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Thanks to Pandemic Puppies, CRE Investors Are Turning Their Attention to Veterinary Clinics

Investors ranging from private equity groups to 1031 exchange buyers to vets looking for a place to put their retirement money are noticing the stability of vet clinics as an investment play.

A move by millions of American households to acquire a cat or a dog during the pandemic has been an added boon for the veterinary real estate sector that’s growing in popularity among investors.

Both group and individual investors have sought out ownership of veterinary hospitals and clinics over the last five years given the stability of their tenants, and that trend has been buoyed the last two years by increasing pet ownership, say industry experts. Since December, two private non-traded REITs have formed, focusing on veterinary real estate, showing investors’ willingness to bet on these properties.

A survey from the ASPCA showed that during the pandemic, when many Americans worked from home, one in five households or some 23 million brought home a cat or a dog. More than 90 million homes, or some 70 percent of U.S. households, own a pet, according to a survey conducted by the American Pet Products Association (APPA). That’s a jump from 67 percent of households in 2019.

APPA executives say that in 2021 the industry reached its highest sales level in history at $123.6 billion—covering everything from food to vet care—a 27 percent increase from 2019. It was the second consecutive record-setting year, and that is expected to continue in 2022. In the category that included vet care, Americans spent some $34.3 billion in 2021, an 8.9 percent increase compared to 2019.

Growing interest in veterinary real estate has coincided with the trend of private equity groups buying practices, says Zach Goldman, president of Maryland-based Vetley Capital, which launched five years ago and owns 35 buildings and about 200,000 sq. ft. of veterinary real estate space across the country, with plans to close on more properties in the coming months. That trend has increased the tenants’ credit worthiness in investors' eyes, Goldman says.

“Traditional investors said veterinary real estate is now a real thing and a viable place to put money,” Goldman notes. “You have seen all the success in human healthcare on the real estate side and veterinary real estate is starting to show some parallels. It’s become more en vogue in the last two years, and in the last 12 months we have seen more institutional groups setting up shop and wanting to buy these buildings. They are seeing it as a mix between retail and healthcare.”

There’s a large private market of 1031 exchange buyers who have sold apartment complexes and other holdings and want a property with less management responsibility and steady rent collection, says Brian Wine, CEO and founder of The Wine Group, a veterinary real estate brokerage. They see veterinary real estate as a stable investment and like the returns it offers.

“We have been at it five to six years now, and over the past two years it’s gotten pretty popular because millennials love animals,” Wine says. “The pandemic has created this sense that I need a best friend. People spent a lot of time with their animals and wanted to make sure (their pet was okay and happy and healthy). Vets are a service people want. Their clients went up and profitability went up. Every week or two there are several buyers calling me about the space and wanting to learn more—investment groups, private buyers, veterinarians, funds, syndicators, 1031 exchanges and foreign money as well.”

Goldman, who’s dad was a vet and who once managed his father’s veterinary practice, notes that a lot of vets have sold their practices in recent years or are nearing retirement and that a lot of their retirement money is tied up in the buildings that housed their clinics. Many buyers of the operating practices don’t want the buildings they come in, which opens up opportunities for groups like his, Goldman adds.

Experts say firms focusing exclusively on veterinary real estate is nothing new, but there’s been some high-profile new creations during the last nine months. In December, the Thurston Group, a private equity firm in Chicago, joined forces with real estate investors AMO Partners to form the National Veterinary REIT.

And on Aug. 1st, Philadelphia-based Terravet Real Estate Solutions, a real estate group focused on veterinary practice real estate, announced the launch of Terravet REIT Inc. It will provide owners of veterinary real estate an opportunity to diversify their real estate holdings by participating in a pool that’s expected to scale to several hundred large general practice facilities and specialty/emergency veterinary hospital facilities nationwide.

For about a decade, Terravet has owned and managed veterinary properties across the U.S. that it acquired through sale-leasebacks and joint ventures and that it then renovated and expanded in partnership with tenants. The firm owns about one million sq. ft. of veterinary real estate in 31 states. It considers itself one of the largest and most active practitioners in that space, according to Daniel Eisenstadt, founder and CEO of Terravet Real Estate Solutions, and a founder of the Terravet REIT.

The increase in pet ownership in recent years and increased spending on pets and veterinary services has led to a new spotlight on the sector, Eisenstadt says.

