Senior Housing Properties Trust (NYSE:SNH)
UBS Healthcare Services Conference Transcript
February 8, 2012 2:30 PM ET
Dave Hegarty – President and COO
Rick Doyle – Chief Financial Officer
Derek Bower – UBS Investment Bank
Derek Bower – UBS Investment Bank
Good afternoon. My name is Derek Bower, and I’m the healthcare REIT Analyst here at UBS. Next I’d like to introduce Dave Hegarty, President and Chief Operating Officer; and Rick Doyle, Chief Financial Officer of Senior Housing Properties Trust. Just as a reminder, there will be a breakout session in the Broadway Room following the presentation. Thank you.
Thank you, Derek, and good afternoon, everyone. And thank you for coming to hear our story about Senior Housing Properties Trust. First, I’ll caveat everything that, I’ll tell everything I can today to the best of my knowledge, and we are probably about a week or so away from our earnings, so I am limited to how much I can comment on today.
I don’t know how many know Senior Housing Properties Trust or SNH is the healthcare REIT, that’s very diversified by geography tenant and product. We are the fourth largest healthcare REIT today. We have $4.9 billion of an investment portfolio and that’s on a costs basis, we have 373 properties right across 38 states, plus Washington, DC, and approximately 560 different tenants in those properties.
We are among, I believe the top seven owners of Senior Housing, private pay Senior Housing real estate that about 30,700 units, and at some point million square feet of medical office, building space. We are also one of the top owners of medical office space in the country.
About 94% of our net operating income come from private pay properties, as oppose to nursing homes, our rehab hospitals, or other government dependent type properties. I believe that’s the lowest amongst the healthcare REIT that have investments in this space.
Also one thing that’s unique about us too that we own a 100% fee interest in our properties that in the healthcare spectrum. I think that’s also pretty unique amongst the healthcare REITs that we especially have no ground leases, joint ventures or other types of joint situations.
There are many reasons to invest in our company. We have a proven track record of consistently strong financial performance and now we’ve been able to do that by maintaining a conservative financial approach to our investing, every -- since the beginning of time of our company we have also underwritten our investments based on existing and historical performance of the properties. We don’t do underwrite based on performed results. And we’ve also try to prudently finance some by maintaining a strong balance sheet.
Company has invest grade Baa3 and BBB- by the rating agencies. We’re also very manageable debt maturities and we’ve had access, great access to the capital markets. All of this has allowed us to raise our dividend for the last 10 years and maintain a very modest 85% or so payout ratio of funds from operations.
In 2011, we raised over a $1 billion in capital markets transactions through a combination of couple debt offerings and couple of equity offerings. Also in June of this past year, we did a new $750 million unsecured revolving credit facility and that’s an attractive pricing at LIBOR plus 160 and it matures in 2015, plus we have an extension for another year after that.
So we have plenty of capital available to make investments, so we try to make them wisely and our differ portfolio itself has been characterized it by say it’s predominantly private assets with limited exposure to government reimbursement.
They are very geographically diversified and also by asset type and tenant, and high -- we have quality assets with low historical investment basis whether you look at it on a per unit square foot or per bed costs, looking into some of these details in a bit.
And also fundamentally, we believe we are in a great spot at this time for the next several years. The demographic trends are increasing growing stronger with about an average of 2% to 3% growth rate in the age cohorts that we are targeting for medical office that might be 65 years and up, whereas in Senior Housing it’s pretty much 75 and up for an age group.
And meanwhile the supply of new inventory is still very limited coming online that’s generally 1% to 1.5% growth in inventory per year. So, I think, the several years we’re in a pretty sweet spot for investing in the Senior Housing space.
As I mentioned, we’re in 38 states in Washington, DC, very geographically diversified, as you expect the biggest dollar invested would be Florida, Texas, California, and the Mid Atlantic region, as well as Wisconsin with a number of medical office building we’ve acquired, as well as the senior living presents that we had for many years.
These are our representative tenants that we do business with, very high-end quality tenant portfolio, Brookdale, Five Star and Sunrise Senior Living our three major senior living operators that we do business with. And then in the biotech area which is part of our medical office portfolio we have Scripts, Quest Diagnostics and Abbott Lab.
In the healthcare systems we have good amount of investments with Aurora Health Care, an A rated healthcare system in Wisconsin. Reliant Medical Group, which is firmly known as Fallon Healthcare. Fallon clinics based in the Central Massachusetts area.
