While publicly traded healthcare real estate investment trusts (REITs) like HCP, Inc., Ventas, Inc., and Health Care REIT Inc. grab a lot of headlines, privately traded ones like Aviv REIT often seem to fly under the radar. But as Senior Housing News recently discovered after speaking with Aviv’s Steven Insoft, who holds dual roles of chief financial officer and chief operating officer, less publicity doesn’t mean they’re not active in the healthcare world.
Aviv’s roots can be found in a business founded 30 years ago by Zev Karkomi, a real estate investor who pioneered the model of triple-net-leasing skilled nursing facilities to operators. The Chicago-based REIT credits Karkomi with cultivating many of its operator relationships and building its substantial nursing home platform. Aviv has one of the largest SNF portfolios in the U.S., and while it will consider adding other assets in the continuum of senior care, Insoft says his company wants to focus on its core competencies.
Senior Housing News: Healthcare REITs like Ventas, Senior Housing Properties Trust, Health Care REIT, and HCP, Inc., generally get a lot of headlines, but I haven’t heard as much about Aviv REIT—have you been flying under the radar, or do you not garner as much publicity as a private REIT?
Steven Insoft: We’ve been in business for more than 30 years; however, the evolution of our company was very different. We have always been a privately-owned company, but our debt trades publicly.
We’ve evolved quite a bit, and we’ve grown quite a bit. The more you grow, not only are people more aware of you, but you get a certain benefit from people knowing who you are. The comfort the capital markets get with a known entity accrues to your benefit with cheaper capital.
While the mission of the company hasn’t fundamentally changed over the years [since evolving from its predecessor business founded by Karkomi], the capital structure has.
SHN: Aviv deals mostly with skilled nursing, but you’re also looking to diversify to assisted living and other sectors. What’s your strategy, and is there sector in particular you’re targeting?
SI: About 15% of our portfolio is not skilled nursing. We see ourselves having core strengths. Our core strengths follow a couple different avenues: We are expert in inpatient healthcare that involves government reimbursement schemes. We’re also well-versed in issues facing geriatric housing. Those fall along our core competencies.
It would be unlikely to see us start buying up medical office buildings, because they’re not with inpatient health care or geriatric housing. Right now, I see ourselves staying within one or two concentric circles of our competency.
SHN: You only seek triple-net leases. What’s your reasoning behind this, and why don’t you look for RIDEA-structured deals?
SI: The RIDEA structure is an excellent structure. Historically, most of the healthcare REITs bought assets where the underlying returns on the properties like SNFs and acute-care hospitals were sufficiently large to satisfy the REITs expectations, with plenty of property left over for the operator themselves.
You are less likely to see a RIDEA deal done in the skilled nursing space for a couple of reasons: The main reason is, there’s still a sufficient profit margin where there isn’t really a need for the landlord to get involved at an operating level [although some REITs do].
The reality is that, the more you go off and do stuff like this, from an investor’s point of view—look at Ventas’ income statement—it’s less clear what business you’re in. The more RIDEA structures, the more it looks like you’re in the operating business. For us, we’re smaller than many of the public healthcare REITs. We have our billion dollars in assets, but because we’re newer to the capital markets, it would be complicating our interests.
We own 250 properties in 27 states; we net lease them to 36 different operators. We do that with 29 properties. It’s a different operating model. It’s not an indictment of the model; it’s just different. It’s a different risk-return tradeoff.
SHN: What would be your ideal portfolio mix in terms of types of senior housing/care and preferred census (meaning private pay residents vs. Medicare/Medicaid)?
SI: We disproportionately like government reimbursements. We actually take some comfort in it because of the longevity in the systems, even though it can be bumpy year to year. We tend to be a little bit unorthodox in terms of how we look at those things. I’m less worried about there being a magic number; what I want to make sure of, is that as an investor, I paid properly for what it is I own.
In the last couple of years, the financial markets have put a very high premium on skilled nursing facilities that have high Medicare revenue mix. While I think that those buildings are, net, more valuable than buildings that don’t [have high Medicare revenue], I think the market over-prices the value of the Medicare reimbursement. In absolute dollars it’s better, but they’re putting a higher multiple on it.
