Senior Housing Properties Trust (NYSE:SNH)
Bank of America Merrill Lynch 2012 Health Care Conference
May 15, 2012 7:20 PM ET
Jana Galan – Bank of America
David Hegarty – President and COO
Richard Doyle – CFO
Good afternoon. My name is Jana Galan. I’m the Bank of America Healthcare Lead Analyst. And today I’m honored to introduce to you Mr. David Hegarty, President and Chief Operating Officer of Senior Housing Properties Trust, and Mr. Richard Doyle, Chief Financial Officer and Treasurer.
Senior Housing Properties Trust is a real-estate investment trust that owns healthcare real-estate in the US including Senior Housing, wellness centers, medical office buildings and life science. SNH was spun out of Commonwealth REIT in 1999 of the separate publicly traded REIT. SNH offers one of the highest dividend yields in the healthcare REIT space, currently at about 7%. And the portfolio is made up of approximately 94% private pay tenant assets.
Mr. David Hegarty has been President and COO since Senior Housing Properties Trust was founded in 1999. He oversees all of SNH’s property acquisition and distribution activities. And prior to this role, David had held numerous positions with affiliates of SNH since 1987.
With that, I’ll turn the presentation over.
Thank you Jana, and good afternoon. And thank you to Merrill, BOA Merrill Lynch for the invitation to present here. So, first I’ll tell you everything I can tell you. As our expecting of play-outs and acquisitions and so on our future events but obviously the result maybe a little bit different than what I expect today. And this chart-off describes our EBITDA and normalized function operations which are concepts particular to the REIT industry and earnings and dividend distributions and so on.
Our company, obviously we’re healthcare REIT and we are a diversified REIT, geography – tenant mix and product that we invest in. We’re at $5 billion of portfolio today, which makes a support life at Healthcare REIT. And this is actually the big-three that are pretty much around $20 billion and assets with a pretty big difference between the next tier which we believe is an advantage in many cases because of the opportunities we see to invest in would be different. And we’re not really competing as the same large portfolio as they do. And we’re able to do a couple hundred million dollars a year. Our investment set are able to move the needle for our bottom line.
Another thing that differentiates us is that we own everything 100%. We don’t have any joint-ventures so we don’t have ground leases. So, we’re pure fee ownership interest in our assets. We’re at 300 A3 properties across 40 states plus Washington DC, over 560 different tenants at this time. And at about 31,300 beds or units of single living where amongst the top 10, probably about the sixth or seventh largest owner today of senior living assets and about 8 million square feet of medical office building space which makes also a major player in the medical office area.
And I think one thing that differentiates us from all healthcare REITs is that, we’re at about 94% of our net operating income comes from private pay properties, which insulates us from a significant amount of the reductions and discussions about Medicare and Medicaid cutbacks.
This is the portfolio today based on its investment assets. As you can see Independent Living is about 35% of our portfolio, Assisted Living is about a quarter, and a multi-tenant medical office building about 30% of our portfolio. And now we have – and in the small portfolio, wellness centers, two rehab hospitals and portfolio of nursing homes that represent about 4% of our NOI, our investment value rather.
And geographically as you would expect, California is the largest segment with most in Southern California, where we just recently bought one at Walnut Creek in Senior Living Community. And Florida Texas in the mid-Atlantic we have significant projects.
And several of the reasons why we think that you would have an interest in investing in our company, one, is the quality of the portfolio. Again, as I mentioned, predominantly private pay, so we have limited exposure to incumbent reimbursement risk. And that’s particularly planning out now. We haven’t bought government dependant nursing home or other type healthcare facility for the past 10 years. So, we have been waiting for this day, when government reimbursement would get tighter and tighter. And I don’t think that’s going to go away any time soon.
And then, we’re currently diversified our properties across the country and by tenant and asset mix. Another thing we’d like to point out is that we buy properties at what we believe are rational prices, which inflates us from cyclical period like we just went through with the recession. And we’ll get into that a little bit more. We’re going to talk about the prices we have paid for our portfolio.
We offer a secure dividend yield today we’re probably a little over 70% given the current market pricing. And we’ve had a history of consistently raising the dividend while maintaining conservative payout ratio. So, we can continue to maintain the current risk dividend as well as several opportunities to raise it.
