by Lawrence Meyers | November 7, 2012 11:15 am
A number of years ago, mutual fund legend Ron Baron took a position in Sunrise Senior Living (NYSE:SRZ) because he identified a long-term secular trend of aging baby boomers needing assisted-living facilities. It fit with his concept of a “sunrise industry,” one that was entering a phase of long-term growth due to some kind of large movement in demographics or a section of the economy.
He was right, but Sunrise isn’t what I’m writing about today, because it isn’t paying a dividend.
Senior Housing Properties Trust (NYSE:SNH) does pay a dividend: 7%, to be exact. And it’s a great, diversified REIT. It owns 61 independent-living facilities, 149 assisted living, 48 nursing homes and 114 MOBs (properties leased to medical providers), a total of 384 properties over 40 states. The company has been on an MOB and assisted-community acquiring binge, focusing on smaller deals with less competition from other buyers.
Senior Housing Properties also has stakes in CommonWealth REIT (NYSE:CWH) and assisted-living property manager Five Star Quality Care (NYSE:FVE). Rental income was up 10% YOY. The largest growth came from resident fees and services, which quadrupled from $10.7 million to $42.3 million, as the number of units assessing these fees grew from 1,200 to 4,300.
Now, you might be concerned about the revenue stream given that Medicare and Medicaid don’t reimburse services so well. As Senior Housing Properties’ CEO says, however, “94% of our portfolio’s NOI is derived from real estate where the predominant revenue source is private pay. With uncertainties surrounding the fiscal cliff and the long-term viability of Medicare, we feel that we are in the best position in the healthcare REIT space within any additional Medicare cuts.” How true.
The company’s financial position is solid, and it’s having no trouble raising financing in either the equity or debt markets. It raised $300 million of equity financing and $350 million in 5.625% senior notes in July — and those notes are unsecured, reflecting the strength of the underlying business.
Senior Housing Properties has paid off more expensive debt. It holds $21 million in cash, $1.1 billion of unsecured senior notes and $717 million of secured debt. The debt to EBITDA ratio is only 41%, which is very reasonable.
Occupancy at the company’s properities and those managed by Five Star are in the 87% range, and at 94% in its MOB business.
Senior Housing Properties feels like it’s in good shape, with management using its financial position in the best possible ways, staying away from deals that might be larger and more accretive and instead going with deals that are modest. With bonds yielding next to nothing, it’s a worthy contender for your fixed-income portfolio.
As of this writing, Lawrence Meyers didn’t own shares in any company mentioned here.
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