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A fully-tenanted medical building in Duluth, in the rapidly-growing city of Atlanta in the US, has presented an irresistible investment opportunity to medical office specialists OrbVest.
One of the outstanding features of Lakeside Professional Centre (Medical 42 in the OrbVest portfolio) is that it is largely leased by practices related to dentistry. Medical professionals make great tenants because they are usually reluctant to move once they have built up a local base of patients, and their income is less affected by economic cycles than many other businesses.
“We have been very cautious, considering where the cycle is at the moment, taking into account high interest rates and persistent inflation,” says OrbVest COO Justin Clarke. “But this building is in our sweet spot.
“Five of the seven tenants are established dentists of various specialities, who refer patients to each other. Some of the tenants have been in the building since it was built. The building is low maintenance, and all the dentists are on NNN leases, which negates the threat of inflation impacting our operating costs.
“The building is also roughly four miles from our Atlanta offices.”
Lakeside is a well-maintained, Class A property in Duluth. It is easily accessible from Interstate 85 and only 4 miles from Northside Hospital Duluth, which enhances its appeal to medical tenants. Atlanta is the capital of the state of Georgia and its metropolitan area has 9.5 million residents, as well as the third-highest concentration of Fortune 500 companies in the US. The strength of the local economy is important because it should make it easier to sell the building when the investment term is up.
This building was completed in 2006 and there have been substantial tenant improvements since then.
Costs and forecast returns
The total acquisition cost of this 23,555 square foot, single-storey building is $8.3 million, including $680,497 as a provision for transaction costs. The equity component, which includes a contribution from OrbVest as the sponsor, is $3.36 million, and the remainder is debt.
OrbVest intends to hold the property for a five-year term and renew existing leases that expire during this period. The weighted average lease term is 4.5 years and all except one tenant have agreed on 2-3% annual rental escalations.
Based on its prior experience with these buildings, OrbVest is confident the tenants will choose to stay as there is a strong symbiotic relationship between these practices.
In year three, it intends to refinance the property to secure a lower interest rate than is currently available, and to boost cash flow. It will contract SG Property to manage the property and handle the leasing.
The forecast annual dividend payable to investors is 7-8%, paid quarterly, and the targeted internal rate of return (capital gain plus income) is 11-12% before tax.
“There is still opportunity for investors to participate as there is still equity available,” Clarke says.
Positioning on the risk spectrum
Although high interest rates have increased the risks in real estate, certain niche sectors like medical offices continue to offer a reliable, inflation-proof return to investors looking for stable income.
Based on the assessment of OrbVest’s investment committee, Lakeside Professional is a “core” asset, which implies capital preservation, a reliable income stream and controlled costs.
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OrbVest is a growing real estate company with a hyper-focus on the US health care sector. Visit www.orbvest.com. OrbVest is an authorised Financial Services Provider. The content of the article is for information purposes only and should not be construed, under any circumstances, by implication or otherwise, as advice of any kind or nature, or as an offer to sell or a solicitation to buy or sell or to invest in any securities. Past performance does not guarantee future performance.
Returns are taxable and will be taxed as dividends from a foreign source, ordinary income or capital gains, depending on your tax residency. OrbVest is not a tax and/or legal advisor. Investors need to consult with their financial and or tax advisor or attorney before investing.
Investment is made via www.orbvest.com where the particulars of the investment are outlined in the property supplement, a private placement memorandum or subscription agreement. These should be read in their entirety by the proposed investor prior to investing and having obtained independent advice.
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