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No. of Recommendations: 3
Thank you to REITnut for his now 1 year old AREEP post, and Yodaorange's 2015 follow-on ARE and AREEP updates.

ARE's closing price: $84.24 (52 week $72.91 - $102.96)
AREEP's closing price: $27.40 (52 week $26.25 - 30.25)

AREEP has been doing a steady job of delivering income while holding its value, and tracking ARE.

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No. of Recommendations: 2
AREEP has been doing a steady job of delivering income while holding its value, and tracking ARE.

Not sure what you mean by holding value. It trades at preferred's yield and at the moment completely disconnected from ARE conversion. If you were to convert today you will lose money.

You are stuck with 6.4% yield and that may be awesome for some besides that I see nothing to get excited about this. Just for your reference, CCP a new spin-off from Ventas, expects to have a dividend of $2.28 and at current price of $30.87, would have a dividend yield of 7.39%. Which has growth prospects and can increase dividends in future.

Of course everyone has a choice to make of what they like, but nothing great about AREEP right now.
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No. of Recommendations: 1
The nursing home business is not the quality of ARE's buildings and tenants. It should yield higher with all the govt payments involved.
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No. of Recommendations: 1
The nursing home business is not the quality of ARE's buildings and tenants. It should yield higher with all the govt payments involved.

It is not clear why you think ARE owns assets that are somehow superior? And why you think government payments make CCP inferior.

Many insurers depend on government payment, so are defense contractors, many technology companies have significant government contracts. So help me understand why government payments make these business inferior.
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No. of Recommendations: 4
Perhaps medical office buildings are considered a superior investment because the rentals are not subject so much to the vagaries of government payments by such things as Medicaid. Medicare doesn't pay for nursing home stay, so far as I know (at least I didn't get any help for my late wife.). As I am sure you know, Medicaid is a hot political issue.

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No. of Recommendations: 0
I could be wrong, but my understanding is the lease or rental payments are not subject to Medicare payments. Of course any major change could cause disruption on their customer base, how tightly the rentals are tied to medicare payments?
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No. of Recommendations: 0
govt payments to the operators can be changed even though the lessee has a LT lease, the operators financial condition can change.
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No. of Recommendations: 25
I think the long term financial outlook for ARE/AREEP is a lot more certain than any of the nursing home/assisted living/memory care/rehabilitation facilities. This is NOT a criticism of CCP or any of the other REITS in that space.

The nursing home space is a very difficult business. Margins are razor thin and are very dependent on government programs, both Medicare and Medicaid. Medicare pays for something like the first 105 days in a rehab facility. After that, it is up to the patient to spend down their assets, typically to ~$2,000 before Medicaid kicks in.

A few facts:

1) Many nursing homes go bankrupt every year. Most of the time, it is because their revenues did NOT match the assumptions they used in the business model. Sometimes it is not enough occupants. Sometimes it is the wrong mix, i.e. too many Medicaid patients instead of “private pay” patients. Like any well run business, these facilities start with a multiyear financial plan aka forecast. Inevitably some percentage of them are too optimistic, resulting in a mess. (I revue a lot of these failed business plans after the fact.)

2) The demographics of demand are VERY strong for nursing homes. Increasing numbers of patients are forecast for several decades. That is the good news. The bad news is MOST of these future patients do NOT have the funds to private pay. Nor have they bought Long Term Care insurance, aka LTC.

3) In round numbers, you can assume it costs about $100k per patient per year, averaged over the whole US. Obviously, it costs a lot more in New York City compared to Keokuk, Iowa, but on the average, it is a LOT of money that inevitably can only come from Washington.

4) Everyone has seen the long term projections of “entitlement disaster” due to Social Security, Medicare and Medicaid. We can stipulate that eventually something(s) will change. It is beyond Yoda to say what and when, but it is reasonable to think that reimbursement rates to nursing homes will come under attack.

BOTTOM LINE is that Yoda’s opinion is that ARE’s medical research office building/complexes business has more long term stability that any nursing home operator like CCP. Some of the orphan’s portfolios we manage literally are targeted for 50 YEAR returns. Yoda is MUCH more comfortable holding AREEP in those portfolios than holding CCP.

In full disclosure, most of these portfolios do hold CCP. That was as a result of the VTR spinout. We have NOT added any CCP shares to any portfolio, but might add a small amount during the current weakness.


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No. of Recommendations: 0
Thanks Yoda. This helps me understand the concern better.
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No. of Recommendations: 9
look at the HCN SNF raise from CMS this year--it's only 0.9% and doesn't keep pace with historical inflation. CMS can cut reimbursement with no negotiation They are solely in charge of the fate of any medical provider or facility that takes Medicare. The more revenue depends on Medicare (CMS) the less predictable raises are and the more likely it is that growth will be slower.

Same property NOI increases were 2.3% for ARE in Q1 beating the 0.9% increases from Medicare for SNF. ARE can control its revenue increases more predictably with the built in rent increases in triple net leases. Skilled nursing gets paid by a governmental formula arrived at yearly by CMS. As an example Medicare was going to cut physician pay based on a value formula by 21% last year. It took a vote by congress to defeat it.

