Senior Housing Properties Trust (now Diversified Healthcare Trust): Q1 2019 10-Q
Entity note: The supplied filing is for Senior Housing Properties Trust (Nasdaq: SNH), the predecessor name associated with Diversified Healthcare Trust. It covers the three months ended March 31, 2019; financial statements are unaudited.
Business context
At quarter-end, the REIT owned 467 properties in 42 states and Washington, D.C., including medical office buildings (MOBs), senior living communities and wellness centers. Approximately 97% of Q1 net operating income (NOI) came from properties where most revenues were derived from private resources.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Total revenue | $266.3 million | $275.8 million | Down 3.4% |
| Net income attributable to common shareholders | $30.1 million; $0.13/share | $236.0 million; $0.99/share | Prior period included a $181.2 million property-sale gain |
| FFO per share / Normalized FFO per share | $0.34 / $0.37 | $0.39 / $0.45 | Normalized FFO down about 17.7% in total |
| NOI | $149.1 million | $167.7 million | Down 11.1%; NOI margin about 56.0%, versus 60.8% |
| Cash from operations | $41.5 million | $84.0 million | Down $42.5 million |
| Cash and restricted cash | $54.8 million | $53.2 million | Cash and equivalents alone were $39.9 million at March 31 |
At March 31, total liabilities were $4.03 billion and total equity was $3.11 billion. Balance-sheet debt and capital-lease obligations totaled approximately $3.73 billion, including $225 million drawn on the $1.0 billion revolving facility; $775 million remained available. Total assets were $7.15 billion. Interest expense was $45.6 million, up from $43.6 million.
Investing activities used $43.3 million, principally reflecting $46.2 million of real estate improvements; financing activities used $13.5 million. Shareholder distributions were $92.7 million, or $0.39 per share, in the quarter.
Material changes and operating trends
- Triple-net senior living revenue fell 26.0% to $50.3 million, primarily because Five Star rent was reduced under the restructuring arrangement. Five Star rent coverage fell to 0.99x from 1.15x.
- Managed senior living revenue rose 5.9% to $108.0 million, but operating expenses rose 10.2%; segment NOI declined 7.6% to $23.0 million. Comparable-property NOI declined 5.7%.
- MOB revenue increased 2.0% to $103.2 million; segment NOI rose 1.2% to $71.0 million. MOB occupancy declined to 94.0% from 95.1%.
- Q1 included $6.2 million of impairment charges on 15 skilled nursing facilities classified as held for sale and $7.8 million of acquisition and transaction-related costs, including costs related to the Five Star agreement.
- Quarterly results also included $22.9 million of unrealized gains on equity securities. These non-cash gains, and the prior-year property-sale gain, complicate year-over-year comparisons of GAAP net income.
Outlook, risks and subsequent events
- Five Star: Five Star, the largest tenant and manager of the company’s managed senior living communities, disclosed substantial doubt about its ability to continue as a going concern. It accounted for 14.8% of Q1 revenue; rents receivable from it were $22.0 million at March 31.
- Restructuring: An April 1, 2019 agreement, subject to shareholder, regulatory and other approvals, would replace Five Star master leases and management arrangements with management agreements effective January 1, 2020, or potentially January 1, 2021. Minimum monthly rent was set at $11 million from February through December 2019, subject to adjustment, with no additional rent during that period. The proposed transactions include Five Star share issuances, a $75 million payment by the trust, and a $25 million credit facility to Five Star. Completion is not assured.
- Distribution and credit: On April 18, the trust declared a quarterly distribution of $0.15 per share, down from $0.39, citing lower expected cash flow. Management described a target payout ratio of about 80% of projected cash available for distribution, while cautioning that future distributions may change. In April, S&P downgraded the issuer rating from BBB- to BB+; senior-note ratings remained BBB- and loan pricing was unchanged.
- Debt and asset sales: In May, the trust redeemed $400 million of 3.25% notes due 2019, funded with cash and revolver borrowings; it also expected to prepay a roughly $42.2 million mortgage. Management intended to sell properties to reduce leverage and stated it expected liquidity sources to cover obligations for the next 12 months, but asset sales are subject to conditions.
- Leasing and rates: Two MOB tenants were expected to vacate 522,118 square feet in Q2, representing about 4.4% of MOB annualized rental income. Releasing or repositioning the space may take time and require significant capital. Floating-rate debt exposure and the anticipated LIBOR phaseout are additional risks.
- Management reported compliance with debt covenants at March 31 and effective disclosure controls. It reported no material change in risk factors from its prior annual report.
Investor facts to verify
- Whether Five Star obtained required approvals and completed the restructuring, and whether it can meet rent and other obligations.
- Actual effects of the lower Five Star rent and reduced distribution on recurring cash available for distribution and normalized FFO.
- Completion proceeds, timing and any impairment or loss from planned property sales, including held-for-sale SNFs and MOBs.
- Revolver borrowings and remaining availability after the $400 million note redemption, alongside upcoming debt maturities and interest costs.
- Leasing outcomes for the expected MOB vacancies, including downtime, occupancy and required tenant-improvement spending.