Healthcare Realty Solutions DST sponsor - anyone have experience?

27 Replies

Hello - I am new to DST and considering a deal offered by Healthcare Realty Solutions to complete my 1031x. Does anyone have experience investing with them? Their returns are higher, but are there risks in investing directly with a sponsor vs. a broker? Thank you for any guidance and help you can provide!

DSTs typically have massive internal fees, a very inefficient utilization of capital in my opinion. 

I analyzed a few and the cumulative fees ended up long-term eating up nearly all of the tax deferral benefit.

So what would be the point unless you are desperate to unload a property you don't want to deal with any longer.



OK that sounds like another I don't really have a choice situation. 

The only thing I would note is that I got something in the mail from a DST group very recently telling me that they were lowering substantially their fees because of the COVID risk, especially for certain commercial deals. Not sure how solid that is, didn't plan on exploiting it, but maybe there are some better deals out there now post COVID.

@Chad Kolinsky - thank you. it is an Atrium/MedCost healthcare office building complex in NC with 8% returns. i'm leaning less towards them because if is an administrative office and not sure that is pandemic-resilient. also, they are sponsor and broker. I'm now considering an NLP offered by Exchange Right which seems to more established and pandemic-resilient. Are they on your top 25 DST sponsor list? thank you!

I am currently reviewing ExchangeRight for a few clients. Their tenants are mostly “essential businesses” that have performed well during the pandemic. I can forward some emails from them about the tenants performance. 

They are a top 10 sponsor by equity raise. 

Hi

I am also looking a DST deal offered by Healthcare Realty... Siemens project in Georgia. Did you ever go with them.

They appear to have lower fees thereby higher returns. The issue of small company is also a concern but not sure if that is relevant considering they have a track record of many fully subscribed projects including the one you were considering.

Sherman Sawhney

A bit off topic, but there is a medical REIT MPW (owns many hospitals globally) that has a pretty good track record over the last few years. I've had it for awhile and added more at the first hard downward spike of the COVID crises when everything initially tanked. Unfortunately it has recovered much of its value and did so very quickly so the buying opportunity now is not as good as it was at the height of the panic.

@Sherman K sawhney have you considered other DST companies?


In my experience, healthcare DSTs are usually 100% cash offerings. The goals of these DSTs are more capital preservation and income generation than capital appreciation. If you are looking to grow your money, you may want to look into a leveraged DST or a different asset class like net lease or multifamily.

Originally posted by @Sherman K sawhney :

Hi

I am also looking a DST deal offered by Healthcare Realty... Siemens project in Georgia. Did you ever go with them.

They appear to have lower fees thereby higher returns. The issue of small company is also a concern but not sure if that is relevant considering they have a track record of many fully subscribed projects including the one you were considering.

Sherman Sawhney

Hi - I also considered the Siemens deal. Ultimately, I went with a net lease portfolio in a pandemic-resilient sector (non-office buildings) through an established DST sponsor with a strong track record. Happy to share more or talk through if you'd a sounding board. Good luck!

 

Hi 

Thanks for the prompt reply.  would like to know who did you finally pick. I have a week to list properties in my QI.

Siemens is a strong international company who invested millions in this building, would be interested in your analysis.

Would love to chat but exchanging phone number is prohibited on this site

Sherman Sawhney

Hi Chad

Appreciate your input and interest. The Healthcare deal with Siemens as the tenant is a leveraged deal with 17 M subscriptions and 8 Million loan on it. The time is about 5 years, rent escalation is about 2 percent each year. Do you have any suggestions?

@Sherman K sawhney I usually have my clients invest in 2-3 DSTs minimum. This allows us to diversify the real estate holdings and the investment goals. For example, a healthcare DST is mostly for income generation. You can look into a net lease DST with a manager who specializes in negotiating lease extensions for income + some potential appreciation. And finally a multifamily asset with some sort of value add / lease up strategy with the goal of capital appreciation.

@Angeline Kung I was curious about your question in regard to the investment directly with the sponsor rather than through a broker. I was not aware that there were many like that out there, and if that is the case I would like to learn more. We are launching our first DST and that is how we set it up, and we are just allowing a private pool of our investors to join, but we would be interested in learning about what others have experienced in this realm for next time. Thank you, and others for some great comments on this thread.

Originally posted by @Kwame Koom-Dadzie :

@Angeline Kung, can you share who /DST you finally picked.