We’ve always maintained a very strong lowly levered balance sheet. And we’re investment grade rate by Moody’s and S&P so we have access to good low cost of debt. And we have hedge fund access to capital. Over the past year, we raised over $1 billion in capital market’s activity, half debt, half equity about. And we have a $750 million unsecured line of credit available to us to draw – to make acquisitions and to grow.
And then, finally but not by least importance is that in fact that the supply and demand fundamentals for our space, very positive and improving for us, for certainly the next several years both on the senior housing side of the business and the medical office portfolio. This just shows we’re obviously – probably geographically diversified.
And so this chart just indicates the net operating income by property type and by tenant mix which is a little bit different from the other sites. Our private pay living is 58% of our NOI. And the medical office building is about 32% for combined about 90%, and the wellness centers makes up the other 4%. So, we’re – that’s where our private pay NOI comes from.
By tenant mix, our largest tenant is a company called Five Star Quality Care which is called the filtrated, also in the New York Exchange. And we actually founded Five Star, little over 10 years ago. And we’ve grown with Five Star and we have a minority interest in it. But again, it’s you know, a major player in the space. It has grown to be and it’s categorized as the fourth or fifth depending on what sector.
But in the independent assisted living and memory care sectors of the Senior Living industry, they are among say the top five operators in the space. And then, we have about 10% with Sunrise Brookdale for other operators, 31% of multi-tenant and medical office buildings. And then, 11% our managed Senior Living Properties and this is because the tax law has changed a few years ago, allowing REITs to invest in the operations of Senior Living Properties in addition to owning a real-estate. So, we’ve gained some more operating ownership which we believe is a good place to be in for the next several years given the fundamentals of the industry.
These are our major senior living tenants. Obviously Five Star, 190 different properties, with 84% occupancy, we believe this is a good amount of upside potential there. And rent coverage is about 1.3 times. And what we do is – we have several master leases with Five Star where we have mixed in with skilled nursing facilities as well as private facing the living communities, so that at any point in time, they could never cherry pick any assets out of the portfolio. So, you know, we’re comfortable with that cash-flow coverage.
Brookdale, another company we have 18 properties, 92% occupied and 2.2 times coverage and our investment base is very low in those assets. So, again, you know, very comfortable cash flow covers there.
Sunrise we have 14 properties, at least until 2013 or 2018 depending on which assets. I’ll spend a moment on this you know, we had 14 properties leased to Sunrise with the Marriot International guarantee on the assets. Marriot is a go sold sea living business at Sunrise but we never let them off the guarantee.
Now the renewal option comes up in 2013, and they can only renew with the Marriot International guarantee on it. So, they were able to obtain the guarantee and cut a deal with Marriot to stay on the guarantee for four properties. And 10 properties, the lease would expire on 2013 and they don’t have the right to renew.
It is our expectation that we would rightly take these back, sooner rather than later because our time is not our ally. We want to make sure that the properties are kept while maintaining an operating wealth. So, we have been in discussions about maybe taking these properties back sooner rather than later.
But in the meantime, the properties cover the rent quite comfortably. And then we have five private operators that seven properties and 2.8 times coverage. And again, I’m very comfortable with all those operators.
And then we have our 23 managed senior living properties. They’re at 87% occupancy for this most recent quarter. And we believe that’s a significant amount of upside because this portfolio average occupancy around 94% prior to the recession. So, we bullied that those assets can be brought back up to that up to that 39. And under idea or format, we receive benefit of that upside potential.
Then, the fundamentals in the senior living industry. The healthcare REITs still own less than 20% of the joint $250 billion of Senior Housing Assets out there. And that’s primarily because it’s a very, very fragmented industry. And so, you know, we believe that there is still a fair amount of opportunity for buying individual assets and small portfolios. As you would expect the demographics or all moving in the right direction for us, for Senior Living, the average age is about 85% in the senior living community. So, the target in market would be 80 and up pretty much for potential residents.
And in the mean time, you know, when the recession occurred all development financing pretty much dried up. And it’s still coming back in very limited amounts, it’s still under 1% of the supply is coming online is in the form of development. So, it’s still very modest. But for the next several years we believe that went into on our backs for this type of asset and this type of investing.
