Filing summary
Entity and period: The supplied filing is Senior Housing Properties Trust’s Form 10-K for the fiscal year ended December 31, 2010, filed February 24, 2011. It is not a filing under the name Diversified Healthcare Trust. The filing includes unaudited fourth-quarter results.
Business context
SNH was an externally managed REIT owning 320 properties across 36 states and Washington, D.C., with $3.76 billion of real estate at undepreciated cost. The portfolio included senior living properties and rehabilitation hospitals, medical office buildings (MOBs), and wellness centers. RMR managed the business. Five Star Quality Care was the largest tenant.
Financial results and key metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Rental income | $339.0 million | $296.8 million |
| Operating income | $203.9 million | $180.7 million |
| Net income | $116.5 million | $109.7 million |
| Net income per common share | $0.91 | $0.90 |
| Cash provided by operating activities | $215.3 million | $209.4 million |
| Common distributions declared per share | $1.46 | $1.43 |
Rental income rose 14.2%, while net income increased 6.2%; higher interest expense and a larger weighted-average share count limited per-share growth. Operating margin was approximately 60.2% and net margin approximately 34.4%, calculated from reported rental income and operating income/net income. The filing does not provide a clearly stated standalone cash-flow measure for funds available for distribution.
Fourth quarter: 2010 revenues were $97.3 million, net income $33.9 million, and net income per share $0.26, compared with $87.2 million, $32.1 million, and $0.25, respectively, in fourth-quarter 2009. The declared distribution was $0.37 per share versus $0.36 a year earlier.
Balance sheet and liquidity: At December 31, 2010, total assets were $3.39 billion, shareholders’ equity $2.13 billion, and reported indebtedness $1.20 billion. Cash and cash equivalents were $10.9 million, with $422 million available under the $550 million revolving credit facility. The revolver matured in December 2011; $128 million was drawn at year-end. Management said operating cash flow should cover operating expenses, debt service, and distributions for the next 12 months and foreseeable future, while also expecting to refinance the revolver before maturity. The filing reported compliance with debt covenants at year-end.
Changes, outlook, risks, and unusual items
- Growth was substantially acquisition-driven. Rental income from MOBs rose 57.9%, mainly reflecting acquisitions. SNH bought 21 of 27 MOBs from affiliated CommonWealth REIT (CWH) by year-end for approximately $374.1 million; the remaining six, for approximately $95.9 million, were acquired in January 2011.
- During 2010, SNH issued $200 million of 6.75% senior notes due 2020 and redeemed $97.5 million of 7.875% notes due 2015, recording a $2.4 million early-extinguishment loss. It also issued 14.4 million common shares for net proceeds of approximately $281.9 million. Interest expense rose 41.9% year over year.
- In January 2011, SNH issued $250 million of 4.30% notes due 2016 and reported that it used proceeds to repay the revolver and support business purposes and acquisitions. These subsequent-period transactions do not change the December 31, 2010 balance-sheet figures.
- Impairment charges were $6.0 million in 2010, down from $15.5 million in 2009. Four properties were classified as held for sale at year-end. Proposed sales of several Five Star-leased properties were subject to customary closing conditions.
- Tenant concentration is material: Five Star accounted for about 49% of annualized rental income at year-end and 56% of reported 2010 rental revenue in the filing’s concentration table; these are different measures. The filing notes Five Star’s limited resources and risk from reimbursement cuts, operating costs, occupancy, and regulation. Sunrise had reported significant losses; Marriott guaranteed its lease.
- Management cited economic weakness and occupancy pressure, healthcare reimbursement and regulatory uncertainty—including PPACA—potentially higher refinancing costs, interest-rate exposure, and competition. It also identified conflicts of interest involving RMR and affiliated transactions, including acquisitions from CWH. Distributions remain discretionary and are not assured. No formal earnings guidance is provided.
- The filing reports no legal proceedings. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the registrant identity: this is Senior Housing Properties Trust (NYSE: SNH), not Diversified Healthcare Trust.
- Review Five Star’s ability to meet rent obligations and reconcile the filing’s annualized-rent and actual-revenue concentration measures.
- Check refinancing and maturity plans for the revolver due December 2011 and the $225 million of notes due 2012; assess debt and liquidity after the January 2011 financing.
- Verify completion and economics of the CWH MOB acquisitions and pending property sales, including related-party approvals and rent effects.
- Assess distribution coverage, tenant operating performance and occupancy, reimbursement-policy exposure, and the impact of acquisition-driven growth and share issuance on per-share results.