HCP Spinoff Reduces Risk for Its Investors

chart01.pngSignificant changes are an understandable source of concern for investors. However, HCP’s decision to spin off both its skilled nursing facilities and its assisted living facilities should not be interpreted in a negative light. After all, it promises to boost its financial performance by reducing its risk for its investors, which is what its management should be seeking under the current circumstances.

In short, the U.S. government has become more and more concerned about rising healthcare costs in recent times, which in turn, has prompted more and more scrutiny of the healthcare sector. Unsurprisingly, this has resulted in the detection of more and more cases of wrongdoing, which has sent tremors running through investors with investments in healthcare REITs reliant on government reimbursements.

HCP has had its multiples brought below the healthcare REIT average by these incidents involving one of its most important tenants, HCP ManorCare. Last year, the U.S. Department of Justice accused HCP ManorCare of requesting government reimbursements to which it was not entitled. This February, HCP announced impairments due to the tenant’s poor performance.

While HCP might not be able to predict the repercussions of the U.S. Department of Justice claims, its status as a large cap REIT with an investment grade rating provides muscle power to contain it. Even after the spin-off, the REIT will remain large.

HCP’s new portfolio will be equivalent to 73 percent of the total revenues, coming from senior housing, life science, and medical offices, thus ensuring the stable revenues from private pay sources that are most attractive to investors who want to earn an income while also playing it safe. In contrast, the spun-off portfolio of both skilled nursing facilities and assisted living facilities will bear the higher risk, and potentially higher rates of return, thus ensuring its appeal to investors who are more willing to take a chance.

Summed up, HCP’s decision is a sensible one that will make its portfolio safer by divesting its sources of risk, thus putting it in an excellent position to reach parity with other healthcare REITs.

Source: HCP, Inc.(NYSE:HCP), Fast Graphs

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.

This Healthcare REIT On Way To A Rebound

chart01At a 7 percent dividend yield, Medical Properties Trust seems like one of the most attractive investments among healthcare REITs, so much so that some investors have wondered whether it is even capable of covering its dividends. However, there are reasons to believe that the healthcare REIT will have no problems doing so, which in turn, suggests that its shares might be undervalued.

Before explaining why shares of Medical Properties Trust might be undervalued, it is important to explain how it has come to its present state. In short, REITs have to issue either debt or equity if they want to speed up their expansion because they are obligated to pay most of their taxable income to their investors in the form of dividends. This means that Medical Properties Trust was not doing anything unusual when it chose to issue 43.8 million common shares in order to fund its purchase of additional healthcare properties.

Unfortunately, it chose to do so right before the mass sell-off in 2015, which forced it to scale down its plans from 43.8 million to 25 million common shares. Combined with the general lack of demand, this caused Medical Properties Trust’s share price to fall 20 percent in a single month, though it still managed to purchase seven hospitals in exchange for $900 million raised through the issuance of equity and debt.

In response to the fall in its share price, Medical Properties Trust has been taking some steps to fix the problem. For example, it has switched over from lines of credit to fixed debt, which should result in controlled costs over the long run. Furthermore, it is raising $550 million by merging an owned operator with a healthcare operating company called RegionalCare (linked to Apollo Global Management, LLC), which will put it in a much better position to satisfy its outstanding debt. Something that should improve its net debt to pro forma EBITDA, which is estimated to go below 6 times over.

Based on these facts, it is no wonder that Medical Properties Trust is projecting FFO growth of 4 percent in 2016 in spite of its difficulties with expansion because of its low share price. As a result, REIT investors might want to take a second look at the healthcare REIT, which could be on its way to a rebound in its share price.

Source:Medical Properties Trust Inc.(NYSE:MPW)

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.

Healthcare REITs Exposed to this Top Independent Living Tenant

chart01Last week, we showcased Genesis Healthcare, one of the largest providers of skilled nursing (SNF) in the United States. We discussed how a single operator could have a tremendous impact on multiple healthcare REITs. Genesis is such a sizeable tenant that they influence the bottom line of Omega Healthcare, LTC Properties, and Welltower. Today we will be featuring Holiday Retirement, another operator in the healthcare segment.