And then the Cedars Sinai, we own two medical office buildings in two part garages that are physically attached to the 1300 bed medical center in our in LA. Then we also have a small portion of our portfolio that leads to medical supply companies like Stryker, Boston Science, [Pacific] and Covidien.
This is couple of charts of our asset by asset type and by tenant mix. As you can see, most of our private pay senior living is independent living. To a little bit lesser extend assisted living and even within these groups there is somewhat of a combination like independent living might be mostly independent living but it has typically an assisted living component maybe some Alzheimer care, and a few cases it might have a skill nursing unit. Though we have 29% medical office buildings, so in the aggregate those three categories are all private pay type investments we make.
And then on tenant mix side, our largest tenant is Five Start Quality Care about 45% of our portfolio that actually had grown to a much higher number. We were the founders of Five Star Quality Care back in 1999-2000 timeframe. It came public in the beginning of 2001 and we have grown with Five Star over the years to the point we are actually at one point versus high as 70% of our portfolio, but we have brought it down through diversifying it to multi-tenant medical office buildings and other type of investments.
Since Five Star is a major tenant of ours, I’d just a take moment to talk about Five Star as a company. They operate 245 communities across 30 different states. They own and operate on their own balance sheet another 31 private pay communities and their revenues now over $1 billion, I think for about $1.3 billion at this point with about 25,000 employees, and about three-quarters of their revenues are from private pay senior living services.
Of the four largestly public trader operators they’ve been the only one that have been profitable over the last two years on a regular basis. And if you look at the, say the six publically traded private pay senior living operators, as you can see they are ranked fourth, in fact, at this point, this is information as of September 30th, by December 31st they probably pretty close Sunrise, and probably neck and neck as far size wise properties they operate.
From a monthly rent perspective, you can see there the high -- second highest for average monthly rent behind Sunrise, and their occupancy is about 86%. So this was suggested they are high-end quality provider of senior living services with the occupancy level were at that and we believe that there is room for improvement on their side and we should also benefit us on our side.
Now the origins of our company was pretty much that we were triple net leasing healthcare REIT and so the portfolio rent coverage was probably more meaningful and historical terms that it is today to us. But we still have a fair amount of assets that are triple net leased on the senior living side.
And this is rent coverage ratios through, unfortunately it’s through June of this past year. We have not yet released the September 30 coverage ratios which we will on our earnings call. But the coverage ratios are very healthy amongst our operators and frankly, I’m not concerned about any of the rent being in jeopardy at any of our properties.
This next chart is our leased maturity schedules. As you can see there are very long-term leases, the average -- weighted average lease term is about 9.8 years of our portfolio. We do have a bump in 2013 but that is 14 properties that we leased to Sunrise. Sunrise has announced that they intend to -- they can only exercise renewal options, if they bring to the table a guarantee from Marriott International, a hotel company, and that was because they had bought out a number of properties we leased to Marriott, but we did not let Marriott ask the guarantees.
Well, they have gotten authority from Marriott to go ahead and renew four leases and the other 10 properties will mature at the end of 2013. They very comfortably cover the rent due to us. So I don’t see a downsize to taken back those properties at the end of 2013 and there is two years in between to possibly work out another different scenario, but the story is incomplete at this point. But I don’t see any downsize to it.
And then the rest of portfolio is normal particularly medical office building type tenancies that are just rolling over it normal course. We do very important -- valuable portfolio of assets. As I mentioned at beginning, we historically invest on historical results and in place an operations. So we have not been -- we have a reputation for not over paying for properties.
And so we believe we’ve exercised disciplined acquisition approach and therefore, we can lease the properties out at reasonable competitive pricing when things get tough like they have the last couple of years. And we are consistently reinvesting in capital expenditures in our portfolios to keep them competitive in the marketplaces and keep those property values high.
So you’re going to take snapshot at September 30th and our recent acquisitions too, as you would see in the senior housing side where investments are about $118,000 unit and certainly most of the transactions out there have been anywhere from 100,000 unit to 354,000 unit.
So we very comfortably invested there. $185 of square footage is pretty reasonable on the medical office side, especially when you consider those include Atrophy assets and LA, the Cedars Sinai medical towers, which ended up costing about $600 a foot, and the rest of the investment are pretty much very reasonable pricing.
Now the -- and as I mentioned, we have a history of paying rationale prices and this is information as of September 30th with our company versus several of our peers and on the medical office building, our Senior Housing side rather, we are reasonable priced for our investments and same on the medical office look at it on our per square foot basis.
