Middle-of-the-Pack Net Lease REIT Enjoys the Ride

chart01.pngWhile it isn’t necessarily “news-news” the net lease REITs have enjoyed a good ride lately. These REITs, which run with less operating leverage, have attracted many investors, affecting all subgroups. The high interest has influenced much hyped companies, such as O and NNN, as well as stocks with a bit of baggage, such as Spirit Realty and Getty Realty. As expected, it has also affected STORE Capital Corporation, a middle of the pack REIT in regards to valuation multiple and market size.

So far this year, STORE Capital has already gone through four public offerings. Oaktree Capital Management, LP., a former major shareholder, promoted three offerings in order to exit its position. STORE Capital will not receive any of the proceeds. In turn, STORE has recently promoted another offering, which was upsized and demonstrated a good bit of interest from investors.

Like its freestanding peers, STORE Capital’s share price has rallied over the past few months. The stock return has exceeded 10%. Currently, the share price is hovering around $26. The company has achieved high marks for its occupancy of 99.9% and its diversified tenant base. STORE is a net release REIT that serves middle market and larger non-rated tenants. A significant portion of STORE’s tenants are restaurants, movie theaters, health clubs, and early childhood education centers.

Something unique to STORE Capital is that it has developed its own methodology to rate lease income, primarily relying on profitability metrics of its properties. Rather than only assessing the tenant credit, they also evaluate the business unit operating at the leased site. This is referred to as its STORE Score.

The signs that the stock has already been priced correctly include that it is trading at the average dividend yield for the sector (4.2%) and its multiple is just north of 16 times AFFO.

In summary, the stock has demonstrated several signs that it is correctly valued or overvalued, most notably by the several offerings, including the three from its former shareholder.

Source: STORE Capital Corporation(NYSE:STOR), 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.

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.

Massive cash-out reinforces good momentum of net lease retail REITs

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Oaktree Capital, a major shareholder of Store Capital Corporation (a net lease retail REIT), cashed out Store shares at their highest price since it became publicly traded in November 2014. Until recently, the shares had not suffered significant appreciation, but they are now about a third higher than their initial price.

Oaktree put up for sale more than 33 million shares, almost a quarter of Store’s outstanding shares. However, Store is not pocketing any of the proceeds–all are going to the selling shareholder Oaktree. One main concern was a significant drop in the share price, but it didn’t happen. Prices held up well, demonstrating that interest in this kind of REIT has attracted investors’ interest.

During a period of greater volatility in the first weeks of 2016, we observed that many investors flocked to net lease retail REITs. Companies such as Realty Income and National Retail Properties have appreciated by more than 15% this year, compressing yields to the lower four percent. Store, a net lease retail REIT, has accompanied that trend, as well.

Last December, Oaktree gave signs that Store could fly more freely when their ownership was below 50%. The company ceased to have “controlled status” and was obliged to comply with tighter requirements related to independent directors.

Oaktree is a global investment management firm, specializing in alternative investments with approximately $97 billion in assets under management as of December 31, 2015.

Seritage also benefits from the good momentum.

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Perhaps the good momentum of net lease retail has positively affected Seritage Growth Properties. The company, which is a spinoff of select stores of Sears Holdings, has caught investors’ attention for its shareholders. Many like the company because Warren Buffett and Bruce Berkowitz have invested in it; the rationale is that they must have access to information other people don’t so it’s a good buy, even though the company is concentrated on a failing tenant and its yield is a meager 2.0%.

Despite finding it a risky strategy, I’ve read a lot of theories why one should invest in Seritage. The most common idea is that there should be upside once the properties are leased to other tenants. Some investors have indicated that by looking at the property level the company is undervalued. The conversion to other tenants should take time and capital so I’d only invest if I knew the company was deeply discounted. Also, there’s a cap of 50% conversion of the properties, so Sears’ concentration should continue in the long haul.

Source: Seritage Growth Properties(NYSE:SRG), STORE Capital Corporation(NYSE:STOR)

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.