Investment firm focuses exclusively on the growing healthcare sector.
By Jeff Shaw
The value proposition of investment management firm American Healthcare Investors (AHI) is straightforward: “Build portfolios with a value greater than the sum of the individual assets.”
That’s according to Danny Prosky, one of the company’s founders and managing principals. “You have to build the portfolio for the exit sale, but the strategy is quite simple,” says Prosky.
AHI is one of the most active buyers and managers of healthcare real estate in the country. The company currently manages a seniors housing portfolio of 202 properties totaling 11 million square feet in 18,600 units. AHI also invests in medical office buildings and hospitals.
AHI values its assets under management at approximately $8.5 billion, which includes $3.5 billion managed on behalf of affiliated real estate investment trusts (REITs) and $5 billion on behalf of Colony Northstar Inc. (NYSE: CLNS). As the advisor to a series of non-traded REITs, which buy and hold the properties, AHI selects the properties each REIT will acquire and manages the portfolio.
Prosky entered the healthcare REIT space by accident as a young accountant, when a three-week temporary assignment in 1992 with American Health Properties (later acquired by HCP) turned into a 14-year stint with the company.
In 2006, he left for Triple Net Properties, which merged with Grubb & Ellis soon after. It was there that Prosky began working with Jeff Hanson and Mathieu Strieff.
Recognizing that Grubb & Ellis was headed toward bankruptcy, the three co-founded AHI in 2011. The company’s headquarters are located in Irvine, California.
“A significant number of our employees came together in 2006 and came with us from Grubb & Ellis to AHI, so many of us have been together for 11 years,” says Prosky. “We left Grubb & Ellis on a Friday and opened as American Healthcare Investors the following Monday.”
In the five years since AHI was founded, the company has grown from 30 employees to 125.
A win-win partnership
AHI has partnered with Griffin Capital Co. to co-advise the non-traded REITs.
The partnership came about because of Kevin Shields, Griffin’s CEO, who AHI’s founders already knew.
“We talked to quite a few firms in 2011 to consider partnerships, but we particularly liked Kevin,” says Prosky. “He has a very institutional mindset, which this industry needs more of. A lot of REITs are run too privately when they should be more institutionally run.”
Shields agreed to have his company become the capital-raising arm of the REITs, while AHI handled acquisitions, accounting and management for the portfolios.
In addition to Griffin, AHI works closely with Colony Northstar, which purchased Griffin-American Healthcare REIT II in 2014 for $4 billion. Although Colony Northstar now owns the properties, AHI continues to manage that portfolio.
“Colony Northstar also owns a piece of our advisory business,” says Prosky. “When they bought that portfolio, they wanted us to continue to manage the assets. So they bought a piece of our business, and we now handle the assets and accounting as a sub-advisor for that portfolio.”
Northstar also co-owns a portfolio of seniors housing properties through a 70/30 joint venture with Griffin-American Healthcare REIT III, with Griffin-American owning the lion’s share.
Prosky sees AHI’s role in the industry as an “aggregator” of valuable properties, which together make for a portfolio that should be worth more than the sum of its parts. The end goal is to hold the properties for several years, hopefully building more value, then sell or list the whole REIT.
“We don’t buy with the intent of flipping the property soon,” says Prosky. “We could sell it piecemeal, but that’s not what we’re trying to do. We want to build the portfolio so that the bigger it is, the higher premium we get.”
A perfect AHI seniors housing acquisition is institutional quality with an operator that can generate a strong cash flow to rent coverage ratio — usually 1.25 or better for assisted living and 1.5 or better for skilled nursing. Ideally, AHI buys four to five properties at once, then leases them to an existing operational partner.
“We work the same as the big REITs, but on a smaller scale,” says Prosky.
The company focuses mostly on assisted living and skilled nursing, preferring to stay on the clinical side of seniors housing. The small amount of independent living that AHI manages (approximately 4,000 units) is mostly within continuing care retirement communities, which span the continuum of care.
Prosky notes that, while independent living is becoming more clinical, offering more services previously associated with assisted living, it’s still not a senior living product type the company plans to invest in heavily. “I never say never, but independent living is not something we focus on.”
The portfolio of Griffin-American Healthcare REIT III is currently made up of 35 percent assisted living/memory care properties, 35 percent skilled nursing assets, 22 percent medical office buildings, 5 percent hospitals and 3 percent loans.