Kwame 

Hi, Kwame - I ultimately went with Exchange Right who has structured and offered many NLPs and seemed to be reputable and vetted by various brokers. I have already been receiving monthly payments on time.

 

Hi, @Paul Moore , @Sherman K sawhney , @Kenny Ware - below are the considerations the DST broker highlighted to me. I was under a time pressure to complete my 1031x with a relatively small boot, so I chose to work with a broker who had a relationship with the sponsor with a track record, performed the due diligence and could answer my questions vs. doing my due diligence directly with the sponsor. Also, given this was my first DST, I wanted the guidance and legwork from the broker.

From the broker:

As I mentioned in my earlier email, their DSTs are not scrutinized by an independent third party broker, so it is incumbent upon the investor (you) to perform their own due diligence.
One thing to look at is the creditworthiness of the tenant. The rent projections are only worthwhile if the tenant can be counted on to pay the rent every month. Unless I am mistaken, Atrium and MedCost are health insurance providers and this DST would be their headquarters. Therefore, it appears in this instance that the building is not a medical office building for providing medical services but rather an office building housing the corporate headquarters for a health insurance company. A medical office providing essential services (such as a dialysis center) is a trustworthy source of income - even during a pandemic like we are in now - because they generate revenues by providing services that people must have or else they could die. The risk in that model is the possibility that the entire population of people who need those services (or at least a substantial portion of that population) might be wiped out by the pandemic such that the medical service provider no longer had enough patients to service. But the "healthcare" DST that you are considering does not appear to fit that model. That building is not built to provide medical services, and that tenant does not provide them. That tenant generates revenues by receiving insurance premiums in excess of the medical claims it pays out. The risk in this model is that the pandemic takes hold of the population and spreads at a rate that causes claims to exceed premiums. In that event, the tenant may default on their contract to pay their rent. So you ought to look into the creditworthiness of the tenant. What is their current profit margin? How much cash do they have in reserve? How long could they continue to pay rent if they stopped being profitable?
Another important factor which a broker-dealer would examine, and which you would do well to investigate, is how much time is left on the underlying lease. One colleague I spoke with said that he had discovered a healthcare DST sponsor who sold directly to investors (like this arrangement, although he couldn't remember for sure whether it was this sponsor you are considering) who was able to project higher returns for investors by buying properties where there were not many years left on the underlying lease. The value of the same property with the same tenant will vary greatly depending on the length of the lease term. Assuming for a moment that the tenant is rock solid (which I explained above is something that you should look into), a lease with 20 years left on it is going to be very valuable because it translates into 20 years of dependable income. However, the same property and tenant with only 3 years left on the lease is going to sell for a fraction of that amount because it represents only 3 years of dependable income, after which there are questions (risks) which have yet to be answered. Will that tenant renew? Who has the leverage in renewal negotiations? If the underlying lease could expire during your projected hold period for the DST, it is possible that you could have a building with no tenant and thus no rent collection and no monthly disbursements. If the lease is set to expire within a handful (say, less than 10) years after your hold period, there is a risk that you will not get adequate value for the property upon the sale and exit from the DST investment. The reason for this is that the buyer will want a significant discount on the property to compensate for the risk that the tenant might leave. You should also consider that every office lease renewal is questionable now that companies have restructured their operations to allow more people to work from home. Corporations will no longer need the same amount of office space going forward, now that the model for working remotely has been proven. Any corporation who can downsize their office space and does not do so will be doing a disservice to their shareholders.
Tenant creditworthiness and lease term are two of the major factors which a broker-dealer examines on behalf of the investor. Since you don’t have that advantage in this instance, I would encourage you to look into those factors yourself and consider the risks. The sponsor should give you any information you request, inlcluding copies of the underlying lease and related documents. Hopefully, you will have a tenant with stellar credit and solid financials, who also has a business plan that accounts for the possibility of claims spiking in a pandemic, and who is locked into a long-term lease. In that event, it would seem more likely that you will hit the projections.

Well, there are other DSTs, but what type of Healthcare properties are in the portfolio and quality of leases?

Examples

Senior care is in the dumps right now and no one knows how much Medicare will pay out.

Outpatient treatment centers.  There is a national group that runs kidney dialysis centers.  They can lose their contract.  I have one half-mile from my house that's been sitting there for two years empty.