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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Q. who wrote (8743)	10/24/1999 12:02:00 AM
From: Michael Burry	Read Replies (1) \| Respond to of 78630

With all due respect, re: SNH, no crap. What you think you're seeing that the market isn't the market really is, and no one else is seeing what you should. That's gobblidygook for there's more to it than "oh, write it off because half of its tenants are in trouble." And it begins by asking what happens to the property owner when the leasee goes bankrupt, and maybe even before that why are the leasees going bankrupt. I'm thinking that VIX is turning to be a good ultra-short-term indicator. Those new lows are relentless, even on the last two good days. Mike

To: Q. who wrote (8743)	10/24/1999 3:44:00 AM
From: James Clarke	Read Replies (1) \| Respond to of 78630

<<Be sure to check the tenants of this particular REIT, as listed in the prospectus. After Marriott, the next several biggest all have stocks that have collapsed and now trade for pennies. Mr. Market is saying that they are at great risk of going belly up. Which brings up the issue of whether they will be able to pay the rent.>> You don't seriously believe that either Mike or myself would invest in a stock yielding 19% without reading the prospectus, do you? But I do appreciate you pointing out to others on this thread that SNH is by no means a "no-brainer". What you point out is absolutely correct - some of them already have gone bankrupt. In a way, it may also be the reason to buy the stock - I read the prospectus to find out what could scare investors so much that a stock could be (or maybe just look) this cheap. When I looked carefully at the tenant list, I found what I was looking for - I almost stopped there. I MUST EMPHASIZE - I STILL HAVE NOT BOUGHT THE STOCK, though Mike has and I pushed him just as you are pushing me - he has done his homework. So why would one treat a dividend backed by a number of bankrupt credits as possibly sustainable? As Mike has pointed out in his writeup on valuestocks.net, about half the dividend is backed by long-term leases to Marriott, a rock-solid credit. The other half, as you pointed out, is backed by a bunch of publicly traded health care companies trading as penny shares (they were $30 stocks two years ago). So the point Mike has made that you could just write off those tenants and still collect a 9% yield is worth thinking about. But let's go one step further. Let's assume those tenants all go bankrupt. If I'm an equity holder or a lender (i.e. bonds), I'm lucky to collect pennies on the dollar. But SNH is in a different position as a creditor. They own the buildings. Comparing SNH as a creditor to a lender is like comparing night and day. If I am SNH I am not an equity holder or a lender. I am the most senior creditor. The tenants (and we are talking about the likes of IHS and GHV - look at their charts and you will see why SNH is cheap) are going bankrupt because they can't pay the interest on billions of dollars worth of debt, not because they can't pay their rent. (How do I know this? Because they all have positive operating income. You want to take a good look at their financials as well.) The risk is that in a bankruptcy, all contracts, including leases, are negotiable. The Vencor-Ventas relationship is similar to what we are looking at with SNH, and in that case the rents were negotiated down 20%. So let's make that the benchmark. Assume half the tenant base goes bankrupt and SNH has to reduce rents by 20%. That might cut the dividend to $2 or so. If that's my risk on a $13 stock, I will sleep well owning it. The way I view risk is why I have not bought this stock yet. Clearly if the dividend is cut even to $2 the stock sells off, but that does not represent permanent loss of capital if I am right in my real estate analysis. I think my real risk here is that I don't know this business or what is going on in health care economics re: Medicare. I think I can understand the real estate risk, so my risk in investing in the stock is that I am missing something huge elsewhere. Any guess what that might be? JJC