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.

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.