Business context and reporting period
The filing is an unaudited Form 10-Q for the three months ended March 31, 2018. The document identifies the registrant as Senior Housing Properties Trust (SNH), not Diversified Healthcare Trust; verify the issuer identity before relying on this summary.
SNH owned 444 properties in 42 states and Washington, D.C., across triple-net leased senior living, managed senior living, medical office buildings (MOBs), and other properties. Approximately 97% of first-quarter NOI came from properties where most revenues were derived from private resources.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $275.8 million | $264.6 million; up 4.3% |
| Operating income | $72.2 million | $75.0 million |
| Operating margin | 26.2% | 28.3% |
| Net income attributable to common shareholders | $236.0 million; $0.99 per share | $32.2 million; $0.14 per share |
| FFO / Normalized FFO per share | $0.50 / $0.45 | $0.44 / $0.46 |
| Net cash from operating activities | $84.0 million | $114.1 million |
| Total NOI | $167.7 million | $163.5 million |
| Cash and cash equivalents | $39.2 million | $31.2 million at December 31, 2017 |
| Total assets / total liabilities | $7.384 billion / $3.968 billion | $7.294 billion / $4.017 billion at December 31, 2017 |
Net income included a $181.2 million gain from selling two senior living communities and $27.2 million of net unrealized gains on equity securities. These items make GAAP earnings substantially higher than recurring operating measures; Normalized FFO declined to $107.2 million from $108.4 million.
Debt reported on the balance sheet totaled approximately $3.645 billion, including revolving credit borrowings, term loans, senior notes, secured debt and capital leases. The $1.0 billion revolver had $55.0 million drawn and $945.0 million available at quarter-end. The company reported covenant compliance. Its quarterly distribution was $0.39 per share, or approximately $92.7 million.
Material changes versus the prior comparable period
- Revenue rose 4.3%, with growth in managed senior living and MOBs. Total NOI increased 2.5%, while operating income declined about 3.7%.
- Managed senior living comparable-property NOI decreased 1.6%; comparable MOB NOI decreased 2.4%. Senior living occupancy and triple-net rent coverage also weakened: portfolio occupancy was 83.6% versus 85.2%, and triple-net rent coverage was 1.20x versus 1.26x.
- Operating cash flow fell by $30.0 million, primarily because SNH paid a $55.7 million 2017 incentive fee in January 2018. Investing cash flow was positive, mainly reflecting $216.0 million of property-sale proceeds; financing cash outflow increased as revolver borrowings were repaid.
- SNH issued $500 million of 4.75% senior notes due 2028 and used net proceeds to reduce revolver borrowings. Acquisitions included four MOBs and two senior living communities during the quarter.
- Effective January 1, 2018, a new accounting standard required changes in equity-security fair values to be recognized in earnings. Adoption also reclassified $86.6 million of historical unrealized gains from accumulated other comprehensive income to cumulative net income.
Outlook, commentary, risks and unusual items
- Management said available operating cash flows, cash and revolver capacity should fund operating and capital needs, debt service, and distributions for the next 12 months and foreseeable future. No specific earnings or FFO guidance was provided.
- SNH agreed to acquire two additional Five Star senior living communities for about $23.3 million, including assumed mortgage debt, subject to conditions; completion was expected by the end of Q2 2018. It also had pending property sales, including a Sunrise-leased community expected to close by the end of Q2 and a Five Star-leased skilled nursing facility expected to close by year-end. These transactions were conditional.
- One Pacifica tenant notified SNH that it would not pay rent for a community; SNH was negotiating a transfer to another operator and enforcing lease and guarantee rights. Five Star was SNH’s largest tenant, generating 18.8% of total revenue, and managed its senior living communities.
- Management cited senior-living competition and new supply, lower occupancy, tenant financial and rent-payment risks, operating-cost pressures, and potential changes to Medicare and Medicaid reimbursement. