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Healthcare Real Estate Firms Buying Again

Orange County-based companies in the healthcare real estate sector are back in a buying mood this year, particularly for skilled nursing facilities.

Mission Viejo-based The Ensign Group Inc. (Nasdaq: ENSG) and San Clemente-based CareTrust REIT Inc. (Nasdaq: CTRE) said sellers’ views of the value of their properties have become more realistic in recent months.

“We stand on the cusp of another new growth opportunity which, if we can get it successfully closed, would surpass in size anything we’ve done to date,” CareTrust Chief Executive Greg Stapley told analysts on a conference call late last month.

Even Irvine-based Sabra Health Care REIT Inc. (Nasdaq: SBRA), which is delevering its balance sheet, said it might make a few small acquisitions in skilled nursing facilities, Chief Executive Rick Matros told the Business Journal.

The skilled nursing space has gone through a shakeup by getting rid of bad operators, he said.

Matros knows this well: his firm early this year said it had resolved litigation related to Dallas-based Senior Care Centers, a prior operator of 38 Sabra facilities that filed for bankruptcy in 2018.

The industry is left with fewer, high quality assets, as well as a more regional network of “smaller, smarter operators”—making them compelling acquisition targets, Matros said.

“Headwinds in skilled nursing are dissipating,” he said. “Private equity owners have kept pricing high for senior housing assets. We’re starting to see more skilled [nursing] deals and that’s where we expect to get some things done this year.”

Skilled nursing facilities, or nursing homes, is an industry where facilities treat short- and long-stay patients with a range of medical, nursing, rehabilitative, pharmacy and routine services like dietary, social and recreational services.

Companies operating these facilities generate revenue from private pay, insurance companies and government agencies like Medicare.

Ensign Group

Ensign went on a buying spree in 2016, picking up 24 skilled nursing facilities. That acquisition number slowed to 11 in 2017 and seven last year when the company reached a total of 188 skilled nursing facilities. Altogether, the company has 244 facilities, of which it owns 72.

Now there are signs that it will pick up its acquisition pace. In the fourth quarter, it bought facilities in Nevada, Texas, Kansas and Idaho, among other places.

In the first 10 weeks this year, it bought two skilled nursing facilities, one in Utah in January and a second one in Downey last week.

“It’s been many years since we have found the right opportunity to grow in Southern California,” Chief Executive Christopher Christensen said in a statement.

The company’s stock has been boosted by recent positive results, such as its fourth-quarter revenue and record profit, both of which topped analysts’ consensus.

Ensign “continues to improve fundamentals, including improving occupancy, and make opportunistic acquisitions to drive growth,” Stifel analyst Chad Vanacore wrote in a note to investors.

“Our takeaway here is that occupancy continues to improve and that is a meaningful lever for growth and a good sign for recovery in the skilled nursing industry,” Vanacore said.

Ensign is forecasting even faster revenue growth going forward.

While its 2018 revenue climbed 10% to $2.04 billion, the company forecast 2019 revenue will grow about 14% to between $2.29 billion and $2.35 billion. It also forecast earnings of $2.17 to $2.26, compared with $1.70 in 2018.

“We’re very excited about the coming year and our guidance demonstrates our optimism for the future,” Christensen told analysts.

Two weeks after the company’s February earnings report, Christensen announced he would give up the chief executive role to Chief Operating Officer Barry Port and would become executive chairman, taking over for his father, Roy Christensen. The father and son founded Ensign Group in 1999.

Shares since its Feb. 6 report have climbed 15% to $50.62 and are up 87% in the past year; it has a $2.6 billion market cap.

CareTrust

CareTrust, a real estate investment trust that was spun out of Ensign in 2014, made $310 million in net acquisitions in 2017.

Last year, it saw prices climb to unrealistic levels so its purchases dropped to $68 million through the first nine months.

Then in the fourth quarter, CareTrust executives decided the time was ripe, making $45.6 million in acquisitions, mostly in skilled nursing facilities. It’s made two more investments totaling about $53 million in the first quarter this year.

“After a slow start to 2018, we were pleased to finish the year with several solid acquisitions and our most robust pipeline in a long time,” Stapley said in a statement.

That robust pipeline is expected to total between $275 million and $300 million in dealmaking this year, mostly in skilled nursing facilities.

Much of that would be through a single portfolio buy. The REIT said it has entered into a definitive agreement to purchase 12 facilities in the Southeast for $211 million. That deal could close in the second quarter.

The company said it could fund upwards of $400 million in acquisitions this year without help from equity markets and without exceeding the midpoint of its targeted leverage range.

“We contemplate a real estate cycle which by some accounts, and we’re not taking a side or making any predictions here, but some might say it might be getting just a little bit long in the tooth. So we’re ready for whatever opportunities may arise,” Stapley told analysts.

Shares have risen about 3.7% since its Feb. 13 earnings report and are up 68% in the past year; it has a $2 billion market cap.

Sabra

Sabra itself has had quite an acquisition ride.

In 2017, it bought Care Capital Properties Inc. in an all-stock deal that valued the company at $4.3 billion.

The deal tripled Sabra’s market cap and gave it the ability to do bigger deals—“over half a billion,” Matros said.

It stumbled during its first year as a combined company. At the beginning of last year, Sabra forecast normalized funds from operations, or FFO, which strips out assets of purchases and sales, of $2.48 to $2.56 per share.

It reduced that forecast last November because of the sale of its senior care centers portfolio and in February reported normalized FFO $2.29 for 2018.

Now it’s forecasting an even lower 2019—normalized FFO of $1.86 to $1.94, missing the analyst consensus.

“We’re going to be delevering the balance sheet which resets the table and it’s been for us—it’s been an 18-month period of transformation,” Matros told analysts on a conference call in February.

Sabra’s nursing facilities have declined from 384 at the end of 2017 to 335 by the end of 2018. Altogether, it has 470 facilities, which includes 90 senior housing communities and 22 specialty hospitals.

Since buying Care Capital—the deal increased its skilled nursing exposure to 70%—the REIT has gotten its senior housing and skilled nursing ratio down to about 50-50, similar to the level where it was before the purchase, he said.

Stifel analyst Vanacore, who has a hold rating and an $18 target price, said the REIT is “hitting the reset button” this year.

Shares currently trade around $17.65.

“We see 2Q as new basis and investor expectation should adjust,” Vanacore wrote after the REIT’s most recent report.

Shares declined 9.9% since the Feb. 24 report and are flat in the past year; it has a market cap of $3.1 billion, well off the value it had in 2017 when it bought Core Capital.

Matros said Wall Street needs time “to absorb all that we’ve done and have the appropriate valuation.”

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Peter J. Brennan
Peter J. Brennan
Peter J. Brennan has been a journalist for 40 years. He spent a decade in Latin America covering wars, narcotic traffickers, earthquakes, and business. His resume includes 15 years at Bloomberg News where his headlines and articles sometimes moved the market caps of companies he covered by hundreds of millions of dollars. His articles have been published worldwide, including the New York Times and the Washington Post; he's appeared on CNN, CBC, BBC, and Bloomberg TV. He was awarded a Kiplinger Fellowship at The Ohio State University.
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