EXPERT OPINION: A Conversation with Dan Bernstein

February 26, 2015

February 26, 2015.  In this Expert Opinion, Dan Bernstein, Equity Analyst, Stifel Nicolaus, discusses public equity markets, IPOs, and REITs.

Read the Transcript

Daniel BernsteinDaniel Bernstein joined Stifel in 2006. Based out of the Baltimore office, Mr. Bernstein is a Vice President in the Healthcare sector, covering Healthcare Providers and Healthcare Real Estate.

His past awards include FT/Starmine and Wall Street Journal's Best on the Street Awards for stock picking in the healthcare services sector.
Before joining Stifel, Mr. Bernstein was an analyst with real estate developer Recycland as well as a financial reporter and editor with Dow Jones & Co. and Bondlink News, where he wrote on homebuilders, REITs, high-yield bonds, and convertible bonds.

Mr. Bernstein is a graduate of the University of Miami, earned an M.B.A. from the University of Maryland, Robert H. Smith School, and holds the Chartered Financial Analyst designation.

 

Read the Interview Transcript:

Steve Monroe

Well, I'm sitting here with Dan Bernstein.  He's an equity analyst at Stifel Nicolaus.  He's been covering the senior housing business for nine years, I guess?  

Dan Bernstein

Nine years.

Steve Monroe

Nine years.  So, let's talk about the state of the public equity markets for senior housing.  If you look at supply and demand, there's basically very little supply, so with that imbalance we would expect there to be huge demand with the public equity stocks.  What's going on?  

Dan Bernstein

You're talking about in supply, the public equity?  

Steve Monroe

Yes.  Yes.  

Dan Bernstein

We have decreasing ten-year interest rates and just interest rates in general, which is I think that's creating demand for yield heavy stocks, whether it be REITs or other dividend yielding stocks.  But also, there's this increasing confidence I think in investors in equity REITs.  They've performed very consistently over the last ten years, increasing their earnings in dividends roughly 7 to 10 percent a year.  And that creates some of its—a little—their own momentum.  

Steve Monroe

But on the provider side, we were—20 years ago, there were 45 publicly traded provider stocks.  Now on the private-based senior housing side, there are three.  So, there's no—public equity investors have nothing to invest in, so why isn't there just such strong demand for the three remaining ones. 

Dan Bernstein

I think it comes down to the real estate value.  If you look at the actual growth of the private paying senior housing operator it hasn’t been terribly consistent.  Some of that might be the recession, a little bit of over supply that we saw in construction going into the recession.  And so, the earnings haven't been particularly consistent.  There's a little bit of economic sensitivity that people continue to be concerned about.  

They're highly levered.  Unlike the REITs, the leverage, the effect of leverage, with operating leases of private-pay senior housing operators is somewhere between eight, nine times, maybe even a little higher.  And that, to the public investor that's just a big red flag.  Maybe to the real estate investor that kind of leverage is not an issue, 70, 75 percent loan-to-value.  That's not an issue.  But for the public investor and company, whether it be real estate or an operator, that becomes a red flag.  

Steve Monroe

So, what's the public investor looking for in the private-pay senior housing companies?  

Dan Bernstein

Well, aside from consistency in the earnings, which could help the share prices if you get that, particularly from Brookdale or Capital Senior Living where they're had a little bit of inconsistency in the earnings over the last I'd say six to 12 months, for a variety of reasons, I think most of the investors I speak to have some kind of real estate angle looking at those companies.  Brookdale may own somewhere between we estimate $8 to $10 billion of real estate based on current cap rates.  Capital Senior Living may own about $1 billion of real estate.  We think the implied value of the companies based on that real estate alone is much higher than current stock prices.

And so, a lot of investors on the buy side, institutional side, have come up to the same similar conclusions and then made investments in those companies for the real estate value and not necessarily for the operational growth.  

Steve Monroe

And let's talk about something that we haven't seen much of at all, the IPO market in senior housing.  Is there any chance in 2015, 2016, we'll see someone wanting to take that plunge?  Or is it just too difficult?  

Dan Bernstein

I really don't see that, Steve.  Not that there—there may not be enough large portfolios out there in the senior housing space of quality anymore.  We've seen the health care REITs over the last five or six years really buy up most of the assets of the super regionals, which probably would be the most likely candidate to become public.  You could see potentially some of the—maybe more the B quality portfolios that are looking for capital come to the public markets.