“A lot of net-lease real estate owners had issues during COVID , where tenants were shut down in many cases and forced to close, but veterinary hospitals stayed open the entire time because they were deemed an emergency and required use,” Eisenstadt notes. “We had 100 percent rent collection at the time from our veterinary tenants, and I think many people woke up to the fact that even in a pandemic, the quality of the tenant is good because you’re talking about non-discretionary healthcare for pets.”

Terravet REIT intends to focus on high-quality veterinary practice real estate with the average property purchase price of about $5 million at the outset, higher than the $2 million to $3 million for its traditional vet-related acquisitions.

Upon completion of its initial acquisition phase by the end of 2022, the REIT expects to own approximately 20 facilities valued at about $100 million and aims to grow significantly over the next 18 months, Eisenstadt says. It’s targeting properties in the top 100 U.S. metros, mostly in suburban areas and ones with ample parking, outdoor dog walk areas and more modern institutional facilities.

“This is not going to grow by huge amounts week-over-week or month-over-month,” Eisenstadt notes. “There are very few portfolios, if any, to be acquired. This is mostly the work of a team to go and talk to veterinary real estate owners. It’s not a fast growth. We think it will grow nicely and grow significantly, but it takes time.”

Two of Terravet’s existing funds contributed to the capitalization of the REIT, and Terravet leveraged its lender relationships to secure a debt facility for the newly formed entity.

What drove the interest in creating a REIT was the growth of investment in and acquisition of veterinary practices by corporate groups and veterinarians with significant wealth acquired through the sale of their practices, according to Eisenstadt. Many of those veterinarians didn’t want to sell their real estate because they didn’t need liquidity, he notes. Instead, they were interested in portfolio diversification without having the tax consequences of a sale or seeking a 1031 opportunity that was unlikely to be outside of the veterinary industry.

Those veterinary real estate owners put their property in a pool that’s diversified by geography and by a number of tenants and operated on a tax-deferred basis, Eisenstadt says. They’re attracted to the perpetual vehicle with no defined term with the expectation that the pool will grow in the future.

On a quarterly basis, the REIT distributes the vast majority of its net operating income from rents collected. That goes to those who put their properties into the pool based on valuations and debt on the property. It also goes to investors who capitalized the REIT, Eisenstadt says.

Terravet Fund 3, a $190 million equity fund which continues to attract high net-worth investors, has helped fund the acquisition of veterinary properties. It also has a debt facility led by KeyBank that allows for the borrowing up to $120 million against the value of the properties in the REIT’s portfolio.

“This formation of REITs is another way to provide for people to sell their building if they aren’t interested in getting its full value now in cash,” says Goldman. “The proof will be in the pudding as far as if the concept is attractive and works for them. It’s still early on. I am of the philosophy that cash is still king in an uncertain time.”

No matter the investment vehicle, analysts say investor demand for veterinary real estate is here to stay.

Michael Moreno, first vice president and senior director with brokerage firm Matthews Real Estate Investment Services who oversees the firm’s healthcare division of which about one-third covers veterinary real estate, sees the formation of REITs as the “natural flow of capital.”

“A lot of these groups are like if I can buy some of these vet properties at 7.5 to 8.0 cap and sell out of them at 150 basis points compression, I am going to do that,” Moreno says. “For REITs, it’s a smart business model because they are offering these vets the opportunity to convert their shares of real estate ownership into shares of an overall REIT. It works for the people who want to hitch their horse to the veterinary wagon for the long term compared to others who want to take their chips off the table and cash out and invest in properties at their own discretion.”

Moreno says Matthews Real Estate did about 50 to 60 vet clinic sales in 2021 and is shooting for more in 2022. People are willing to spend much more money on their pet’s healthcare vs. their own, and that’s hit some real estate owners who have lamented owning retail and office properties in 2020, he notes.

“It’s shot up like crazy,” Moreno said of the veterinary sector. “If I look at a deal in 2019 and look at that same deal at the end of 2020 it probably went up 20 percent to 30 percent in value. Overall, 2020 wasn’t an ideal time, but what it did for the vet industry was provide a great proof of concept for how strong and stable the market really is. It showed how resilient the business model is.”

As a result, buyers groups ranging from institutional investors to mom-and-pop shops decided that veterinary real estate was an attractive buy.

There has been more consolidation in the sector recently, according to Moreno, although that means the playing field has gotten a bit smaller as operators get acquired and some opportunities get taken off the market. He notes that veterinary real estate is a more niche sector than human healthcare, for example, but “it’s a good time to be a seller because all of these buyers want to get a bite of the apple.”

Given the growth in pet ownership and the money spent on pet care, “I don’t see it going anywhere and [it] will be a staple in our world for a long time.”

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