In November 2014, Newcastle Investment Corp. (NCT) spun-off its senior-living communities into a separate entity called the New Senior Investment Group Inc. (SNR). New Senior is the only pure-play, publicly-traded senior housing REIT available today.
Since the spin however, shares are down approximately 18%, drastically underperforming its former parent and the S&P 500 overall. Is this an opportunity for enterprising investors?
The Business
93% of portfolio’s operating income is comprised of private pay senior housing properties. Its diversified portfolio contains 117 properties with over 14,500 beds across 30 states.
The company targets primarily private pay, independent living, assisted living and memory care properties due the limited government reimbursement exposure. This provides more secure and predictable cash flows.
History
Growth Opportunities
Fortunately, there are multiple long-term growth drivers that should help the company continue to grow regardless of the overall economic backdrop. For instance, the U.S. 70+ population is expected to grow faster than any other age group. This is the primary age cohort using New Senior’s services.
This has already started to lead to demand outstripping supply. With inventory growth outpacing demand growth previous to 2009, the next few years are expected to absorb the excess capacity, raising occupancy rates.
In addition, senior housing has proven to be resilient through various economic cycles. It was the only real estate sector to experience positive operating income growth during recession due to the need-based characteristics of industry. For 2015–2018, operating income is expected to grow at 2% annually.
In addition, the company has ample acquisition opportunities to boost growth. As the only pure-play REIT in the industry, the company is well positioned to roll-up the fragmented industry.
Already, the company has identified a significant amount of attractive acquisition opportunities to pursue.
Management
The management team looks to have the experience necessary to operate as a consolidator in the industry, with past roles in private equity and finance.
Valuation
While valuation is difficult given the company’s limited operating history as an independent company, it looks to be trading at the lower range of its healthcare REIT peers. On a P/B basis, SNR looks cheaper than:
- HCP, Inc. (HCP)
- Health Care REIT, Inc. (HCN)
- LTC Properties, Inc. (LTC)
- Medical Properties Trust, Inc. (MPW)
- National Health Investors, Inc. (NHI)
- Omega Healthcare Investors, Inc. (OHI)
- Senior Housing Properties Trust (SNH)
- Ventas, Inc. (VTR)
Conclusion
While the company is certainly a long-term play, the current valuation and strong underlying growth drivers look to be setting up a decent investment opportunity. For more ideas like this one, check out GuruFocus’ Spin-Off List or the rest of R. Vanzo’s Articles.
