Senior Housing Properties Trus SNH
December 18, 2000 - 11:43am EST by
pgu103
2000 2001
Price: 9.25 EPS 1.85
Shares Out. (in M): 26 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 78 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Senior Housing Properties Trust (NYSE: SNH) is a REIT which owns assisted
living facilities (ALFs) and skilled nursing facilities (SNFs). SNH was
spun off from HRPT Properties (NYSE: HRP) a little over a year ago. As with other healthcare REITS, SNH's stock has been a dismal performer during 2000. However, SNH is at a critical inflection point. While the nursing home stocks have been on a tear lately, SNH has continued to be misunderstood, ignored and overlooked. In fact, at the current stock price, you have the opportunity to acquire a substantial amount of real estate for free. Here’s the investment rationale:

All of the ALFs owned by SNH are operated by Marriott and the leases are guaranteed by Marriott International--an investment grade credit. The book value of these properties is $325mm. When you subtract all of SNH's long-term debt of $78mm, the resulting net book value is $247mm, or $9.50/share--$.25 higher than the current stock price. The $325mm book value works out to about $82K per ALF unit--certainly a very realistic, if not conservative, value. At book, the Marriott properties are valued for about a 9.5% cap rate. SNH recently sold its Brookdale ALFs for about a 9% cap. You really can't get higher quality ALFs than those operated by Marriott.

In addition to the Marriott ALFs, SNH owns 8,000 nursing beds. This side of senior housing housing has been under complte distress for the last year or so. When almost a quarter of an industry is in bankruptcy, you know a bottom is near. Recently, HCFA has increased the rates for SNFs which has sparked a run in HCR and BEV stocks.

Substantially all of the beds were formally operated by Mariner and
Integrated Health Services. SNH has recently finalized negotiations with
both bankrupt operators and now operates about 6,000 beds for its own
account. Thus, much of uncertainty (timing, terms of the settlements, etc.) caused by the bankruptcies has been removed. The remaining 2,000 beds are leased to HealthSouth and other operators at very attractive rates.

During the most recent quarter, SNH operated the nursing faciltities at a profit and is likely to improve the profitability of the SNFs going forward. Once again, SNH has removed much of the uncertainty regarding its ability to operate the SNFs by being profitable during its first quarter of operating the SNFs.

If you value the SNFs at $25K/bed (which is a decent historical benchmark—SNH recently sold some beds for 28K each), the SNF beds are worth close to $8/share. It appears that the NAV of SNH is at least $18 when you give the ALFs and SNFs conservative values. At this stock price, you're getting the nursing homes completely for free!

SNH pays a current dividend of $1.20/share or a 13% yield so you get paid to wait for the NAV to be realized. Also, it’s important to note that the dividend rate was set without regard to the income from the operated SNFs. Accordingly, SNH may have to raise its dividend rate as the profits from the SNF portfolio grows.

One knock against the REIT is that it’s externally advised. We believe that the stock price more than compensates for that risk. Further, management recently sold a significant amount of ALFs at a nice gain—an event that was positive for shareholders but not management as it reduces the fee base.

Catalyst

Almost no capital has been committed to this industry in over two years, yet the demand for senior housing is a lock to grow at attractive rates for the next several years. The “under-building” on the SNF side is almost certain to have a favorable impact on the profitability of senior housing.

With $192mm available on its revolver, SNH is one of the few players that
has dry powder to take advantage of the distressed senior housing environment. It's conceivable that SNH could make some acquisitions (at distressed prices) next
year and jump start the growth.

SNH recognized gains from the bankruptcy settlements with Mariner and IHS
that have yet to be reported. Will SNH have to make a special distribution
or increase its payout to retain its REIT status?
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