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This REIT Is Paying $1 Billion for Trophy Properties in San Francisco. Good News for CRE Investors?


[Updated: Nov 02, 2020] Nov 02, 2020 by Matthew DiLallo
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Ventas (NYSE: VTR) recently announced a $1 billion trophy property portfolio acquisition in the San Francisco market. That location is noteworthy because property values and occupancy rates in that market have been under pressure due to COVID-19, which has driven many tech companies to allow their employees to telecommute. That's affecting both office and residential vacancy and rental rates.

However, before commercial real estate investors get too excited by the healthcare real estate investment trust's (REIT) big bet on the San Francisco market, it's important to point out that these are life science buildings. That's a key distinction since companies in that field require specialized labs, meaning telecommuting isn't an option.

Details on the deal

A real estate fund managed by Ventas is acquiring a class A trophy portfolio consisting of a campus with three newly developed or recently renovated buildings totaling 800,000 square feet. Ventas owns a 21% interest in the fund, which is paying $1 billion for the properties. That price point implies a 5% cap rate on the portfolio's NOI.

The portfolio is currently 96% leased with an average remaining term of six years. More than half of the tenants are large, publicly traded life science-focused companies. The rest are a balance of early-to-mid-stage life science companies backed by top private equity and venture capital companies.

The buildings are purpose-built for advanced research, including best-in-class lab space supporting biotechnology and other life science research. That's a crucial aspect because these facilities can meet nearly all life science companies' needs, suggesting that this campus should maintain high occupancy levels, which bodes well for rental rates.

A red-hot property type

Ventas, which owns a diversified portfolio of healthcare properties, has increased its focus on acquiring and developing research and innovation properties in recent years. Its current portfolio has 7.3 million square feet across 39 properties. Meanwhile, it's developing four new properties with 1.5 million square feet for three leading research universities.

While investors have been shying away from most office buildings this year due to work-from-home concerns, those leased to life science-focused companies are red hot. For example, private equity giant Blackstone Group (NYSE: BX) recently agreed to sell its interest in BioMed Realty -- the largest private owner of life science office buildings in the country -- to a group led by existing BioMed investors for $14.6 billion. That deal price implies a massive $6.5 billion gain for Blackstone, which just purchased BioMed in 2016.

Meanwhile, leading alternative asset manager Brookfield Asset Management (NYSE: BAM) is exploring the sale of its life science portfolio, which could be worth up to $3 billion. The company purchased 2.3 million square feet in life science properties as part of its $11.4 billion acquisition of Forest City Realty Trust in 2018. That portfolio made up a portion of the diversified Forest City, which also owned 6.3 million square feet of office space, 2.2 million square feet of retail space, 18,500 multifamily units, and five large-scale development projects.

The strong market for life science properties has benefitted office REIT Alexandria Real Estate Equities (NYSE: ARE). While its average office peer has lost about 30% of its value this year, Alexandria's total return is in positive territory as its focus on life science more than offset its exposure to technology companies. That's because those properties should maintain high occupancy levels and rental rates, especially in light of COVID-19, which could drive more investment into the life science sector to fund research for more vaccines, therapeutics, and testing solutions.

High-value tenants

While the location of Ventas' $1 billion trophy portfolio purchase is interesting, the main driver here is the tenant base. Life science companies need specialized buildings to perform research and thus can't work remotely like other industries. Because of that, these properties will likely maintain high occupancy levels and rental rates. Further, they stand to potentially benefit from the pandemic as it will likely lead to increased funding for research and innovation.

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Matthew DiLallo owns shares of Brookfield Asset Management. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool recommends Alexandria Real Estate Equities. The Motley Fool has a disclosure policy.