Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

SNH Reports Good Q4-16

|Includes: Senior Housing Properties Trust (SNH)

What's wrong with SNH? Something must be wrong - or else the yield would not be as high and the Price/FFO be so low - and it is specifically low for a REIT with 38.6% of NOI coming from MOBs.

One disturbing note - the weighted average cap rate for SNH's 2016 MOB was 11.5% compared to other REIT acquisition cap rates around 5.5%. I doubt that SNH was finding outstanding values overlooked by others. Thus the quality of those MOB's are suspect. REITs fail to provide total portfolio cap rate numbers. Added to this, SNH has had $18.674 million in 'impairments' in 2016. If SNH has as good a portfolio as the headline numbers on asset allocation imply - the impairments would not be this high. Summation - one needs to set a moderately high RRR on SNH.

Let's look at the three main segments:

(1) For the quarter ended December 31, 2016, 38.6% of SNH's NOI came from 119 properties leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or MOBs, with 11.4 million leasable square feet. SNH's MOB same property Cash Basis NOI increased 2.2% and same property NOI increased 2.7% for the quarter ended December 31, 2016 compared to the quarter ended December 31, 2015.

(2) For the quarter ended December 31, 2016, 44.7% of SNH's NOI came from 236 triple net leased senior living communities with 26,220 living units. Same property Cash Basis NOI and same property NOI from triple net leased senior living communities increased 2.3% and 1.8%, respectively, for the quarter ended December 31, 2016 compared to the quarter ended December 31, 2015.

(3) For the quarter ended December 31, 2016, 14.1% of SNH's NOI came from 68 managed senior living communities with 8,788 living units. As a result of casualty losses and hurricane evacuation costs, same property Cash Basis NOI and same property NOI from managed senior living communities each decreased 3.1% for the quarter ended December 31, 2016 compared to the quarter ended December 31, 2015.

Summary - NOI growth is relatively week. FFO growth is week (as will be shown). And there has not been a dividend increase since Q4-12.

Let's look at the FFOs and the price/FFO numbers using pricing data from 2/13/17:

 

Health Care Price/FFO Ratios 02-13

The UHT projected 2016 FFO stat is slightly under four times Q1 FFO. DOC IPOed in 2013. CCP was spun off in 2015.

  FFO / Share % FFO Growth Price/FFO 16 FFO Range
Co. 2012 2013 2014 2015 2016 2017 14-15 15-16 16-17 2015 2016 2017 High Low Range
CCP 0.00 0.00 0.00 3.42 3.05 3.10 na -10.82 1.64 7.48 8.38 8.25 305 305 0.00%
CTRE 0.00 0.00 0.00 0.91 1.10 1.21 na 20.88 10.00 17.30 14.31 13.01 123 119 3.64%
DOC 0.00 0.26 0.72 0.74 1.01 1.21 2.78 36.49 19.80 27.15 19.89 16.60 126 116 9.90%
HCN 3.51 3.36 4.13 4.38 4.54 4.31 6.05 3.65 -5.07 16.00 15.43 16.26 440 420 4.41%
HCP 2.76 3.01 3.04 3.16 2.72 1.92 3.95 -13.92 -29.41 10.33 12.00 17.00 194 191 1.10%
HR 1.31 1.32 1.46 1.60 1.68 1.75 9.59 5.00 4.17 20.09 19.13 18.37 172 160 7.14%
HTA 1.22 1.28 1.46 1.54 1.61 1.71 5.48 4.55 6.21 20.81 19.90 18.74 175 169 3.73%
LTC 2.26 2.37 2.55 2.77 3.05 3.19 8.63 10.11 4.59 17.17 15.59 14.91 321 314 2.30%
MPW 0.90 0.96 1.06 1.26 1.27 1.36 18.87 0.79 7.09 10.60 10.52 9.82 141 133 6.30%
NHI 3.18 3.55 4.20 4.67 4.87 5.14 11.19 4.28 5.54 16.10 15.44 14.63 515 513 0.41%
OHI 2.19 2.53 2.85 3.13 3.31 3.39 9.82 5.75 2.42 10.40 9.83 9.60 340 337 0.91%
SBRA 1.41 1.84 2.20 2.14 2.28 2.30 -2.73 6.54 0.88 12.60 11.83 11.73 236 225 4.82%
SNH 1.75 1.69 1.75 1.84 1.87 1.88 5.14 1.63 0.53 10.98 10.80 10.74 192 184 4.28%
SNR 0.00 0.00 0.00 1.01 1.25 1.31 na 23.76 4.80 10.37 8.38 7.99 131 131 0.00%
UHT 2.84 2.77 2.74 2.88 3.03 3.09 5.11 5.21 1.98 22.38 21.27 20.86 300 300 0.00%
VTR 3.80 4.14 4.48 4.47 4.13 4.15 -0.22 -7.61 0.48 14.54 15.73 15.66 417 414 0.73%
Average           6.44 6.02 2.23 15.27 14.28 14.01

SNH is not generating the FFO growth to produce much when it comes to dividend growth. It has the FFO to produce some tiny amount dividend growth - but it has not happened.

