In what we would call a change in strategy for a healthcare REIT, Ventas is launching a new “growth platform,” called the Ventas Life Science and Healthcare Real Estate Fund, L.P. They are calling it a “perpetual life vehicle” that will focus its investments in core and core-plus life science, medical office and seniors housing real estate. It will officially launch late this quarter, and it will have $700 million in assets under management, and they have third-party equity commitments for about $650 million, so far.
Ventas will be the fund sponsor and general partner, expecting to hold a 20% ownership stake and participating in the future cash flows. Ventas EVP and Chief Investment Officer, John Cobb, will lead the effort and will be joined by Fran Federman, Brian Newman and Nevin Boparai, all of whom are currently at Ventas and will be Managing Directors of the fund. They will source, underwrite and close the new investments for the fund. The $700 million initial investment will be contributed by Ventas comprising 1.2 million square feet of life science and medical office assets valued with a going-in cash cap rate of 4.9%. But no seniors housing at this initial go-round.
First of all, to get a 4.9% cap rate valuation is a great reason to spin some assets into a new fund. But over the decades of following healthcare REITs, accessing capital has never been one of their problems. That is why we thought it interesting that they are seeking other investors to join them in seeking new investments. Perhaps one of the reasons is that REITs have become less competitive for some large transactions is because private equity firms have stepped into the arena and have way too much dry powder waiting to be invested. And it pretty much has to be invested. And for that reason, many times they are just more competitive with their pricing than some REITs have been.
This fund is supposed to augment Ventas’s already significant investment capacity and expand its strategic reach, enabling institutional investors to invest with Ventas in a private or public investment structure. We understand that the fund will be investing in fully stabilized properties, but is it because their investment partners will have a lower expected return requirement that makes the concept work, so they can be more competitive on lower cap rate deals in the market? If so, perhaps it is brilliant, since their downside risk is minimized, and they receive asset management fees, a return on their 20% ownership stake, as well as a promote if fund investors receive their expected return.
The other interesting aspect of this is that it may be symptomatic of what has been happening in the REIT market, with some people claiming that the traditional sale/leaseback structure used by REITs is dead (we think that is premature). And, the RIDEA portfolios of some REITs have not been performing well recently, with Ventas a case in point on that. Also, does this mean that the fund will have first dibs on “core and core-plus” investment opportunities, and leave other deals for Ventas? Mr. Cobb is the both the CIO of Ventas and now the leader of the fund. Our guess is he will have some fun with this one, but let’s hope investors have a good understanding of what is going where, and why.