Healthcare and Trading up

Two of 2CHYP’s healthcare REITs reported this week with strong results but one would not have gotten this impression listening to the analysts on the conference calls.  Medical Properties Trust (MPW) got more questions about Adeptus than Adeptus did on their own calls.  Omega Healthcare (OHI) got lambasted with a slew of questions about an aggressive Department of Justice and changes to industry reimbursement.  Tenant EBITDAR coverage was in fact down across the entire healthcare REIT space, but it still remains healthy overall.

We have seen similarly pessimistic environments in the past and it is usually a buy signal.  As value investors, we pay attention to the fundamental difficulties our companies face, but we keep them in perspective of the bigger picture.  Regarding MPW, Adeptus is prepaid and current through February and appears to be stabilizing their business through the use of a HOPD (hospital out-patient department) system, so we think it is likely they will continue to get rent.  Further, in the worst case scenario in which Adeptus goes under and MPW for some reason cannot re-lease the high quality new hospitals, it is only 7% of their revenue.  With the deep discount at which MPW is trading, far more damage is already priced in.

OHI’s problems are entirely those of the SNF (skilled nursing facility) industry, with none of the concerns specific to OHI.  As such, I think it will be a beneficiary of the shakeup as it has ample liquidity and minimal debt burden.  It will be the REIT that picks up discounted SNF properties when operators need to raise immediate capital.  Much like MPW, OHI is trading a massively discounted multiple, so we suspect whatever happens, the bear case is already priced in.

Both companies issued 2017 guidance showing positive year over year growth and neither has a history of aggressive guidance.  We are maintaining a large position in each REIT for the oversized dividends and we anticipate material capital appreciation once the environment calms.

Beyond earnings announcements, we made some opportunistic trades this week, selling JCAP and BRX to buy CubeSmart (CUBE).  High growth REITs like CUBE rarely trade at such a reasonable price so we jumped in.

Commentary may contain forward looking statements which are by definition uncertain.  We retain no obligation to update or correct forward looking statements should the available information change.  Actual results may differ materially from our forecasts or estimations.

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