EXPERT OPINION: A Conversation with Steven Insoft

June 1, 2011

In this "Expert Opinion" interview, Steven Insoft, CFO of Aviv REIT, discusses the explosive activity in the health care REIT market over the last several months.

Steven InsoftWatch the video      Read the transcript

Mr. Steven J. Insoft is currently employed at Aviv Asset Management L.L.C. in the position of Senior Vice President and Chief Financial Officer. Mr. Insoft is responsible for handling the company's investment and finance responsibilities. Mr. Insoft joined Aviv in 2005. Mr. Insoft has been in the long term care and senior housing business since 1991. He spent 8 years as a Vice President and Senior Investment Officer for Nationwide Health Properties, a publicly-traded Real Estate Investment Trust (REIT). Prior to that, Mr. Insoft spent 7 years as President and CFO of CMI Senior Housing & Healthcare, Inc., a Boston based developer and operator of long term care and senior housing facilities. Prior to his experience in the long term care industry he spent three years at the Prudential Insurance Company of America as an associate in the Capital Markets and Prudential-Bache Interfunding Groups. Mr. Insoft received an M.B.A. from Columbia University and a B.S.E. in Electrical Engineering from the University of Pennsylvania.

 

Contact Information:
Mr. Steven Insoft, CFO
Aviv REIT INC.
303 West Madison Street, Suite 2400
Chicago, IL 60606
Tel: (312) 855-0930
Fax: (312) 855-1684
sinsoft@avivreit.com

 

Watch the video of the interview: 



 

Read the interview transcript:

Steve Monroe:
I'm sitting here with Steven Insoft. He's the CFO of Aviv REIT, a private REIT specializing in long-term care and specifically skilled nursing. Given everything that's been happening in the health care REIT market these past six to eight months, being a REIT is certainly the right place to be right now. What's your take on all the recent explosive activity?

Steven Insoft:
Steve, I think what you're seeing in the marketplace is a byproduct of a little bit of Wall Street sort of renewing their interest in the health care real estate sector, a combination of a couple of things, perhaps. Some larger players that Wall Street can get excited about because they have liquidity and transparency, in combination with the fact that we're at a place in the economic cycle because of the low interest rate environment making REITs interesting and because of the alternative asset classes within REITs being perhaps less interesting at this point in the cycle. And I think health care right now is the beneficiary of both those factors.

Steve Monroe:
You completed last year a major recapitalization of your REIT, you did a private equity raise. Have you put most of that money to work already or do you still have more to go?

Steven Insoft:
Good question. About half and half. Much of the equity we raised originally was to recap the company. As you know, we had a prior institutional partner we enjoyed doing business with, so there was a return of capital on that side. We made a decision to deleverage the organization, which I think is a safer way to grow the organization, in today's debt environment. But we are in the process of putting that money out, that growth capital out, in sort of what I call a disciplined fashion, consistent with what we've done in prior years.

Steve Monroe:
And you historically have invested mostly in the skilled nursing side of the business. Are you going to diversify away from that a bit or stick with your knitting?

Steven Insoft:
Sort of at a macro level, I think we'll stick to our knitting. And I think our knitting has primarily been to invest in operators. And what I mean by that is we first underwrite somebody's ability to operate skilled nursing facilities, and once we're able to vet folks from a character and skill-set point of view, the real estate is easy. And once we get comfortable with people, we tend to do a lot of follow-ons.

That said, once you have something, you tend to do more of it because the operator's already a known quantity. We did do a couple of assisted living transactions in Q4 of last year, and again, not because we found the assisted living sector in itself de facto attractive. We really liked a particular operating group, actually, out of the Connecticut area who had some interesting opportunities, and we felt given the risk-return situation of those projects, it made sense for us. But I don't think you'll see us going wholesale into other asset classes, but perhaps incrementally over time.

Steve Monroe:
And what are you seeing in the market right now? Are you mostly seeing small portfolios or one-off sales?

Steven Insoft:
Well, I think we're seeing actually a lot of everything. In the last 90 days we have taken an interest in one-off deals ranging from $1 million to $5 million, three-, four-asset portfolios in the $10 million to $50 million range, as well as 30- and 40-asset portfolios. It's an interesting time now. I think that all the activity at the large-scale level that's been much discussed about in the press is leaving a little bit of a void down the small—what we call our mainstream business, which has always been what we call our bread and butter business. And, in an odd way, perhaps, becoming more attractive than ever as the larger players are having a harder time making sense of doing a $5 million, $10 million and even a $50 million deal.

