Equity Research 3 September 2019 CORE Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 281. Restricted - Internal U.S. Health Care Services Healthcare Real Estate Roadmap Initiate on 7 Companies: We are initiating coverage of seven additional HC companies, including five HC REITs (on top of Welltower) and two senior housing operators, Brookdale (BKD) and Capital Senior Living (CSU), where real estate ownership is a key variable. The overall REIT sector is in favor right now (+26% total returns YTD; vs SPX up 18%), with HC REITs close behind (+21% YTD); however, HC property types are seeing mixed operational results. We see the greatest near-term growth opportunities in life sciences and medical office buildings in key regions of the U.S. (California and Boston). Among large diversified HC REITs, HCP Inc. (HCP) has the greatest leverage to this while waiting for a turnaround in its senior housing assets. Ventas is also thriving in life sciences, but the portfolio is not yet large enough to offset its challenges in Senior Housing. So with flattish SSNOI growth currently at VTR, but industry-leading SSNOI growth at HCP, we initiate with an OW rating on HCP, and EW rating on VTR due to its valuation vs. growth. As an aside, WELL (OW) is the only company (REIT or public provider) posting positive SSNOI trends in its senior housing portfolio. SNF REITs – A Time to Shine: Initiate CTRE and SBRA with OW ratings: HC REITs tied to the skilled nursing facilities (SNF) have historically commanded the lowest valuations in the group. However, we believe now is one of the more opportunistic times to be positive, as our channel checks suggest the new Medicare PDPM reimbursement system for SNFs starting 10/1/2019 is likely to provide a material tailwind to the sector. So we initiate Sabra (SBRA) and Care Trust REIT (CTRE) with OW ratings. CTRE’s SNF portfolio enjoys better coverage ratios vs. SBRA, but SBRA’s ~30% discounted valuation to CTRE also makes its equity attractive at current levels. Initiate Senior Housing Operators - BKD at EW, CSU at UW: The new management team at Brookdale has done an excellent job, in our view, of stabilizing the ship in 2018 and 2019 YTD following negative operating leverage related to Senior Housing industry oversupply. Capital Senior Living also recently made management changes, but many of its key operating metrics are still trending in the wrong direction in 2019. Our sense is both companies’ current asset portfolio may still be subject to less favorable supply/demand trends and population growth relative to national averages. So while both companies should eventually have positive leverage to the ‘silver wave’ of senior population growth starting in 2022, they may still struggle with the ‘supply tsunami’ in 2019-21. As such, we initiate BKD at EW ($8 PT) and CSU at UW ($3 PT). Initiate Medical Properties Trust (MPW) with OW rating: MPW is the only pure-play HC REIT catering to the acute hospital sector. The company’s management are former hospital operators, and this expertise gives MPW a unique calling card when seeking new business opportunities. A recent wave of transactions for MPW both domestically and internationally further validates the business model, and should help drive some of the fastest FFO growth in the HC REIT sector in 2020 (~20%). We also view favorably the much higher rent coverage ratios for acute hospitals vs. other HC property types. INITIATING COVERAGE U.S. Health Care Services NEUTRAL Unchanged For a full list of our ratings, price targets and earnings in this report, please see table on page 2 U.S. Health Care Services Steve Valiquette +1 212 526 5496 steve.valiquette@barclays.com BCI, US Morgan McCarthy +1 212 526 1168 morgan.mccarthy@barclays.com BCI, US Andrew Mok, CFA +1 212 526 2687 Andrew.Mok@barclays.com BCI, US Jonathan Yong +1 212 526 3647 jonathan.yong@barclays.com BCI, US Barclays | U.S. Health Care Services 3 September 2019 2 Summary of our Ratings, Price Targets and Earnings Estimates in this Report Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E) Old New 30-Aug-19 Old New %Chg Old New %Chg Old New %Chg U.S. Health Care Services Neu Neu Brookdale Senior Living Inc. (BKD) N/A EW 8.18 N/A 8.00 - N/A -1.05 - N/A -0.99 - Capital Senior Living Corporation (CSU) N/A UW 4.61 N/A 3.00 - N/A -1.46 - N/A -1.22 - CareTrust REIT, Inc. (CTRE) N/A OW 23.79 N/A 26.00 - N/A 1.35 - N/A 1.49 - HCP, Inc. (HCP) N/A OW 34.71 N/A 37.00 - N/A 1.73 - N/A 1.81 - Medical Properties Trust Inc. (MPW) N/A OW 18.59 N/A 20.00 - N/A 1.29 - N/A 1.57 - Sabra Health Care REIT, Inc. (SBRA...
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