Senior Housing Properties Trust — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. The filing names the registrant Senior Housing Properties Trust (not Diversified Healthcare Trust). Amounts below are in millions unless stated otherwise.
Business context and financial performance
The REIT owned 327 properties in 37 states and Washington, D.C., across senior living and care facilities, medical office buildings (MOBs), and wellness centers. Results reflect substantial MOB acquisitions completed since early 2010.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Rental income | $98.1 | $80.4 | +21.9% |
| Property NOI | $88.1 | $76.1 | +15.8% |
| Operating income | $54.5 | $48.2 | +12.9% |
| Net income | $31.8 | $30.0 | +6.0% |
| Net income per share | $0.22 | $0.24 | −8.3% |
| Cash from operating activities | $65.1 | $52.0 | +25.1% |
Weighted-average shares rose 11.4% to 141.9 million, so per-share earnings declined despite higher net income. NOI increased mainly because of acquired MOBs; comparable MOB NOI decreased 0.7%. Residential-care occupancy was 86.2%, unchanged year over year, and reported rent coverage improved to 1.43x from 1.39x.
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $14.8 million, versus $10.9 million at year-end. Operating cash flow was $65.1 million; investing cash use was $148.5 million, primarily acquisitions; financing provided $87.4 million.
- Debt carrying amounts included $25.0 million drawn on a $550 million revolving facility, $670.4 million of unsecured senior notes, and $651.7 million of secured debt and capital leases. The filing separately reports $637.2 million of mortgages and $14.5 million of capital leases.
- Undrawn revolver availability was $525 million at quarter-end. The facility matures in December 2011; management expected to refinance before maturity but warned refinancing could be unavailable, smaller, or more costly. The company reported covenant compliance.
- In January, the company issued $250 million of 4.30% senior notes due 2016. Net proceeds were used partly to repay revolver borrowings and fund acquisitions.
- A $0.37-per-share distribution, approximately $52.5 million, was declared for Q1 and scheduled for payment in May 2011. Management said operating cash flow should cover operating expenses, debt service and distributions for the next 12 months and foreseeable future.
Material changes, outlook and risks
- Q1 rental income growth was acquisition-led: seven MOBs were acquired for about $110 million, and the remaining six buildings in a previously announced CWH portfolio purchase closed for about $95.9 million. MOB occupancy was 97.1% overall.
- Property operating expenses rose 128.1% and interest expense rose 23.5%, partly reflecting the larger MOB portfolio and financing. Acquisition costs increased to $1.1 million from $0.04 million. A $0.17 million impairment was recorded on two properties.
- The company agreed to acquire 20 senior living communities for approximately $304 million, subject to regulatory and lender approvals, and expected to close in Q2. It also agreed to acquire six additional properties for about $36.5 million, subject to diligence and customary conditions. These were pending, not completed, at filing.
- Six properties held for sale had a combined expected sale price of about $19.6 million; completion was contingent on customary conditions. Separate sales requested by Five Star would reduce its annual rent by about $1.9 million if completed.
- Five Star, the largest tenant and a related party, accounted for 47% of annualized rents. The company also held approximately 9% of Five Star’s shares. Tenant financial difficulty could materially affect rent collection. Related-party relationships with Five Star, former parent CWH, and manager RMR are disclosed as potential conflict-of-interest risks.
- Management highlighted uncertainty around Medicare and Medicaid reimbursement, state budget pressure, healthcare regulation and tenants’ ability to cover rising costs. It also cautioned that refinancing and future debt or equity issuance depend on volatile capital markets. No specific earnings or acquisition guidance was provided.
- MOB lease renewals and new leases signed in Q1 were at weighted-average rents 18.4% below the prior rents for the same space, an indicator to monitor. The filing states disclosure controls were effective and reports no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the December 2011 revolver was refinanced on acceptable terms and how subsequent borrowing costs affected interest expense.
- Whether the announced senior-living and other property acquisitions and property sales closed, and their resulting leverage, rent and cash-flow effects.
- Five Star’s rent-paying capacity, operating performance, rent coverage and exposure to public reimbursement changes.
- Whether comparable MOB leasing, occupancy and renewal pricing stabilized after the reported rent reductions.
- Cash available for distributions after debt service and acquisitions, and whether the $0.37-per-share distribution was maintained.