Shares of Senior Housing Properties Trust (DHC 0.00%) dropped by just under 32% in April according to data provided by S&P Global Market Intelligence, losing nearly a third of their value in a single month. The real estate investment trust (REIT) has been losing ground for a little while at this point, and it is now down by more than 50% from its 2016 highs. The drop in April, however, is noteworthy because it was so steep and because it was driven by management's making a decision that no income investor wants to hear.
To end the suspense, the big news from the Senior Housing Properties leadership team was a massive 61% cut in the dividend. That took the quarterly disbursement from $0.39 per share to just $0.15 per share. Although this isn't the first time that the healthcare-focused REIT has cut its dividend, that fact doesn't soften the blow any. That said, the current dividend haircut wasn't exactly unexpected.
Senior Housing Properties operates three distinct segments, and none of them have been performing particularly well. For example, at the end of 2018, management announced that its medical office, research, medical provider, and medical clinic assets saw occupancy decline by 0.5 percentage points year over year. Occupancy at assets owned for more than a year, however, fell even more, dropping 0.8 percentage points. Rent coverage at senior living communities that the REIT leases out to others, meanwhile, dropped from 1.22 times in 2017 to just 1.08 times in 2018 -- highlighting very weak rental coverage. And occupancy at senior housing assets that Senior Housing Properties owns and operates fell 0.01 percentage point. Although that's a small drop, occupancy was a fairly worrying 85.8% in 2018.
To be fair, some of the REITs troubles aren't surprising. With more than half of its revenues tied to senior housing, the company is muddling through the same oversupply issues that every other provider in the space is facing. However, the company paid out $1.56 a share in dividends in 2018, but produced funds from operations (FFO) of only $1.59, leading to a troublingly high FFO payout ratio of 98%. With the senior housing industry continuing to face headwinds, the dividend cut was well short of a surprise, but it was still unwelcome news.
Senior Housing Properties has taken the drastic step of cutting the dividend. Although that should put the current dividend on much more solid footing, the fact that it had to make this move suggests that most income investors would be better off looking at REITs with a better track record of success.