ASSET CLASS: Class A Medical Office Portfolio OFFERING SIZE: $12,897,000 MINIMUM INVESTMENT: $50,000 LEVERAGE: 50.95% # OF PROPERTIES: 2 YEAR BUILT: 2018 HOLD PERIOD: 7-10 Years REMAINING EQUITY: $9,000,000
Completed in 2018, the facilities were purpose-built for NeuroRestorative to use as post-acute neuro- rehabilitation facilities. The sites were selected in a high-growth target market near synergistic healthcare operators and referral sources. NeuroRestorative is a subsidiary of Civitas Solutions, Inc., a leading national provider of home-and-community -based health and human services to individuals with intellectual, behavioral, physical or developmental disabilities, located across 36 states. The absolute triple net leases each have approximately 14 years of the remaining term, with 2.0% annual rental increases. NeuroRestorative is a market leader in acute care for acquired brain injuries, which a ects an estimated 10 million people annually across the globe. Traumatic brain injury-related emergency department visits, hospitalizations and deaths increased by 53% from 2006 to 2014.
The property is located in Round Rock, Texas, approximately 15 minutes north of Austin at the epicenter of the city’s growing medical district. Austin was the fastest growing large city in the United States between 2010 and 2014 and had the second-highest rate of job growth among the 40 largest metro areas between February 2017 and February 2018. The City of Round Rock’s property tax rate is one of the lowest in the region.
Austin is currently the eighth fastest growing city in the US and is expected to have an economic growth rate of over 6% with a population growth rate approaching 3% from 2011-2019. Metro Austin’s population surpassed 2 million in 2015. The decade ending in 2017 saw a more than 34% increase in population.
The property is located in San Antonio within walking distance of several hospitals and medical buildings, including Methodist Stone Oak Hospital, North Hills Family Medicine North Central Baptist Hospital, The Children’s Hospital of San Antonio, Trinity Adult & Pediatric Orthopedic Specialists, and more.
According to a recent U.S. Census Bureau report, San Antonio experienced the largest population increase in the country during 2016 and 2017. The city boasts an unemployment rate of 3.3% and its job market has increased by 1.6% over the last year. Job growth is predicted to increase 39.6% over the next 10 years.
Medical Office Fundamentals
According to the Marcus and Millichap Second Half 2019 Medical Office Research report (the most recent report published as of the date of this opinion), shifting demographics and the need for outpatient care are supporting medical office demand. The strong demand for medical services personnel is outstripping the labor pool. To combat shortages, healthcare businesses are favoring outpatient care as well as enhanced technology, trends which favor purpose-built medical office facilities. Hospital and health system merger activity continues to transform the medical office sector, driving a reduction in physician-owned practices in recent years. In 2012 nearly half of locations were physician-owned practices, but in 2018, just 31 percent were owned by doctors. The consolidation has supported investor sentiment as major providers create efficiencies and broaden service coverage.
Elevated construction lifted the national vacancy rate 20 basis points in the third quarter to 8.6%. The tightest area of the country is the Pacific Northwest, where vacancy rates are hovering near 4.0%, while the highest vacancy rates are found in the mountain regions of the country. Asking rents escalated modestly to $23.41/SF, up from $22.81/SF as of the end of 2018. California metros dominate the list of the highest rental rate markets in the county with an average rent of nearly $60/SF in the third quarter of 2019.
Medical Office Investment Market
According to the Boulder Group Net Lease Medical Report issued for the 3rd quarter of 2018 (the most recent report published as of the date of this opinion), cap rates in the net leased medical sector expanded by 22 basis points between the third quarter of 2017 and the third quarter of 2018. Despite the compression, net leased medical properties still trade at a 5 basis point premium to the overall market, primarily due to the high number of non-credit-rated transactions. The dialysis subsector experienced the lowest cap rates of the net leased medical office group at 6.0%, down 10 basis points.
The net leased medical office market is particularly attractive to private investors and 1031 buyers given the low threshold to entry. An average net leased medical property trades at $2.7 million. Investment grade properties average $3.3 million ($369/SF), while non-investment grade properties have an average price tag of $2.1 million at $325/SF. Going forward, the single tenant net leased medical sector is anticipated to remain active as investors seek attractive yields in stable properties.
