Biomed Realty Trust Inc (BMR), a REIT that invests in laboratory and office space for the life science industry, is currently trading at a discount to net asset value, as the company continues to lease up its assets and is growing FFO/FAD up to 7% a year, says Daniel Bernstein, Analyst at Stifel, Nicolaus & Co., Inc.
“[Biomed] is primarily a company that invests in life science assets, biotech lab space. It has improved its balance sheet dramatically; it’s sub-40% leverage. It continues to lease up its assets. It has diversified its tenant base, and it’s growing FFO/FAD 6% to 7% a year,” Bernstein said.
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Bernstein believes that the BMR is currently trading at a discount and has the potential to be an acquisition target for a large-cap health care REIT, therefore it is one of his top picks. He points to both internal and external growth opportunities as reasons for investors to continue looking at health care REITs.
“Longer term, the health care REITs are going to continue to grow their dividends. They have good external growth opportunities from acquisitions and average to above-average internal growth opportunities, particularly for seniors housing and medical office. So I think if I’m an investor, I’m looking for an opportunity to buy health care REITs on pullbacks, especially if I’m looking at the longer-term picture for income growth and income needs,” Bernstein said.
Capital Senior Living Corporation (CSU), Brookdale Senior Living (BKD) and Emeritus Corporation (ESC) could end up being acquired by larger companies in the health care real estate space given the current juncture of interest rates, says Dana Hambly, Analyst at Stephens Inc.
“With interest rates being a bit of an uncertainty right now, it probably is going to create more activity in the marketplace. It’s definitely impacting the psyches of both buyers and sellers. If you’re buying right now, you might think, well, interest rates are up, but still they’re very low by historical standard, so if they are on their way up, it makes a lot of sense for us to be buying stuff now. And if you’re a seller and interest rates are going up and that, in effect, could push your asset price down, then maybe you didn’t catch it right at the top, but you’d still be getting a very attractive price,” Hambly said.
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Hambly says BKD, ESC and CSU could always end up as takeout candidates, although the timing would differ for each. He said, “Brookdale has talked in the past about maybe doing something where they could split their assets out into some sort of property company. I’m not sure that happens anymore. Emeritus, certainly it has been speculated in the past. If any of the three names that I’ve talked about get taken out, that would probably be the first one.”
Capital Senior, he says, currently has growth potential in the double digits for its cash flow, and a transaction may take place after this growth is realized. “CSU, certainly it’s much smaller, and CSU has a lot of growth in front of it right now. They can do 20%-plus type of cash flow growth over the next few years doing their own acquisitions. I think they’d be giving up a lot of potential future value by selling out right now. But certainly, I think at some point they’re all potential candidates for some sort of transaction involving their real estate, and I think that the markets understand that, and I think they are getting pretty good premium valuations right now with some expectation that something could happen with their real estate to unlock shareholder value,” Hambly said.
Skilled Healthcare Group, Inc. (SKH) is in the process of restructuring its balance sheet, which will likely lead to company growth and SKH weighing options of where to take the business next, due to its 77% facility ownership, says Dana Hambly, Analyst at Stephens Inc.
“Skilled Healthcare Group I think has some operational challenges that they’ve been working through, but they are in the process of completely restructuring their balance sheet, and they’re going to basically turn most of their $450 million in corporate credit debt into HUD-insured debt, which should save them pretty substantially in interest expense. But more importantly, I think, once they get all of that done, it allows them to start growing the company again,” Hambly said.
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Skilled Healthcare Group owns 77% of its facilities, which provides them with numerous options of where to take the company next, Hambly says. He believes there is a possibility SKH will at some point pursue strategic alternatives.
“They have talked about it in the past; in April 2011 they announced that they were exploring strategic alternatives, and specifically whether they may somehow monetize their real estate or sell the entire company. I think as they get their balance sheet in order and can start demonstrating some growth again, there is optionality in that they may try to pursue strategic alternatives at some point in the future,” Hambly said.