To me, you’re doubling down your risk, because although I find high Medicare census to be net more attractive, I want to pay a less aggressive multiple for that cashflow.
I don’t want to buy properties on a linear relationship; if a building is 80% more profitable, I don’t want to pay 80% more for it. Right now, the market is paying more for that asset, and putting a higher multiple on it. We give some pause to that.
More private pay and Medicare is better, but I gotta make sure I didn’t overpay for the asset in order to achieve it. I’d rather pay a more modest level and have my operators drive revenue. The value proposition of our business to us is not the real estate. It’s the operator. It’s not about, ‘Do I think the building will perform well?’ The operator has to perform well.
SHN: Do you look for opportunities in turnaround deals?
SI: Sometimes real estate can get in the way of profitability. We don’t really like to buy turnarounds. REITs generally like to buy properties that can cover rent from the get-go. But I might look at a property that looks like a value-add play. The real estate isn’t the problem, but the existing manager is the problem. But I don’t want to buy real estate that’s poorly performing because the market, or the physical plant, is causing that to happen.
SHN: In 2011, your portfolio had an average 74% occupancy rate. The industry average for skilled nursing is about 88%. Why is yours so comparatively low?
SI: Our occupancy is at 83% for our skilled nursing portfolio, and it has been very consistent; it’s not like it was 88% and it fell to 74%. If you look at the skilled nursing census, you need to look at it state by state. At the inception of the Social Security Act, states became responsible for determining how licenses are rationed for healthcare facilities.
There are two kinds of states: Those where the licensure requires certificates of need (CONs); and states that don’t. What happened was, 45 of our buildings are in states without CONs;
Texas, for example, has an average census of about 70%. Coastal states tend to be CONs, and have higher occupancy.
Aviv has a history of buying facilities in states with below-average census, but we might start giving back the licenses; it’s an optical impairment. It’s a perceived value indicator; people like portfolios that are fully occupied. Many of the buildings are actually not designed to house the number of people it’s licensed for, and what happens over time is these buildings aren’t used the same way. Operators don’t care about optics of the census.
We’re thinking through strategy to reduce licensed bed capacity, because we have too much capacity in our beds on a licensed basis. We’re going to programmatically go through our portfolio and shed some licensure that is no value to us or our operators. It’s nominal capacity that’s misleading.
SHN: Aviv REIT did about $660 million of acquisitions between ‘05 and ‘11. But you did about a third of those acquisitions in 2011 alone, with more than $220 million in deals. What happened?
We recapitalized our business in the Fall of 2010; we partnered with a private equity firm in New York, Lindsay Goldberg, LLC. They’re providing us with capital to fuel the growth. We see our 2011 experience being more of an indicator of things to come, than what our activity had been in the past five years.
We have more capital to invest, more resources dedicated to the effort. We’re creating more avenues for capitalization and growth. We’re not going to compromise our underwriting standards or the folks we like to lease our properties to, but we do think we can invest at a slightly faster pace, more along the lines of 2011.
SHN: Will Aviv evolve into buying or investing in other property types?
SI: We probably want to get a bit larger. In our portfolio, 15% is not skilled nursing; we do own other healthcare in geriatric housing/asset types. We’re developing a couple [assisted living] properties in Fairfield [County, Connecticut], so it can’t be out of the question as far as doing it. But I think it’s going to be a small part of our story during the next stage of growth, the next doubling of our asset base (to $2 billion).
As we get larger, our cost of capital might afford us to be a little more competitive in some of our other asset classes. It’s about making sure we’re buying things we understand. It’s possible—even probable it will happen over time, but won’t be a meaningful part of our story. We stick to what has worked for us.
SHN: Do you prefer new construction, or existing properties, for investing?
SI: We start with finding operators, and then we find real estate for them to operate. We’re working on six new construction projects—two assisted living facilities, and four skilled nursing facilities. Three of the four SNFs are replacement projects.
We’re going through our portfolio to find aging stock, and replace it ourselves. An old building might be in a good market, but the building is challenged. We’re more apt to do new construction with people with whom we have a portfolio relationship already. There’s a risk element to it that it’s generally best merged with an existing portfolio relationship.
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