Senior Housing Properties Trust — Q2 2014 Form 10-Q
Reporting-period note: The supplied filing is for Senior Housing Properties Trust (SNH), for the quarter ended June 30, 2014—not a filing under the name Diversified Healthcare Trust. The financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context
SNH was a healthcare REIT with 372 properties (399 buildings) in 39 states and Washington, D.C., including senior living communities, medical office buildings (MOBs), and wellness centers. Its three reportable segments were triple-net-leased senior living, managed senior living, and MOBs. Management reported that 96% of NOI came from properties where most charges were paid from private resources.
Financial results and liquidity
- Q2 revenue: $206.7, up 10.6% from $186.9. Rental income was $127.7; resident fees and services were $79.0.
- Q2 earnings: Operating income was $68.1 versus $61.3; net income was $37.7 versus $5.6; diluted-style reported net income per weighted-average share was $0.19 versus $0.03. Operating margin was approximately 33.0%, compared with 32.8% a year earlier. The net-income comparison was affected by a large prior-year impairment charge and current-period property-sale gains.
- First-half results: Revenue was $398.2, up 6.5%; operating income was $135.1 versus $125.0; net income was $76.2 versus $40.8. Net income per share was $0.39 versus $0.22. Normalized FFO, a non-GAAP measure, was $86.6 for Q2 ($0.43 per share) and $166.7 for the first half ($0.86 per share), versus $79.1 ($0.42) and $158.1 ($0.85), respectively.
- Cash flow, first half: Operating activities generated $179.0, up from $150.9. Investing used $1,163.6, mainly for acquisitions; financing provided $1,024.8, including equity and debt issuance. Cash and cash equivalents ended at $79.4, up from $39.2 at year-end 2013.
- Debt and liquidity: At June 30, total debt and capital-lease carrying amounts were approximately $2,765.7: $1,742.9 senior notes, $350.0 term loan, and $672.8 secured debt and capital leases. The $750.0 revolving facility was undrawn, leaving $750.0 available. Total liabilities were $2,987.3 and shareholders’ equity was $3,029.6. Management said it believed operating cash flow and available resources would cover operations, debt service, distributions, and planned needs for the next 12 months and foreseeable future; this is a forward-looking assessment, not a guarantee.
- Distributions: The trust paid $0.39 per share in each of the first two quarters and declared another $0.39 distribution for payment in August 2014.
Material changes versus the prior comparable period
- Results reflect substantial portfolio growth: two MOB acquisitions in the first half totaled approximately $1,158.1, including a major Massachusetts acquisition in May for approximately $1,125.4. MOB revenue increased 33.7% in Q2 and 18.9% for the first half, largely because of acquisitions. Comparable-property MOB NOI was nearly flat: down 0.6% for the first half.
- Managed senior living revenue rose 5.9% in Q2 and for the first half; same-property occupancy improved, while average monthly rates declined slightly. Comparable managed-community NOI increased 6.4% in Q2 and 5.6% for the first half.
- Triple-net senior living rental income declined 3.1% in Q2 and 3.2% for the first half, primarily reflecting property sales; comparable rents increased through improvement-related rent increases.
- Interest expense increased to $34.1 in Q2 from $29.6 and to $63.0 for the first half from $59.1, principally due to new notes and the term loan, partly offset by repayments and lower revolver costs.
- SNH issued 15.525 million common shares, raising approximately $323.3 net of underwriting discounts, and issued $650.0 of senior notes, raising approximately $644.9 net of discounts. It also obtained a $350.0 term loan in May.
Outlook, risks, contingencies, and unusual items
- No quantified company earnings or revenue guidance was provided. Management’s liquidity expectation is subject to operating performance, tenant rent payments, capital-market access, and other conditions.
- Five Star Quality Care was SNH’s largest tenant: its rent represented 35.8% of Q2 rental income, and its leased properties represented 34.5% of investment carrying value. Five Star also managed 44 communities for SNH. Five Star had restated prior-period financial statements, disclosed material weaknesses in internal control, and had not yet filed its 2013 Form 10-K or Q1 2014 Form 10-Q. SNH therefore did not report current Five Star rent coverage.
- Nine properties were classified as held for sale, with a net book value of approximately $13.2. SNH cautioned that sales might not occur or might occur on different terms. Sale of certain Five Star-leased communities would reduce rent under the leases. First-half impairment charges were $0.3; Q2 included a $2.4 gain on sale of two senior living communities.
- Healthcare reimbursement and regulatory changes—including Medicare and Medicaid rates, the ACA, and proposed payment rules—could affect operators’ ability to pay rent and the profitability or value of properties. SNH stated that the effects were uncertain.
- Related-party relationships are significant: SNH had no employees and relied on RMR for management and services; Five Star was both major tenant and manager. The filing describes overlapping governance and other affiliated-party arrangements. RMR agreement amendments changed termination notice and payment terms.
- SNH reported compliance with debt covenants and effective disclosure controls, with no material quarterly change in internal control over financial reporting. Its financial covenants, cross-default terms, floating-rate exposure, and dependence on financing markets remain relevant risks.
Most important facts for investors to verify
- Confirm Five Star’s current financial condition, completion of its delayed filings and control remediation, rent coverage, and capacity to meet lease and management obligations.
- Assess whether acquisition-driven growth—especially the large Massachusetts MOB—translates into durable cash flow, and compare it with same-property operating trends.
- Review total debt, maturity schedule, variable-rate exposure, covenant headroom, and the funding sources available for distributions and future investment.
- Verify the status, sale prices, and rent consequences of the nine held-for-sale properties, and whether further impairments or gains arise.
- Evaluate the sustainability of the $0.39 quarterly distribution against recurring cash generation and the company’s non-GAAP FFO measures.
- Review the risks and governance implications of related-party arrangements with RMR, Five Star, and affiliated entities, as well as potential reimbursement and regulatory changes.