Senior Housing Properties Trust — Form 10-Q Summary
Filing identity: The supplied filing identifies the registrant as Senior Housing Properties Trust, not Diversified Healthcare Trust. This is the unaudited quarterly report for the three and nine months ended September 30, 2011. Financial statement amounts below are in millions unless stated otherwise.
Business context and reporting period
The REIT owned 357 properties in 37 states and Washington, D.C., spanning senior living and rehabilitation properties, medical office buildings (MOBs), and wellness centers. Its largest tenant, Five Star Quality Care, leased 188 senior living communities and two rehabilitation hospitals; the company also had 13 Five Star-managed communities operated through its taxable REIT subsidiary.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $113.3 | $81.0 | $312.1 | $242.2 |
| Operating income | $54.4 | $48.0 | $162.1 | $143.6 |
| Net income | $30.0 | $28.1 | $112.8 | $82.6 |
| Diluted/unadjusted net income per share as reported | $0.20 | $0.22 | $0.77 | $0.65 |
| FFO per share | $0.38 | $0.40 | $1.19 | $1.17 |
| Normalized FFO per share | $0.43 | $0.42 | $1.30 | $1.27 |
- Q3 revenue rose about 40% year over year and nine-month revenue about 29%, primarily reflecting acquired properties and, in 2011, revenue and operating expenses from managed communities. Comparable-property trends were more modest: Q3 residential rental income increased 0.5% and comparable MOB NOI increased 4.7%; nine-month comparable MOB NOI increased 1.3%.
- Q3 net income increased about 7%, while reported per-share income declined as weighted-average shares rose to 153.4 million from 127.4 million. Nine-month net income increased about 37%, substantially aided by a $21.3 million property-sale gain, versus $0.1 million in 2010.
- Q3 and nine-month NOI were $93.5 million and $271.5 million, compared with $76.4 million and $229.0 million. GAAP operating margin was approximately 48% for Q3 and 52% for nine months, versus approximately 59% in each 2010 period.
- Operating cash flow was $172.0 million for the nine months, versus $161.4 million. Investing used $554.2 million, largely for acquisitions and the Five Star loan; financing provided $398.2 million, including equity and debt proceeds, offset by $161.7 million of distributions. Cash ended at $26.8 million.
- At September 30, total assets were $4.00 billion and total liabilities $1.69 billion. Debt and capital leases reported on the balance sheet totaled about $1.60 billion: $210 million drawn on the revolving facility, $670.8 million net unsecured notes, and $723.9 million secured debt and capital leases.
- The $750 million revolving facility matured in June 2015; $540 million was available and its rate was 1.8%. The company reported covenant compliance. Significant fixed-rate maturities included $225 million of 8.625% notes due 2012. Management said operating cash flow should cover operating costs, debt service, and distributions for the next 12 months and foreseeable future.
- The company paid a $0.37-per-share distribution for Q2 and declared $0.38 per share for Q3, payable in November. It issued 11.5 million shares in July for net proceeds of about $247.5 million; after quarter-end, it issued 9.2 million shares for about $184.7 million.
Material changes, outlook, and risks
- During the first nine months, the company acquired 44 properties for approximately $569.9 million and sold seven properties for $39.5 million, recognizing the $21.3 million gain. A September purchase from CommonWealth REIT added 13 MOBs with 1.3 million square feet for approximately $167 million.
- It agreed to buy nine senior living communities for approximately $478 million, with most closings expected in Q4 2011 but some potentially delayed into 2012, subject to regulatory and lender approvals. Other pending purchases were also subject to closing conditions.
- Five Star represented 44.8% of annualized rental income. Five Star’s reported nine-month operating cash flow was $49.8 million, compared with $110.0 million a year earlier; its net income was $8.8 million versus $17.4 million. The company’s exposure also includes a $48 million secured bridge loan to Five Star, maturing July 2012 at 2.8% as of quarter-end.
- Healthcare reimbursement is a key tenant risk. CMS rules effective October 1, 2011 were estimated to reduce aggregate Medicare SNF rates by 11.1% in federal fiscal 2012; the filing cautioned that effects on tenants, including Five Star, could materially impair rent-paying ability. The impact of PPACA, possible federal spending reductions, and state Medicaid budget pressures was uncertain.
- Related-party relationships are extensive: Five Star is the largest tenant and a managed operator; RMR provides management services; and the company acquired MOBs from CommonWealth REIT. The filing describes independent committee review but warns of potential conflicts and transaction challenges. An October 26, 2011 amendment to the RMR management agreement changed asset-cost treatment for certain acquisitions from RMR-managed companies and added a first-offer provision for certain properties.
- Other risks include tenant occupancy and rent performance, lease renewals, acquisition execution, refinancing and capital-market access, floating-rate exposure, REIT qualification, and information-technology security. The company recorded $1.2 million of nine-month impairment charges and had one property held for sale at a net carrying value of approximately $0.85 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing provided no numerical earnings guidance.
Important facts for investors to verify
- Confirm the registrant’s identity: the filing is for Senior Housing Properties Trust, despite the request metadata naming Diversified Healthcare Trust.
- Assess Five Star’s ability to pay rent and service the $48 million bridge loan, particularly given its lower reported nine-month operating cash flow and exposure to reimbursement changes.
- Verify closing status, funding, and expected returns for the pending $478 million senior-living acquisition and other contingent purchases.
- Review the 2012 $225 million note maturity, mortgage amortization, revolving-facility covenants, and the company’s dependence on future debt or equity access.
- Distinguish recurring operating performance from acquisition growth, share issuance, property-sale gains, and the company’s non-GAAP FFO and Normalized FFO measures.
- Examine related-party transaction terms and the amended RMR agreement, including the property first-offer provision and governance safeguards.