Mainstreet Primes the Pump for Next Mega-Deal

Mainstreet is at it again.

One year ago, the Indiana-based post-acute developer closed on its massive partnership deal with Health Care REIT, now known as Welltower (NYSE: HCN). Now, Mainstreet is laying the same kind of groundwork that ultimately resulted in that $2.3 billion transaction.

Specifically, Mainstreet is creating a new public company in Canada—Mainstreet Health Investments—to build up a portfolio of U.S. and Canadian properties that could eventually be sold. The seed portfolio will consist of 11 senior housing properties in the Chicago area, which Mainstreet is acquiring through a newly formed subsidiary for approximately $302 million.

That portfolio consists of 10 skilled nursing properties comprising 2,335 licensed beds and one assisted living property with 120 licensed beds, operated by Symphony Post-Acute Network. One of the properties, located in Hanover Park, Illinois, is set to be acquired in 2016; the others were acquired pursuant to an agreement on Oct. 30, 2015.

The properties have been leased back to Symphony on a triple-net basis, with annual rent in the first year of approximately $24.2 million.

As for how Mainstreet will enter the Canadian public markets, it will do so through a reverse takeover (RTO) transaction with Kingsway Arms Retirement Residents Inc. (TSX.V: KWA).

After acquiring its first property in 2008, Kingsway encountered rough market conditions and was not successful in securing more capital or acquisitions. After changes to the board, the company pursued new avenues for financing and growth, but by the end of 2014 had concluded that it did not have a “critical mass of activity to warrant being public,” according to filings with the Canadian Securities Administrators. In August, the company concluded the sale of its only property.

KWA is attractive as a means to enter the Canadian public markets precisely because it is “an empty shell,” Mainstreet Executive Vice President of Investments Scott White told Senior Housing News.

Under the reverse takeover, KWA will exchange common shares to acquire all of Mainstreet’s stake in the company—Mainstreet Health Holdings Inc.—that owns the newly acquired Symphony portfolio. The implied purchase price is estimated to be $15.6 million.

At that point, Mainstreet will become the new control person of Kingsway, owning about 95% of the outstanding common shares and non-voting shares. KWA will be renamed Mainstreet Health Investors.

Mainstreet Founder and CEO Zeke Turner will be Mainstreet Health Investments’ chairman and CEO; Scott White will serve as president. Scott Higgs, Mainstreet’s senior vice president of finance, will be CFO for the new investment enterprise, and its chief investment officer will be Adlai Chester, Mainstreet’s CFO.

An independent board of directors will oversee Mainstreet Health Investments.

Going Back to the Well

Mainstreet isn’t shy that it is attempting to re-run a winning play.

“The way I see it is, this is really us doing HealthLease Properties again,” White said. “We talked about calling it HealthLease Properties 2.0.”

HealthLease was a publicly traded Canadian real estate investment trust for which Mainstreet Property Group was the external management company. It went public in June 2012. The REIT began with a portfolio similar in size to the Symphony portfolio, and ultimately was built up to 53 assets, at which point is was sold to HCN for $950 million, as part of an overall $2.3 billion transaction.

HealthLease also was a way for Mainstreet to secure capital for its ambitious development pipeline of distinctive post-acute and transitional care communities, as the REIT was given priority in financing and acquiring Mainstreet-developed properties. The same is true of the new venture.

Mainstreet will be required on an annual basis to provide the opportunity for the new investment vehicle to provide mezzanine financing for the first $100 million gross book value of developments that are not committed to other parties under existing agreements. Mainstreet Health Investments will then have the option to purchase any property for which it has provided mezzanine financing.

Mainstreet Health Investments’ independent board will review the Mainstreet developments on a case-by-case basis to determine which, if any, are right to invest in, White emphasized. They are not obligated to invest, but the access to Mainstreet’s development pipeline—pegged at $5 billion over the next five years—is a key differentiator for this enterprise.

“What I think is unique is the way we have this relationship structured so the board of directors of the public company has access to what we think is the best pipeline in the U.S. of these types of assets,” White said. “It’s the special sauce.”

The HealthLease portfolio ultimately contained about a dozen Mainstreet properties. However, White stressed that nothing is set in stone in terms of what the “HealthLease 2.0” portfolio might end up looking like, except to say that he expects it will consist mainly of U.S. rather than Canadian properties and that opportunities to grow it are not lacking.

“We have a very robust pipeline of acquisition opportunities we expect to execute on shortly after the RTO closes,” he said. “We are currently diligencing a few of those opportunities.”

Depending on where cap rates are, what the portfolio mix looks like, and other factors, Mainstreet Health Investments has the flexibility to pull different “levers” to create the best value for shareholders, White said—and that’s really the goal.

“We’re not a pure developer,” he said, of one misconception that some have of Mainstreet. “We’re an investment company that’s investing in different opportunities. One of the things we have developed and built is a development business, but it’s not the only thing. The public vehicle is a long-term opportunity for investors to participate in.”

Written by Tim Mullaney