So. Cal. Medical Office Portfolio, DST

Pasadena, Rancho Mirage, Azusa

ASSET CLASS:  Medical Office Portfolio
OFFERING SIZE:  $10,728,000
MINIMUM INVESTMENT:  $100,000
LEVERAGE:  56.06%
# OF PROPERTIES:  3
YEAR BUILT:  2006, 1924-1984, 1981
HOLD PERIOD:  5-10 Years
CURRENT OCCUPANCY:  100%
TARGETED YR.-1 RETURN:  6.25%

The three properties consist of (i) an approximately 11,331 square foot medical office building located in Azusa, California, an approximately 23,687 square foot medical office building located in Pasadena, California and an approximately 7,500 square foot medical office building located in Rancho Mirage, California.

Algos, Inc., a California medical corporation (the “Tenant” or “Algos”), will execute a new lease for each Project at the Trust’s closing of its acquisition of the Projects, with a base term of 15 years and guaranteed by Olios Health LLC, a California limited liability company (“Olios Heath”).

The Tenant, which was formed in 1990 by Dr. Clayton Varga, is a pain management group doing business as Synovation Medical Group (“Synovation”). Synovation takes a holistic approach to pain management with a comprehensive offering of services provided by over 40 medical practitioners in 18 locations throughout Southern California (this includes physical/occupational therapy, neurostimulation, outpatient surgery procedures, psychotherapy, acupuncture, and more). In addition to the pain management clinic, each Project features a surgical center providing outpatient surgical procedures relating to the pain management practice. Dr. Varga is the controlling partner of each of the outpatient surgery centers. Finally, Olios Health provides administration management services (billing, certification, facilities management, bookkeeping, for each Synovation location. Olios Health shares common ownership with Algos. Dr. Varga was previously Director of Pain Management at Huntington Memorial Hospital (Pasadena) and Director of the USC Spine Center, and has served on the faculty of UCLA School of Medicine.

The three properties consist of (i) an approximately 11,331 square foot medical office building located in Azusa, California, an approximately 23,687 square foot medical office building located in Pasadena, California and an approximately 7,500 square foot medical office building located in Rancho Mirage, California.

The Projects are net leased and therefore, applicable capitalization rates are more likely to come from the NNN leased medical office sector. According to the August 2018 Medical Office Research Report produced by CB Richard Ellis (the most recent report as of the date of this opinion), conditions within the medical office investment market are strong. Over the past two decades the healthcare industry has shifted away from on-campus treatment to favor outpatient care in convenient locations. From a “fundamentals” standpoint, this has placed a high-level of demand on existing medical office product, and in addition, has spurred a wave of new medical office development.

Consolidation within the healthcare industry has resulted in major medical providers owning a number of medical office buildings. These properties are being packaged into portfolios and being met with extremely strong demand, particularly from REITS and private equity funds. On a capitalization rate basis, many of these portfolios have traded at capitalization rates which are below 5.5%. Private physician groups are also considering sale-leaseback opportunities, cashing out an investment in real estate for capital to continue expansion. The market for these properties is competitive and has resulted in favorable pricing. Stabilized medical office properties in prime markets, near or on a campus environment command capitalization rates ranging between 5.5% and 6.0%. Comparable off-campus properties are trading approximately 50 basis points higher. Secondary or tertiary market capitalization rates are often up to 200 basis points above prime markets, or between 7.50% and 8.50%.

According to the third quarter 2018 Net Leased Medical Report completed by The Boulder Group, cap rates for the single tenant net leased medical product were up 22 basis points over the level found one year prior. The 3rd quarter 2018 medical cap rate was 6.47%, while the cap rate found during the third quarter of 2017 was 6.25%. The increase in cap rate is attributed to a higher concentration of properties located in secondary markets as well as a high percentage of non-investment grade tenants within the net lease medical sector. The lowest cap rates found within the medical net leased market are primarily comprised of Fresenius and DaVita dialysis properties, which had an average asking cap rate of 5.85% for properties with more than 11 years of lease term remaining. In the third-quarter of 2018, dialysis properties made up more than 55% of the overall net lease medical sector supply.

Net lease cap rates remain at a discount to the overall net lease market. In the third-quarter of 2018, net lease medical properties were priced nine basis points below the overall net-lease market. The medical sector consists of approximately 75% non-investment grade tenants in the third-quarter of 2018.

The single-tenant net lease medical sector will remain active as investors remain attracted to the long-term outlook for healthcare related properties. The net lease medical sector is e- commerce resistant and the country’s aging demographic will keep investor demand strong.

Synovation takes a holistic approach to pain management with a comprehensive offering of services provided by over 40 medical practitioners in 18 locations throughout Southern California (this includes physical/occupational therapy, neurostimulation, outpatient surgery procedures, psychotherapy, acupuncture, and more). In addition to the pain management clinic, each Project features a surgical center providing outpatient surgical procedures relating to the pain management practice. Dr. Varga is the controlling partner of each of the outpatient surgery centers. Finally, Olios Health provides administration management services (billing, certification, facilities management, bookkeeping, for each Synovation location. Olios Health shares common ownership with Algos. Dr. Varga was previously Director of Pain Management at Huntington Memorial Hospital (Pasadena) and Director of the USC Spine Center, and has served on the faculty of UCLA School of Medicine.

Targeted 1st-Year Cash-on-Cash: 6.25%
Targeted Cash Range: 5.65% - 7.25%
Targeted Cash Average: 6.43%

All-In Price: $24,428,000
Purchase Price: $21,090,000
Appraised Value: $21,800,000
Loan Amount: $13,700,000
Equity Raise:. $10,728,000
Trust Reserves: $646,848
Trust Reserves to All-In Price: 2.65%
Ongoing Reserves Yrs. 7-10: $45,248
Total Reserves to All-In Price: 2.83%
Net Load (Gross Load - Trust Reserves): $2,691,152
Net load to Equity: 25.09%
Net Load to All-In Ratio: 11.02%
Appraised Net Load: $1,981,152
Appraised Net Load to Equity: 18.47%
Appraised Net Load to All-In Price: 8.11%

Net Operating Income: $1,420,734
Purchase Cap Rate: 6.74%
All-In Cap Rate: 5.82%
Cap Rate Spread: 92 bps
Breakeven Exit Cap: 7.77%
Breakeven Exit Cap Rate Spread: 103 bps
Appraised Cap: 6.52%
Appraised Cap Rate Spread: 125 bps

Loan Amount: $13,700,000
Term: 10 Years Fixed
Interest Only Period: 5 Years then 30 Year Am.
Interest Rate: 4.90%
Prepayment: 1% of loan balance
Lender: Societe Generale Financial Corporation
LTV: 56.08%
Non-Recourse: Yes

The Trust will pay approximately $137,000 to the Lender to buy down the interest rate from 5.02% to 4.90%.

DST Due Diligence & Advisory Services

(415) 336-9225

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