The REITs typically start out heavy on medical office because those properties are easier to execute as one-off transactions, which works better when fundraising is still in its infancy. Once the fundraising hits its peak, AHI begins to go after larger seniors housing portfolios.
“Our acquisition volume is directly related to the available capital,” says Prosky, pointing out that last year AHI was in a lull on the acquisitions front due to some timing issues in the life cycle of the non-traded REITs. “We’ve done as much as $1.8 billion in a year, but last year was lower as a result of those timing issues.”
Leases within the portfolio are split between triple-net (where the operator pays a set fee) and RIDEA (where the owner and operator share in the profits). The company prefers triple-net leases, but several years ago RIDEA structures were all that was available. “That’s where the market was,” says Prosky.
“Our goal has been to be more triple-net than RIDEA. The fact is, though, if we wanted to buy good-quality assisted living with attractive cap rates, we had no choice.”
Although non-traded REITs have gotten some bad press in recent years — particularly due to scandals and government actions surrounding AR Capital’s investment practices — Prosky is a big believer in the sector.
Digesting a blockbuster
AHI sometimes makes headline-grabbing purchases — like in 2015, when the company acquired Trilogy Health Services for $1.1 billion. The acquisition was the previously mentioned 70/30 joint venture between Griffin-American Healthcare REIT III and Colony Northstar.
Founded in 1997, Louisville-based Trilogy operated 96 seniors housing campuses throughout Indiana, Ohio, Michigan and Kentucky at the time of the sale. The portfolio comprises more than 10,000 beds, and most campuses were built or renovated within the past 10 years. Trilogy continues to operate all the communities, which offer a range of care, including assisted living, memory care, independent living and skilled nursing services.
“We’ve known Trilogy’s CEO Randy Bufford for a long time and think he’s a fantastic operator,” says Prosky. “If you compare its performance to the rest of the industry, Trilogy has done especially well over the last few years.”
Although the portfolio contains a heavy dose of skilled nursing, Prosky says AHI is not afraid of the sector that many of the big REITs are running from. He notes that operators with good outcomes, low readmission rates and strong hospital partnerships are still doing well. “Skilled nursing is still the lowest-cost source for patients who need that care,” says Prosky.
“We wouldn’t have done the deal that we did with Trilogy with any other operator. We think it is the best. If you look outside of that transaction, we don’t do a lot of skilled nursing.”
AHI also manages an international portfolio, with about 50 assets in the United Kingdom operated by Caring Homes.
Although AHI doesn’t have a huge appetite for international assets, the deal was too good to pass up. The deal was structured with absolute net leases in place, meaning AHI doesn’t have to manage the day-to-day issues, and the risk-adjusted returns were higher than what AHI saw domestically.
“We’re not looking to buy overseas just to say we’ve done it,” says Prosky. “We do it when it makes sense. Caring Homes is a great operator, and we’ve expanded on that relationship.”
The U.K. assets were acquired at a 7.25 percent capitalization rate, which Prosky says was 50 to 75 basis points better than similar assets here in the United States.
Investing in themselves
The founders of AHI believe in their REITs, and it’s not just talk. All three take the entirety of their AHI compensation in REIT shares instead of cash. The three have enough other sources of income to cover their daily living expenses without a standard paycheck.
“Instead of putting the money in our bank account, we send it to the REITs,” says Prosky. “The three of us are almost always the largest investors in our programs.”
In addition, many members of the senior management team under Hanson, Prosky and Strieff take between 5 and 15 percent of their salaries in REIT shares.
A lot of the AHI team has been with the company since the first Grubb & Ellis REIT in 2006.
He also credits AHI’s laser-like focus on healthcare properties — “that’s all we’ve done and all we intend to do” — for the company’s successes.
He describes the sector as “not recession proof, but recession resistant” because of the aging population of the United States. The number of people 65 and older in this country is projected to increase 81 percent between 2010 and 2030, according to the U.S. Census Bureau.
Those demographics also smooth out any worries he might have about legislative and regulatory changes for the industry. Prosky jokingly notes that the investors most worried about a possible overturn of the Affordable Care Act are the same ones who worried about its original passage in the first place.
“Do you think you’ll be spending more or less on healthcare in five years? Unless you’re going on Medicare, the answer is ‘more,’” says Prosky.
“It doesn’t matter who controls the House and Senate. That’s going to be the case.”