Can You Count On Senior Housing Properties Trust’s 13% Yield?
March 22, 2019
If You Own Senior Housing Properties Trust, Read This
What is the worst number in business?
Marketing guru Dan Kennedy tells clients to avoid the number one: one customer, one product, one key employee. If any problem wipes out your “one,” then you’re screwed.
The same thing applies to dividend stocks. Many income streams look safe, only to dry up when a big customer stops making payments. For proof, take a look at the losses investors stomached in names like Imagination Technologies or Uniti Group Inc (NASDAQ:UNIT).
Case in point today: Senior Housing Properties Trust (NASDAQ:SNH). Like the name implies, the partnership owns a collection of retirement communities and nursing homes. Analysts love these businesses for their recession-proof cash flows.
For that reason, many income hunters have assumed this 13% yielder will keep mailing out payments. But once you understand the “Rule of One,” red flags start to pop up. Let’s dive into the financials.
What’s Going on With Senior Housing Properties Trust?
At first glance, Senior Housing Properties Trust’s distribution looks safe.
In the real estate industry, we use a metric called fund “flow from operations” (FFO) to measure performance. This figure gives us better insight than traditional earnings into how much cash the business can pay out to unitholders.
Last year, Senior Housing Properties Trust generated $1.59 per unit in normalized FFO. Over the same period, executives paid out $1.56 per unit in distributions.
Generally, I like to see firms pay out 90% or less of their cash flow out as distributions. This leaves management with a little bit of wiggle room in the event of a downturn. Senior Housing’s payout ratio looks high (98%) at first glance, but the business can still make payments.
But be warned: the partnership’s 10-K reveals a big problem.
Senior Housing doesn’t manage any of the properties it owns. Instead, executives lease out their buildings to operators in exchange for rent payments.
Five Star Senior Living Inc (NASDAQ:FVE) represents the trust’s biggest tenant. In 2018, Five Star paid Senior Housing about $213.2 million in rental income. That accounts for $0.28 out of every dollar Senior Housing earned last year. (Source: “Senior Housing Properties Trust (SNH) Q4 2018 Results – Earnings Call Transcript,” Seeking Alpha, March 14, 2019.)
In other words, Senior Housing Properties Trust has too much business tied up with a single customer. That presents an especially large issue in the case of Five Star because of the company’s deteriorating financials. Rising wages and interest rates have wiped out the operator’s profits, pushing the business into a tough spot.
Senior Housing Properties Trust Top Five Tenants
|
Renter |
Annual Rental Income |
% of Total Rental Income |
|
Five Star Senior Living Inc |
$213.2 million |
28% |
|
Vertex Pharmaceuticals Incorporated |
$94.7 million |
12% |
|
Advocate Aurora Health |
$17.0 million |
2% |
|
Cedars-Sinai Medical Center |
$15.1 million |
2% |
|
Pacifica Senior Living, LLC |
$11.4 million |
1% |
(Source: Ibid.)
And I’m not the only one worried.
“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,” said Chief Operating Officer Jennifer Francis. “We are currently engaged in discussions with Five Star about a possible restructuring of our agreements to address its operating and liquidity issues.” (Source: Ibid.)
Translation: Senior Housing Properties Trust admits they have the corporate equivalent of a deadbeat tenant. In the best case, management can lower the rent they change Five Star to keep their business afloat. At worst, the tenant will stop making payments entirely.
The Bottom Line on Senior Housing Properties Trust
Both scenarios spell trouble for unitholders. With less money coming in from operations, Senior Housing’s cash flow will no longer cover the distribution. That could force the company to slash its payments to investors.
Investors in Senior Housing Properties Trust will soon learn a lesson in the Rule of One. Does a single customer account for a large percentage of a company’s business? Then your distribution sits on borrowed time.