Capital Senior Living Corporation (CSU) is expected to grow in the range of 20% to 30% a year for several years, primarily through consolidation in the health care real estate industry, says Daniel Bernstein, Analyst at Stifel, Nicolaus & Co., Inc.
“Our favorite seniors housing pick is Capital Senior Living. It’s a little bit more growth than value. Capital Senior is a small-cap company; market cap is roughly $675 million, but it is a top-20 operator of seniors housing assets in the United States. We think it will grow somewhere between 20% and 30% a year, and we think that there is a multiyear growth opportunity at Capital Senior, primarily through consolidation in the industry,” Bernstein said.
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Bernstein says CSU is acquiring a significant amount of assets, with would grow the bottom-line cash flow on the double digits, all of this while the stock currently trades below his price expectations.
“It is acquiring about $150 million to $200 million of assets a year at a leveraged IRR of 15% to 20%, and again, along with good seniors housing fundamentals, we think its bottom-line cash flow can grow 20% to 30% a year. And the stock is significantly undervalued to our price target of $29,” Bernstein said.
Health Care REIT (HCN) is expected to benefit from rising interest rates thanks to the real estate investment trust’s exposure to seniors housing, and the company’s strategy for growth looks attractive to Daniel Bernstein, Analyst at Stifel, Nicolaus & Co., Inc.
“Our top pick today is Health Care REIT in the REIT sector. It’s an $18 billion market cap health care REIT. Post their acquisition of Revera Properties in Canada, they’re getting about 38% of their NOI from seniors housing operating assets, so we think the portfolio will benefit from rising interest rates, and again, the good underlying fundamentals in seniors housing,” Bernstein said.
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Bernstein says HCN has a relationship-driven acquisition model, which allows the company not to rely on those large acquisitions for growth, even though they have engaged in a large number of them.
“They get a significant amount of acquisitions from their existing relationships at better-than-market prices, and so we continue to see them be attractive with 5% better FFO and FAD growth, similar dividend growth and a potential for them to continue to improve their valuation versus peers,” Bernstein said.
Crown Castle International Corp. (CCI) is likely to follow American Tower Corp (AMT) in converting to a tax-efficient REIT structure in 2015 or 2016 once the company’s net operating losses are exhausted, says Benjamin Lowe, Vice President at Stifel, Nicolaus & Co., Inc.
“I think the primary reason for AMT‘s conversion, and why Crown Castle will look to convert when their NOL position is exhausted in the 2015-2016 time frame, is because it is the most tax-efficient structure. As a REIT you avoid paying federal income tax in the U.S. The offset is you are required to pay out at least 90% of your taxable income and return that to shareholders, but that trade-off is a positive one in terms of being able to avoid a lot of the tax liability associated with being a C-Corp in a tax-paying position,” Lowe said.
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Currently CCI still has a meaningful amount of net operating losses, yet once those are finished, Lowe expects the company to convert to a REIT to optimize the tax structure of the company.
“AMT looked to convert when they were getting close to a point where their net operating losses were exhausted, and therefore they would be a more meaningful cash taxpayer. Crown Castle is going to do the same thing. Right now they still have a meaningful amount of NOLs that are shielding their tax liability, but as they burn through those over the next couple of years, and they get to the point in 2015-2016 where they are going to be a more meaningful taxpayer in the U.S., they will work to convert to a REIT structure as well,” Lowe said.
RigNet (RNET) recently reported a 36% increase in EBITDA compared to last year that can be attributed in large measure to the growth in communications services provided to oil-producing sites and growth in the average revenue per site, and the industry trend is to increase data throughput going forward, says Mark Slaughter, CEO and President of the company.
