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Skilled Nursing Facilities


Zorrofan
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This is me thinking aloud and looking for feedback. I am trying to determine if this is an opportunity or a value trap.......

 

There is a lot of turmoil in the whole healthcare field right now - from CVS facing a potential threat from Amazon, RAD selling stores to WBA, Davita and UNH striking a deal, to funding changes in Medicare potentially affecting skilled nursing facilities. But of course with crisis comes opportunity.

 

Two companies I'm looking at are OHI and SBRA. Both are healthcare REITS and are deeply involved in renting facilities to skilled nursing home operators. Both have high yields approaching double digits, typically indicative of companies in trouble although both have been raising their respective dividends and can, for now, comfortably cover the dividend.

 

OHI's main problem is that it has three tenants representing 18.5% of revenue under stress, with one tenant no longer paying rent. OHI is working with tenants and has reduced rent for several operators. SBRA faces similar problems as both companies have a number of the same operators as tenants. SBRA is selling and/or transitioning properties held by weaker tenants. Tenant rental coverage has fallen the past few years for both companies, dropping for OHI tenants for example from approximately 2 to 1.3ish.

 

Skilled nursing facility operators face many headwinds. Falling incomes, reduced medicare coverage and higher operating costs have resulted in falling rental coverage. Government is looking at alternatives to reduce cost such as at-home-care. As skilled nursing operators have been under pressure many have sought rent reductions. This has called in to question just how sustainable is the dividend both OHI and SBRA pay and will they be able to sustain the current dividend going forward never mind continue to grow it. 

 

Both companies pay a high dividend and have been taking steps to deal with tenant issues.  If they can successfully deal with the ongoing industry headwinds they could provide a substantial return given their current low valuations. But I am concerned that the industry headwinds could last a number of years and that this is a value trap.

 

Sorry for rambling but looking forward to your thoughts......

 

cheers

Zorro

 

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For me I would put this in the to tough pile. The reason is that your REITs are dependent on the SNF for revenue. The facilities are most likely purpose build for that, and your not going to find a higher and better use for the SNF facility, or a better tenant. The SNF ability to pay is driven by the money they get from medicare and medicaid for the most part. Many SNF are low quality when it comes to delivery of care and getting good outcomes, CMS has realized this, and there is a value based push, meaning they are going to start changing the payment mix to be biased to lower cost and higher quality facilities. Quality is a very elusive thing in health care, and my feeling is that it's not quality that is so much the objective, but finding ways to push down cost. quality metrics are set by medicare and medicaid and are going to be biased to drive down payments. In another words, there will not be winners, it will be a few who keep the same rates of payment, and a bunch who fall short. So then the question becomes how much do you trust the SNF's that are part of your REIT portfolio? Are you in a position to make a judgement on the quality? The other question is how to figure out what payments look like going forward? A brief glance at https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/SNFPPS/Downloads/SNF-VBP-RTC.pdf, tells me that it's not even clear to the people writing the law how they will structure payments going forward, so not sure how an individual investor would figure it out. Maybe if you have a team of people to dig through everything and model it? Anyway those are my thoughts for what it's worth.

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Agree, one should always be careful of industries with headwinds threatening their margins and even survival. Whether that be certain brick and mortar retail or other industries, in the face of such upheaval, investing for me automatically goes into the "too hard" pile. I am certain there are a few retailers in the brick and mortar retail pile that are inappropriately being punished as we speak, but I am not sure I am equipped to know or figure that out.

This industry(healthcare) is facing enormous upheaval and scrutiny like never before in decades, their margins are nowhere near to acute care facilities, and patient and family expectations and liability is quite high(as they often transition there from acute care and used to that level of care ad supervision which SNFs are not set up to provide). Staff is not the most motivated(or well paid for that matter).

Hence it is not the best business when further to those issues, payments are pressured. Granted these are REITs, but if their end customer is not healthy their porospects too cannot be.

 

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