Business context and reporting period
Senior Housing Properties Trust (the registrant named in this filing; not Diversified Healthcare Trust) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The REIT owns senior living communities, medical office buildings (MOBs) and wellness centers, and also operates managed senior living communities. The filing reports 395 properties owned in 40 states and Washington, D.C.; its portfolio overview excludes properties classified in discontinued operations.
Financial performance and position
Dollar amounts below are in millions unless noted.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $186.9 | $144.4 | $373.8 | $287.0 |
| Operating income | $61.3 | $60.1 | $125.0 | $119.8 |
| Net income | $5.6 | $33.3 | $40.8 | $65.6 |
| Net income per share | $0.03 | $0.20 | $0.22 | $0.40 |
| Normalized FFO per share (non-GAAP) | $0.42 | $0.45 | $0.85 | $0.90 |
Q2 rental income was $112.3 million and resident fees and services were $74.6 million. Operating expenses were $125.6 million, including $38.3 million depreciation and $4.4 million impairment; interest expense was $29.6 million. Q2 included a $27.9 million impairment on seven MOBs in discontinued operations, the principal reason net income fell sharply. For the six months, cash provided by operations was $150.9 million, versus $146.5 million a year earlier; investing used $98.7 million and financing used $57.3 million. Cash and equivalents were $37.3 million at June 30.
Total assets were $4.749 billion and shareholders’ equity $2.812 billion at June 30. Balance-sheet debt included $30.0 million on the revolver, $1.093 billion of senior notes and $720.2 million of secured debt and capital leases. The $750 million revolving facility had $720 million available at quarter-end; borrowings were $10 million and availability $740 million at July 31. The company reported compliance with its debt covenants. Quarterly distributions were $0.39 per share; declared distributions were $0.78 per share for the first half.
Material changes versus prior comparable periods
- Q2 revenue rose 29% year over year, largely reflecting managed-community operations and acquisitions. Managed senior living revenue more than doubled, while MOB revenue increased 15% due mainly to acquired properties.
- Comparable-property managed-community NOI increased 7.9% in Q2; comparable MOB NOI declined 3.4%, with same-store occupancy falling from 95.3% to 93.6%. Triple-net senior living rental income fell 4.5%, partly because ten communities shifted to managed operations in 2012.
- Despite higher operating income, Q2 net income was substantially lower because of the held-for-sale MOB impairment. Six-month net income also declined, while revenue and operating income increased.
- Normalized FFO per share declined to $0.42 for Q2 and $0.85 for the first half, from $0.45 and $0.90, respectively. These are non-GAAP measures defined by the company.
- In January, the company issued 11.5 million shares and raised approximately $262.1 million net of underwriting discounts, before expenses. It used proceeds partly to repay revolver borrowings and fund acquisitions.
Outlook, risks and unusual items
Management said operating cash flow, cash balances and available financing should be sufficient for operating costs, debt service, distributions and planned activities over the next 12 months and the foreseeable future. This is forward-looking and not a guarantee. Discussions with lenders about extending the revolver maturity and reducing borrowing costs were preliminary and might not result in an amendment.
At June 30, 18 properties were held for sale: 11 senior living communities and seven MOBs. The company recorded $32.3 million of impairment charges during the first half to reduce 11 of these properties to estimated sale value; their aggregate net book value was $42.6 million. A sale of one skilled nursing facility was under agreement for $2.6 million, subject to closing conditions. The company cautioned that sales may not occur on expected terms or at all. Sale of the senior living properties could reduce rent from Five Star under the lease terms.
Five Star was the largest tenant: it represented 44.0% of annualized rental income and leased properties representing 41.9% of investments at cost. Its aggregate rent coverage was 1.27x, compared with 1.30x a year earlier. The company also identified extensive related-party relationships involving Five Star, RMR, AIC and affiliated parties. Investors should consider tenant concentration, potential conflicts and the dependence of managed-community operations on Five Star.
Healthcare reimbursement and regulation remain risks. Approximately 6% of NOI came from properties where most NOI was derived from Medicare and Medicaid reimbursements. The filing noted a 2% Medicare payment reduction from sequestration effective April 1, 2013, and uncertainty around state Medicaid rates and healthcare reforms. Other risks include interest-rate changes, refinancing and capital-market access, lease expirations, tenant performance, and acquisition and sale conditions.
Important facts for investors to verify
- Confirm the registrant identity: this filing is for Senior Housing Properties Trust, despite the request metadata naming Diversified Healthcare Trust.
- Review the nature, valuation assumptions and sale progress for the 18 held-for-sale properties and the $32.3 million first-half impairment.
- Assess Five Star’s financial condition, rent coverage and ability to meet lease and management obligations given its concentration in rental income and investments.
- Reconcile GAAP earnings with FFO and Normalized FFO, including the company’s adjustments, and assess distribution coverage.
- Check completion and terms of pending acquisitions, the proposed revolver amendment, future refinancing needs and ongoing covenant compliance.