Once again, I’m in mea culpa mode. When I recommended Senior Housing Properties Trust last July, the share price was about twice as high as it now is and the dividend was more than twice as high as the recently announced payout rate.

Long story short: the concerns about major tenant Five Star Senior Living proved accurate. The company had to be restructuring. In a deal struck between SNH and Five Star, SNH will acquire an ownership stake in Five Star Senior Living and Five Star will pay reduced rent. Also, SNH announced it plans to cut is dividend payment to about 60 cents per share per annum, down from $156 before.

The stock plummeted on the news. The restructuring, I think, only added to concern about SNH’s relationship with its external manager. Concerns have been raised in the past that a REIT that’s managed by an external property management company has a built in conflict of interest, because the external manager will always want SNH to buy more properties at any price in order to grow its portfolio of managed properties.

SNH executives and board members say they have put in place systems to safeguard shareholders, including incentives that punish RMR if SNH’s share price declines (I’d like to see the details of how that is playing out now, with SNH down substantially.)

Moody’s placed the company’s credit ratings on review for a downgrade in April after the company announced the restructuring of its relationship with Five Star, a likely dividend cut, and the need for property dispositions to reduce debt. (Have rating agencies every been ahead of the curve?)

Sure, I wish I’d gotten out of SNH before the proverbial you know what hit the proverbial wall. Once again, I hung on too long when storm clouds starting rolling in from the horizon. But at this point, I’m ambivalent. The dividend will get slashed, but not eliminated (and still will look like an attractive yield given how far share prices have fallen). I’m generally on board with the company’s move to reduce its reliance on senior living properties and invest more in medical office facilities.

The company’s next earnings call is scheduled for May 9. I plan to wait and see how much clarity management provides at that time about the company’s future prospects and strategic direction before making any buy, sell or hold decision. According to Zacks (which has a “strong sell” rating on SNH), Wall Street expects the company to report EPS of $0.38 per share, down nearly 16% from the prior-year quarter. That’s not good, but in my opinion it doesn’t justify the extent of the sell off we’ve seen.

 

 

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