Healthcare REITs Face Critical Challenges

| About: Brookdale Senior (BKD)


Hospitals have been declining at a significant pace.

Healthcare real estate is losing its luster.

No one is safe from the pain of lower reimbursement revenue.

Community Health System is the loss-leader for publicly owned hospitals. Brookdale Senior Living has lost so much value it's hard to imagine a near-term recovery. Many health facilities will be in for surprises as the year continues to play out. Healthcare REITs have plummeted from the drop in occupancy rates. While the declines might be marginal, investors seem to be worried that these businesses have peaked in some areas of profitability.

Many of these companies are becoming prime short candidates as the equity and cash flows are becoming depressed compared to the debt levels. The prime concern investors fear is reimbursement risk since it is the major source of revenue for facilities across the nation. Any current shareholders should be aware of the physician fee schedule, or Medicare sustainable growth rate (SGR), that will be updated March 1st regarding reimbursement risk. Legislation has been successful in delaying physician rate cuts for years, but this could be a downside catalyst for lower projected revenue for facilities again. Chances are the "doc fix" will happen again, only to repeal the SGR; keep this on your calendar of economic events if you invest in healthcare.

Brookdale Senior Living (NYSE:BKD)

Last year Sandell Asset Management released a noteworthy activist presentation illustrating how management can unlock a significant amount of shareholder value. Similar to other activists, Sandell suggested the real estate be spun off since the operating business was trading at a discount when combined. This may have created a short-term boost in value, but in hindsight both stocks would have tumbled as much as the energy sector in the last 52 weeks.

To add salt to shareholder wounds, last week BKD released its annual earnings report, which disappointed investors, as we witnessed the stock fall to a 5-year low of $11.28. Revenue is declining and the occupancy rate is falling - these go hand in hand as the lifeblood of any real estate investment. With significant principal losses and no dividend, it is difficult to be excited as an investor behind long-term facilities.

Unfortunately the losses have been the same for many other healthcare REIT,s such as WellTower (NYSE:HCN) and HCP Inc (NYSE:HCP). These companies may be beating earnings estimates, but have consistently lowered guidance for 2016. The entire sector is beginning to show signs of weakness with a faltering revenue stream.

Community Health Systems (NYSE:CYH)

Now let's briefly look at some hospital stocks that need to be brought back to life. Community Health Systems is one of the major public hospitals that have been absolutely hammered in the last twelve months. In six months, CYH lost 75% of its equity value and does not show signs of slowing down. Even with the support from investors like Tepper's Appaloosa Management, the stock has not found much support during these volatile times. As of its latest 10-k, the company has a market capitalization under $1.7 billion and long-term debt nearing $17 billion. With 10x leverage, I can see management running out of breathing room as the stock price continues to drop. Even if CYH sells a facility or generates 'excess' cash, I am not betting the debt will go down by much. In this case, the P/E and Enterprise Value/EBITDA multiples make the company look cheap because the company has become distressed. Unfortunately we have seen this stress seep into other hospital stocks such as Tenet Healthcare Corp (NYSE:THC) and HCA Holdings (NYSE:HCA).

I think shareholders should anticipate a lot more value destruction in the upcoming year as we witness more change in healthcare. If you want to weather the volatility and invest in more sound health facilities then I would recommend looking at LifePoint Health (NASDAQ:LPNT) and LTC Properties (NYSE:LTC). Message if you have questions about healthcare activism and how to better position your healthcare stocks to capitalize the upcoming changes.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of this commentary Vijar Kohli, his family and/or clients of Golden Door Asset Management held no positions in the stocks mentioned - although positions can change at any time. Vijar Kohli is the Portfolio Manager of Golden Door Asset Management, LLC, a registered investment advisor specializing in individual and high net worth individual private wealth management. For more information on investing with Golden Door Asset Management, LLC please visit our website, Golden Door Asset Management, LLC is a New Jersey LLC, with its principal office located in Manalapan, NJ. Vijar Kohli is also the publisher of CareStocks, a newsletter focusing in on healthcare services, medical equipment, technology and real estate stocks. More information to the newsletter can be found at © 2015 Golden Door Asset Management, LLC. All rights reserved.

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