SNH Still Seems Behind Goal on Asset Sales

SNH has set a goal of $900 million in announced or closed asset sales in 2019.  With more than nine months of the year gone, it has completed only $119.1 million in asset sales and has an estimated $125 million of pending sales.  Thus, total announced or closed asset sales to date are roughly $244 million, which means that the Trust must announce another $654 million of asset sales in the remaining ten weeks of the year in order to reach its target.  (If the $99 million in net proceeds that SNH received from the sale of RMR shares in July is counted toward the $900 million objective, it would have to sign up for $555 million of asset sales by the end of the year to reach its target.)

A brief analysis of recently announced asset sales.  Of the $119.1 million asset sales completed to date, the company reported $84 million of closed asset sales in two separate press releases on Sept. 23 and Oct. 9.  Included in those sales were (1) a 15-facility skilled nursing facility portfolio for $8.0 million; (2) the Reliant Medical Group portfolio of 13 medical office buildings for $18.0 million (3) the sale of three senior living communities (with a total of 361 units) in South Dakota for $10.5 million and (4) the sale of a 205,000 s.f. medical office property in Bridgewater NJ for $47.5 million.

The closing of the sale of the skilled nursing facility portfolio of 15 properties for $8.0 million appears to be the same as the previously announced agreement to sell 17 skilled nursing facilities for $17 million.  While it is possible that SNH continues to hold two SNFs with an implicit value of $9 million, it seems more likely that it has sold these properties for less than it had originally agreed (perhaps after buyers completed their due diligence). It is not clear whether the remaining two SNFs are saleable at this time.

The Reliant Medical Group sale of 13 MOBs for $18 million appears to be an expansion of the previously announced agreement to sell 5 MOBs in Massachusetts for $9.926 million.

I am assuming that the sale of the three senior living communities in South Dakota for $10.5 million is part of the previously announced agreement to sell 15 senior living communities for $135 million.  SNH has not as yet provided an update on the status of the sale of the remaining properties, but it almost certainly will do so when it reports 19Q3 earnings.

The sale of the 205,000 s.f. MOB in Bridgewater for $47.5 million is a positive development that was not previously announced.

Asset sales yet to come and what may happen if SNH falls short of its goal.  Based upon communications to date, it appears that SNH has adopted a policy of announcing (through a press release) the closing of significant asset sales (i.e. in excess of $20 million in proceeds).  The disclosure of agreements to sell certain assets, however, has been made either in quarterly earnings reports and 10-Q filings.  (The Trust could have announced recent contract signings in its Sept. 23 and Oct. 9 press releases, but it did not.) Consequently, if no press releases are issued in next few weeks, we should expect receive a more complete update on the status of the asset sale program on Nov. 7, when SNH releases 19Q3 earnings.

With time running out, SNH will have to announce a slew of asset sales in the coming weeks in order to reach its $900 million goal.  At this point, even if it announces signed agreements for the remaining $555-$654 million, the bulk of those sales will probably be completed during 2020.  SNH could make up a substantial portion of the difference by selling its 50% joint venture interest in the buildings leased to Vertex Pharmaceuticals.  I have assumed that the Vertex properties will not be sold.  If that joint venture interest is sold, I will likely lower my forecast for SNH’s 2020 earnings modestly because the Vertex lease is more profitable than the Trust’s average property.

Alternatively, if SNH falls meaningfully short of the $900 million target, it may decide to raise equity as an alternative means of achieving its debt reduction goal.  Such a sale of equity might have a modest negative impact on SNH’s future potential earnings per share (because of the extra dilution).  While it would take away some of the stock’s current upside potential, I would still view the stock as attractive.

For now, investors do not seem to be concerned at all about the Trust’s ability to achieve its asset sale goals.  As of the 19Q2 conference call, management remained highly confident in its ability to meet its asset sale objectives.  The stock, meanwhile, has reached a nearly seven-month high today and it has rebounded sharply since bottoming in May, significantly outperforming both the S&P 500 and the Dow Jones U.S. REIT Index.

October 21, 2019

Stephen P. Percoco
Lark Research
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