Then, on the medical office building side our largest tenants are roar out gear in Milwaukee Wisconsin. They are a major provider in particularly the eastern part of Wisconsin. And we did a 10 property sale we stopped transaction with them about a year and half ago. And they’re an A-rated credit. This is 10 satellite locations, massed to least back to the healthcare system.
And then we have City Center Medical Towers in parking garages in LA, these are two towers with over 130 different tenants, that is physically attached to the City Center Medical Center and it’s the largest non-profit hospital in the Western US with over 1,300 beds at that location. And this constant tenant roll-over at those properties could typically of five year leases or so. And we’ve been and it’s 100% occupied with waiting list. And we’ve been able to raise the rend typically 5% to 10% per year. The new deal is being cut there, rent typically start out in the around 68,000 to 70,000 square-foot. So, it’s obviously a fantastic investment for us.
And then we have another California investment The Scripps Research Institute with three biotech laboratory building in La Jolla, California. And there are masterly back to The Scripps until 2019. And it’s basically a triple-net situation. And then Reliance Medical Group used to be the noticed balanced community health plan. It’s the first medical group in Massachusetts, in central Massachusetts. And again a portfolio of locations for outpatient care leased to them. And a couple of properties we have leased to Covidien for medical manufacturing. So, we have a diverse group of medical office building in our portfolio.
Fundamentally, again the same thing is true about the demographics. And medical office buildings is catering more to say The Baby Boomers and Up, were the biggest consumers of medical care. And so, another thing is that most of the healthcare is being delivered on an outpatient basis. I believe I had heard recently it was about 70% in-patient and 30% outpatient few years back and the trend it to get it to a point where it’s more reverse with 70% being treated on out-patient basis.
So, and going out to the suburbs and bringing the care out to the residents, so that creates a lot of outpatient opportunities to somebody like us. And the REIT’s only own about 10% of the $1 trillion market of healthcare related real-estate in the sector. So, again, there should be quite a bit of opportunity still going forward.
And as I mentioned, we believe we’ve been very conservative in our investing. And so, the private pay single living, our investment value is about $118,000 a unit. And many transactions just seem to be – market is going for $200,000 to $300,000 per unit. So, we’ve checked up in the amount of value in those investments.
In the office space, it’s around $200 a foot again, very conservative. And sort of bar-chart, to just give you an idea of how we compare against some of our peer groups as far as our investment per square foot or per unit and we believe again we tried to hold the line, we don’t invest in pro-forma numbers or we don’t look for value add opportunities per say, we try to look for very stable situations.
And this chart shows our acquisition history over the years, back in 2006 and 2007, we felt that pricing was trying to get out of itself. And we actually pretty much pulled out of the market for a period of time. And we’d only bid on selected situations. And then, in 2008 or so, we raised a significant amount of equity, had our lines of credit wide open. And then, when the recession hit, we were available to go into the market and start buying assets. So, while most of our peers were just trying to right-size their balance sheets during that several year period.
And then in 2011, it was, we are very fortunate with a couple of large portfolios, of senior housing and a portfolio of medical office buildings. So, it’s a $1 billion year for us, which is about 20% growth, 25% growth on our asset base.
One of our largest transaction of last year and it closed in December was an agreement to acquire 19 living communities, all rental communities that used to be operated by Hyatt, which was really high-end. So, they were either built by Hyatt or acquired by Hyatt. And our purchase price was more on $478 million the cap rate was low 7% cap rate.
And four of the properties that were in Florida were on the East Coast and the others were in the Mid-Atlantic or one is in Reno Nevada. And another one is in Dallas Texas. And these are all private pay, independent and assisted living units. And we bought them using this text or REIT subsidiary structure where we could reap the benefit of the upside potential.
The occupancy at the time we closed about 87%. The portfolio was about 85% in 2010 when we were doing the underwriting for this. And as I said, this portfolio was in the mid-90s for occupancy, people that are recession hit. And so, this way, we see the most potential upside.
Now I’ll turn over to Rick Doyle, our CFO to talk about our financials for a few minutes.
