As real estate investment firm Invesque Inc. (TSX: IVQ.U) continues its diversification plan after a 2016 separation from skilled nursing operator Mainstreet, its CEO insists that the future for the SNF space remains bright.
In fact, Scott White’s Invesque — known as Mainstreet Health Investments until late 2017 — continues to own buildings developed by its former corporate partner, even as Mainstreet has struggled with the roll-out of its rehab-focused Rapid Recovery Center model. The Carmel, Ind.-based Invesque retained ownership of four former Mainstreet properties amid a February tenant switch, and skilled nursing facilities will still form a key backbone of the company’s strategy even as it expands into the medical office building (MOB) space.
Skilled Nursing News sat down with White last month to discuss Invesque’s ongoing diversification efforts, the challenges associated with a listing on the Toronto Stock Exchange, and why year-to-year variations in the SNF landscape may not really matter to savvy investors.
When we last spoke, Invesque had just stepped into the MOB world. How’s the diversification push been going?
We continue to look for opportunities across the full spectrum of health care. Today, we are a little bit less than half seniors housing, about half skilled nursing, and then about 10% medical office buildings. Medical office buildings were new for us in 2018, and we think there’s an opportunity to continue to grow there.
We’ll continue to look at other opportunities as they present themselves. Our historical track record, and our historical expertise, is on the skilled and seniors housing side. Now with MOBs, we partner with a group — Mohawk Medical Group — and they manage our MOBs for us, and we’d love to continue to grow that. For us, there’s lots of opportunities. We have a pipeline and it’s hundreds of millions of dollars.
The hard part, for us, is access to capital. Right now, we’re a Canadian-traded public company with limited access to capital. That’s going to continue to be very creative in 2019. We did a number of transactions … where we used our shares as currency, because we didn’t have access to cash at that time.
What’s your outlook on the skilled nursing industry for the coming year?
I’d say about the same. I’ve been about the same for the last five years, quite frankly. The reality is, when we buy skilled, we buy skilled with a very long-term horizon. They’re always long-term, triple-net leases. I think it’s very hard, and quite frankly dangerous, to try to figure out: Is next year an up or a down year?
I fundamentally believe, that over the next five, seven, 10 years, there will be a place in the ecosystem for skilled nursing. I fundamentally believe that if you have the right partners, and you price your transactions appropriately, there’ll always be a spot for skilled. Whether or not 2019 is a good or a bad year — I don’t know. I don’t have a crystal ball, and those that think they know don’t really know.
That’s always been my philosophy. This is real estate. You’re buying long-term, cash-generating assets. Will there be peaks and valleys? Will there be challenges in the cycle? Absolutely. Has skilled nursing been around for 30, 40, 50 years? Absolutely. Will be it around for another 30, 40, 50 years? Absolutely. What will it look like? I don’t know. Who will be the winners and losers? I don’t know. For me, it’s partnering with the right partners — we really like our skilled operating partners — and doing deals at the right price.
Does it look like the short-term Mainstreet model?
We do think there’s a place for that. What, exactly, it’s going to look like, again, I don’t know, but we certainly have some of those in our portfolio and we’re not afraid to continue to expand that part of the portfolio.
How has the MOB expansion gone? Will there be further expansion in that area?
We’ve generally said, since the beginning, that we would like our portfolio to be a highly diversified portfolio of cash-generating health care real estate assets. What does that mean? That means approximately a third will be in seniors housing, a third will be in skilled, a third will be in “other strategic health care.” What is other strategic health care? It’s kind of a catch-all bucket for lots of different things, including MOB. Today, we’re only at a little bit less than 10% We absolutely want to grow that. We think there’s a real opportunity there.
We play it differently. We don’t generally — and I don’t want to say never — — we don’t do on-campus, Class-A, single-tenant, credit-quality tenants. We just think that the yield associated with that is too low. We can’t afford it from a cost of capital standpoint. There are too many dollars chasing it, and it’s just not interesting to us.
So what do we do? We look for places that there’s value creation opportunities. We actually do the exact opposite. Our portfolio today is all off-campus, multi-tenant, class-B type assets. So we have hundreds of tenants in our … medical office buildings.
We have a highly diversified portfolio of cash-generating assets, because you’re getting multiple cash flows associated with that. You also have an opportunity to really create value. We partnered with Mohawk Medical REIT — the people we bought the portfolio from — we keep them on as our asset manager, our property manager.
There’s opportunities for them to look at the mix in the building — we call it the ecosystem in the medical office building — and make sure that you have: Where does the pharmacy go? How many general practitioners do we need in the building? Does this general practitioner have a referral pattern to cardiologists? We need cardiologists in the building. That’s how you create value … We think there’s massive opportunity there. We think few people are looking at the world this way, and we kind of like that.