With over 300 senior living communities, Holiday Retirement is one of the largest providers of independent living in the U.S. Along with New Senior Investment Group, a healthcare REIT, Holiday is under the wing of Fortress Investment Group, LLC. Fortress is a global, publicly traded investment management firm with approximately $71 billion in AUM.

In addition to New Senior, Holiday has lease agreements with Ventas (NYSE:VTR), Sabra Health Care REIT (NasdaqGS:SBRA), and National Health Investors Inc.(NYSE:NHI).

Unlike Genesis Healthcare, Holiday is not publicly traded. Due to this fact we certainly cannot paint the entire picture. That being stated, we do know that Holiday’s founder sold the company to Fortress in 2007, and is set to mature as an investment in 2017. In addition, Fortress reduced the company’s assets by fifty-percent from 2013 to 2015. As you will notice the business sold many of their properties to REITs.

Is Independent Living Dependent On Medicare/Medicaid?

According to the above-mentioned REITs, we can infer that most independent living facilities do not have the high levels of exposure to both Medicare and Medicaid. These types of properties, different from SNFs, are subject to less government regulation due to the fact that they rely on private sources. On the other hand, when being compared to SNFs, independent living facilities share the exact same level of competitiveness resulting in the potential that their rent coverage may be thin.

What Is Their Exposure?

Holiday encompasses 76% of New Senior’s net operating income. Blue Harbor, a company that is also manages senior living properties and is a part of Fortress Group, covers an additional 12%. Together, these two companies consist of over 88% of New Senior’s net operating income. Based on that reason alone, any investment in New Senior is also highly concentrated in both Fortress and its funds.

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Holiday is a Ventas’ top tenant contributing 3% of net operating income. They certainly have been a contributing factor by increasing Ventas’s current footprint to 786 senior housing communities. In 2014 alone, Ventas acquired 29 senior housing communities in Canada from Holiday Retirement. This transaction is referred to as the Holiday Canada Acquisition.

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Holiday is Sabra Health Care’s second largest tenant. In fact, 17% of Sabra’s annualized revenues have been generated directly from a master lease with Holiday. In 2014, Sabra added 21 independent living facilities from Holiday. These properties are located in fifteen states, and have lease terms of 15 years.

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Holiday is a significant tenant for National Health Investors, encompassing 21% of their total rental income. In December 2013, National Health acquired 25 independent living facilities from an affiliate of Holiday. The company was able to ink a master lease term of 17 years.

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Source: New Senior Investment Group In(NYSE:SNR), Ventas (NYSE:VTR), Sabra Health Care REIT (NasdaqGS:SBRA), National Health Investors Inc.(NYSE:NHI).

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.

Healthcare REITs Exposed to this Top SNF Tenant

chart05.pngIndividual dividend investors fond of healthcare might find this article useful as we look at the skilled nursing facility industry. The last time we reviewed this industry, we pointed out that operators in the industry have been tenants of their fellow healthcare REITs. Looking at it from another angle, we wonder what the effect is on individual healthcare REITs who are dependent upon a single, interdependent tenant.

Genesis Healthcare, a prominent healthcare operator and publicly traded company, is one of the United States’ largest post-acute care operators. Genesis is associated with Omega Healthcare, LTC Properties, and Welltower. Due to challenges in the industry, Standard & Poor’s downgraded the company to B- last year and put it on alert.

Genesis Healthcare is a sizable healthcare operator, with almost $400 million in market cap. Despite the size, the company is highly concentrated in Medicare/Medicaid revenues. It has 475 skilled nursing facilities and 56 standalone assisted/senior living facilities across 34 states. A lot of the facilities are located in the Northeastern U.S and most are leased.

Margins have been thin due to levels of high competitiveness and government pressure to reduce healthcare costs. As a result, some segments of the company have not been profitable; overall, the company incurred losses in 2015, 2014 and 2013. The company intends to strengthen its balance sheet in 2016. They are selling non-strategic assets which should generate U$100-150 to pay down debt. This initiative has been welcomed by S&P.

