On Tuesday, May 17, 2015 I was featured in a question and answer session over breakfast with subscribers of Senior Care Investor, moderated by its editor Steve Monroe. We covered a wide range of topics. I summarize below key takeaways from my Senior Care Investor interview and provide a link to the nearly one hour webcast.
The public markets are much less important for seniors housing and post-acute care than they were twenty years ago when there were as many as 30 public companies including operators and health care REITs. If you review the investment history of seniors housing and post-acute care there have been a number of “pivot points” where stocks in these sectors experienced significant sell offs and then rebounded strongly. These pivot point were driven by overbuilding and reimbursement and operating problems that in some cases led to operator bankruptcies. If you got the timing right, these pivot points provided very attractive investment opportunities in the stocks of private pay senior housing operators, post-acute care operators and health care REITs, with the stocks within each of these industry groups moving on somewhat different events and at somewhat different times.
I see current industry conditions again creating pivot points for investments in senior housing, post-acute care and health care real estate and believe it is the right time for investors to be studying these sectors and deciding when it makes sense to invest.
Private-Pay Seniors Housing – Overbuilding, few publicly traded investment options and operating issues at the largest publicly traded operator, Brookdale Senior Living, Inc. (BKD), have caused most public market institutional investors to flee the private-pay seniors housing space. I don’t see a quick pivot in private-pay seniors housing because capital remains plentiful for new construction, underlying demand from older seniors (80+) is slower than it was before 2010 (see Slow 80+ Pop Growth, Elevated Construction Spark Concern For Seniors Housing on this blog), and issues at Brookdale will take some time to resolve. I also believe private equity investors will await a more receptive market before bringing other quality operators public.
Post-Acute Care – Post-acute care currently has more publicly traded operators with scale than private-pay seniors housing, but deteriorating operating fundamentals and high leverage have also driven public market institutional investors away from publicly-traded post-acute care operators. Major REITs, such as Ventas (VTR) and HCP (HCP) spinning off skilled nursing assets has underlined the risks investors see in this space. Increased use of Medicare and Medicaid managed care and ever expanding use of bundled payments are reducing lengths of stay (LOS), pressuring post-acute care rates and volumes and eroding operator revenue and EBITDA. However, because baby boomers are now beginning to turn 70, the pool of post-acute care patients should grow dramatically over the next 5 – 10 years while the supply of post-acute care facilities and beds is flat or declining and quality operators should be able to attract higher volumes of patients from hospitals if they care demonstrate quality outcomes. A mild flu season and high operator leverage exacerbated poor 1Q16 financial performance. I anticipate pressures on rates and LOS stabilizing and volume growth providing upside for post-acute care operators over a 1 – 2 year period while operators are rationalizing their delivery systems and paying down debt. I believe these factors put post-acute care closer to a performance pivot point than private pay seniors housing.
Health Care REITs – Health care REIT share prices have been buffeted by some of the same issues affecting private pay seniors housing and post-acute care operators but health care REIT share price performance has been much more mixed than that of the operators. Many health care REITs are well diversified, have strong lease coverage and are less exposed to overbuilding and revenue pressures than the operators themselves. Health care REIT stock performance is also significantly influenced by investor’s views on interest rates and overall economic growth. Some healthcare REITs, with more significant exposure to seniors housing or post-acute care issues, such as HCP, presumably its future SpinCo, and CCP, have been more directly impacted by the industry and operator issues noted above. These REITs, and some others, offer larger cap, more liquid investment vehicles than seniors housing or post-acute care operators but likely also have potential for upside from the industry pivot points described above.
Having retired as an equity analyst who followed seniors housing, post-acute care and health care REITs for 15 years, I no longer make Buy, Sell, Hold recommendations. I do recognize that there are significant risks for private pay senior housing operators and particularly for highly leveraged post-acute care operators. However, experience in the 1999 – 2002 crash of private-pay seniors housing and post-acute care and other sell-offs driven by operating underperformance, reimbursement cuts and regulatory issues show that these sell-offs have often proven to be great investment opportunities and have absolutely been a time to look harder at these sectors and develop an investment strategy and timetable rather than to flee the space.
For a more in depth discussion of these issues, listen to the Senior Care Investor webcast by clicking on the link below. Comments, including those with opposing viewpoints, welcome.