Reader "ADL" mentioned this one in my ill-fated Medley post the other week and I took a small position but the write-up hung out in my draft folder, this afternoon the company announced an exchange offer that appears inadequate to me. Regional Health Properties is offering 0.5 shares of common stock for each preferred share, on a headline basis its a healthy 20+% premium on today's closing prices (RHE closed at $12.04, RHE-A closed at $4.90), if fully exchanged the preferred stock would only receive 45% of the proforma shares when it should be 90+% (similar situation would be the AHT preferred exchange last year). The exchange offer requires an amendment to revise the terms of the preferred stock (liquidation value to $5/share, eliminate the accumulated dividends) that would require 2/3rds preferred shareholders voting for the amendment (non-votes are the same as no votes). Below is the original write-up, but now that things are in motion, seems like an even better opportunity as the company attempts to recapitalize.
Regional Health Properties (RHE) (fka AdCare Health Systems) is a real estate investment company (but technically not a REIT) focused on senior housing in the southeast United States. It's another small and illiquid idea, the common stock is probably uninvestable and the preferred stock has a market value of $12.4MM. The company has a rough history, some previous fraud accusations, multiple CEOs in a short time frame, etc., but if you look past the mess to the underlying assets and the recent announcement of a possible recapitalization of the balance sheet, there might be an interesting personal account type opportunity here.
High level summary, the company's primary business is owning or leasing 24 senior housing properties and then leasing or subleasing those properties on a triple-net lease basis to operators. A few of these properties the company now either manages or operates on a temporary basis due to operators failing. Of the 24, 12 are owned and leased out under traditional triple-net leases, meaning the tenants pays for all expenses, the rent is virtually the same as net operating income to calculate a cap rate. I don't quite understand the leased model where they then turn around and sublease the properties, seems like a dangerous spread trade to me where you have to reach for risky tenants to make it work. It appears that's how its played out with most of the distress in their tenant base happening in the subleased book, so we'll ignore that for the purposes of the pref thesis. Below is the rent-roll for the owned properties:
This portfolio is financed with an assortment of government guaranteed debt (generally a negative, means the borrower couldn't get reasonably commercial terms without the government guarantee), total debt is approximately $55MM.
Add in the $12MM as the market value of the preferred and through the preferred stock you're buying the owned triple-net portfolio for $67MM or an ~11.5% cap rate, as usual with me, pretty back of the envelope math. The preferred stock trades for $4.50, has a standard liquidation preference of $25, but hasn't paid a dividend in several years. The total liquidation preference is over $35, but it almost doesn't matter, the preferred stock is unlikely to be made whole so any incremental value above the senior debt accrues to the preferred stock, it is the fulcrum security despite the common having a current market cap above $20MM.
In their recent earnings release, RHE added this line:
In early 2020, the Company began on-going efforts to investigate alternatives to retire or refinance our outstanding debt of Series A Preferred Stock through privately negotiated transactions, open market repurchases, redemptions, exchange offers, tender offers, or otherwise. Costs associated with these efforts have been expensed as incurred in Other expense, net and were approximately $394,000 and approximately $144,000 for the three months ended March 31, 2021 and March 31, 2020, respectively.
Apparently they initially started down this path just before covid, now that things are opening up and rent collections are largely back to normal, the time is right to address the capital structure as it clearly doesn't work anymore. My guess is RHE will attempt to exchange the preferred shares for common stock, maybe something similar to what happened over at Ashford Hospitality Trust (AHT). Just for a quick example, if you valued the triple-net lease portfolio at a 9.5% cap rate (a higher quality but smallish triple-net like CareTrust REIT (CTRE) trades at 6-7% cap and has been buying properties this year in the 8-10% range) then the preferred might be worth $25MM, or a double. But that's just a guess, the upside seems highly variably in mind but the downside is fairly well protected.
- Senior housing obviously suffered during covid, but with vaccinations now widely completed for the elderly and front line workers, new residents can begin to move into facilities. There might be a temporary ramp up as move-ins were delayed the last year, but there's certainly an open question at least in my mind if covid permanently impaired senior housing and whether alternatives might become more popular than housing the most at-risk all together in close quarters.
- Whatever the common stock is doing is a mystery to me, it might be caught up in meme stock trading or other pump and dumps, ignore it, its almost certainly going to get completely diluted. The unpaid preferred is $30.1MM, so the total due to prefs is ~$100MM, you have to be pretty optimistic on their leased/operated properties to see any value to the equity, and if you are optimistic, the preferred is still the better risk/reward.
- I don't know who owns the preferred stock, it's hard to parse out with publicly available data sources, and surprisingly/concerning that despite having the right to nominate board members to represent the preferred stock, no one has to-date.
- RHE should probably just sell themselves, but in their press release and 10-Q they hint their strategy is in the opposite direction, they want to go in growth mode, difficult to fully understand how they could do that but certainly couldn't without first resolving the preferred share overhang somehow.
Disclosure: I own shares of PHE-A