Why Do People Invest in Skilled Nursing Facilities (SNFs)?

chart01.pngHere is a real estate investment proposition that might spark your interest. You will own facilities whose tenants serve an increasing amount of elderly patients in the United States. The majority of the patients will pay your tenants through government program reimbursements. Remember, governmental programs depend on federal and state budgets, some of which may have shortfalls. Over the past years, the reimbursements have increased by a compound annual growth rate (CAGR) of 2-3%. Tenant profitability is low, and in a previous budget sequestration, government programs have not been preserved and Medicare has suffered cuts. Would you invest in skilled nursing facilities?

The skilled nursing facility industry today provides many excellent benefits but also downfalls. One of the best aspects of the industry is the future demographics. As the baby boom generation ages, they will need to visit healthcare facilities more frequently. The United States census notes that the number of citizens older than 85 years will increase significantly in the coming decades.

On the other hand, there is a highly regulatory aspect of the business. Obamacare increased the number of insured citizens; however, the healthcare system has suffered regular changes and scrutiny has intensified. The Center for Medicare and Medicaid Services (CMS), a federal agency within the United States Department of Health and Human Services (HHS), has been executing details of Obamacare. CMS is trying to increase transparency within the industry by tracking payroll, staffing and number of penalties (see website here). They are also looking to contain growth in Medicaid expenditures and control daily rates which affects SNFs’ revenues and profitability.

The performance of Genesis Healthcare Inc. in the financial market may reflect the invest mood of the SNF industry. Genesis Healthcare is a publicly-traded company and one of the largest post-acute care operators in the United States. Genesis Healthcare is a tenant of healthcare REITs Omega Healthcare and LTC Properties. In January 2015, it was downgraded by Standard & Poor’s to B- for challenging prospects in the SNF industry. Their year-to-date share price has plummeted by almost 50%.

In Standard & Poor’s January 2015 report, they highlighted the following: “The downgrade follows a review of the industry prospects for nursing facilities and reflects our assessment that Genesis will be challenged to generate substantial free cash flow on a sustained basis,” said credit analyst David Kaplan. Our rating on Genesis reflects our assessment of its business risk profile as “weak” and the financial risk profile as “highly leveraged”, and our view that the company’s financial risk is comparatively weak within the highly leveraged assessment. Our outlook is stable, reflecting our view that industry headwinds will offset margin expansion initiatives, leading to thin margins near current levels, and that the company will generate only modestly positive free cash flow.”

In summary, the SNF business offers excellent demographic fundamentals with minor upside and major downside as a result of constantly changing government regulations. If that is the case, why invest in the industry? First, healthcare REITs have historically been immune to the swings of the stock market. Second, yields have been one of the highest among equity REITs. Furthermore, if we saw less regulatory impact and revenues continued to grow incrementally, healthcare would be the ideal REIT stocks. They would provide stable, gradually-increasing dividends over time.

Source: Omega Healthcare Investors, Inc. (NYSE:OHI), Standard & Poor’s, Genesis Healthcare, Inc.(NYSE:GEN), LTC Properties Inc.(NYSE:LTC), CMS, Ventas, Inc.(NYSE:VTR)

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.

What Can We Learn From HCP?

chart01In 2015, HCP recorded a $1.3 billion impairment related to their HCR ManorCare investments. HCR ManorCare, their biggest tenant in the post-acute/skilled nursing segment, has experienced deteriorating operational performance due to changes in reimbursement rules. Also, the U.S. Department of Justice has sued HCR ManorCare on the grounds that they had filed claims to Medicare for services not needed by their patients.

Although the litigation is at an early stage, this is nonetheless a reminder to investors who invest in skilled nursing facilities (SNFs) through healthcare REITs that their investments tend to be reliant on Medicare and Medicaid reimbursement. As a result, changes in Medicare and Medicaid reimbursement can have enormous consequences for their investments, which can catch them by surprise.

How Can You Evaluate Healthcare REITs Investing in SNFs?

Before evaluating healthcare REITs that invest in SNFs, it is important to mention some of the background. In brief, Medicare and Medicaid reimbursement rates tend to increase over time, as shown by how average Medicare reimbursement rates rose from $408 per day in 2008 to $484 per day in 2014 while average Medicaid reimbursement rates rose from $164 per day to $186 per day across the same period of time according to Eljay LLC and CMS. This means that SNFs possess potential in the long run, though the same cannot be said in all periods of time.

