Fitch Ratings has affirmed the rating for Senior Housing Properties Trust (SNH) issuer default rating (IDR) and senior unsecured notes at 'BB+'. In addition, Fitch has assigned a 'BB+' rating to SNH's unsecured revolving credit facility. The Rating Outlook is Stable.
Senior Housing Properties Trust
--Issuer Default Rating (IDR) affirmed at 'BB+';
--Senior unsecured notes affirmed at 'BB+';
--Unsecured Revolving Credit facility 'BB+'.
Fitch's rationale to affirm the IDR and senior unsecured notes at 'BB+' and to assign a 'BB+' rating to the unsecured revolving credit facility pertains primarily to SNH's substantial operator/tenant concentration. SNH's property portfolio is primarily operated and leased by two senior living operators, Five Star Quality Care, Inc. (Five Star) and Sunrise Senior Living, Inc. (Sunrise). As of September 30, 2007, Five Star operated and leased 146 properties which represented 71.8% of total investments and 69.8% of total annualized rent. Sunrise operated and leased 14 properties that represented 17.6% of total investments and 17.0% of total annualized rent. Additionally, Fitch is concerned by the inter-relationships SNH, as well as its external manager, Reit Management & Research LLC (RMR) have with Five Star. Lastly, Fitch is somewhat concerned that some of SNH's senior living investments are significantly reliant on revenue from government reimbursement programs.
SNH's operating performance improved year over year for the past three fiscals through September 30, 2007. For the last twelve months (LTM) ended September 30, 2007, Fitch calculated net profits higher by 23.3% to $86.2 million as compared to $66.1 million in fiscal 2006 due to increased rental revenue, reduced interest expense, and a lower recognized loss on the early extinguishment of debt. Fitch considers SNH's debt service coverage as reported by the company for the three months ended September 30, 2007 of 4.98 times (x) to be solid, especially as it relates to the covenant requirement of 2.00x. Fitch's calculation of SNH's fixed charge coverage for the prior three fiscal periods is considered healthy, and improved significantly for the LTM ended September 30, 2007 to 4.33x.
SNH has a substantial unencumbered asset pool which Fitch calculated to be $1,712.2 million as of September 30, 2007. We also believe that the unencumbered asset to unsecured debt coverage of 5.32x as reported by the company indicates significant support for unsecured creditors in a default situation. In addition, Fitch believes that SNH remains committed to prudently managing leverage. Leverage as measured by total debt to undepreciated book capital remained low and declined sharply to 22.0% as of September 30, 2007. Furthermore, we favorably view SNH's restrained use of secured debt within its debt financing mix.
Fitch considers SNH's $550 million unsecured revolving credit facility, which includes a feature that could expand the borrowing capacity by an additional $550 million under certain circumstances, to be a solid source of liquidity. We also favorably view SNH's willingness to raise equity to repay borrowings outstanding under the unsecured revolving credit facility as indicated in its recent offering of 5.0 million common shares of beneficial interest. Additionally, SNH has no significant debt maturities due until 2012.
SNH is a real estate investment trust (REIT) which owns senior living properties comprising independent and assisted living communities, continuing care retirement communities, nursing homes, and rehabilitation hospitals throughout the United States. As of September 30, 2007, SNH owned 196 senior living properties leased to 11 tenants under 12 separate leases with approximately 23,981 living units located in 32 states. All of the company's leases are generally 'triple-net' leases which require the tenants to pay all property-related expenses.
In 1998, SNH was created by HRPT Properties Trust (NYSE:HRP), a publicly traded REIT that primarily owns and leases office buildings. In 1999, SNH was spun-off to HRPT's shareholders as a separate publicly traded REIT on the New York Stock Exchange (NYSE:SNH). SNH and HRPT are externally managed by Reit Management & Research LLC (RMR).
In 2000, SNH created Five Star to operate nursing homes repossessed or acquired from two former SNH tenants. On December 31, 2001, SNH distributed substantially all of Five Star's outstanding shares to its shareholders. Subsequently, Five Star became a separate publicly-owned company listed on the American Stock Exchange (AMEX:FVE).
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.
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