Thank you Dave and good afternoon everyone. Turn it to slide 14 we’ve always taken a conservative approach to our financial profile. Over the past 10 years, we’ve been averaging above 35% of our debt to total per capital. In the last couple of quarters, we’ve been – between the high 30% to low 40%. And as we approach the $5 billion mark in our total asset, going forward would be a comfortable range between the high 30s and 45% for that to total capital.
We also have manageable debt maturity schedule as you see here. In the next couple of years, we only have about $15 million of maturities. And our next large maturity about senior notes is doing 2015 we have $250 million within. We have no derivatives, no balance sheet liabilities as Dave may have mentioned.
Moving on to slide 15, we have a conservative balance sheet with 750 million of senior notes. As I said, 250 million during 2015, we also have one during 2020 and 2021. Now let’s have mortgage, debt and capital, leases of just over $800 million secured by 23 properties that represent about 19% of our portfolio in a $750 million credit facility at a cost of LIBOR plus 160 basis points. It matures in June 2015 with one option at higher option to extend it to one year. And as of May 01, $235 million was outstanding, $515 million was available.
Moving on to slide 14, I’m sorry, slide 16, we have successfully provided returns to our investors. Over the past 10 years, we have successfully raised our dividend as you could see on this chart. And the current annualized dividend is now $1.52 per share annually and cutting yield at about just over 7% on today’s stock price. And over the past 10 years, our total returns, our annual total return has been averaging approximately 15% so, very favorable to the investors.
Looking over our key financial and operating data on slide 17, for the three months ended March 31, 2012 compared to the same period in 2011, we own 370 properties as of March 31, 2012 with over 30,000 Senior Living units and about 8.4 million square feet of MOB wellness center space.
Our revenues grew year-over-year by 47% to $145 million. Our NOI grew 20% and our EBITDA grew 19% to $101 million. For the three months ended March 31, 2012, our normal AFFO was $72 million and per share of $0.45.
That completes our formal presentation. But we added a couple of pictures here just to show couple, recent acquisitions. Here on slide 19 is the premier residence of Boca Raton on Florida. These are one of our managed communities we acquired in December from Vi. That’s about 214 independent assisted living units. Here’s another one, another managed property, Premiere Residence of Chevy Chase, Maryland, another independent assisted living community with 337 units. During 2011 we acquired a medical office building located at Richmond, Virginia, from HCA with about 45,600 square feet.
On Slide 32 it’s another Boca Raton senior living community, leased to Sunrise for continuing care, retirement community with 527 units and a property leased to Five Star located in Tucson, Arizona with 326 units, and a biotech laboratory building located in Torrey Pines, California, leased to Scripps Research Institute. We have three of these buildings on one campus with about 164,000 square feet.
With that, I’m going to turn it over for questions if anybody has a question.
Jana Galan – Bank of America
Maybe I’ll ask to get off with, you provided on your first quarter call that you expect kind of an annual run rate of acquisition between $300 million and $400 million per year. You showed last year was outlay over $1 billion. Maybe if you could let us know what you are seeing in the market currently, is it more senior housing, is it more medical office building?
Yes, I think we are seeing both. I think maybe more on the medical building side. Last year was an outlay, you are actually right. I think 2 and 3 of $300 million to $400 million helped us to move the needle. Last year we had great opportunity to acquire some Class A senior living properties that are, you know, we are very excited about. But now I think we’ll see more MOBs coming to the space that we can look at in and successfully bid on.
And I would envision as times move on, we’ll also be more aggressive on medical office building side too. It represents 13% of our portfolio today. And actually I can see that’s going north of 40% and maybe at some point to be 10 to 50:50. We’ll take a long while to do that. But I think there’s greater opportunity in the medical office space today and promising now.
Jana Galan – Bank of America
And when you think about your future portfolio, what – you mentioned 50:50, but what components of the senior housing would be the operating asset?
Oh, today the managed communities represent about, on a pro forma basis 11% of NOI and I believe we’ll see much more than a 20% if we make up towards 20% of the NOI. But it’s always private pay senior living properties that we’d be looking at.
