Which REIT Stock Best Combines Dividend Record with High Yield?

 

chart01The question you may be asking yourself is which stock best combines a good dividend record with a high yield? The answer is Senior Housing Properties Trust. This company is a $4 billion market cap healthcare REIT that has been largely undervalued in recent times. Before you go ahead and purchase their stocks, we have listed what we like and what we don’t like about Senior Housing Properties Trust.

We like the following factors:

  • Senior Housing Properties Trust has distributed quarterly dividends since April of 2000 without interruption or a decrease.
  • The company went through a strong period of growth between 2011 and 2015. As a matter of fact, they increased their rental revenues by 53%. The rapid expansion was fueled by both equity and debt. The debt amount nearly doubled, and the total debt to market capitalization is now close to 50%.

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  • The business is not much dependent on government reimbursements such as Medicare and Medicaid. In 2015, approximately 97% of their net operating income was generated from renting properties to businesses that produce a majority of their revenue from private sources. Only 3% of the company’s NOI is generated from renting properties to businesses that operate skilled nursing facilities (SNF). Typically, a majority of SNF based revenue is dependent on Medicare and Medicaid.chart03
  • Senior Housing Properties portfolio is well balanced in terms of property type. In addition to SNF’s, 42% of their portfolio consists of medical office buildings. The remaining building types include both independent and assisted living communities, along with wellness centers. The company owns properties in 43 states and the District of Columbia.chart04
  • Lastly, Senior Housing Properties managed to maintain their investment grade. The business’s debt metrics continues to be on par with companies that enjoy the same rating. Their debt to adjusted EBITDA is below 6x, and the adjusted EBITDA to interest expense is at 4.0x.

We do not like the following factors regarding Senior Housing Properties Trust.

  • Two tenants concentrate almost 40% of rental income.chart05
  • Senior Housing Properties Trust rapid portfolio expansion has yet to be translated into sizable FFO per share growth, which has only increased incrementally during this period. As a matter of fact, much of the FFO growth was diluted because the number of shares increased significantly. That is exactly why the company has not increased their dividend since 2012, and has kept the dividend payout at a fairly reasonable 81%.
  • The company has bizarre ties with their external management, RMR Group, who was pressured by activists last year. The result of that pressure is interesting to say the least. RMR Group required all of the REITs that they manage to have an active participation in the company. They began trading on NASDAQ in late 2015 with their REIT’s holding an aggregate of 15,000,000 Class A Common Shares. The managed REITs are Select Income REIT (NYSE:SIR), Government Properties Income Trust (NYSE:GOV), Senior Housing Properties Trust (NYSE:SNH), Hospitality Properties Trust (NYSE:HPT).chart06
  • The RMR ownership stake certainly made an impact on Senior Housing during the fourth quarter last year. All of the REIT’s that RMR manages, including Senior Housing, distributed half of the RMR shares to their shareholders. After the distribution occurred it led to a non-cash loss of $38 million on the income statement. Senior Housing’s common shareholders each received 0.0111 of a share of the RMR common stock for every Senior Housing share they owned.

The recent eagerness in the financial markets did have Senior Housing’s share price rally. The company had lost nearly 40% of their value up until last month at which time the stock showed some positive reaction. The share price is still 21% below its 52-week high. In addition, the AFFO multiple is at 11x, which is well below historically normal levels.

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In summary, Senior Housing Properties Trust certainly shows the components of a good dividend stock, including a good entry point. That statement can be made with the exception of their external management situation and tenant concentration.

Source:Senior Housing Properties Trust(NYSE:SNH)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

 

 

 

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