Firms came together with $215 million recapitalization, and are now planning up to $1 billion of investments
For several years now, a number of large investors have entered the healthcare real estate (HRE) sector by partnering with longtime and successful HRE firms.
For the large investors, including those that manage funds for institutions, establishing such partnerships gives them a way to enter what is considered an extremely complicated sector, one in which understanding the nuances of healthcare is never easy for newcomers.
For the HRE firms, including developers, such partnerships provides them with an influx of cash that allow it to grow and, in many cases make acquisitions at high dollar values and lower capitalization (cap) rates, or first-year expected yields, than they typically have in the past.
One of the newest of these partnerships was announced in recent weeks, as New York-based KKR & Co. Inc. (NYSE: KKR), a global investment firm involved in multiple asset classes, including healthcare companies and other sectors of commercial real estate, started a formed a partnership with Indianapolis-based Cornerstone Companies Inc., a 35-year-old HRE developer and full-service firm that has grown steadily over the years in accumulating and developing its portfolio It has developed more than $1 billion worth of mostly medical office buildings (MOBs) and manages more than 100 facilities with a total of about 7.7 million square feet.
The two entities kicked off the partnership with a $215 million recapitalization transaction involving 26 medical office buildings (MOBs) and ambulatory surgery centers (ASCs) previously owned by Cornerstone through a series of fund. The facilities have a total of 713,705 square feet in 12 states.
In announcing the recapitalization, the two firms also announced that they have formed a programmatic joint venture (JV) partnership expected to lead to about $1 billion of HRE acquisitions and developments in the next “few” years.
To gain a better perspective on the deal and the new partnership, Healthcare Real Estate Insights posed some questions to key executives with the firms: J. Taggart “Tag” Birge, president and CEO of Cornerstone; and Peter Sundheim, director in the real estate division with KKR.
Question: From each of your perspectives, how did this partnership and recapitalization come together? And, how did the talks go from a potential sales transaction to a recapitalization and a JV partnership moving forward?
Sundheim: 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.
Birge: Prior to partnering with KKR, Cornerstone was the largest fully integrated healthcare platform, active at a national level, without an institutional quality equity partner. Cornerstone has been courted in the past but waited until we found a strong cultural fit. We found that in our new platform with the KKR real estate healthcare team led by Peter Sundheim and Billy Butcher. At the onset of the process to recapitalize our healthcare real estate portfolio, we were not in the market for a long-term capital partner. Our marketing process was led by Jay Miele and his Newmark team who did a fantastic job identifying the opportunities in the marketplace.
Question: As Mr. Birge noted, there are quite a few new partnerships like this one taking place in the sector, often starting with recaps, in which an investor partners with an experience healthcare real estate firm because of their knowledge and expertise in the sector. Mr. Sundheim, is that what happened here?
Sundheim: We considered building our own platform, but as we developed a relationship with the Cornerstone team it was an easy decision to partner with a world-class company that has been a leader in this space for more than 30 years of experience.
HREI: Mr. Birge, please explain what this partnership does for Cornerstone? As background, how have you funded projects, purchases in the past? And, have you sold many assets over the years?
Birge: Prior to partnering with KKR, our acquisitions and development projects were funded by Cornerstone principals, family offices, physician investors and RIAs. 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.
To the second part of your questions, Cornerstone has acquired, developed and sold about $600 million worth of medical real estate over the last 10 years. We have one of the largest integrated healthcare real estate platforms in the country with over 150 healthcare real estate professionals involved on a daily basis in healthcare construction, leasing and development. Our platform is augmented by the nearly 8 million rentable square feet of space under management.
Question: Mr. Sundheim, please tell us about KKR’s involvement in healthcare prior to this transaction and the formation of the joint venture with Cornerstone.
Sundheim: KKR has significant experience in healthcare through our private equity business, which has been investing in this sector for more than 20 years. Our credit and capital market businesses work with leading businesses across the industry. Life sciences real estate is also an important theme that we’ve been investing in. This institutional experience helped us identify the opportunity in healthcare real estate, which we like because it’s a market that’s fragmented and requires significant specialization to enter. We believe the sourcing and underwriting capabilities of KKR’s real estate and credit teams, together with Cornerstone’s expertise and relationships, positions us to build an attractive and scaled portfolio of healthcare properties.
Question: What does the future hold for this partnership? Are there investment goals, dollar-wise? Will you be looking to acquire a certain number of properties each year? Will there be co-development projects as well?
Sundheim: We are making funding commitments from KKR’s real estate and credit funds and Cornerstone, which position our joint venture to acquire more than $1 billion in assets over the next few years. Our strategy is to grow the portfolio through acquisitions and net-lease development opportunities.
Birge: Cornerstone has a true partnership with KKR and will be completing 100 percent of our development and acquisition projects with KKR as we work to assemble a portfolio of over $1 billion of healthcare assets. Since closing the joint venture with KKR, we have identified about $100 million of new healthcare real estate opportunities. KKR’s connectivity to the healthcare market is very impressive. Given their deep expertise in the healthcare market, KKR is more than just a capital partner for Cornerstone.
