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No. of Recommendations: 41
I’ve been on vacation (and still am), and other things as well have kept me from our Board. A poster here asked about my opinion on Care Capital Properties (CCP), the new VTR spin-off that will begin trading “regular way” on Monday or Tuesday. I promised him I’d post my views here.

CCP owns skilled nursing facilities (SNFs) leased to smaller, regional operators. Its closest peer is Omega (OHI). CCP’s top five markets (as a % of NOI) are Texas, Mass, Indiana, Kentucky and Oregon. Texas is 23% alone, so there is some “oil depression” risk. Here are some of the basics, IMO:

Management, coming primarily from VTR, is experienced and capable. The balance sheet will be very good (34% debt to estimated asset value and debt/ebitda of 4.5x), slightly better than the “Big Three” healthcare REITs. CCP owns higher cap rate properties, approximately 8.3% average cap rate, so the stock will trade at a lower P/AFFO multiple than most REITs. This high cap rate suggests fairly low internal growth, about 2% annually, and more risk – due to dependence on Medicare and Medicaid by CCP’s lessees (although current coverage ratios are reasonable and in line with peers).

OHI has consistently traded at a large NAV premium, which suggests that private market cap rates are too high and/or expectations of strong external growth due to acquisitions in a fragmented industry. This will be CCP’s story also.

The initial dividend yield will be a little in excess of 6%, and AFFO is about 120% of the dividend, so it is well covered. The substantial dividend yield of 6% along with potential AFFO growth of 6-8% (due to what will be a strong acquisitions focus) makes for an attractive story, assuming the risks are not excessive.

Let’s take a quick look at those risks. They include cutbacks to Medicare and/or Medicaid reimbursement rates, which are dependent upon government decision; this has been a problem in the past and, while not a near-term threat, is something to watch. This, along with slow internal growth, is why the cap rates on CCP’s and OHI’s properties are as high as they are. There is also the risk of obsolescence, as newer and better SNFs may be built over time. CCP, like other healthcare REITs, will be more sensitive to rising interest rates and bond yields. Finally, should the stock trade at or below its NAV (somewhere in the neighborhood of $30 per share), the external growth story will dissipate.

Summary: I like the CCP story. The dividend yield is high and well covered, the risks here are moderate and AFFO may grow at between 6% and 8% annually for the next few years, depending upon management’s ability to execute a sound acquisition strategy and whether the stock can trade at a meaningful premium over NAV. I would add to my spin-off shares at any price below $35. There has been some when-issued trading in the shares, but that’s probably not a good indicator of where CCP will trade this coming week.

Ralph
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