If you are interested in investing in SNFs through healthcare REITs, there are some simple ways to evaluate your potential investments:

* The Centers for Medicare and Medicaid Services post updates such as the payment rates for 2016, meaning that it can be worthwhile for investors to monitor their website. While its updates can have a wide range of effects on SNFs, most may not prove pleasing to investors because it has an unsurprising interest in ensuring that the costs of Medicare and Medicaid are as low as possible.

* Some SNFs have slimmer margins than others, meaning that a negative occurrence can hurt them and thus their investors more than competitors. One way to avoid such SNFs is to examine their EBITDAR coverage ratio, which is their earnings before interest, taxes, depreciation, amortization, and rent divided by rent costs. A higher coverage ratio means that a SNF is more resilient in the face of negative occurrences because it has the earnings needed to tough them out.

* Occupancy is a useful figure for telling whether a SNF will be profitable or not because each occupied unit is a unit that is earning revenue for the SNF. There is a problem in that the occupancy at which a SNF becomes profitable is not the same from SNF to SNF. However, it is very much possible to compare occupancy from year to year for the same SNF, meaning that a rising occupancy is a positive sign for its profitability.

* Finally, check whether a healthcare REIT has all of its investments in the same state or has taken the proper precautions by spreading them out. You should avoid healthcare REITs that cannot be bothered with diversification because a statewide change for the worse can hammer their figures, which is particularly problematic because state governments can have significant influence over Medicaid spending.

Source: HCP, Inc.(NYSE:HCP), Ventas, Inc.(NYSE:VTR), CMS

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.

HCP needs a Hazard Control Plan

chart01Last week, the healthcare real estate investment trust (REIT), HCP, the only REIT in the S&P 500 Dividend Aristocrats index, scared the hell out of investors, when it dropped by 17%. Its fourth quarter results included an $817 million noncash impairment that led to a negative FFO per share of 0.99. In isolation, for a noncash impairment that represents less than 3% of its total capitalization value, it goes without saying the financial markets have overreacted. Yes, the market has been very unstable, but, in this case, investors may be showing signs that they are tired of the developments behind the impairment.

The cause of the impairment can be traced back to HCR ManorCare, a top tenant focused on post-acute/skilled nursing facilities (SNF) for those not requiring the more intensive treatment, has seen its operational performance deteriorate. In light of this situation, HCP decided to project reduced future lease payments, which decreased the fair value of the related direct financing leases (based on the present value of the future lease payments).

chart02  The fact that HCR ManorCare’s rental rates are under direct financing leases (DFL), rather than operating leases, is an important accounting aspect. Unlike DFLs, the reduction of future operating leases wouldn’t lead to impairments. Consequently, if HCR ManorCare had been operating leases, the impairment and negative FFO wouldn’t have occurred and perhaps, the market wouldn’t have been scared as much. Regardless of the accounting aspect, the main takeaway is that HCP’s cash flow will be decreased.

This isn’t the first time HCP has been hit by an impairment charge. In the first quarter 2015, they recorded an impairment charge of $478 million because HCP and HCR ManorCare amended the original lease, reducing the rental payments by more than 10%. There were also minor impairments associated with HCR ManorCare in the fourth quarter of 2014 and the third quarter of 2015.

The US Department of Justice (DOJ) has been severely scrutinizing Medicare reimbursements to HCR ManorCare, which relies heavily on government reimbursement programs. In April of 2015, the DOJ filed a complaint reporting that HCR ManorCare had requested Medicare reimbursements they were not eligible for. The complaint also reported that the company consciously increased Ultra High billing, the highest daily rate for Medicare, from 39% in October 2006 to 81% in February 2010 (percent of all days that it billed for rehabilitation therapy). The complaint is still under investigation.

chart03 HCP is well aware of its dependency on top tenants. HCR ManorCare accounts for 23% of HCP’s total revenue. HCP has been working with HCR ManorCare to sell 50 non-strategic assets and have managed to sell 21 facilities so far. In addition to HCR ManorCare in SNFs, Brookdale is also a major tenant in senior living whose revenues represent 10% of the total.