But at the same time, why come public?  If you look at the valuations of the public operators returning at implied cap rates of 7 or 8 percent maybe, a multiple, if you want to put a multiple on it, they're trading around 10 to 12 times EBITDA.  You can go ahead and sell your real estate to private equity.  You can sell your real estate to the REITs at something closer to six cap rate for a large portfolio, maybe lower nowadays.  

And if you don't want to go ahead and sell to a REIT, you can go ahead and refinance with Fannie Mae, Freddie Mac.  The insurance companies are starting to lend in the industry at 70 percent levered LTVs.  Take out most of your equity, pay yourself back, and why be beholden to a REIT, or sell to an operator.  

Steve Monroe

And not deal with all the requirements of being a public company and the extra cost.  What about the Skilled Healthcare-Genesis reverse merger?  Is that going to put a little more fizz into the skilled nursing market, the public equity skilled nursing market?  

Dan Bernstein

Well, at the very least it brings back a sizeable company to keep track of within the industry.  If you look at—if we don't look at the other post-acute operators like HealthSouth or Kindred and just purely more at the skilled nursing operators, you're looking at market caps below $1 billion.  Genesis-Skilled Healthcare is going to be quite larger than that.  Genesis is obviously one of the largest—if not the largest skilled nursing operator in the US.  

And so, it puts a very good mark to keep track of the industry, trends in the industry.  It brings some excitement back.  We haven't seen that sizeable of an operator in quite a long time.  

Steve Monroe

And you bring up Kindred.  What don't investors get about Kindred Healthcare right now?  Shouldn't they be kind of clicking on all cylinders with their own post-acute ACO model that they've been working on?  What's going on there?  

Dan Bernstein

Well, it's a complicated company.  I think the easiest way to say it is they actually run multiple business lines.  It's all post acute, skilled nursing, in-patient rehab, long-term acute care hospitals.  Those are really all different businesses.  They have different regulatory dynamics behind them.  That might change, and I think that's why Kindred has built the company the way they have.  They expect to see more site neutral payments, more paying for quality.  They're able to build more relationships with hospitals and insurance systems to reduce re-hospitalizations.

But I think all that works out over a long period of time.  We're only starting to see now the proposals for site neutral payments.  We're really only first seeing the dynamics changing, perhaps in their favor.  It's a company really built for several years from now rather than a company that's built for today's regulatory reimbursements.  

Steve Monroe

Well, that's what I don't understand because the price seems so low so if that's true, buy now and then ride it out, whether it's one, two or three years from now.  But who knows?  

So, let's look at with REITs, with their low cost of capital—their really low cost of capital—their diversification in property type, diversification in geography, in everything, pretty much.  What's going to keep the REIT train from rolling on?  Is this just going to keep on going forever?  

Dan Bernstein

Well, it can't keep going on forever or you end up with a lack of quality in assets.  But we estimate the total real estate market, which would include seniors housing, medical office buildings, life science assets, skilled nursing, all the different hospital classes, perhaps $1 to $1.2 trillion, investable maybe something a little bit smaller than that, $800 billion, somewhere in there.  They only own 10 percent of that or so.  So, they actually have a lot of assets—and that's just in the United States.  They're obviously expanding now internationally, the UK, Canada, mainland Europe and Germany.  We could even see some investments in Australia at some point.

So, there's a lot of assets for them to buy.  The key for them will be continuing low cost of capital, interest rates, the 10-year Treasury at 2 percent, a little bit below that.  As long as there's not a rapid rise in interest rates, their cost of capital will stay very low and they'll continue to be aggressive buyers.  

Steve Monroe

Well, we'll see what happens.  With that record year in 2014 in terms of the acquisition market and the values, we'll see what happens in 2015.  I don't know about you, but I'm just assuming it's going to be a repeat or even more.  

Dan Bernstein

We expect a repeat.  

Steve Monroe

You expect that?  Okay.  All right, well, keep up your good work, and look forward to reading reports.  

Dan Bernstein

Thank you.  

Steve Monroe

Okay.  Thanks.

Comments

Post new comment

The content of this field is kept private and will not be shown publicly.