The Case For SNH, A Senior Housing REIT

| About: Senior Housing (SNH)

Senior Housing Properties Trust (NYSE:SNH) is a REIT which owns a variety of healthcare and senior-housing real-estate assets: independent living and assisted living communities, continuing care retirement communities, nursing homes, wellness centers, medical offices, clinic and biotech laboratory buildings.

Most of SNH's assets are triple net leases, meaning that each tenant pays all operating costs, taxes, insurance and maintenance costs in addition to the rent.

As of September 30, 2011, SNH owned 357 properties in 37 states and Washington D.C. The average remaining lease term for all assets is almost 10 years, occupancy rate was on average very close to 90% (in terms of income).

Other players in the industry include:

Healthcare REITs: HCP Inc. (NYSE:HCP), Ventas Inc. (NYSE:VTR), Health Care REIT Inc. (NYSE:HCN).

Residential REITS: Equity Residential (NYSE:EQR), Avalonbay Communities Inc. (NYSE:AVB).

All of the above are research-worthy; I will refer to them in the future.

Some numbers about SNH

SNH has 41% debt to book ratio and a 3.7 EBITDA to interest expense ratio. That indicates that debt levels are certainly under control as it has been along the last few years. Net Debt as of September 30, 2011 was $1,571 million.

Net operating income for the first nine months of 2011 was $271 million, up 18.5% from the same period in 2010. NOI for the 3rd quarter of 2011 was $94 million, up 22.4% from the same period in 2010. NOI increased 13% between 2009 and 2010, and 21% between 2008 and 2009.

SNH's normalized FFO per share for 3rd quarter of 2011 was $0.43, compared to $0.42 in the same period in 2010. Current stock price implies FFO multiple of 12.5.

These NOI and FFO numbers indicate that the company grows nicely in what I find to be tough times for real estate companies. I will refer to the current price per share below.

The company pays a $1.52 per share dividend, or 7.0% on current stock price. The company has increased its annual dividend every year since 2001 but at a low rate – 27% for the whole period of time.

Portfolio book value (depreciated) has increased from $2,425 million in December 31, 2008 to $3,691 million in September 30, 2011.

There was only one insider stock sale in August (~$83,000), no purchases.

Throughout the year the company successfully raised capital several times, the last of them in October - $184.7 million net of expenses. The amount raised was used to repay loans.

In order to take advantage of the beaten real-estate market's prices and purchase more assets, SNH also refinanced their revolving credit facility – increasing it from $550 million to $750 million. It will mature on June 2015 with an additional 1 year extension option.

The pros and cons of SNH

  • SNH is active in one of the fastest growing industries in the world – healthcare for senior population. In times of aging populations the industry will have to grow in the future.
  • Although occupancy rate could be higher (I assume management will try to take care of that), most of their existing contracts are long term triple-net leases.
  • SNH shows nice growth numbers by purchasing more assets in a weak market. A look in their press release shows that they currently purchase assets at cap rates of 7.1% to 9.7%. The result is shown above in NOI, FFO and assets value. I like it that the management buys at low levels, leaving room for capital appreciation, combined with higher rent income and dividends in the future. However I would like to see less of cap rate <8%.
  • In spite of the credit crunch, SNH made it to increase its revolving credit facility and raised equity during the year. I see that as the market's confidence in the company.
  • While you wait for the real estate market to go up, SNH pays 7% annual dividend. There seems to be no danger for future dividends, more probable are dividend hikes.
  • SNH priced the stocks in the recent public offering at $21, however current stock price is $21.5.


I really like SNH as they operate in what I think of as an industry that has no alternative but to grow. It is on my shopping list for all the reasons I mentioned above – fundamentals and future growth expectations.

However, even though I like the fundamentals I think current price level per share is too high. Although I will not be too surprised to see it climb to $26 per share (the target price), I will be buying on dips around $20 per share.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SNH over the next 72 hours.