The main thing to take away from this is that HCR ManorCare’s problems are far from over and new impairments could easily happen again, especially if the company has to make more adjustments to their billing. The worst outcome, of course, is bankruptcy. For HCP, the best thing to do now is focus on protecting itself even more.

Source: HCP, Inc.(NYSE:HCP), Yahoo!Finance, US Department of Justice (DOJ)

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.

Physicians have more financial sense than you might think

 

chart01Physicians Realty Trust, whose NYSE ticker is DOC, has been a breath of fresh air in the equity REIT space, which has challenged some of my beliefs. One of those beliefs is that physicians dedicate their entire lives to healthcare, leaving them with limited financial and stock market knowledge. This is turning out not to be true.

Physicians has invested in medical office buildings, which are in high demand due to the increasing number of outpatient services offered. Let me be clear. Medical office buildings are not hospitals. They include private physician’s offices, laboratories, imaging suites, and outpatient surgical centers. They may standalone or be associated with a hospital, as well as on or off campus.

Physicians has capitalized on the strong healthcare fundamentals in the United States. With the population aging and ObamaCare increasing the number of insured people, consumers are choosing healthcare options that are strategically located.

chart02Here are several beliefs that Physicians has made me question.

  1. For being a small cap, there should be additional risk premium.

Since Physicians went public in mid-2013, the company has grown fourteen fold. Today’s market capitalization is $1.8 billion and its valuation multiples have been in line with bigger peers. Its AFFO multiple is 20x versus their peers 14x. I don’t see Physicians being penalized for being a small cap.

  1. This is not an environment for raising equity.

The current selloffs made new equity offerings harder. However, Physicians was able to raise capital in late January to payoff unsecured revolving credit facility and invest in working capital and real estate.

  1. It is harder for a small cap company to become investment grade.

The company was awarded an investment grade rating by Moody’s in mid-2015.

  1. Due to its relative high valuations, dividend yield sucks.

Based on the universe of healthcare REIT stocks, Physicians has been in the bottom 1/3 in terms of dividend yields. However, compared with the overall REIT universe, its yield of 5.2% has been better than 60%.

  1. Beta must be high.

Small caps usually carry more risks than large caps as the former doesn’t have shock absorbers during unstable periods. Their shares tend to fluctuate more often. As a result, their beta is also high.

However, Physicians performance in the stock market has been relatively stable. They have a beta of 0.39, better than many large caps in the REIT space. As a matter of fact, the average beta for healthcare stocks has averaged around 0.33, which makes it a more stable sector.

On a final note, I haven’t been able to find any actual physicians on Physicians management team. It seems they are physicians in name only.

Source: Physicians Realty Trust(NYSE:DOC), 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.

 

 

 

 

U.S. REITs – Will Share Price Decline Stop Medical Properties Trust?

chart

Medical Properties Trust (NYSE:MPW) is in the upper echelon of healthcare REITs. The company has enjoyed relatively strong growth results, when measured against 2014 metrics, especially the funds from operations (FFO) per share, and projected FFO for the 2015 fiscal year. In addition, their current dividend yield of eight percent is above the sector median and price-to-FFO of 9.4x is below the sector median.

Medical Properties began distributing dividends in 2005. The company has yet to miss a quarterly dividend, and has always either increased or maintained the dividend payouts with the exception of 2008. At that time, Medical Properties decreased the dividends from $0.27 down to $0.20. After a long hiatus with zero dividend increases, the company has resumed dividend growth over the past two years. In March of this year, they increased dividends by five percent up to $0.22.

The majority of Medical Properties investments have been in net-lease healthcare facilities, particularly focusing on acute care and rehabilitation hospitals. The company is also in the mortgage business, providing both mortgages and other type of loans to their tenants. This book of business comprises approximately eleven percent of their assets. Medical Properties owns real estate in the US, and internationally as well. They have a large presence in California and Texas, and close to twenty percent of their investments are in Germany and the United Kingdom.

