I have been spending a lot of time reviewing potential real estate transactions to invest in through different real estate crowdfunding platforms. I have identified several investments through CrowdStreet and am waiting for them to close. You can read about my strategy here.
This week I closed on my second transaction through CrowdStreet. The investment is a portfolio of medical office buildings. Here is a summary of the deal:
The Deal – 10 Dialysis Centers in Dallas, Texas
Last week I closed on an investment holding a portfolio of leased medical centers specializing in dialysis in the Dallas-Fort Worth area. Why? Here are the key points I liked about the investment:
- Predictable Cash Flow: The investment is expected to have an average cash yield exceeding 15% based on existing leases during the investment period. Each of the leases in the portfolio are structured as triple-net lease with tenants responsible for all expenses, including real estate taxes, insurance, and maintenance, which provides predictable cash flow to investors.
- Recession-Resistant Portfolio: Dialysis patients require consistent treatment for their entire lives, and certain government programs insure any American who needs dialysis, insulating the industry from economic cycles. Therefore, the tenants should have their businesses unaffected by COVID-19 or any recessions resulting from the economic slowdown.
- High Tenant Retention: Dialysis tenants have a historic 99% tenant retention rate for the industry. This is due to the lengthy licensing process for new facilities and the significant upfront capital investment necessary to build-out a new location. Therefore, once you have a tenant with a good business it is very unlikely to leave. Speaking of a good business…
- Strong Earnings-vs.-Rent Ratio: A high-performing, single-tenant medical office building will generally have an earnings-to-rent coverage above 3.0x. The portfolio acquired by this investment has an earnings-to-rent coverage much higher than this coverage ratio. This means these locations are performing well.
- High Cap Rate vs. Sales Comps: Sale comps for individual dialysis properties with 6 to 8 years of weighted average lease term (WALT) trade at cap rates of below 7%. This portfolio was bought at cap rate above 8% with a WALT of almost 6 years. The goal is to extend the lease terms and sell these properties on an individual basis at higher cap rates.
- Solid Business Plan: I like the business plan to purchase the portfolio at a discount, extend the lease terms of each lease, and then sell the properties individually at the lower cap rates which are industry standard. In the meantime the properties will throw off attractive cash to be distributed to investors.
- Good Plan B (it could be a Plan A for a lot of investments): In the event we have a longer than expected recession that impacts selling these properties, the Plan B is to hold the properties for longer than the initial investment period to generate the double digit annual cash yields for investors. Remember, the tenants should continue to have good businesses and therefore pay their existing rents in a negative economic environment.
Is there Downside? Of course.
There is always risk when investing. Here, the tenants, although major players in the dialysis space, could have business changes that keep them from extending the terms of their leases. Home dialysis, a competitor to dialysis centers, could catch on more quickly than anticipated and therefore make these locations less profitable. The government could always make changes to how it covers dialysis for patients and thereby impact the underlying business model for dialysis centers. I do not think any of these risks are likely to materialize but they exist.
The sponsor appears to have significant experience with medical office buildings but he does not appear to have significant experience with dialysis centers. I am not sure how relevant that is in this triple net scenario but I will be finding out. The sponsor also has significant experience in the Dallas metro area so that is a plus with this investment.
I think this is a solid investment that I would have never found without CrowdStreet. These real estate crowdfunding platforms should be something for you to look into – remember do your own diligence as there is no such thing as a risk-free investment that generates 10%+ annual cash returns. I will keep you posted how thins progress with this investment.