With the dust settled on a whirlwind 2019, Invesque (TSX: IVQ U) will spend 2020 improving its operating relationships, consolidating its portfolio into master leases, and pruning non-essential assets from its roster.
The Toronto-based real estate investment company is doing this with an eye toward sustained growth in 2021 and beyond, and believes the shifting supply-demand dynamics in senior housing will favor its secondary market strategy.
Invesque is in daily contact with its operating partners in handling the ongoing coronavirus crisis. To date, no resident at an Invesque-owned property has tested positive for the virus, and operators are following CDC guidelines and protocols to prevent and/or contain it, Invesque Chairman and CEO Scott White said during an earnings call on Thursday.
Invesque reported net income of $6.7 million and normalized funds from operations (FFO) of $0.19 per share in fourth quarter of 2019. For the full year, the company reported a net loss of $5.4 million and FFO of $0.85 per share. The loss was mostly due to consolidation fees related to its $340 acquisition of Commonwealth Senior Living in May, White said.
Invesque completed its final tranche of the Commonwealth deal, acquiring three communities for an aggregate price of $55 million. It also completed its transition of 13 properties from Greenfield Senior Living to Commonwealth and Blue Bell, Pennsylvania-based Heritage Senior Living, and sold a former Greenfield community in Arlington, Texas.
Invesque reported $51.8 million in revenue in the quarter, a 57.8% increase year-over-year.
Focus on operations
Commonwealth is now Invesque’s largest source of net operating income, accounting for 26% of its total. The Charlottesville, Virginia-based operator’s portfolio now 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%.
Invesque spent the second half of 2019 consolidating the majority of its portfolio into master lease agreements, and the company holds options to tie other assets in its portfolio to master leases. As a result, over 90% of Invesque’s portfolio income derives from master leases, an increase from 77% in 2017.
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Senior housing now accounts for 55% of Invesque’s pro forma NOI, and nearly 40% from senior housing operating portfolio (SHOP).
“The master lease structure reduces credit risk in times of stress because of the cross collateralization and single rent payment obligation,” White said.
As Invesque moves deeper into 2020, it will use Commonwealth to analyze opportunities and create efficiencies across its senior housing portfolio.
Secondary market boom
Invesque has been paying close attention to analysis from the National Investment Center for Seniors Housing & Care (NIC) suggesting a course correction in supply-demand dynamics, as well as positive construction trends that will bode well for the industry over the next few years.
White believes that Invesque’s secondary market investment focus will position the company for strong, sustained growth in 2021 and beyond. While NIC’s analysis focuses on the top 31 markets in the U.S., nearly 60% of of the remaining top 100 markets featured assisted living construction below 3% of inventory.
This lends further credence to NIC’s contention that assisted living is nearing an “inflection point” — one White believes Invesque is ready to seize.
“It is important to note that today’s demographic growth of the 80-plus group is much stronger than 10 or even just five years ago. We continue to believe seniors housing occupancy may see its first year-over-year increase in 2021 as supply growth slows and demographic growth accelerates,” he said.
Invesque will assess its portfolio throughout 2020 and focus on internal redevelopment and expansion opportunities, as well as selective acquisitions with existing operators.
“We remain disciplined in our underwriting with a focus on recycling capital, acquiring assets at a discount to replacement cost and assuring that any growth further strengthens our high-quality portfolio of health care real estate,” White said.As the market plunged Thursday on coronavirus fears, Invesque stock ended trading down over 18%, to $4 per share.