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CCP - Care Capital Properties


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Healthcare REIT, recently spun-off from Ventas. I am a lazy bitch so here is the VIC writeup: http://www.valueinvestorsclub.com/idea/Care_Capital_Properties/137177

 

Trades at a discount of around 30% to OHI, despite having lower debt, smaller size and probably better management.

10% dividend growth + 7.5% dividend yield + 30% discount = >25% returns over the next 3 years.

 

 

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Healthcare REIT, recently spun-off from Ventas. I am a lazy bitch so here is the VIC writeup: http://www.valueinvestorsclub.com/idea/Care_Capital_Properties/137177

 

Trades at a discount of around 30% to OHI, despite having lower debt, smaller size and probably better management.

10% dividend growth + 7.5% dividend yield + 30% discount = >25% returns over the next 3 years.

 

 

 

Just curious why you think that the folks at Carefirst have better management.  OHI has a pretty reasonable track record over the past 10 years, outperforming Ventas by about 50%, and they were able to do that while operating with a more restrictive investment mandate (skilled nursing facilities) than Ventas (senior housing, MOB, hospitals, skilled nursing).  I have an existing position with OHI, took a look at CareFirst when it was spun-off, and decided to keep my money with OHI.

 

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I think any discussion regarding Care Capital Properties needs to differentiate between mix of Skilled Nursing Facilities versus that of the Independent living, Assisted Living

 

My understanding is that SNFs can be acquired at 8-9% cap rates with 1.3x EBITDAR to rent coverage ratio at the time of acquisiton.  Independent living and assisted living have much lower cap rate. So a simple comparison to OHI or some of the others may not be apples to apples.  Care Capital Properties should be compared to CareTrust and Sbra which yields 5.63% and 8.2% respectively.  However CareTrust is paying out roughly 60% of its AFFO for a NNN reit.  At a normalized 80% payout ratio, it's close to 7.5%.  CareTrust also benefits from having large concentration in Ensign where the underlining properties have EBITDAR to rent ratio closer to 1.9x. 

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Just curious why you think that the folks at Carefirst have better management.  OHI has a pretty reasonable track record over the past 10 years, outperforming Ventas by about 50%, and they were able to do that while operating with a more restrictive investment mandate (skilled nursing facilities) than Ventas (senior housing, MOB, hospitals, skilled nursing).  I have an existing position with OHI, took a look at CareFirst when it was spun-off, and decided to keep my money with OHI.

 

I shouldn`t have written it the way i did, i think both OHI and Ventas were and are very good stewards of capital. Maybe i am wrong but the diversification in Ventas has come at a cost, and thats probably the reason for the spin-off. Of course OHI has the visible track record, maybe thats the reason it is more expensive than CCP at the moment. But i doubt that CCP is of lower quality or will grow slower than OHI going forward, especially because they have reset some of their properties to market rates before the spin-off. (see VIC writeup)

OHI is a pure play SNF like CCP, so i think the comparison is very valid and not invented by me. But even CTRE trades at similar premiums to OHI.

 

Some valuation metrics:

P/FFO: OHI 12, CCP 9.4, CTRE 12

EV/EBITDA: OHI 17.5, CCP 14.3, CTRE: 17.6

 

Why a REIT and why now? Fears of the rate hike have driven down the prices in the sector, but historically REIT`s have performed well when interest rates are rising.

 

Healthcare REITs have performed well during the great recession and the demographics should give huge tailwinds in the coming years. From what i know SNF`s have the highest cap rates in the sector, which is very fragmented and therefore the ideal target for a roll-up. According to the investor presentation (http://www.carecapitalproperties.com/sites/default/files/documents/CCP_November%202015_Investor%20Deck.pdf) supply is going down, while demand for SNF`s are going up, so whats not to like here?

 

All this doesn`t sound risky to me, but i am sure there are some risks like regulation. What else?

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I think the risk is very "step function" in the SNF space.  It's very regulation driven.  If you wake up one day and realize that the government wants to cut reimbursement rates by 5%, that EBITDAR to rent coverage ratio goes from 1.3x to 1.0x and you're living dangerously then.  With multi-families, I'm okay with a low coverage ratio.  But with SNFs, the reimbursements policies can be quite a risk.  SBRA just had a operator default and the market is punishing them.  SBRA had an issue where their portfolio wide EBITDAR to rent coverage consistently stayed at 1.3 over time.  CTRE seems to have EBITDAR to rent trend upward over time as the new operators improve their performance.  CTRE tend to strike deals with new operators when they acquire an asset.  However, CTRE last deal left a bad taste in my mouth.  It goes without saying that a good capital allocator is very important in the space.  CTRE last deal left a bad taste in my mouth.   

 

My conversation with a healthcare IB analyst is that the space is tough.  He basically phrased it as "The good operators needs to constantly acquire, achieve scale, and drive down cost in order to survive"  I got the impression from him that the government wants to continue to trim cost over time.  This naturally drives consolidation within the industry.  I get a little worried when the assets can't survive on its own.  The reason why real estate is attractive as an asset class is because it has the impression of something that you buy, rent it out, and it appreciates over time.  It used to be an "old men's game", buy it and lease it out and keep your day job.  Owning a multi-family is almost like that Geico quote, so easy a caveman can do it.  But SNF require good operators.  As the REIT owner, you need to be able to identify whether the managers are good at identifying good operators. 

