Former Baupost investor David Abrams (Trades, Portfolio) added a new stock to his concentrated portfolio at Abrams Capital, GuruFocus Real Time Picks showed Monday.
Abrams shares several common investment principles with Baupost’s Seth Klarman (Trades, Portfolio), a renowned value investor who assesses stocks based on business fundamentals and margin of safety between price and intrinsic value, and with whom Abrams worked for 10 years before founding his firm in 1999. Abrams, who invests across an array of asset types in foreign and domestic markets, has only 16 long positions, valued at $2.02 billion. His new Quality Care Properties Inc. (QCP, Financial) position makes up approximately 5.3% of the concentrated long stock portfolio.
Abrams purchased 5 million shares of the company on Jan. 13, valuing the transaction around $81 million based on the day’s closing price of $16.02. The price has declined less than a percent since his buy, and has increased by 3.16% year to date, to around $15.99 Tuesday afternoon. Since the company began trading in October, its shares have declined 15.8%.
Quality Care Properties was formed as a spin off from HCP Inc. (HCP, Financial), a health care real estate investment trust, on Oct. 31. HCP Inc. dispersed to its shareholders one share of Quality Care Properties per five share of HCP Inc. they owned, but Abrams did not own the parent company and purchased shares of the spun-off company several months later.
HCP decided to spin off the company after one of its tenants was charged with filing false Medicare claims. It spun off the tenant as Quality Care Properties, an independent REIT with a portfolio of 257 post-acute and skilled nursing facilities, 62 memory care and assisted living properties, one hospital and one medical office building across the U.S. QCP is one of the nation’s biggest actively managed REITs in these types of real estate.
HCP also undertook the spin off to give QCP more flexibility to choose different strategies and to focus its experienced management team. QCP’s capitalization consists of $1.75 billion in debt, $7 million in cash, $100 million in revolver and $60 million in promissory notes it will owe its parent company within three years.
Though REITs are required to return at least 90% of their earnings in dividends, QCP announced on Dec. 31 that it would not declare a dividend for the fourth quarter as it had no taxable income since the spin off and financial trouble at its biggest tenant, HCR Manor Care, continued.
For the third quarter of 2016, QCP reported revenue of $123.67 million, a $22.3 million decline from $146 million the same period the previous year, primarily due to changes in accounting methods and the same of 33 non-strategic properties in the prior two years. Approximately 94% of QCP’s revenue derives from rents on its HCR Manor Care properties.
The company also paid $6 million in legal fees for the first nine months of 2016 related to its Medicare case with the U.S. Department of Justice. As of Sept. 30, QCP had no estimated time-frame for the complaint to be resolved and expected to continue to incur legal fees.
See David Abram's portfolio here.
