Dividend Watch: Is Senior Housing Becoming Lost in Translation?

A risk here is that Senior Housing Properties Trust may be losing its focus. Again, maybe.

An analyst downgrade this week prompted this review, but a new acquisition brings yet another reason to question this one. Before you hit the panic button, just keep it in mind that management has been able to navigate through many situations here. Extreme pullbacks have also shown to be great times for new buyers to get optimistic.

The analyst downgrade this week came from UBS, which slashed its rating down to Sell from an already cautious Neutral rating. The price target went down to $19 from $22 as well.

A larger concern is this “lost in translation” issue. This REIT is acquiring 2 biomedical office buildings that are 96% occupied, with a 15-year term with Vertex Pharmaceuticals Inc. (NASDAQ: VRTX). Vertex is now worth almost $20 billion and is expected to be profitable in 2015. Senior Housing will almost certainly get an earnings boost from this lease, but there is one small problem here – most investors believe that they are investing in a company that makes its bread and butter from senior living facilities. Owning biotech leases of healthy large companies is not a bad business; it just changes the focus of the company because this will add about 20% or so in size.

When UBS downgraded the stock, they addressed that the biotech building purchase highlights problematic issues regarding its external management structure. The other concern brought up by UBS is that this grows the company 20% in size but may only add 2% to 3% to the bottom line. One word of caution in just automatically trusting this downgrade that was seen. It is possible that UBS is being too negative here. After all, UBS now has the lowest price target of all Wall Street analysts covering the stock.

The flip side of this concern is that Moody’s already reiterated Senior Housing’s “Baa3” rating and stable outlook.

Senior Housing hit a low of $21.04 on Friday, yet another 52-week low, and closed at $21.08. The high over the last year was $29.99, and the consensus price target is up at $22.25.