I think you would have to consider any skilled nursing REIT as a riskier investment and need for the yield to be higher to compensate
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No. of Recommendations: 18
For what it's worth, I still love ARE and AREEP. Yoda is right when he pegs the risk profile of this REIT at below average. Their markets are the best they've ever been, SS NOI growth is very strong and NAV continues to increase. The NAV discount is now over 16%, should anyone care.

I continue to buy both ARE and AREEP, although Mr. Market thinks I am an idiot.

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No. of Recommendations: 0
<although Mr. Market thinks I am an idiot.>

Mr. Market is a snob!

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No. of Recommendations: 19
I spent yesterday couple of hours reading through the transcript of recent quarterly report, Seeking Alpha articles and the news releases of ARE.

Obviously anyone reading about ARE will observe immediately that the portfolio holdings are very high quality - around 80% or so concentrated in highly supply constrained markets including Greater Boston, San Francisco, San Antonio and then New York even though the life sciences type businesses are less common in NY than the first three locations.

The rise in FFO, FFO/share, revenue clearly indicates the strength of the company. It did $204 million/ in revenue this last quarter compared to 176 a year before. More importantly it was done without issuing new shares so the FFO per share was $1.31 vs. $1.19. Considering that terms are around 8-9 years on the average for each of remaining leases, these growths are impressive as the rent is not setting that frequently (as opposed to Apartment REIT or self storage or hotel rates). The growth and predictability of the cash flow is a real strength going forward in my opinion.

Management went crazy in the conference call to highlight the recent sale of around $190 million (70% interest) for a Boston property with 4.5% cap rate. They kept talking about it as if the whole portfolio should be valued at the same rate. It really drove me nuts - I get that it fetched good price but boy it leaves you wondering whether management is really well grounded or they out there just trying to upsell the business to its shareholder constituency.

The FFO projected is around 5.2 to 5.4/share this year. With shares selling at $84, at midpoint it is selling for 16 times FFO. For a company with majority leases being triple net lease, I would think the FFO and AFFO would not be that far part but I have got no clue what the AFFO is like for this company.

The company also acts a venture capital firm. It has around $170 million in unreliazed gain on the investment in Bio tech companies. When working with clients, if it finds attractive, it invests in the company. When pointed by one of the analysts that right now would be a good time to sell, the managemetn indicated that they do monetize it steadily (the guidance has $4 million year/gain built into it) but then they also think if one of the company turns into Biogen or Celgene, they could hit a home run. I really don't know what to think about it. Venture capital and real estate businesses require different skills, so at first sight it is not so great a sign. But then the kind of gain they have tells you the guys may be know more than we think they do. Overall despite my first inclination I don't want to think management is throwing darts around and see what sticks. So in my eyes it is net neutral - yes despite the steller performance of the investment portfolio.

The debt makes me really really uncomfortable. Sitting at $4B, it is around 7.4 times EBITDA. That is huge huge. For a company that is going to generate less than $1B in revenue, $4B of debt seems out of whack. From a total market cap perspective, it is probably inline with others? The proceeds from the recent sale and other disposition will be used to bring the debt down but still it looks high. May be for a triple net lease company with such predictable and growing cash flow, it is not a big deal, so looking for insight from others. I looked at companies in the Apartment sector, their debt level compared to revenue is nowhere close to this.

The rents they have in contract has automatic escalation built in. So that is really really good. I guess it comes with being in the AAA market.

The company does provide lot of detailed information in its quarterly report. The occupancy currently sits just below 96%. I would think that with the markets the company is in, it would be little higher but not sure what to make of it. They do have some vacancy that is working through the system, but still ...

Any way, would like to see what others have found interesting about the company.

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No. of Recommendations: 28
Good post, Investor 133. Here are a few additional comments on ARE:

1. Lab space is a good business if engaged in with care and intelligence. Owners enjoy long-term leases with internal rent bumps, expanding research budgets from good, stable tenants, little competition (this being a specialty property type), low sensitivity to the US economy, and the prospect of owning properties in strong cluster markets favored by medical research companies.

2. ARE has been running this business successfully for many years, led by CEO Joel Marcus.

3. Development and redevelopment projects increase both risks and potential reward. So far, ARE has made these projects largely successful.

4. Debt leverage is being reduced, but gradually. The current leverage ratio, based on estimated asset values, is slightly over 40%. This is not excessive, and is roughly in line with long-term REIT industry averages. Debt/ebitda is about 7.8x, which is a bit high and is due to ARE's substantial development pipeline (projects under development do not generate current cash flow).

5. Value is being created at ARE through strong tenant relationships, deep knowledge of the business and successful developments and redevelopments. The latter may slow somewhat due to ARE's higher cost of equity capital and its reluctance to raise substantial equity at a discount to NAV. I have been told that ARE will engage in more property recycling in order to fund new projects.

6. I do not value REITs on the basis of FFO or AFFO, as these metrics are too easy to manipulate by buying high cap rate properties with poor prospects or by levering up. NAV is certainly not a perfect metric, but I use it as the best of all alternatives. ARE is currently trading at an NAV discount of over 15%, which in my opinion is not warranted. NAV has increased about 5% since the end of last year.

7. Summary: ARE is a very good and well-managed company with a better growth profile than most REITs, less sensitivity to the US economy, good properties in excellent locations and an acceptable balance sheet. The stock is on sale, but nobody seems to care right now. AREEP, which is convertible into common stock and has substantial call protection, is another alternative here, for yield-oriented investors.

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