But I think today you will be trying to be in that particular segment because our industry the assisted living industry came into being I’d say really in the mid 1990s. And since then we’ve probably seen about three cycle, these older building or capital constrains and other things. So I envision if I will be in another cycle down the road, once the banks give money, but certainly it’s a great space to be in for the next several years that I’m seeing come from the road and will prevent us from having better growth in those assets that we work on probably triple that situation.
Jana Galan – Bank of America
And on the senior housing side, the fundamentals have been pretty strong for the industry for the last couple of quarters, and again previously there was a thought that you would be – you’d have had the housing market improved or unemployment go down, but you’ve seen lot of drains, do you think that’s pent up demand, do you think that that we haven’t seen any surprise?
Yeah, I think it’s all those. I think there hasn’t been new supply over the last couple years for now. We may see that in the future. But I think that’s further rout, it does, there is a housing market will affect on appointment – the plans will affect on that. But it’s the need-driven. They haven’t been coming to the properties now and they feel that their need is few that they need the help in how you see occupancy could pent up a little.
Jana Galan – Bank of America
You have any questions?
Yeah, senior housing been a great place to be now, sure it sound like it, the fundamentals look good, but the stocks of the operators have not been great stocks. How do you explain that – that difference?
Sure. It’s interested basis, it’s such a boutique industry and there are very few, decent sized cap companies to invest in. And I think what you’ve seen is that the borrowers set very high their expectations. I think that the industry is performing more in line with the general economy. And we are muddling our way, but getting incrementally better and I think that’s the same trend you’re seeing in the occupancy levels. I think what is also more subtle piece that are maybe underappreciated and that, you know, occupancies are only once piece of the story and also the fact that somebody who was paying one rental rate can’t afford to pay that anymore and moved to a lower rent per unit in that same complex.
So occupancy stayed unchanged, but the revenue decreased. You’ve also – localized business many times, like of any portfolio also may significantly improve over the year, but unfortunately something decreased on the other side. So it’s been very high to get all the – everybody’s moving in the same direction, the statistics and so on, to get right on track. I think there’s also a number of properties that had become distressed that they have come on in the market and people, you know, they’ve been offering great discounts and so on to sell those units.
So – and unfortunately those are not in the public companies. So that also is taken away from the improvement on the public side, but they just fundamentally has to get better. I think also the unemployment picture in the housing market has played a big part in this. For unemployment, typically it’s – with somebody’s unemployed they may have an elder relative that they can take care of in their house, that person contribute some money, so it’s a win-win for both of them. Once that person goes back to work, mom or dad or the relative has to go somewhere. And that’s slowly coming – slowly happening. But I know again tough to get out of it with recession period that we are so called are out of.
Just one other question, your reliance on Five Star, is there an optimal percentage you want them of your mix, can you go down over time naturally but where would you like it to be?
Right. Well, we would like to get it down to more close to like a third of our portfolio. It peaked really – few years ago at around 72% of our portfolio so we brought down to 44% at this point and hope to continue to bring it down. Another distinction that, I don’t know if to depreciate out there is that, in these managed communities that we have in the TRS, in most cases, if not all the cases, we’ve hired Five Star as the manager. But in our eyes we view that as a different situation, we can start a credit risk on Five Star with a lease repeat and review our cash flows in our credit risk really to pass through down to the resident. And, so we are banking on the properties rather than Five Star paying the rent there. So that’s also a structure that we would envision using for the foreseeable future going forward.
Jana Galan – Bank of America
I guess maybe when, as you were evaluating lot of the Senior Housing acquisitions, when you think about them you look more of the age, location, the demographic, if it’s IL or AL, what’s most important to you in future Senior Housing acquisitions?
Well, clearly saying on the side of pay side of things, it seems like – at the other day a lot of it comes down to the pricing of the investment, I mean, I think all of those segments, Independent Living, Assisted Living and Memory Care are all great places to be in. Clearly these Assisted Living, Memory Care is more need-driven. So that should drive the occupancies there. But what we are seeing recently is that the Independent Living has had the greatest pickup in occupancy. And also rates is not getting pushed there. So I think that that may have better short-term potential and growth in NOI. So we do try to factor it into the pricing anyways.
Jana Galan – Bank of America
Thank you very much.
Thank you all.