Steve Monroe:
And then within that $1 million to $50 million, do you have a target number, a little sweet spot, let's say, that you like to do?

Steven Insoft:
You know, it's interesting. We really don't. It's all about facts and circumstances, the way we look at things. For an existing tenant relationship that we enjoy, it's a range. We will do a follow-on of perhaps any size, $1 million to $100 million with somebody who's already got an operating track record with us. For a new operator to the extent they're a local or small regional operator, obviously we wouldn't want to get too aggressive with them in our first relationship. In those situations, we generally see the $5 million to $25 million range fitting better.

Steve Monroe:
As you look into 2011 and 2012, what percentage of your business do you think will come from existing customers as opposed to new customers?

Steven Insoft:
Let me see if I can answer that question in a slightly different way. Today, Aviv net leases its properties to 32 different operators around the United States. In the last five years, we have typically brought in a new operator or two in every year. So I think while it's hard to decide how that might fall out on a percentage of investment basis, if you look at it on a percentage basis, perhaps somewhere between five and ten percent of our new activity, all else being equal, could be with new customers. And again, the new customer is always more difficult from a risk-adjusted standpoint than the old customer because in our business, it is far more difficult to underwrite the operator than it is to underwrite the real estate.

Steve Monroe:
What do you think about the new—I call it the so-called RIDEA structure that a lot of the large REITs are doing, where it's not just a sale-leaseback, it's a sale-manage back and they benefit from the increase in operating income. Do you think that is a riskier position, and do you see yourself doing something like that down the road?

Steven Insoft:
Let me see if I can answer that in a couple of parts. I think it made and continues to make an enormous amount of sense for those REITs who are participating in the asset classes within health care that look more like housing, assisted living, independent living. The reason for that is as the cap rates of those investments start to compress towards those REIT's cost of capital, the spread or the covering to the operator is getting so small that arguably, the REIT owns the downside anyway, so why not own the upside? To buy a bond and only to own the downside wouldn't be in the best interest of their equity holders. So I think the evolution of those REITs getting into the RIDEA structures makes perfect sense.

I think I'd have to be convinced that it would make sense for the skilled nursing space. I think there's perhaps a little bit more volatility in the earnings stream, and there is still sufficient spread, even in the largest deals we've seen done in the marketplace. The Genesis transaction, the HCR ManorCare transaction. There's still enough spread back to the operating company where the REIT is sufficiently buffered in their return that the RIDEA structure probably is still not making much sense.

Steve Monroe:
So I assume not many of your existing clients have come to you to switch from the lease to the RIDEA management.

Steven Insoft:
No, they haven't. And hopefully, at least from the industry's perspective, the first skilled nursing RIDEA deal won't be a byproduct of a workout.

Steve Monroe:
I hope not. When they recently announced this quarter the NHP-Ventas deal, do you see more of the large REITs going after the small REITs, or the small REITs merging together to be more competitive?

Steven Insoft:
It's a great question. And obviously, it's something that Wall Street, our management team, gives some thought to once in a while. I think what's happened obviously, just by doing the numbers, is there's been a barbelling or bifurcation in the health care REIT space. You've got a couple of very large REITs. Not that that in itself is new, but the disparity in the size now is almost an order of magnitude and then some. I think what it's done is it's really put them into an entirely different business within the asset class. Not better, not worse, just different. They are almost becoming health care real estate mutual funds of sorts. Their constituents are looking for a different risk return profile. Our constituents are looking for more growth and yield, and we can move the needle of course with smaller deals.

So for the latter part of your question, I think it remains to be seen as to whether or not you see some meaningful consolidation at the smaller end. I think you've got four or five groups, ourselves included, who are still adding an enormous amount of value to their investors as independents. And I think it's a byproduct of what I call the mainstream business. There's still such sufficient spread for that investor that the urgency to consolidate isn't so great. Now again, that's a macro statement. Within that subset of five, one or two of them might see their spreads narrowing, their cost of capital getting away from them, and perhaps there again you may have a given REIT that might see the need to do it. But again, I think as I look around the landscape, most of our peer group is becoming more acquisitive and seeming to be more interested in growing their platform.

Steve Monroe:
I would say so. And I think we're going to see a lot more of that, especially with the large—the super REITs, we can call them now, not going after the $5 million, $10 million, and $20 million deals.

Well, great. Thanks for spending time with me, and good luck on your growth plan.

Steven Insoft:
Thank you, Steve. 

 

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Senior Care

hey..this is one fine piece of conversation..it is highly informative and beneficial...thanks a lot for sharing the thoughts and expertise on such important as well as valuable issues...keep posting such conversation..!

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