 

On an absolute basis, SNF valuation on a per bed basis has also been the highest on average.  I believe that's a very important metric.  On the surface a 9% cap rate should sound cheap, but SNF beds are at peak prices on a per bed basis and that worries.  The problem with owning REITs is that, it's in their DNA to acquire assets at all times.  It's good to have an opinion on market timing and when you should be a buyer and when you should be a seller.   

 

I believe CTRE is trading at a lower P/AFFO and EV/EBITDA multiple than what you presented.  They issued a ton of equity to finance a $170mm deal.  You're likely not adjusting for the added AFFO and EBITDA but you likely added the sharecount. 

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  • 1 month later...

Now nearly a 10% yield. OHI reported yesterday very good numbers, looks a bit like all healthcare REIT`s are trashed regardless of the fundamentals. Or i am just to stupid to understand whats going on. Looks like HCP`s problems weigh on the whole sector and the elections create uncertainty. Any additional ideas, known problems with operators?

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Almost all reits regardless of sector are being trashed. Looking at the dislocation between public and private market values is astonishing in some cases. This is like a shopping spree for me (even though I've been burned a little since I began getting aggressive early last month).

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  • 4 weeks later...

Q4 Results: http://seekingalpha.com/pr/16418652-care-capital-properties-reports-fourth-quarter-full-year-2015-results

 

FFO Guidance of ~2.9$/Share. This is lower than i thought but it looks like a lowball guidance (should not be that hard to beat when i look at the assumptions) and even with this lower guidance its still 10% cheaper than OHI at current prices.

 

Minor glitch:

 

In March 2016, CCP entered into a transition and settlement agreement with a tenant who operated 14 properties that provides for, among other things, a consensual transition of the properties to two replacement operators. The tenant stopped paying rent as of January 1, 2016. The replacement operators assumed management of the properties on March 1st and entered into master leases which will become effective upon receipt of regulatory approvals. Rent relating to the properties in 2015 was approximately $10 million. Rent under the new leases will be approximately $7 million in year one, stepping up to approximately $9.5 million in year three.

 

 

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I think the risk is very "step function" in the SNF space.  It's very regulation driven.  If you wake up one day and realize that the government wants to cut reimbursement rates by 5%, that EBITDAR to rent coverage ratio goes from 1.3x to 1.0x and you're living dangerously then.  With multi-families, I'm okay with a low coverage ratio.

 

First, remember that being regulation-driven is different from the problem of government reimbursement.  Being regulation-driven can be a good thing as it tends to weed out the less sophisticated operators over time...compliance starts to require multidisciplinary teams...in the SNF space, this means that the mom and pop operators are squeezed out.  Also remember that in many jurisdictions, you must be able to demonstrate need before building healthcare facilities, including SNF.  This is not a perfect system, and some overbuilding does occur, but certainly not to the extent that we see in Class-A multi-family right now.   

 

Second, the overhang of declining reimbursement rates has been an issue for decades, and will continue to be an issue for decades to come.  There is always going to be this tug between government wanting to pay less and private industry wanting to earn a reasonable return on their investment, and I tend to think that the reimbursement rates will remain relatively stable (and maybe gradually increase over the next decade) because the elderly tend to be quite noisy about benefit cuts and tend to vote very consistently for those that support Medicare and Social Security.  To some extent, this overhang will be mitigated by property owners, such as LTC, who have a larger share of private pay operators vs. government pay operators.     

 

Owning a multi-family is almost like that Geico quote, so easy a caveman can do it.  But SNF require good operators.  As the REIT owner, you need to be able to identify whether the managers are good at identifying good operators. 

 

Do you own and manage a multi-family?  If so, I'd like to know how you do it, because my experience has not been that a caveman can do it.    With that said, I do agree with your comment about managers needing to identify decent operators.  I think OHI and LTC have been fairly successful at doing this (and Ventas before the Spinoff).  But I think this comment applies to multi-family as well...bad operators are a cash flow killer.   

 

On an absolute basis, SNF valuation on a per bed basis has also been the highest on average.  I believe that's a very important metric.  On the surface a 9% cap rate should sound cheap, but SNF beds are at peak prices on a per bed basis and that worries.  The problem with owning REITs is that, it's in their DNA to acquire assets at all times.  It's good to have an opinion on market timing and when you should be a buyer and when you should be a seller.   

 

I disagree with your broad statement about the DNA of REITs.  I would say that poorly run REITs, or those incentivized on the basis of revenue or asset level are prone to buy/acquire even when cap rates suck.  However, I think there are a number of well-run REITs that do a pretty effective job of allocating capital (LTC comes to mind with their recent focus on build-to-suit, LXP comes to mind with their recent build-to-suit stuff, TPRP also).     

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