Prior Syndications: 61
Real Estate Assets: 86
Total Transaction Volume: $1.5 Billion
Market Share: 6.0%
Full Cycle Multifamily Offerings: 6
Hold Period (Years): 4.49
Average Return of Equity: 161.08
Average Distribution: 6.58%
Average Annualized Return: 13.10%
The Projects are newly-constructed and each is 100% leased under a 15-year lease to a subsidiary of NeuroRestorative, which is owned by National Mentor Holdings, Inc. Both leases are guaranteed by National Mentor Holdings, Inc. NeuroRestorative provides post-acute neurorehabilitation to persons who have sustained an acquired brain injury or whose conditions restrict mobility, social interaction, communication, employability and re-entry into their homes and communities. NeuroRestorative’s facilities are specifically designed to provide the proper environment of care for each individual. As stated in the PPM, NeuroRestorative constructs an individualized treatment plan that is realistic, achievable and includes input from the persons served, as well as from their family and support system.
The RR Project Lease is a triple net lease whereby the RR Project Tenant is responsible for all costs of operating the RR Project, including but not limited to taxes, insurance and utilities. Furthermore, the RR Project Tenant is required to keep the RR Project in good condition and repair or replace as necessary, all portions of the interior and exterior (including, without limitation the roof, walls, foundations, parking surfaces) structural and nonstructural (including the heating, air conditioning, mechanical, elevator, electrical and plumbing systems). A review of the RR Project Lease identified no significant concerns.
The SA Project Lease is a triple net lease whereby the SA Project Tenant is responsible for all costs of operating the SA Project, including but not limited to taxes, insurance and utilities. Furthermore, the Tenant is required to keep the SA Project in good condition and repair or replace as necessary, all portions of the interior and exterior (including, without limitation the roof, walls, foundations, parking surfaces) structural and nonstructural (including the heating, air conditioning, mechanical, elevator, electrical and plumbing systems). A review of the SA Project Lease identified no significant concerns.
Targeted Yr.-1 Cash-on-Cash: 6.25%
Targeted Cash Range: 5.30% - 6.60%
Targeted Cash Average: 5.91%
Targeted Cash Range w/ Principal Paydown: 6.25% - 8.79%
Targeted Cash Average w/ Principal Paydown: 7.42%
Projected IRR: 7.01%
All-In Price: $26,292,000
Purchase Price: $22,725,000
Appraised Value: $23,075,000
Loan Amount: $13,395,000
Equity Raise: $12,897,000
Trust Reserves: $802,105
Reserves to All-In Price: 3.05%
Reserves to Equity: 6.22%
Net Load: $723,000
Net Load to Equity: 13.64%
Net Load to All-In Ratio: 13.64%
Appraised Net Load: $2,764,895
Appraised Net Load to Equity: 18.72%
Appraised Net Load to All-In Price: 9.18%
Net Operating Income: $1,454,711
Purchase Cap Rate: 6.40%
All-In Cap Rate: 5.53%
Breakeven Exit Cap: 7.14%
Breakeven Exit Cap Rate Spread: 74 bps
Appraised Cap: 6.30%
Appraised Cap Rate Spread: 84 bps
Loan Amount: $13,395,000
Term: 10 Years Fixed
Interest Only Period: 2 Years
Amortization Period: 30 Years
Interest Rate: 4.28%
Lender: Cantor Commercial Real Estate Lending
Non-Recourse: Yes to Investor
The contents of this communication: (i) do not constitute an offer of securities or a solicitation of an offer to buy securities, (ii) offers can be made only by the confidential Private Placement Memorandum (the “PPM”) which is available upon request, (iii) do not and cannot replace the PPM and is qualified in its entirety by the PPM, and (iv) may not be relied upon in making an investment decision related to any investment offering by the issuing company, or any affiliate, or partner there of the issuer. All potential investors must read the PPM and no person may invest without acknowledging receipt and complete review of the PPM. With respect to the “targeted” goals and performance levels outlined herein, these do not constitute a promise of performance, nor is there any assurance that the investment objectives of any program will be attained. These “targeted” factors are based upon reasonable assumptions more fully outlined in the Offering Documents/ PPM. Consult the PPM for investment conditions, risk factors, minimum requirements, fees and expenses and other pertinent information with respect to any investment. These investment opportunities have not been registered under the Securities Act of 1933 and are being offered pursuant to an exemption therefrom and from applicable state securities laws. Past performance and statements regarding current occupancy and earnings are no guarantee of future results. All information is subject to change. You should always consult a tax professional prior to investing. Investment offerings and investment decisions may only be made on the basis of a confidential private placement memorandum issued by the issuer, or one of its partner/issuers. The issuer does not warrant the accuracy or completeness of the information contained herein. Some offerings are subject to a “cooling off” period and are not available to all investors.Thank you for your cooperation.
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