Let's look at the 2016 FFO numbers:

Normalized FFO were $446.4 million, or $1.88 per diluted share, for the year ended December 31, 2016, compared to $429.7 million, or $1.84 per diluted share, for the year ended December 31, 2015, which represents an increase of $0.04 per diluted share. This increase in Normalized FFO is primarily attributable to acquisitions, partially offset by increased interest expense of $0.06 per diluted share.

The projections from Nasdaq:

Fiscal
Year End
Consensus
FFO Forecast
High FFO
Forecast
Low FFP
Forecast
Number of
Estimates
Over the Last 4 Weeks
Number of Revisions
Up Down
Dec 2016 1.87 1.88 1.84 6 0 0
Dec 2017 1.88 1.92 1.85 6 0 0
Dec 2018 1.90 1.98 1.86 4 0 0
Dec 2019 2.03 2.03 2.03 1 0 0

Historical earning projection accuracy since 2014 for SNH has been excellent - but it was not so good before that.

I would discount the relatively high 2019 FFO projection. And when that lone good number is subtracted - the forecast of for continued 1% growth. SNH fails to provide dividend guidance. I would say such guidance is needed. 1% FFO growth may fail to move the needle on dividend growth.

My REIT spreadsheets start with Q1-14 data. Over that specific time period, SNH looks in line with sector average on FFO growth. But we know from a longer time period perspective - that is the wrong perception.

My spreadsheet:

SNH

  Senior Housing Properties Trust Q4-16 Q3-16 Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14
  FFO 117.522 104.825 111.505 109.885 81.385 108.167 99.500 93.496 96.895 86.970 81.579 77.500
  FFO/share 0.50 0.44 0.47 0.46 0.34 0.46 0.42 0.42 0.48 0.43 0.41 0.41
  Normalized FFO 118.601 105.733 111.685 112.930 112.984 111.430 104.156 98.563 91.264 89.585 86.591 80.122
  Norm. FFO/share 0.50 0.45 0.47 0.48 0.48 0.47 0.44 0.45 0.45 0.44 0.43 0.43
  Straight line rents 4.006 4.292 4.745 4.561 4.300 5.040 5.191 3.509 2.857 2.876 2.351 1.578
  Norm FFO - straight 114.595 101.441 106.940 108.369 108.684 106.390 98.965 95.054 88.407 86.709 84.240 78.544
  My AFFO number/share 0.483 0.427 0.450 0.457 0.458 0.448 0.42 0.429 0.434 0.368 0.380 0.385
  LTM AFFO FAD Guide 1.82 1.79 1.81 1.78 1.76 1.73 1.65 1.61 1.57      
  SSNOI 167.161 156.372 147.370 138.816 145.347 136.614 114.131 114.165 123.360      
  SSNOI Growth 1.4% 2.1% 1.4% 1.2% 0.3% 2.3% 0.4% 0.9% 3.6%      
  Interest Coverage 3.7x 3.75x 3.7x 3.9x 4.0x 3.9x 3.8x 3.8x 3.6x 3.5x 3.6x 3.8x
  Total Debt / EBITDA 5.7x 6.1x 6.0x 5.7x 5.7x 5.8x 5.9x 5.0x 5.4x 5.4x 5.7x 4.4x
  Investments (billions) 6.917 6.919 6.976 6.877 6.914 6.966 6.976 6.508 5.728 5.720
  NormFFO/Investments 6.86% 6.11% 6.39% 6.57% 6.54% 6.40% 5.97% 6.06% 6.37% 6.26%
  Revenues + Div + Int 275.054 264.731 262.333 258.422 247.544 255.332 247.814 228.652 229.809 216.951
  Revenue/Investments 15.90% 9.56% 15.04% 15.03% 14.32% 14.66% 14.21% 14.05% 16.05% 15.17%
  Adjusted Income 42.640 28.093 35.263 31.278 37.243 38.440 38.216 41.477 46.740 37.571
  Adj Inc/Investments 2.46% 1.62% 2.02% 1.82% 2.15% 2.21% 2.19% 2.55% 3.26% 2.63%

Note - the Debt/EBITDA is a bit high and the interest coverage is a bit low - but not dramatically so.

I would put a bit of charity in my 1% dividend CAGR projection. The cap rates on MOBs scare me - so I would give SNH a Required Rate of Return assessment just under that of the SNF REITs. At a current yield around 7.72% ---- the yield + CAGR = 8.7% ---- which is relatively attractive. Then you need to subtract the RRR that is close to that same 8.7% - and find that SNH is close to fairly valued.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.