Business context and reporting period
This is the unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The filing identifies the registrant as Senior Housing Properties Trust; the request metadata names Diversified Healthcare Trust, so the entity identity and any successor or name-change relationship should be verified. The REIT reported 443 properties in 42 states and Washington, D.C., across medical office buildings (MOBs), senior living communities, and wellness centers.
Financial performance and liquidity
Unless stated otherwise, amounts below are in millions of dollars; the filing presents financial statement amounts in thousands.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $277.2 | $265.0 | $553.1 | $529.6 |
| Operating income | $65.2 | $64.5 | $137.3 | $139.5 |
| Net income attributable to common shareholders | $123.6 | $16.0 | $359.6 | $48.2 |
| Net income per share, basic and diluted | $0.52 | $0.07 | $1.51 | $0.20 |
| FFO attributable to common shareholders per share | $0.46 | $0.36 | $0.97 | $0.80 |
| Normalized FFO per share | $0.44 | $0.44 | $0.89 | $0.89 |
| Property NOI | $167.2 | $162.2 | $334.8 | $325.7 |
- Quarterly revenue increased 4.6% year over year. Six-month revenue increased 4.4%, while operating income declined about 1.5%.
- Reported net income rose sharply, primarily because of property-sale gains: $80.8 million in Q2 and $261.9 million for the six months. The six-month result also included $50.5 million of unrealized gains on equity securities, principally the RMR Group investment. These items make GAAP earnings less representative of recurring property operations.
- Normalized FFO was flat per share year over year in both periods: $0.44 for Q2 and $0.89 for six months. The quarterly declared distribution was $0.39 per share.
- Six-month operating cash flow was $179.1 million, down from $211.5 million. Management attributed the decline primarily to payment of a $55.7 million 2017 business-management incentive fee in January 2018. Investing activities provided $161.8 million, including property-sale proceeds; financing activities used $248.9 million.
- At June 30, cash and cash equivalents were $30.7 million, restricted cash was $108.7 million, and $936.0 million remained available under the $1.0 billion revolving facility. Restricted cash included $94.3 million held for future acquisitions.
- Balance-sheet debt carrying amounts totaled approximately $3.67 billion, including revolving borrowings, term loans, senior notes, secured debt, and capital leases. The company issued $500 million of 4.75% notes due 2028 in February and used the net proceeds to reduce revolver borrowings. It reported $64 million drawn on the revolver at quarter-end and $125 million outstanding as of August 6. Management said it was in compliance with debt covenants.
Material changes versus the prior comparable period
- MOB revenue grew 9.7% in Q2, partly from acquisitions, but comparable-property NOI increased only 1.3%; comparable MOB occupancy declined to 95.6% from 96.5%.
- Triple-net senior living revenue fell 1.9% in Q2, largely reflecting dispositions and a transfer of a community to managed operations. Tenant occupancy declined to 82.4% from 84.1%, and reported rent coverage fell to 1.18x from 1.24x.
- Managed senior living revenue rose 4.4% in Q2, with acquisitions contributing; comparable-property NOI fell 4.6%. Companywide managed-community occupancy was 86.1% in Q2 versus 85.7% a year earlier, while average monthly rate declined.
- General and administrative expense increased to $29.1 million in Q2 from $22.9 million, including an estimated $17.6 million RMR incentive fee. Six-month estimated incentive fees were $32.0 million; the actual 2018 amount, if any, is determined after year-end based on the agreement’s measurement terms.
- During the first half, the company sold five senior living communities, acquiring four MOBs and four senior living communities. It also adopted accounting guidance that moved fair-value changes in equity investments into earnings.
Outlook, commentary, risks, and unusual items
- Management said cash flows and available financing were expected to be sufficient for operating and capital expenses, debt service, and distributions over the next 12 months and the foreseeable future. No specific earnings, revenue, or FFO guidance was provided.
- After quarter-end, the company prepaid approximately $90.6 million of mortgage debt in July and gave notice of a planned $6.4 million prepayment expected in September. These actions and planned payments should be considered alongside the company’s debt maturities and liquidity.
- Five Star was the largest tenant and manager of the company’s managed senior living communities. Its rent represented 18.6% of Q2 revenue, and the properties it leased represented 26.9% of real estate investments at cost. The filing notes potential tenant financial and operating risks and extensive related-party relationships, including with Five Star and RMR.
- The company cited competition from new senior-living supply, potential pressure on occupancy and rates, operating-cost increases, healthcare regulation and reimbursement changes, and sensitivity of residents’ ability to pay to economic conditions. Approximately 97% of NOI came from properties where most revenues were derived from private resources.
- Floating-rate debt exposes earnings to LIBOR changes. The filing estimated that a one-percentage-point rate increase would raise annual interest expense by about $6.1 million on quarter-end floating-rate borrowings, or about $15.5 million if the revolver were fully drawn and term loans remained outstanding.
- A $0.5 million impairment charge related to an acquired lease intangible followed a tenant default; the company settled past-due amounts, terminated the lease, and transferred operations to a Five Star-managed structure. The filing reported no material change in risk factors from the prior annual report and no material weakness in disclosure controls.
Important facts for investors to verify
- Confirm the registrant’s identity and the relationship, if any, between the Senior Housing Properties Trust named in this filing and Diversified Healthcare Trust in the request metadata.
- Assess recurring performance using Normalized FFO and property NOI alongside GAAP earnings, which benefited materially from property-sale gains and fair-value investment gains.
- Monitor Five Star’s rent-paying capacity, occupancy, and coverage, given its concentration as the largest tenant and operator.
- Review debt maturities, floating-rate exposure, post-quarter mortgage prepayments, covenant headroom, and continued availability of revolving credit.
- Track comparable-property operating trends, especially senior-living occupancy and margins, MOB leasing and occupancy, and whether the $0.39 quarterly distribution remains supported by recurring cash generation.