Exposure to Genesis

Genesis is Omega Healthcare’s top tenant, responsible for about 7% of its annualized base rent. Overall, Omega has a good number of operators (83 in total); none of the top 10 operators individually are responsible for more than 10% of revenues. This is a good indication that the company would not be hugely affected by a potential Genesis’ default.

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While Omega’s top 10 tenants encompass 48% of revenues, LTC Properties’ top 10 consists of 81%. In LTC’s case, Genesis is among the top 10 tenants but is seventh in the rankings. It is responsible for 5% of revenues. Certainly, the management has other tenants to care about equally.

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Genesis is also a top tenant of Welltower, which leases 187 facilities to Genesis via a long-term, triple-net master lease. For the year ended December 31, 2015, the lease with Genesis accounted for approximately 31% of Welltower’s triple-net segment revenues and 10% of total revenues. In terms of net operating income, this is equivalent to 14%.

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Genesis’ shares have lost two-thirds of their value over the past 12 months. The lowest point was in February when the stock bottomed at $1.42. More recently, the stock has rebounded and is now trading at around $2.35. During the same period, the three healthcare REITs above mentioned have experienced some depreciation as well, but not as severe.

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Extra vulnerable companies such as Genesis have suffered more, in light of being exposed to regular sell-offs in the financial markets. The reason for Genesis’ distress is further related to its high leverage, high competitiveness in the industry, and heavy reliance on the Medicare/Medicaid industry.

In summary, it is not entirely clear how the healthcare REITs’ underperformance is associated with Genesis’ distress; but, as we’ve seen, a single, shared tenant/operator such as Genesis Healthcare can certainly cause some damage and negatively affect the multiple REITs it is involved with.

Source:Omega Healthcare Investors Inc(NYSE:OHI),Genesis Healthcare, Inc.(NYSE:GEN),LTC Properties Inc.(NYSE:LTC),Welltower Inc.(NYSE:HCN)

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.

U.S. REITs: Longest Dividend-Paying Stocks — Welltower (HCN)

 

chart01Although Welltower may not have the highest dividend yield in the healthcare REIT sector, the company certainly makes up for that fact with their size, solid dividend history, and high quality investment properties. This company enjoys status as the longest paying dividend healthcare REIT along with their competitor Universal Health Realty Income Trust (UHT) and HCP. Welltower has recently completed an outstanding forty-four years of quarterly dividend payouts to their investors. This is certainly an incredible record.

Welltower changed the company name from Health Care REIT last September. This initiative was designed to match the name with their investment strategy that is focused on wellness. With $24 billion in market capitalization, this business is a giant player in the healthcare industry. They tend to invest in senior housing, along with post-acute communities, and outpatient medical properties. Welltower maintains investments in the United State, Great Britain, and Canada, although the majority of their annualized base rent is in the U.S.

chart02The Welltower property portfolio is well diversified, as would be expected for a REIT of this size. They divide into three main segments that include triple net lease properties, seniors housing operators, and outpatient medical facilities.

  • Their Triple-net properties tend to range from zero assistance to intensive care facilities. A few examples of this are independent living facilities, assisted living facilities, Alzheimer’s/dementia care facilities, long-term/post-acute care facilities, and hospitals. Welltower does not manage these properties; instead the company leases them to operators under long term, triple net master leases. This portion of the business accounts for thirty-one percent of total revenues.
  • Seniors housing operators are included in some of the above-mentioned properties; however, they are the result of a joint venture between Welltower and the operator. This segment accounts for almost sixty percent of annual revenues. They are structured under the commonly referred to RIDEA structure, which allows REITs to participate in actual net operating income, as long as there is an involved third party manager.
  • Welltower’s outpatient medical segment includes medical offices, surgery centers, laboratories, and diagnostic facilities.

chart04Welltower is certainly a defensive stock that works well in these volatile times. The company has low 0.1 three-year beta. On average it has barely moved in tandem with the S&P500, although it is a component of the index. In addition, the estimated population of the United States citizens sixty-five years or older may very well grow by forty percent by the year 2024. Management is looking ahead and believes that they have room to grow. According Welltower, they have captured less than three-percent of the health care industry.

chart03Welltower has proven methods in order to sustain a 3-4 percent growth in their annual dividend rate. As the funds from operations (FFO) per share grow quicker than its dividend rate, the proportion of FFO paid to their shareholders has declined during the past years. As a matter of fact, this past quarter the company’s FFO payout ratio fell down to 73 percent. It was 90 percent in 2010.