A main contributor to Medical Properties growth is their continued acquisition and development program. This has led them to grow their Adjusted FFO by forty percent in the second quarter of 2015, compared to the same period in 2014. To fuel this growth, Medical Properties has issued equity and debt over the past year. Last December, Medical Properties received an investment grade rating of BBB- on their unsecured debt from Standard & Poor’s.

More recently industry share prices have decreased, including theirs. This factor makes it hard to accurately determine how it has affected the company’s funding. This August the company announced a public offering of common shares to fund acquisition activity. Regarding debt, the company’s total debt to total capitalization has tended to be on the high side, reaching a high level when compared to other healthcare REITs.

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 – National Health Investors Shines, But With A Caveat

charts

National Health Investors (NYSE: NHI) has proven that it is a star in terms of growing dividends, enjoying one of the highest dividend increases amongst healthcare REITs. Although they do not have a perfect record, the company’s second quarter results report robust metrics, thereby keeping their momentum in high gear. In addition, National Health Investors’ dividend yield is nearly six percent, and their price-to-FFO is at more reasonable levels than some other REITs.

National Health has benefited from a long history of doing business, and currently has a market capitalization of 2.2 billion dollars. Incorporated in 1991, records show that they did indeed have some tough times in the early 2000s, all well as the last recession. Funds from operations dropped and the company skipped paying dividends to their investors in some quarters.

Today, National Health Investors owns 187 properties in thirty-one states, with a significant amount being assisted living facilities that house seniors. The company also owns and leases skilled nursing facilities, hospitals, and medical office buildings. Currently, the company’s focus has been on investing in senior housing. Based on that fact, we do not see a drastic change in their current strategy.

Here are a few highlights of their performance in Q2 2015 year over year figures:

Revenues are up by twenty-eight percent.

FFO per share is up by ten percent.

Dividend rates are up by ten percent.

The Dividend payout ratio is at seventy-four percent.

Justin Hutchens, National Health’s former CEO, caught the market off guard by resigning this past August. He left to join HCP, a larger healthcare REIT, as the Executive Vice President, and Chief Investment Officer of senior housing and care. National Health’s new CEO has been a part of the company since earlier this year. This curveball does not make National Health a decisive buy. Only time will tell how the new CEO will perform because National Health’s latest figures are a result of the previous leadership.

Source: National Health Investors, 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.

U.S. REITs: Longest Dividend Paying Stocks (UHT)

See the advantage high dividend stocks offer investors.Combining quality with high yield produces interesting results.12 high quality stocks with 5%+ yields are examined in this article.

Sourced through Scoop.it from: seekingalpha.com

Thanks to the selloff from this past August, many investors have been able to harvest a great deal of opportunities in the healthcare sector in terms of dividends. Stocks within the healthcare sector itself have seen a decrease of approximately 17 percent this year thus far. This is something that ended up positioning this particular sector’s dividend yield to 6.3 percent, which is higher than the equity REIT median of 4.7 percent. Dividend yields are currently fluctuating between 5.1 and 10.2 percent. 


Ever since December of 1987, Universal Health Realty Income Trust (NYSE:UHT) has distributed steady, increasing dividends. The company will hit another annual milestone in just three months for having paid dividends without ever having to decrease them. This company is also known as one of the smallest publicly-traded REIT healthcare stocks, possessing a market capitalization of around $600 million.

 

Universal Health Realty Income Trust was launched in 1986 in order to acquire some of the properties of Universal Health Services (UHS), which is the company’s adviser and largest operator, as it’s responsible for approximately 25 percent of total revenue. The company currently owns 62 different investments in 18 states, which include the following:

 

*Acute care hospitals

*Medical office buildings

*Rehabilitation hospitals

*Behavioral healthcare facilities

*Sub-acute care facilities

*Child care centers

 

Executives have held positions in both Universal Health Realty Income Trust and Universal Health Services, with Alan B. Miller holding the offices of Chairman and CEO ever since the companies were launched.

 

The company’s dividend paying streak is expected to continue since their second quarter figures remain strong. Revenue saw an increase of 12 percent, with both AFFO and FFO per share also growing at about 4 percent. In addition, dividends increased by 2 percent, with dividend payout coming in at around 89 percent. Finally, debt to total capitalization has been recorded at approximately 26 percent, which is conservative. 

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.