This Healthcare REIT Share Price Hasn’t Taken Off Yet

chart02In hopes of a stock rebound, activist Levin Capital Strategies made an agreement with the externally managed healthcare REIT, New Senior Investment Group, last month. This is just another development by an activist in a market that has seen several stocks become underappreciated by sellouts in 2015 and has never recovered.

In addition to agreeing to add an independent board member, Levin Capital will not object to board director nominees at the next annual meeting. When Levin complained about New Senior’s stock performance last September, they owned 6.5% of New Senior; since then, they have likely not profited from them yet.

chart05New Senior Investment Group is externally managed. In November 2014, Fortress Investment Group LLC spun off New Senior Investment Group from one of its publicly traded funds, Newcastle Investment Group, hoping that the aggregate market value of both companies would be higher.

Nevertheless, the share price hasn’t taken off. In fact, last year the stock dropped by 40%, the worst performance among healthcare REITs. On the other hand, assets saw a 50% increase and debt level almost doubled. It appears that the management pushed the boundaries last year.

chart01Their share price performance has followed trends similar to other externally managed REITs, such as NorthStar Realty Finance and Ashford Trust. Interestingly, Levin also owns shares of NorthStar Realty Finance.

Despite its short history as a standalone company and being externally managed, New Seniors does have good things going for it. The defensive sector stock currently has the highest yield among healthcare REITs and its dividend payout to AFFO is below 90%.

For those who don’t like investments dependent on Medicaid and Medicare, New Senior sources their revenues primarily from private sources. They invest in independent living and assisted living/ memory care facilities. In a spectrum between minimal and intensive care, they are situated in the middle.

New Senior’s portfolio is composed of managed and triple net lease properties. In managed properties, the company has direct participation in the cash flow of the facilities. In Q4 2015, managed properties occupancy has advanced by 310 basis points year over year, and triple net lease properties occupancy has increased by 110 basis points. Like many, their triple net lease tenants don’t have much room to cover rental payments, EBITDARM is around 1.28x.

chart03

Additionally, AFFO per share increased 58% in Q4 2015 year over year. Their AFFO multiple is around 8.4x, as opposed to the sector median of 16x.

What concerns us most is that their total debt to total enterprise has reached 71%, which is high. Management is well aware of the leverage level, but they don’t seem to be too concerned about it. While they are selling some properties, they prioritized stock repurchases for now, where they can extract higher cap rates (even more than buying properties, according to management). As of now, their debt hasn’t been rated by major credit agencies, so it’s difficult to know exactly where they stand.

chart04In conclusion, we believe that New Senior does have some very good qualities, but they also have very bad ones. Given its share price discount and the existence of an activist as a catalyst of change, we are placing this on our activist/speculative bucket.

Source: New Senior Investment Group (NYSE:SNR), SEC

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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