Senior Housing Properties Trust: Is The Dividend At Risk?

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About: Senior Housing Properties Trust (SNH)
by: Achilles Research
Summary

Senior Housing Properties Trust faces attractive long-term growth prospects.

However, operator troubles could point to a dividend cut over the short haul.

Shares are priced for a dividend cut.

An investment in SNH yields almost 13 percent.

Senior Housing Properties Trust, Inc. (SNH) might have to cut its dividend over the short haul. The healthcare REIT has a large, diversified healthcare facility portfolio, but its largest operator is causing serious concerns, and Senior Housing Properties Trust's distribution coverage has taken a major hit in the last quarter. Shares are priced for a dividend cut, in my opinion, and yield 12.95 percent at the time of writing.

Senior Housing Properties Trust - Portfolio Snapshot

Senior Housing Properties Trust is a U.S. healthcare real estate investment trust with an equity value of $2.9 billion. The REIT primarily invests in independent and assisted living facilities, medical office properties and life science buildings.

At the end of the December quarter, more than half of the REIT’s net operating income came from independent and assisted living facilities (combined 53 percent) while life science facilities contributed 22 percent and medical office buildings 19 percent of Q4-2018 NOI.

Here’s a portfolio breakdown by property type and geography.

Source: Senior Housing Properties Trust Q4-2018 Supplement

At the end of the December quarter, Senior Housing Properties Trust’s investment portfolio included 443 properties that were valued at $8.4 billion.

Here’s a more detailed portfolio breakdown by property type.

Source: Senior Housing Properties Trust

Senior Housing Properties Trust benefits from an aging U.S. society. Higher life expectancy rates and rising healthcare costs are favorable growth drivers for real estate investment trusts with senior-focused healthcare facility portfolios.

The U.S. population is projected to age rapidly in the next two decades which means older age cohorts (65+ and older) will make up a larger share of U.S. society going forward. At the same time, healthcare expenditures are forecast to keep climbing, setting REITs such as Senior Housing Properties Trust up for long-term FFO growth.

Source: Physicians Realty Trust

Distribution Coverage

Senior Housing Properties Trust reported disappointing fourth quarter results with respect to its distribution coverage, though.

In Q4-2018, Physicians Realty Trust reported just $0.04/share in funds from operations and $0.27/share in normalized funds from operations, well below historical averages. Impairment charges of $61.3 million, increasing interest expenses on Senior Housing Properties Trust's debt, and incentive fees weighed on the REIT's results in the fourth quarter. Source: Senior Housing Properties Trust

In addition, Five Star, the company’s largest operator, is in trouble and could stop making rent payments (see risk section).

Senior Housing Properties Trust earned an average of $0.41/share in normalized FFO in the last ten quarters while paying out $0.39/share in dividends. However, the REIT’s distribution coverage stats have taken a major hit in the last quarter.

See for yourself.

Source: Achilles Research

Risk Factors Investors Need To Consider

There is a considerable risk that Senior Housing Properties Trust will adjust (i.e. lower) its dividend payout on the back of its operator troubles with Five Star.

Five Star Senior Living is Senior Housing Properties Trust’s largest tenant that accounts for more than a quarter of the REIT’s annualized rental income.

Here’s an operator breakdown.

Source: Senior Housing Properties Trust

It is never a good thing if the largest tenant/operator is in trouble, for obvious reasons. Five Star’s rent coverage stats have slowly deteriorated in 2018.

Source: Senior Housing Properties Trust

Management said the following on the fourth quarter earnings conference call with respect to Five Star:

In November, our largest tenant and operator of our senior living communities, Five Star Senior Living announced that there is substantial doubt about its ability to continue as a going concern. We are currently engaged in discussions with Five Star about a possible restructuring of our agreements to address its operating and liquidity issues. The boards of both SNH and Five Star have formed Special Committees comprised solely of independent trustees and directors, and they have engaged separate advisors to help facilitate these discussions.

As a result, there may be changes to our agreements with Five Star in the future. If there are any changes to our agreements with Five Star, our current expectations are that it could be announced within the next 60 days. Nevertheless, we cannot be sure that there will be any changes to our agreements with Five Star or whether Five Star will be able to continue as a going concern.

On the back of Five Star's deteriorating rent coverage stats and warning on the conference call, Senior Housing Properties Trust may be forced to cut its dividend over the short haul.

Valuation

Senior Housing Properties Trust’s shares are already priced for a dividend cut: A 13.0 percent dividend yield from a healthcare REIT should be seen as a red flag, in my opinion. Based on the REIT’s fourth quarter results, SNH’s dividend stream currently sells for 11.2x Q4-2018 run-rate normalized FFO. Though shares are no longer oversold, they could head lower in case the company indeed announces a dividend cut.

Source: StockCharts

Your Takeaway

Unfortunately, a dividend cut at this point is a real possibility, and the odds of a dividend adjustment increase if Five Star fails as a business. In this case, Senior Housing Properties Trust’s dividend would most certainly get cut, which in turn would most likely be another negative catalyst for the healthcare REIT’s stock. As much as I like the REIT’s long-term FFO prospects based on strong demographic fundamentals in the sector, the looming threat of a dividend cut is a major negative. There may be a turnaround opportunity here once investors have more clarity about the operator situation. That said, I don't recommend SNH anymore for new income investors.

Disclosure: I am/we are long SNH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.