Outpatient Campus Sale Near D.C. is a ‘Great Story’
A partnership led by Virtus Real Estate Capital acquired the complex for about $36M
At a time when MOB sales have slowed considerably as a result of the COVID-19 pandemic, it was reassuring to see a good-sized transaction take place in recent weeks.
The deal involved the sale of the three-building, 212,153 square foot Colesville Medical Campus in Silver Spring, Md., a suburb of Washington, D.C. According to Revista data, the sale closed on April 15 for about $35.95 million at a cap rate of 6.75 percent.
According to Ben Appel, a managing director with the Healthcare Capital Markets Group of Jones Lang LaSalle Inc. (NYSE: JLL), which represented the seller, the transaction represents a “great story” for the MOB sector during this time.
It was a transaction that saw the buyer, a partnership of Austin, Texas-based Virtus Real Estate Capital and Dallas-based Lincoln Property Co., execute “flawlessly through the impacts of COVID. They did a phenomenal job closing on this and did everything they said they would.
Mr. Appel says nearly 10 would-be investors originally submitted bids for the campus.
The seller was Beckham Gumbin Ventures, which had acquired the campus for $10.7 million in 2016. At that time, the complex was only 43 percent leased. A couple of years earlier, in 2014, the campus was, for the most part, vacant after the original tenant from the 1980s, Choice Hotels International Inc. (NYSE: CHH), left for a new location.
Since then, the campus has been undergoing a transition to medical, with the first tenant, Holy Cross Health System, signing a lease for one of the buildings in 2014. The system operates two hospitals in the area, including its flagship 209-bed Holy Cross Hospital just a couple of miles from the Colesville campus. Holy Cross, which operates its home and hospice care units in one of the buildings, is part of Livonia, Mich.-based Trinity Health (Aa3 rating from Moody’s).
The occupancy at the time of the closing on April 15 was 83 percent.
A good share of that increase in occupancy – from 43 percent in December 2016 to the current level – came under the watch of Beckham Gumbin, which made about $12.8 million worth of capital improvements in the property. Much of the leasing momentum has come over the last 18 months or so, with six new tenants signing leases during that time totaling more than 59,000 square feet.
In acquiring the campus in 2016, Beckham Gumbin Ventures “recognized that the attributes of the property would appeal to the medical community and successfully cultivated a vibrant ecosystem of healthcare providers,” Neal Gumbin, co-founder, said in a news release.
While the campus today still has some general office tenants, a majority of the space is currently occupied by healthcare tenants. In addition to Holy Cross, the other main anchor tenants are Alexandria, Va.-based Advantia Health, which focuses on providing care for women and families, and locally based Capital Digestive Care.
The new owner plans to continue to transform the property into a full outpatient medical campus in the years to come.
“This is an example of a growing trend, for healthcare providers to take occupancy in well-located professional office buildings, allowing most-notably for speed-to-market as compared to building new,” Mr. Appel says.
“This campus is perfect for medical,” Mr. Appel adds, noting that it is in area rife with other medical facilities and has “great visibility on Columbia Pike, where 56,000 vehicles pass by per day. With a focus on medical tenancy, the occupancy has gone from 43 percent to 82 percent in, actually, about 24 months. We were projecting that the tenancy will rise to over 95 percent.”
In addition to those strengths, Mr. Appel notes that Maryland is a high-barrier-to-entry Certificate of Need (CON) state and that Virtus’ acquisition provides it with a value-add opportunity, as there is still space to lease and room for rental rate growth. Also, the campus is in an area – within a one-mile radius – with an average household income of $136,000, about 51.7 percent higher than the national average.
Mr. Appel adds that while deal flow has certainly slowed down during coronavirus crisis, he doesn’t “expect to see much of a price discount for high-quality offerings. Core product will continue to trade as investors flock to quality, stability, credit and lease term.”
“Prior to the turmoil caused by the coronavirus, I would say an MOB offering of high quality, or that is appealing and that would move for a variety of reasons, would generate anywhere from 12 to 15 offers,” Mr. Appel adds. “But I would say during all of this, we might see about half that number of bids; there are still very interested investors out there.”
Most brokers expect that MOB sector’s most-active private equity investors and institutional investors – but not the public REITs – will continue to pursue acquisitions.
In addition to brokering the sale for the seller, a capital markets team with JLL arranged financing for the buyer. That team included Robert Carey, Daniel Turley and Evan Parker.
The JLL brokerage team, in addition to Mr. Appel, included Dave Baker, Jim Meisel, Andrew Weir and Matt Nicholson.
John B. Mugford
Healthcare Real Estate Insights