Inside Veterinary Net Lease Opportunities

There’s usually nothing unusual about building a portfolio of net lease properties in a given industry. But it is out of the ordinary when the properties are almost all veterinary facilities.

Terravet Real Estate has been in exactly that space since 2012 and raised its first fund in 2018. “I’m buying and developing veterinary hospital facilities,” chief executive and founder Daniel Eisenstadt told GlobeSt.com. They do 10% of their business in ophthalmological ambulatory surgery real estate, but 90% comes from vet tenants.

Eisenstadt was a co-founder of a veterinary operating group called Community Veterinary Partners which owned a series of vet practices. He saw other groups that similarly owned veterinary practices but with a common trait. “A lot of institutional money was investing in the op-co side, but no one was investing on the prop-co side,” he says. Money focused on the practices but not so much on the real property side. The vets continued to own the property.

“My core thesis was that as doctors were increasingly selling their practices to corporate operators, many wouldn’t want to continue to be the landlords,” Eisenstadt says.

Many vets initially wanted to keep hold of the real estate for passive income, but as they looked at retirement or even diversifying their investment portfolios, they didn’t want to keep investing in the upkeep and expansion that was necessary.

“There was an increasing trend toward more purpose-built veterinary facilities,” says Eisenstadt. In the spirit of anthropomorphization, pet owners wanted facilities that reminded them of the settings in which they got their own care.

There are some practical reasons as well. Full HVAC systems, room for diagnostic equipment, pharma facilities (often purchased directly from the practitioner), easier cleaning and sterilization, and improved drainage.

The accumulation of veterinary practices — similar to how private equity has expanded into other types of medical care — is well advanced. “It depends on who you ask, but probably 20% of the veterinary practices and 60% of the specialty hospitals are owned by corporations,” Eisenstadt said. Mars, the candy company, is the largest player in the U.S., he adds. “They’re also our largest tenant.” He estimates that there are probably 50 other corporate veterinary groups, primarily owned by private equity.

Typically, these organizations aren’t interested in owning real estate, as the risks and returns are lower than desired by their business models. Plus, when operated as a net lease, the payments become immediately tax deductible.

“At the unit level, our risk-return is not private equity-like, but at scale we may be able to drive some pretty good returns,” said Eisenstadt. “We think we can get more than a two times multiple and more than a 20% return. For the foreseeable future, we’ll continue to grow, primarily in the REIT structure.” Terravet also uses section 721 UPREIT exchanges, so those who own the real property can contribute it to the REIT for an equity stake.