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Michael Burry

Senior Housing Properties
NYSE:SNH
2000-2001
Industry: Senior Housing REIT
Category: Legal

Context
Senior Housing Properties was a REIT which owned senior apartments, congregate communities, assisted living centers, and nursing homes.
Senior Housing was a spin-off from HRPT Properties Trust.

Why the Company was Mispriced
Two lessees accounting for 48% of Senior Housing's revenue filed for bankruptcy.
As a result, the stock is bouncing along it's yearly lows.

Alternative View
The alternative view is that the bankrupt lessees' operations were not poor and lacked cash flow, rather they simply had too much debt.
As a result of the bankruptcy, Senior Housing gains 3 nursing homes and 24m in cash.
If we assume the rents approximate it's mortgage payments, which is ultra-conservative, then in Q102, the bankrupt operators generate 80m in cash flow before interest and D&A.
This is significantly more than what Senior Housing was receiving from these operators in rent.

The general perception that Senior Housing took over money-losing operations is incorrect.
Senior Housing will lack cash flow as bankruptcy proceedins go through approval.
However, once resolved cash flows will return, and may exceed what was previously normal.

Senior Housing also agreed to sell one of it's major properties, Brookdale for $123m, and using the proceeds to pay off debt, reducing the total to to $60m.
Given that Brookdale cost $101m, it suggests it's last remaining major property Marriott, which is equal in quality to Brookdale, could be sold for it's cost of $325m.
Given the market capitalization of ~250m the downside is limited, there's a 14% annual dividend yield, and the bankruptcy proceeding is a catalyst for more earnings.
The current price is $10 and Burry sees the fair value between $15-17/sh.

Risks
Burry saw a potential risk in reduced government reimbursements.
He also saw a pseudo-risk in the parent company HRPT Properties, who disclosed in Barron's that it is looking to dispose 49.3% of it's stake in Senior Housing.
Notably, insiders do not own a significant amount of shares, preferring to hold HRPT stock.

Result
Senior Housing lives under a common conflict of interest that afflicts REITs, it's management gets paid according to a percentage of AUM.
This creates an opportunity for abuse. REITs can raise capital, inflate assets, and collect fees, no matter the profitability.
Management has shown it's true, quite ugly colours by issuing preferred and common shares, despite the book value and replacement cost being well below the selling price.
It is not at all clear that Senior Housing will earn a return in excess of the cost to sell Brookdale and issue shares below their intrinsic value.
It is clear management is willing to destroy shareholder value both now and in the future.
Therefore, despite Warren Buffett being a shareholder in the parent HRBT and the stock offering being oversubscribed, Burry sold his position.

Burry sold his shares at ~$13/sh, above his cost at ~$10/sh. The holding period was about a year, for a total gain and CAGR of 30%.