In addition, a conservative capital structure provides the tranquility that dividend investors seek out. Standard & Poor’s has maintained the company’s credit rating at a triple B, which was reaffirmed last year. Much like many other REITS with similar ratings, Welltower’s net debt to adjusted EBITDA remains below 6x. The major private revenue sources, high occupancy rate across their various property types, and the good rent coverage have all helped investors to remain optimistic about the company’s future prospects.

chart05In summary, Welltower has proven itself enough to deserve a place on the cautious dividend investors watch list. Although their AFFO multiple of 17x may not signal the ideal entry point, they do have a superior dividend yield (5.2%) when compared to the average REIT.

Source: Welltower Inc.(NYSE:HCN), Universal Health Realty Income(NYSE:UHT), HCP, Inc.(NYSE:HCP), Fast Graphs, Yahoo!Finance.

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.

Six Reasons Why We Like National Health Investors

 

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We’d like to let you know about National Health Investors, a company we’ve identified as one of the most consistent dividend-paying REITs. It doesn’t yet enjoy the longevity of either HCP, Welltower (HCN), or Universal Health Realty (UHT) in terms of the longest paying dividend stocks in the healthcare REIT sector, but so far it has accumulated a respectable dividend history. By distributing similar or growing dividends for the past 14 years, National has already placed itself in this elite club of dividend-paying REITs.

Those investing, in general, seem to like the healthcare sector because of its defensive nature–National Health is no exception in this group of REITs. We are not currently in a recession even though the markets have been volatile; however, some experts have argued that we are headed for one. Regardless of the abundant number of opinions floating around, investor fears’ could be reduced if their investments were in stocks that do not fully ride the market’s roller coaster. With a 3-year beta of 0.5 (a move, on average, half of what the SP500 index moves), National Health is among those stocks that can provide some peace of mind.

So what do we like about National Health Investors? We find six reasons why this is. First, over the past five years, the dividend rate has grown at a CAGR of 8%. In fact, the company just increased its dividend rate following its last years’ distribution routine.

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The second reason is that for over the past five years, the funds from operations (FFO) per share have been at a CAGR of 11%. A strong FFO-per-share growth likely translates into a strong dividend rate growth, which allows maintenance of a reasonable payout ratio in the range of 80%. Just last quarter, National’s AFFO payout ratio was 83%.

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Another reason we like National is that its portfolio is diversified in terms of property type. It is a great option for those who don’t want to be too dependent on Medicaid and Medicare revenues, from which the company has moved away since 2009. The company basically splits its portfolio into 35% medical and 62% senior living, but further clarification is needed. The properties encompass 116 senior housing properties (both assisted and independent living), 68 skilled nursing facilities (SNF), 3 hospitals, and 2 medical office buildings.

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The fourth reason we like National is that although the company has not been rated by a major credit rating agency, it appears to have a conservative debt profile. Less than one-third of its capital structure is composed of debt. Its net debt-to-adjusted EBITDA ratio is about 4.2x, more stringent than the typical investment-grade REIT ratio. For instance, Welltower, rated BBB by S&P, has an equivalent ratio of 5.6x.

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Fifth, we like that National’s lease portfolio has been holding up well. EBITDARM coverage, which is relevant for the healthcare sector, is a measure of a property’s ability to generate sufficient cash flows. This allows the operator/borrower to pay rent and meet other obligations, assuming that management fees are not being paid. National’s EBITDARM varies depending on the type of property, but the full portfolio coverage is 2x, which is reasonably good.

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And, finally, there are no major lease expirations in the short, midterm. The number of expirations will only pick up in 2025.

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Source: National Health Investors Inc.(NYSE:NHI), Universal Health Realty Income(NYSE:UHT), Welltower Inc.(NYSE:HCN), HCP, Inc.(NYSE:HCP), Yahoo!Finance, Fast Graphs.

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.

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.

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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.