I’d just talk about a couple -- for moment here about a couple of our recent acquisitions. We announced in September and closed on eight out of nine properties, portfolio properties that were classic residence by Vi, and those were -- Vi is renamed Hyatt Senior Living division.
And so these were builds were acquired by Hyatt and this particular property is 214 properties -- 214 units in Bookertown, Florida and it’s about three quarters independent living and one quarter assisted living.
And another property in the portfolio is in Chevy Chase, Maryland and that’s 337 units. And again, it’s more than, probably in this case about 80% independent and rest assisted living. We have couple of properties in this area that were part of this transaction one in Yonkers, New York, one in Hudson River and another one over in Teaneck, New Jersey.
We’ve also been very active in the medical office side and frankly going forward, I envision at more of the transaction this year will be in the medical office side of our business then the senior housing side. We are about 30% in the medical office at the moment.
This was a transaction that we recently did with that was predominantly leased to help HCA 46,000 square foot standalone Medical office building are going in cap rate was about seven and three quarters, and GAAP cap rate would be more around lower over 8.5% for that building.
We have property, this next property was build by Marriott down in Bookertown, Florida too and it’s 527 units. It has all continue of care and it’s almost entirely private pay senior living a little bit of Medicare and a little bit of Medicaid.
Then this property is another one that company called the foreign group which was the major developer of private pay senior living rental CCRCs and this is a property we owned and leased to Five Star in Tucson, Arizona.
Then here is our -- amongst our medical office building there is a portfolio of a few buildings that are biotech, and this is at La Jolla, California leased to Scripts Research Institute. It’s a beautiful three building campus that we’ve had great success with.
Now, I’ll turn it over to Rick Doyle, our Treasurer and CFO for the financial information.
Thank you, Dave. Good morning, everyone -- good afternoon, everyone. Turning over to slide 19, some of our key financial and operating data for the three and nine months ended September 30, 2011, compared to the same in 2010.
As of September 30th, we have owned 357 properties over 28,000 living units and 8.3 million square feet of MOB and wellness center space. Our total revenues increased by $32 million to $113 million or 40% quarter-over-quarter.
Our property net operating income also increased 22% to $93.5 million quarter-over-quarter and our normalized funds from operations or FFO increased to $65.4 million or 22% during the same time period. Our normalized FFO per share was $0.43 for the third quarter 2011 and we paid a dividend during the third quarter of $0.37.
For the past 10 years our debt as a percentage of total or capital ranged from a high of 44% to a low of 17%, and averaged only 32% during that time period. The past couple of quarters as you can see here, our debt averaged about 40% and as our total assets approached to $5 billion mark, we are comfortable to see our leverage go up to at least 45%. As Dave mentioned earlier, our debt is investment grade rated by Moody’s Baa3 and by S&P of BBB-.
We have a manageable debt maturity schedule as shown here on slide 21. We have $750 million of senior notes due in 2016, 2020 and 2021. We have mortgage debt of approximately $900 million and we have $225 million outstanding on our $750 million line of credit that matures in June 2015 at the cost of LIBOR plus 160 basis points.
As you can see on the schedule, we have approximately $58 million of mortgage debt due this year in 2012 and no meaningful debt due until 2015 and beyond.
We have a very strong balance sheet. As of September 30th, pro forma adjusted for our equity offering in October 2012 had debt offering in December 2011, and the loans we assumed of our completed and pending acquisition since September 30th, our unsecure senior note represents 17% of our total book capital. Our mortgage debt represents 21% of our total capital -- book capital and our common equity represents 57% of our book capital.
Slide 23 here shows that we have consistently raised out dividend over the past 10 plus years. We raised our dividend in the fourth quarter 2011 to $0.38 per share per quarter for the three months ended September 30, 2011, and on an annual basis our dividend for 2012 will be $1.52. Our normalized FFO payout ratio for the three months ended September 30, 2011 was 86%.
Our dividend yield in normalized FFO payout ratio compare favorably to our peers. As of January 31, 2012, our dividend yield was 6.7% and our normalized FFO payout ration for the three months ended September 30, 2011 was 86%.
We have produced excellent returns to our investors, here on slide 25, our total return over the past 10 years was approximately 400%, and we provided an average annual total return of over 15% to our investors.
That completes our presentation today and we thank you for joining us, and if you have any questions we’ll be down in the breakout session.