Borrow at 5% for Yields of 9% in Healthcare Real Estate: Investment Opportunities Increase for US Portfolios According to Stifel Nicolaus & Company

Wall Street Transcript

67 WALL STREET, New York - August 8, 2012 - The Wall Street Transcript has just published its Medical Real Estate Report offering a timely review of the sector to serious investors and industry executives. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Healthcare Real Estate Market Consolidation - Affordable Care Act and Reimbursements - Hospitals, Senior Housing, Skilled Nursing and Acute Care

Companies include: Sun Healthcare Group Inc. (SUNH), Ventas Inc. (VTR), Health Care REIT Inc. (HCN), Senior Housing Properties Trus (SNH), and many more.

In the following excerpt from the Medical Real Estate Report, Daniel Bernstein from Stifel Nicolaus discusses his outlook for the sector:

TWST: What kind of growth prospects do these companies have? And whether it's by property acquisitions or development or M&A, how much activity do you expect to see?

Mr. Bernstein: On the health care REIT side, these are still primarily triple-net operators, though you do, on some of the large-cap names, have senior housing operating assets under the taxable REIT subsidiary structure. Some companies like Ventas (VTR) have upward of 25% of their net operating income from senior housing operating assets, and Health Care REIT (HCN) and Senior Housing Properties Trust (SNH) have significant senior housing operating assets.

But for the most part, health care REITS are triple-net leased, and so you may get the 1.5% to perhaps 2.5% internal growth from triple-net leases. For some of the large-cap names, including HCP (HCP), Ventas and Health Care REIT, you may see internal growth of perhaps 3% to 4%. So it's modest growth internally. There remains an external acquisition opportunity.

Obviously, there is a law of large numbers. For the large-cap names, when you get to be a $15 billion or $20 billion health care REIT, it's harder to find more multi-billion-dollar portfolios as you have the last past couple of years. But the industry - senior housing, medical office - is fragmented enough that these large companies still will find acquisition opportunities. And certainly the smaller-cap names in health care REITs, they're looking at offers for more portfolio acquisitions. They're not competing with the large-cap investors, but they probably will find their fair share of acquisition opportunities as well.

On the senior housing side, you also have Fannie Mae (FNMA) and Freddie Mac (FMCC) financing for stabilized assets, so the senior housing operators also may find acquisition opportunities. In particular, one company doing that is Capital Senior Living (CSU), which we have a "buy" rating on and a $13 price target. Capital Senior Living is making a lot of these acquisitions using Fannie Mae or Freddie Mac financing for 60%, 70% of the loan-to-value, and cash for the remainder.

Essentially, they're borrowing money at 4.5% to 5%, and then buying these assets at 8% to 9% yields. So for small acquisitions, you get a very high spread between your cost of capital and the initial yield. So there are some very good acquisition opportunities for the senior housing, potentially, as well.

On the skilled nursing side, most of the operators are conserving their cash - post last October's CMS cut, Medicare rate cuts - and focusing on their internal business rather than external business. Given a modest CMS market basket increase for fiscal 2013 offset by sequestration, our general thought is if you have a flat reimbursement environment, a good skilled nursing/postacute operator, between changes in mix and volume, probably can go ahead and increase their EBIDTAR 3% to 5%. So we would expect that the skilled nursing operators will be able to grow internally at about that rate, perhaps higher than that given their financing and operating leverage, but we don't see a lot of external opportunities for the skilled nursing operators. We don't necessarily see them having the financial capability to make a lot of external acquisitions in skilled nursing or postacute.

TWST: So the health care REITs have the best access to capital right now?

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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