After a whirlwind of acquisition activity in 2019, Invesque (TSX: IVQ U) is winding down the year with an eye on maximizing the value of its expanded senior housing portfolio in 2020 through improved operations, selective paring of assets, and holding options to consolidate most of its portfolio into master leases.
The Toronto-based real estate investment company also believes it is well positioned to capitalize on what it sees as positive construction trends in the secondary markets where it executes its investment strategy.
Invesque reported a net loss of $2.34 million and normalized funds from operations (FFO) of $0.23 per share in Q3. This was mostly due to consolidation fees related to its $340 acquisition of Commonwealth Senior Living in May, Invesque Chairman and CEO Scott White said during an earnings call on Thursday.
Invesque also expedited its transition of 13 properties from Greenfield Senior Living to Commonwealth and Blue Bell, Pennsylvania-based Heritage Senior Living, the fees from which also contributed to the loss.
Invesque reported $38.6 million in revenue in the quarter, an 18.1% increase year-over-year.
Heavy lifting completed
Invesque spent the third quarter focused on completing the Greenfield transitions. Originally expected to be completed by the end of the year, Commonwealth came to an agreement with the Falls Church, Virginia-based operator to expedite the transitions. As a result, 12 of the Greenfield communities have completed transitions — 10 are managed by Commonwealth and two by Heritage.
Invesque is evaluating its options on a 13th community in Arlington, Texas. Those options include a sale, White said.
Commonwealth is now Invesque’s largest source of net operating income, accounting for 26% of its total. With the Greenfield transitions, Charlottesville, Virginia-based Commonwealth’s portfolio includes 34 communities and nearly 2,400 units under management. Twenty-seven of those communities are in Virginia, making Commonwealth the largest senior housing operator in the state.
Heritage is now Invesque’s third-largest source of NOI, at around 8%.
The firm closed on the $30.7 million acquisition of three memory care communities developed by Ellipsis Real Estate Partners and operated by Constant Care Management Company. Constant Care now manages seven Invesque properties.
Invesque also spent Q3 placing as many of its properties into master lease agreements, and holds options to tie other assets in its portfolio to master leases. As a result, 92% of Invesque’s portfolio income derives from master leases, an increase from 77% in 2017.
Senior housing now accounts for 55% of Invesque’s pro forma NOI, and nearly 40% from senior housing operating portfolio (SHOP).
“Invesque is one of the fastest-growing, publicly traded companies in North America. That growth requires that we constantly monitor and assess the performance of our portfolio. This process assures that we are achieving our long-term goal of building a world-class portfolio with a stable of preferred operators who can maximize the value of each of our assets,” White said.
Secondary market confidence
White believes that Invesque’s senior housing portfolio and its roster of operators is strong enough to withstand the industry headwinds that have bowed other publicly traded health care companies and operators during third quarter earnings.
Notably, Ventas’ (NYSE: VTR) senior housing performance suffered in Q3 from what the Chicago-based REIT’s CFO, Bob Probst called an “unprecedented” combination of market dynamics, particularly with pricing discounts in secondary and tertiary markets.
Industry construction trends are slowly turning in favor of investors and operators, White noted. Quarterly occupancy and construction reports from the National Investment Center for Seniors Housing & Care (NIC) show a dropoff in new construction starts throughout 2019, and absorption outpaced new inventory growth in the first and third quarters. Development activity is decelerating faster in the secondary and tertiary markets that are at the foundation of Invesque’s investment strategy, and is paying close attention to this moving forward.
“We have long believed that the gap between demand and supply is more important than just focusing on the supply side of the equation,” he said.
Furthermore, assisted living supply continues to improve, with construction as a percentage of supply at its lowest level since 2013. This is important for Invesque as more than 80% of its senior housing portfolio is concentrated on assisted living and memory care units, and the growth of the 80-plus age demographic will only increase in the following years.
If these trends continue to improve, White sees consistent occupancy gains industry-wide, starting in 2021, and Invesque’s portfolio will be well-positioned to capitalize. Excluding NIC’s top 31 primary markets, more than half of the subsequent 100 markets have new assisted living construction below 3% of inventory.
Invesque plans to be very selective with its acquisition opportunities in mid-tier secondary markets, and may even kick the tires on opportunities in the top MSAs.
“These markets continue to provide us with the opportunity to invest in sizable, scalable and high-quality opportunities at a [favorable] discount to replacement costs,” White said.
Invesque stock ended trading Thursday up 2%, to $6.91 per share.