real estate company, to acquire and develop healthcare properties across the country. The companies have seeded an initial portfolio with the recapitalization of 25 healthcare properties owned by Cornerstone. In addition, KKR will provide funding to the joint venture, positioning it to acquire more than $1 billion of real estate assets over the next few years.
The current portfolio includes 713,705 square feet of medical office buildings and ambulatory surgery centers in 12 states. Cornerstone has leased these properties under long-term contracts to a group of high-quality healthcare systems, physician group practices, and surgery center operators. They plan to expand that portfolio by acquiring and developing additional health care properties. They intend to focus on long-term leased single-tenant medical office buildings, ambulatory surgery centers, and facility-based outpatient healthcare assets.
Why these types of healthcare properties?
KKR and Cornerstone are focusing on a specific niche of the healthcare real estate sector. That's worth noting because the pandemic has had a significant impact on the industry. On the one hand, the pandemic has proven to be a major headwind for senior living facilities, driving up costs while weighing on occupancy. On the other hand, it's a strong tailwind for life science real estate, driving demand for this specialized office space by companies researching and developing tests, therapeutics, and vaccines.
Meanwhile, medical office buildings have proven to be relatively stable assets, even during the pandemic. That has benefitted healthcare REITs focused on these properties. For example, while Physicians Realty Trust (NYSE: DOC), a REIT focused on medical office buildings, deferred some rent during the early days of the pandemic, it collected 99.6% of what it billed in the fourth quarter and all amounts due under previously announced deferral agreements. The sector's overall stability has enabled Physicians Realty Trust to steadily grow its earnings over the past few years as it acquired more properties.
In addition to the sector's overall stability, medical office buildings and ambulatory surgical centers align with the future of healthcare. The industry is increasingly emphasizing off-campus outpatient facilities to deliver better patient care. While hospital campuses have proven to be vital in battling the pandemic, healthcare providers are finding that they can provide care at lower costs in an outpatient setting. That's leading many to expand their services further off-campus by leasing more medical office space and other specialized facilities.
That combination of stability and growth potential fits well with KKR's real estate investment strategy. This year, the private-equity firm has focused on investing in properties with those two qualities, including self-storage, net lease, and industrial real estate.
A solid sector
KKR is making another move to expand its real estate platform. Its partnership with Cornerstone adds some high-quality medical office buildings to its portfolio that the pair plan to grow in the future. These properties offer stability and growth, making them a good fit with KKR's real estate investment strategy.