“Rigs only use an average of a meg of throughput today, but there is pressure to increase as more and more software applications and monitoring systems are deployed at the edge to make sure the rig is working effectively and is working safely post-BP Macondo. All those things are driving bandwidth growth from multiple customers. The drillers, operators and service companies are all using more and more bandwidth to access their applications. That is a very positive trend we certainly have seen retrospectively and expect to see prospectively,” Slaughter said.
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Slaughter says RigNet recently acquired Nessco, bringing engineering skills and product sets for telecommunications systems integration into the company’s portfolio that allow it to compete more efficiently in the oilfield communications area.
“Nessco goes out to these production facilities, and in some cases rigs, where they design, procure, construct, install and service these large telecommunications solutions. Some of this does deal with remote communications, but some of it deals with communications on the facility itself such as intercom systems, radars, beacons — solutions that legacy RigNet had not done historically, as we are more focused on communications from the remote sites back to civilization. But we found that to compete effectively, we needed that broader product set and engineering skills, and we have been very pleased with that acquisition,” Slaughter said.
8×8, Inc. (EGHT) is the largest provider of VoIP technology services in the U.S., yet with only 10% of U.S. business services using the technology, is eyeing the large amount of growth left domestically as well as opportunities on an international level, says Huw Rees, Vice President of Business Development at 8×8, Inc.
“We see continued growth in our United States market. We are the largest provider in the United States of the services we talked about, but according to FCC data, there still is only about 10% penetration of business services using voice over IP or IP technologies like ours, so there is a huge amount of growth left in the United States,” Rees said.
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EGHT has also launched a Global Reach initiative, aimed at taking its technology to the international market by delivering VoIP services to Europe, Asia and Latin America by the beginning of 2014, Rees says.
“We want to take this technology to the next level and become more of a global player, and we have launched an initiative called Global Reach toward that goal. The idea here is to be able to provide the same services as we provide to our U.S. customers in Asia, Europe and Latin America. Toward the end of this year we plan to launch services in Europe and Asia, and in Latin America in the beginning of 2014,” Rees said.
American Tower Corp (AMT) has the most international exposure of the three publicly traded tower companies, with 30% of the company’s revenue coming from the expansion of its colocation model into emerging markets in Latin America, Africa and India, says Benjamin Lowe, Vice President at Stifel, Nicolaus & Co., Inc.
“If you look at it by operator, American Tower has been the most aggressive in terms of trying to take this colocation model, which again is the shared infrastructure business model, and extend that into markets that are less mature,” Lowe said.
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Lowe says that these emerging markets mirror where the U.S. was 15 years ago, when most of the towers were owned by the operators and were primarily single-tenant towers. Now companies like AMT are looking to redeploy cash internationally to set up towers with multiple platforms, Lowe adds.
“If you look at AMT, over 30% of its business come from emerging markets in Latin America, Africa and India,” Lowe said. “For the last several years, they have been very aggressively redeploying cash flow into emerging markets. They are getting just over 30% of their revenue now from international markets.”
American Vanguard Corp. (AVD) is expected to see increased demand for its core insecticide and herbicide products as conventional pest-control measures are making a come-back to farms, says Chris Kapsch, Analyst at Topeka Capital Markets. Moreover, he says, the agricultural chemicals company can expect some upside as corn prices re-rally closer to harvest time.
“American Vanguard is a special situation story that’s a beneficiary of the resurgent demand in conventional crop-protection chemistries, where there’s good momentum for demand in its core insecticide and herbicide products, which should be sustained for the next several years so for value or GARP investors, I think it’s a compelling situation,” Kapsch said.
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Kapsch has a “buy” rating on this small-cap chemicals company. He says companies with exposure to agriculture tend to have their fortunes tied to the price of corn, and although this year the crops were planted late and saw several problems, he expects better pricing later in the year.
“With acreage and yield forecasts that are likely to be revised lower, we think there’s a chance corn prices could re-rally closer to harvest time, so any negative investor sentiment being created by the recent pullback in corn could actually provide an opportunity for ag-related equities that have been underperforming,” Kapsch said.
