On Thursday, January 11th, two of the higher yielding REITs managed by Reit Management & Research LLC, announced the distribution of their regular quarterly dividends. In this article I will take a closer look at both companies and demonstrate why I think a position should be established at current levels.
Senior Housing Properties Trust (SNH): Based in Newton, Massachusetts, the firm invests in properties focused on senior-oriented care. According to the company's website and as of September 30th, 2012, Senior Housing Properties Trust owned 384 properties in 40 states and Washington, DC. Over the course of the last 3 months, shares of SNH have traded an average of 1.468 million shares per day and currently yield 6.50% ($1.56).
In my opinion there are three things to consider when it comes to Senior Housing Properties Trust: earnings performance, dividend behavior, and recent growth activity. The first of these variables is earnings performance and over the past four quarters SNH has missed estimates by an average of 1.075%. When companies, especially REITs, miss estimates by less than 3%, I'm not overly concerned due to the fact such misses rarely affect dividend distributions. If things get worse for SNH over the next 12 months and the company misses estimates by a considerably wider margin, I'd look to reduce the size of any position that had been established due to the fact the company's dividend may be affected.
The second variable to consider revolves around the company's recent dividend behavior. Since April 18th, 2006 SNH has increased its dividend a total of seven times and by an average of $0.01 per increase each time. The total increase equates to $0.07/share or 21.875% over that period. From an income perspective, the company's current yield of 6.50% coupled with its payout ratio (currently 191.00%) and its continued annual increases could equate into a very viable income option for long-term investors looking for a steady stream of income.
When it comes to most REITs, a growth-by-acquisition strategy can play a major role in the life cycle of these firms. According to the company's most recent quarterly report, "In August and October 2012, we entered into four separate agreements to acquire three senior living communities and one MOB for total purchase prices of approximately $68.3 million, including the assumption of approximately $12.3 million of mortgage debt and excluding closing costs". If Senior Housing Properties can continue to grow as a result of their continued acquisitions, not only will earnings performance improve, dividend performance may also see an enhancement over time.
Hospitality Properties Trust (HPT): Based in Newton, Massachusetts, the firm engages in purchasing, owning, and leasing of hotels and other hospitality-based properties. According to the company's website and as of September 30th, 2012, "RMR oversaw one of the largest portfolios of publicly owned real estate in the United States, including approximately 1,680 properties, located in 46 states, District of Columbia, Puerto Rico, Ontario, Canada and Australia". Over the course of the last 3 months, shares of HPT have traded an average of 725.55 thousand shares per day and currently yield 7.80% ($1.88).
For those looking to invest in Senior Housing Properties Trust, there are three things to keep in mind: earnings performance, dividend behavior, and recent growth activity. The first of these variables is earnings performance and over the past four quarters HPT has missed estimates by an average of -4.325%. When companies, especially REITs, miss estimates by more than 3%, I become slightly concerned due to the fact such misses could affect the behavior of dividend distributions. If things continue to get worse for HPT and earnings begin to demonstrate double-digit misses, I'd look to reduce any position by at least 25% each time such a miss occurs.
The second variable to consider revolves around the company's recent dividend behavior. Since April 10th, 2006 and when compared to Senior Housing Properties, HPT's dividend behavior has been a bit erratic to say the least. Between April 10th 2006 and January 16th 2009, the firm increased its quarterly payout from $0.73/share to $0.77/share and paid a special dividend of $2.99/share on February 1st 2007. After almost a year of not paying a quarterly distribution, HPT resumed payouts on January 21st 2010 of $0.45/share (a decrease of nearly 42.33%) and has since increased that payout to $0.47/share on October 18th 2012.
When it comes to most residential-based REITs, and especially those in the hospitality sector, occupancy plays a major role in the life cycle of these types of REITs. The company's CEO John G. Murray noted the company "expects 31 hotels will be under renovation during all or parts of the fourth quarter and about 56 in the first quarter of 2013. Renovation activity is expected to continue throughout 2013, principally at our Sonesta and Wyndham Hotels and, to a lesser extent, in our Marriott No. 234 and IHG portfolios. Nonetheless, there will be projects underway during each quarter and the impact will partially offset growth in properties not under renovation." Although earnings and subsequent revenues have been offset by ongoing renovations, once completed these renovations should contribute quite nicely to the company's bottom line.
Although each company needs to show a drastic improvement in earnings over the next 12-18 months, both should be considered viable income-based plays for those who may be searching for a yield over 6.5%. Variables such as earnings and property acquisitions should also be taken into account when one is looking to either increase or decrease their current position.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.