Business context and reporting period
Entity note: The supplied filing is for Senior Housing Properties Trust, not Diversified Healthcare Trust. It is an unaudited Form 10-Q for the quarter and nine months ended September 30, 2014.
The REIT owned 371 properties in 38 states and Washington, D.C., across senior living communities, medical office buildings (MOBs), and wellness centers. Approximately 97% of net operating income came from properties where most charges were paid from private resources.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $216.9 million | $187.3 million | $615.1 million | $561.1 million |
| Operating income | $73.7 million | $65.9 million | $208.8 million | $190.9 million |
| Net income | $37.1 million | $38.1 million | $113.4 million | $79.0 million |
| Diluted net income per share | $0.18 | $0.20 | $0.57 | $0.42 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $281.5 million | $248.2 million |
- Q3 revenue rose 15.8%, while net income fell 2.7%. Approximate operating margin was 34.0%, versus 35.2% a year earlier; net margin was 17.1%, versus 20.4%.
- Nine-month revenue increased 9.6% and net income increased 43.6%. The comparison reflects, among other items, substantially lower impairment charges in 2014 than in 2013.
- Q3 FFO was $0.43 per share and Normalized FFO was $0.44, compared with $0.40 and $0.42, respectively. Nine-month Normalized FFO was $1.30 per share. Distributions declared were $0.39 per share each quarter, or $1.17 for the nine months. These are non-GAAP measures as defined by the company.
- At September 30, cash and cash equivalents were $80.8 million; the $750 million revolving facility was undrawn and fully available. Management said operating cash flow and available funding were expected to cover operating costs, debt service, distributions, and other needs for at least 12 months.
- Reported debt included $1.743 billion of senior notes, a $350 million term loan, and $669 million of secured debt and capital leases. Total liabilities were $3.005 billion; shareholders’ equity was $2.984 billion. The filing states the company was in compliance with debt covenants.
Material changes versus the prior comparable period
- Growth was led by MOB acquisitions: the May 2014 Massachusetts acquisition cost approximately $1.125 billion, and the company also acquired a Texas MOB. Q3 MOB revenue increased 52.8% and segment NOI increased 66.5%; comparable-property MOB NOI rose only 2.1%, indicating acquisitions drove much of the reported increase.
- Managed senior living revenue increased 5.8% in Q3, but comparable-property NOI was essentially flat. Triple-net senior living rental income declined 3.2%, primarily following property sales, partly offset by rent increases tied to property improvements.
- Interest expense increased to $36.2 million in Q3 from $29.4 million, reflecting new notes and the term loan. General and administrative expense rose to $10.4 million from $7.8 million.
- In April, the company issued $650 million of senior notes and 15.525 million common shares; it also entered into a $350 million term loan in May. The share count increased, contributing to per-share results that did not track aggregate income growth.
Outlook, risks, contingencies, and unusual items
- No formal earnings or FFO guidance was provided. Management expressed confidence in liquidity and the ability to fund obligations, while noting that financing access and costs depend on capital markets and credit ratings.
- The company had agreed to acquire 23 MOBs for about $539 million, including approximately $30 million of assumed mortgage debt. Closing depended on Select Income REIT’s proposed acquisition of the seller and other conditions; completion, timing, financing mix, and terms were not assured. Two Wisconsin senior-living acquisitions were also pending.
- Five Star was the largest tenant: it generated 34.7% of Q3 rental income and leased properties representing 34.5% of investment carrying value. Five Star had not filed its first- and second-quarter 2014 10-Qs and had disclosed material weaknesses in financial reporting controls. Accordingly, the trust did not report current-period Five Star rent coverage.
- Related-party relationships are significant: RMR provides management services, Five Star is a major tenant and manager, and overlapping trustees and executives create potential conflicts. The proposed MOB acquisition also involves SIR, with shared-affiliation relationships disclosed in the filing.
- Healthcare reimbursement and regulation remain risks. The filing discusses Medicare and Medicaid policy changes, including potential payment reductions and new SNF reporting and incentive requirements, and says their effects could adversely affect tenants’ ability to pay rent and property values.
- Eight properties were classified as held for sale at quarter-end, with a net book value of $12.9 million. Sales could reduce rent from Five Star; the filing gives no assurance that remaining sales will occur on expected terms.
- Interest-rate sensitivity: a 100-basis-point increase was estimated to raise annual interest expense by about $3.5 million on the outstanding term loan; if the revolver were fully drawn, the estimated increase would be about $11 million additional across the modeled floating-rate debt.
- Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting. The interim statements include normal recurring adjustments; results may not indicate full-year performance.
Most important facts for investors to verify
- Confirm the filing belongs to the intended issuer: this report names Senior Housing Properties Trust, not Diversified Healthcare Trust.
- Assess Five Star’s financial condition, filing delays, control weaknesses, tenant concentration, and capacity to meet rent and management obligations.
- Check the completion, funding, returns, and related-party governance of the proposed 23-MOB transaction and other pending acquisitions.
- Reconcile acquisition-driven revenue and NOI growth with comparable-property trends, rising interest and corporate costs, and increased share count.
- Review debt maturities, covenant headroom, variable-rate exposure, distribution coverage, and the potential rent effects of property sales and healthcare reimbursement changes.