A First Look at SILA Realty Trust
Newly listed REITs are a challenge. One generally has a lot of assurances and not much relevant track record. But having missed out on some big gains in previous cases, I decided to jump into SILA Realty Trust (SILA) last month before taking a detailed look. Here is that look.
SILA Realty Trust (SILA) listed shares on the NYSE in June. One very unusual aspect is that there was no IPO, no offering of newly issued shares.
Instead they ran a “Dutch Auction,” selling nearly 4% of the existing shares to new shareholders. This enabled previous shareholders to cash out some of their holdings.
But the auction raised no funds for the company. On the earnings call a few weeks later they explained:
Given our strong and flexible balance sheet, we did not need to raise capital through a traditional and typically expensive IPO mechanism. In fact, we believe we've plenty of dry powder to meet our strategic objectives over the next 12 to 24 months. However, being a publicly traded company opens the door wider to capitalize on growth opportunities in the large growing and sustainable health care market.
So this is different, fun, and hopeful. Before we go deeper, a few contextual details. Over the past 14 years, the principals here have:
Started two real estate companies
Merged them
Issued a lot of stock (privately) and taken on a lot of debt.
Acquired (since 2015) $2.5B of properties
Sold off (since 2015) $1.9B of properties, including a portfolio of data centers
Paid down a bunch of that debt
Listed publicly
It is worthwhile to highlight positives before I start in on topics that include criticisms of various aspects of Sila. It is quite an achievement to start a REIT and develop it to the point of having it listed. I do appreciate the achievement, even as the following includes some serious criticism.
Triple Net for Real?
Today Sila is a net-lease REIT. They use triple net lease contracts, under which the tenants pay all maintenance, taxes, and insurance.
This sounds like shareholders are protected, but there are limits to that. Boston Properties (BXP) uses triple-net leases, but still encounters major capital expenditures for new tenants.
Health-care REIT Welltower (WELL) uses a lot of triple-net leases for Senior Housing, but was never purely triple net. What matters is that they have been forced by financial difficulties in that sector to take on the operation of properties after tenants have failed.
So the question for SILA is how they will handle tenant failures. Will they stick to their announced business model?
So far so good on that. The multiple bankruptcies of operator Genesis Healthcare have wreaked havoc across the healthcare REIT sector for the better part of a decade now. (I discussed that aspect of the Welltower story here.)
The impact on Sila has been this. They owned 17 properties operated by Genesis before their most recent bankruptcy. As of December 31, Genesis was a top-ten tenant:
In the event, Genesis still operates 7 of the 17 properties, at least until their next bankruptcy, and has dropped out of the top ten tenant list. Of the other 10 properties, 6 have been leased to new tenants and one is in lease negotiations. The remaining 3 will be sold, along with their only Steward hospital, now closed.
We will discuss the financial implications below. This year, at least, Sila is proceeding as triple-net REITs normally do.