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Capturing Value From Health-Care Collaborations

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In the wake of the pandemic, collaboration within and among organizations has become increasingly important—if not necessary.

While turbulent times forged new partnerships across all sectors, some of these preserved and further strengthened their key competencies. Chestnut Funds and Anchor Health Properties’ newly launched Chestnut Healthcare Fund II stands as an example of what can be achieved through perseverance and the successful identification of off-market opportunities. Chestnut Healthcare Fund I was launched in 2015 and raised a total of $50 million, which included the acquisition of 52 assets through direct or joint venture transactions.

In an interview with Commercial Property Executive, Anchor Health Properties Chief Investment Officer James Schmid and CEO Ben Ochs, alongside Chestnut Funds CEO Steen Watson, elaborate on their partnerships and how Chestnut Healthcare Fund I’s success fueled their drive to initiate its successor.

CPE: Tell us more about Chestnut Healthcare Fund II. How does the investment vehicle differ from its predecessor, Chestnut Healthcare Fund I?

James Schmid: The new fund is a follow-up to its successful predecessor, which was our initial health-care real estate acquisition fund. The first fund raised just under $50 million in equity, and we have recently completed placement of these funds. The new fund will continue the investment strategy of medical office acquisitions—primarily core and core-plus assets in major U.S. markets—both through direct ownership and through joint venture investments with institutional equity capital.

CPE: Elaborate on the partnerships you’ve created since you launched Fund I.

Ben Ochs: The initial fund has invested across multiple joint venture acquisitions with both The Carlyle Group and Harrison Street Real Estate. Each of these partnerships continues to expand.

CPE: What kind of assets are you targeting and why?

James Schmid: Core and core-plus medical office acquisitions in major markets continue to be the broadest area of focus. These assets continue to offer attractive risk-adjusted returns and ample debt market liquidity to provide leverage and enhance returns. The Anchor platform has acquired over 50 percent of its recent investments in an off-market fashion, allowing for the continued volume of investment opportunities despite increased investor appetite for sector investments.

CPE: What are the markets you are targeting through Chestnut Healthcare Fund II and why?

Steen Watson: The target market focus generally overlaps with the largest 30 U.S. markets, though we have had particular success building scale in markets such as Boston, New York, Philadelphia, Washington, D.C./Baltimore, Charlotte, N.C., Atlanta, Nashville, Tenn., Denver, San Diego and Seattle.

CPE:Tell us more about the factors and conditions that stimulate growth in the aforementioned areas.

Steen Watson: We carefully evaluate factors such as local demand for health-care services, local population trends, local health-care insurance trends, constraints of supply of new facilities, needs of local health-care systems and medical tenancy, and local and state health-care regulations to make informed decisions about investing in a given market and for a given target asset.

CPE: What are the major changes the medical office sector has seen since the onset of the pandemic?

James Schmid: Perhaps the biggest change was the one that didn’t happen. Health systems and their patients continued to need medical office space to handle patient health-care needs. While elective surgeries—typically the highest margin contributor to medical groups and health systems—generally shut down for 90 to 120 days at the beginning of the pandemic, they quickly reopened and regained previous—and backlogged—case volumes.

While telemedicine became a tool for health-care practitioners in certain circumstances, it did not serve as a replacement for physical space to handle true clinical and acuity needs of patients. Going forward, we see telemedicine as a complement to medical office space for lower-acuity and administrative functions, as opposed to a replacement for said space.

CPE: How do you see the sector going forward?

Ben Ochs: An aging U.S. population will continue to drive demand for additional health-care services in the years to come. Health systems will continue to push to capture market share through expansion into strong demographic locations and through the use of modern, efficient outpatient facilities.

Dedicated facilities for inpatient rehabilitation, behavioral health, memory care and substance abuse should continue to be in demand, fueling opportunities for additional development.

 

Source: Commercial Property Executive

Joint Venture Kicks Off $100M MOB Fund

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Chestnut Funds and Anchor Health Properties have launched Chestnut Healthcare Fund II, a new investment vehicle centered on the acquisition of medical office buildings and other related health-care real estate assets across the U.S.

The $100 million real estate private equity investment fund will seek core and core-plus assets over the next 48 months.

“Chestnut Funds and Anchor anticipate many attractive investment opportunities in 2021 and beyond, with the fund focused on approximately 30 key markets across the U.S., where very specific potential investment targets are being identified,” James Schmid, chief investment officer & managing partner with Anchor Health Properties, told Commercial Property Executive.

