KKR Adds Healthcare Assets to KREST Portfolio

KKR Real Estate Select Trust (KREST) has acquired a portfolio of core medical office buildings and ambulatory surgery centers located in seven Sun Belt states.

The portfolio was assembled by Montecito Medical, a player in the medical office space, and FCA Partners, a real estate investment management company. The transaction will recapitalize the portfolio with Montecito Medical retaining its interest and operational responsibility for the properties.

The purchase marks KREST’s first acquisition of core healthcare real estate assets, further diversifying the fund’s portfolio following its recent first-time multifamily property investment, as well as its first international property acquisition. 

The portfolio consists of 15 outpatient medical office buildings and ambulatory surgery centers totaling approximately 400,000 square feet. The properties are located across the southern US in growth submarkets within Arkansas, Florida, Georgia, North Carolina, Tennessee, Texas and South Carolina. 

The portfolio is over 99% leased to a mix of investment grade health systems and specialist medical groups in practice areas including orthopedics and ophthalmology, with a weighted average lease term greater than 10 years.

Medical Office Continues to be a ‘Great Niche Asset Class’

Alexander Snyder, Portfolio Manager at CenterSquare Investment Management, tells GlobeSt.com that medical office and ambulatory centers “are a great niche asset class of real estate. They proved extraordinarily resilient during the pandemic, offering stable cash flows and reasonable yields.”

The bid for medical office buildings in particular has been very strong, Snyder said.

“There are several reasons for this, the first is because investors are searching for a resilient asset class given all the uncertainty in the world. The second is that it’s a niche asset class that’s approachable for people that usually invest in regular office space, which has seen a big pull back in capital flows.

“From a long-term perspective, there are two other things that make the KKR deal referenced appealing: demographic tailwinds as the US population ages and requires more medical care. The other is population flows to the sunbelt. This means that healthcare real estate in the Sunbelt gets a double tailwind of demographic growth.”

Taking advantage of this, Snyder said that CenterSquare has invested in Flagship REIT, a company with a similar strategy. “They buy and develop MOBs in the Sunbelt,” he said. “It’s a strong thematic that should benefit investors for years.”