Senior Housing Properties Trust — Q1 2015 Form 10-Q
Entity note: The supplied filing is for Senior Housing Properties Trust, not an entity named Diversified Healthcare Trust. The filing covers the three months ended March 31, 2015; financial statements are unaudited.
Business context
At quarter-end, the REIT owned 392 properties in 39 states and Washington, D.C. Its portfolio included senior living communities, medical office buildings (MOBs) and wellness centers. Approximately 97% of net operating income (NOI) came from properties where most charges were paid from private resources.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $228.6 million | $191.5 million | +19.4% |
| Operating income | $77.3 million | $66.9 million | +15.6% |
| Net income | $39.8 million | $38.6 million | +3.1% |
| Net income per share, diluted | $0.18 | $0.21 | Down |
| Cash provided by operating activities | $104.1 million | $90.1 million | +15.6% |
| FFO per share | $0.42 | $0.41 | Up |
| Normalized FFO per share | $0.45 | $0.43 | Up |
Revenue growth was driven chiefly by acquisitions, including 23 MOBs acquired in January. Reported operating margin was about 33.8%, versus 35.0% a year earlier; net margin was about 17.4%, versus 20.1%. The diluted weighted-average share count rose to 221.4 million from 188.0 million, helping explain why net income increased while diluted EPS declined. FFO and Normalized FFO are non-GAAP measures; management cautions they are not substitutes for GAAP earnings or operating cash flow.
- Segments: MOB revenue rose 63% to $86.0 million, largely from acquisitions; comparable MOB NOI fell 2.3%, with lower same-property occupancy and some lease renewals at lower rents. Managed senior living NOI increased 9.3% to $20.4 million. Triple-net senior living NOI increased 0.7% to $55.3 million.
- Cash and investment: Cash and equivalents were $77.8 million at March 31. Operating cash flow was $104.1 million; investing used $521.1 million, primarily for the MOB acquisition; financing provided $467.2 million, including $659.8 million net share-offering proceeds. Property improvements were $12.3 million.
- Debt and liquidity: Balance-sheet debt and capital leases totaled about $2.72 billion, including $1.74 billion of senior notes, a $350 million term loan and $625.1 million of secured debt and capital leases. The $750 million revolver was undrawn at quarter-end. By May 5, $550 million was drawn, leaving $200 million available, following the May senior-living acquisition. Management reported covenant compliance.
- Distributions: The quarterly distribution was $0.39 per share, unchanged from the comparable period. A distribution of approximately $91.7 million was declared after quarter-end.
Material changes, outlook and risks
- In February, the trust issued 31.05 million shares and raised approximately $659.8 million net. The proceeds helped repay revolver borrowings and fund general purposes; the expanded share count is relevant to per-share comparisons.
- After quarter-end, it acquired 37 of 38 contracted senior-living communities for approximately $762.6 million, financing the purchase with cash, revolver borrowings and about $139.2 million of assumed mortgage debt. The remaining community’s acquisition was delayed and remained subject to conditions. A separate $9.75 million senior-living acquisition was also pending.
- Management expected operating cash flow and available financing to cover operating expenses, debt service and distributions for the next 12 months and beyond. This is an expectation, not a guarantee; no specific earnings guidance was provided.
- Five Star was the largest tenant: it represented 32.7% of rental income, leased 180 communities, and owed minimum annual rent of $191.0 million. Five Star also managed 46 communities. Tenant financial or operating weakness could affect rent collection and managed-property results. Overall Five Star lease rent coverage was 1.21x, down from 1.26x.
- Healthcare reimbursement, regulation and operating costs remain risks. The filing discusses proposed Medicare payment updates and potential state Medicaid rate pressure, and states that effects on the trust and its operators are uncertain. Interest-rate changes could raise costs on floating-rate borrowings; a 100-basis-point increase was estimated to add about $3.5 million of annual interest expense on the $350 million term loan outstanding at quarter-end.
- Other notable items included a $1.4 million loss on termination of a bridge-loan commitment, related-party arrangements with Five Star and RMR, and no material off-balance-sheet arrangements reported.
Investor verification priorities
- Confirm the legal registrant and its relationship to the requested Diversified Healthcare Trust name.
- Review the May 2015 acquisition financing and resulting revolver balance, debt maturities and covenant headroom.
- Assess Five Star’s financial condition, rent coverage, lease obligations and concentration exposure.
- Separate acquisition-driven growth from comparable-property performance, especially the decline in comparable MOB NOI.
- Reconcile GAAP earnings, FFO and cash flow with the distribution level and the dilution from the equity issuance.
- Check closing status and final terms for the delayed senior-living community and the separate pending acquisition.