The launch of Fund II comes five years after the initiation of Chestnut Healthcare Fund I, which, having raised roughly $50 million, will have completed its four-year investment period early this year with the acquisition of 52 assets via direct or joint venture transactions. Due to the U.S.’s aging population, expanded health insurance coverage and a shift in patient services away from hospitals, the medical office building sector has only grown more popular among investors since the 2016 introduction of Fund I. However, Anchor, which will co-manage Fund II with Chestnut Funds, is undaunted by the increased competition.

“There’s no question that institutional investors continue to recognize the performance of the sector across economic cycles and accordingly commit more dollars to sector investments. On behalf of Chestnut Healthcare Fund II, the Anchor team does an excellent job of sourcing off-market opportunities,” Ben Ochs, CEO & managing partner with Anchor Health Properties, told CPE.

Ochs’ assertion is not hyperbole; historically, more than 50 percent of Anchor’s closed transactions are sourced on an off-market basis.

“This allows the fund the opportunity to avoid broadly marketed processes and/or having to pay large portfolio premiums for aggregated asset pools while continually sourcing over $400 million of sector transactions per year,” Ochs continued. “Other investors new to the sector have found it more challenging to source transactions without deeply established relationships and a national infrastructure–elements notable within Anchor’s integrated operating platform of management/leasing, development and investment services.”

Pandemic-Resistant

While no sector of commercial real estate has gone completely unscathed by the COVID-19 pandemic, medical office buildings have survived the lockdowns and temporary halts in elective medical procedures.

“The strong performance of medical office and health-care real estate during the pandemic has really accelerated demand for these investments as a consistent source of stable cash yield and total return,” Schmid said. “While the period between March and June 2020 saw a modest pause in capital markets activity, new investment closings returned in a meaningful way in the second half of the year, and the pipeline of new attractive investment opportunities remains robust.”

Along with announcing the launch of Fund II, Chestnut Funds and Anchor disclosed that they have completed the inaugural seed investment with the purchase of 1408 3rd St. S.E., a 10,000-square-foot medical office building on the campus of Good Samaritan Hospital in the medical corridor in Puyallup, Wash. The high-quality, two-story, metropolitan Seattle property opened in 1997 and is presently occupied by MultiCare Health.

 

Source: Commercial Property Executive

Healthcare Realty Trust Announces The Formation Of Joint Venture With TIAA

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Healthcare Realty Trust Incorporated (NYSE:HR) announced that it has entered into a joint venture agreement with Teachers Insurance and Annuity Association (“TIAA”) to invest in a broad range of medical office buildings.

The joint venture strengthens the Company’s efforts to sustain higher investment volume and earnings growth regardless of market volatility by further diversifying its funding sources. The Company is the managing member of the partnership and manages day-to-day operations and leasing of the properties in the joint venture.

Healthcare Realty owns a 50% interest in the joint venture and will fund its pro-rata share of future investments. The joint venture expects to purchase approximately $200 million of properties annually and does not contemplate using property level debt in most instances.

On November 12th, the joint venture purchased its first property for $16.6 million at a 5.1% cap rate. The 92,139 square foot building is located on Allina Healthcare’s Mercy campus in Minneapolis. The joint venture will seek to realize additional value through the lease up of the 80% occupied building. Property level debt was not associated with this initial acquisition. The Company intends to provide additional disclosure in its future quarterly supplemental materials regarding properties owned by the joint venture. BlackBirch Capital served as advisor to Healthcare Realty on this transaction.

Healthcare Realty Trust is a real estate investment trust that integrates owning, managing, financing and developing income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. As of September 30, 2020, the Company owned 211 real estate properties in 24 states totaling 15.5 million square feet and was valued at approximately $5.5 billion. The Company provided leasing and property management services to 11.9 million square feet nationwide.

In addition to the historical information contained within, the matters discussed in this press release may contain forward-looking statements that involve risks and uncertainties. These risks are discussed in filings with the Securities and Exchange Commission by Healthcare Realty Trust, including its Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Risk Factors,” and in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020, and September 30, 2020 and other risks described from time to time thereafter in the Company’s SEC filings. Forward-looking statements represent the Company’s judgment as of the date of this release. The Company disclaims any obligation to update forward-looking statements.

 

Source: GlobeNewswire