Individual 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.
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.
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%.
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.
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.