Inside Ridgeline’s Mid-Pandemic MOB Deal

Jeff Axley, Founder, Ridgeline Capital Partners. Image courtesy of Ridgeline Capital Partners

Predictions for a quick recovery of the health-care sector, made at the beginning of the COVID-19 crisis, are being fulfilled. As nonemergency medical procedures are resuming and offices are gradually reopening, leasing activity is expected to bounce back, although with variations in hotspots across the country. 

After a slight slowdown in April and May, medical office investment activity in the Dallas Fort-Worth area has also been rising. Recently, Ridgeline Capital Partners purchased a portfolio of nine high-quality medical office buildings in the metro, the majority of which operate as dialysis centers.

According to the company’s founder, Jeff Axley, MOB cap rates in the area haven’t changed as a result of the pandemic, and need-based, stabilized assets continue to be in high demand. Axley revealed the details behind the buy—financed through a $21 million loan provided by CIT Group—and what he believes won’t make a good investment this year.

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Tell us how you identify investment opportunities in a sector such as health care in the current environment.

Axley: The U.S. economy lost 20.5 million jobs in April. Health care, the largest sector in the U.S. economy, accounting for 18 percent of the GDP, lost 1.4 million jobs in the same month. We are seeing some positive indicators, however, as patients postponing elective procedures are creating pent-up demand that is now allowing the sector to come back quickly.

However, the environment created a financial strain on all providers. It is important to stay disciplined and focus on well-positioned MOBs with good credit tenants, providers that have a large patient and referral base and that provide critical health-care services in strategic locations. 

Was your recent MOB acquisition in the Dallas-Forth Worth area any different than others, given the COVID-19 pandemic? 

Axley: We went under contract before the pandemic. The anchor tenant, U.S. Renal Care, provides dialysis treatment that did not experience a decline in patient visits due to COVID-19, strengthening my conviction in the investment. What’s more, the economic shutdown as a response to the pandemic led to a significant drop in interest rates for our closing, and beyond.         

All properties are triple net leased and the majority are dialysis centers. What made you opt for this portfolio? 

Axley: I was looking for stabilized buildings that would better withstand an economic downturn. The recent acquisition includes an anchor tenant offering dialysis services needed in any economic environment.

What challenges have you encountered in financing the acquisition?

Axley: Our lender, CIT Bank, understood that patients on dialysis continue to visit their dialysis center throughout the pandemic. CIT Bank honored the commitment made before the pandemic and provided great customer service throughout the process.     

Tell us how you see the dynamics of the MOB market in the Dallas-Fort Worth area at this time.

Axley: Leasing activity is coming back now that providers are seeing patient demand increase. Investment transactions slowed down in April and May as investors digested the impact from the pandemic, but activity is coming back.

Cap rates have not really changed at this point, but the debt market has become tighter which should impact cap rates over the near term. Some projects will have large pricing adjustments, while others will not see much adjustment, if any. Health-care providers are pulling back on expansion plans to focus on shoring up their existing operations. 

What are your predictions for investment activity in the MOB sector in DFW for the midterm? What about the other markets you invest in?

Axley: I believe investment activity will increase in DFW and other markets because investors are attracted to the durable income streams in the MOB sector.

What types of properties would not make a good investment this year, given the current circumstances?

Axley: Each situation is unique, but as a general rule, I would not invest in MOBs leased primarily by small independent physicians.

Tell us one fact most people don’t know about Ridgeline.

Axley: The company is named after the line of ridges—the mountains—in Colorado, a very special place to our family. It is where my wife and I had our marriage engagement and many vacations with our kids. Every time I see the company name, I think about how special my family and the mountains are.