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Care Capital Properties Inc

CCP: NASDAQ

Care Capital Properties (CCP) is the second largest publically traded dedicated skilled nursing facility (SNF) real estate investment trust (REIT). It was spun out of Ventas, another health care REIT, in August of 2015 and now owns 345 properties, which it leases to third-party operators. The portfolio is spread across 36 states and contains a total of about 38,000 beds/units. [1]

Investment thesis

We believe that REITs offer a unique investment opportunity, in which equity investors can benefit from real estate ownership, and are becoming more widely owned as REITs are now a dedicated sector in the S&P 500. [2] As the number of U.S. citizens over 85 increases, we see a growing need for nursing homes, which we expect nursing facility REITs to benefit from. With Care Capital’s stock down 30% from its $34 high at the time of spin, we thought that the selloff may be overdone. [3]

Confirmation through research

The U.S. contains 15,632 skilled nursing homes, down from 15,726 at the end of 2008 and will continue to decline. [4] The number of U.S. citizens over 85 has risen to 6.5M, up from 4M in 2000 and is projected to increase to 10M by 2030. [5] SNFs provide traditional long term nursing home care and are supported by Medicaid and Medicare. [6] Medicaid and Medicare daily rates have increased at a 2-3% annual rate since 2008 but those rates are being pressured by efforts to shorten the length of stay and bundle services. [7]

We believe that the stock is down due to the risk of increasing interest rates, operator financial difficulties, leverage and reimbursement risk. Even with increasing interest rates, we trust that REITs will continue to play an important role in portfolios. Some nursing home REITs have run into difficulty with operators burdened by increased regulatory costs, and any Medicaid or regulatory relief for skilled nursing operators would be a welcome benefit. With the current administration in place, we believe this is more likely. Based on our research, we feel that Care Capital’s operators are in decent financial positions and this quarter management reported increases in rent coverages by two of its largest operators. [8] CCP also finished restructuring its debt this quarter, which we see as a breakthrough. [9]

Variant Perception

CCP is selling at a discount to other health care REITs on an EV/EBITDA and dividend yield basis. [10] We believe that the dividend will be covered by cash flows, which are also supported by recent asset sales, and that the demand for skilled nursing will continue to grow while supply is constrained by the lack of capital and investor concerns about Medicare reimbursement. Given the depressed valuation, we consider the risk/reward to be in our favor.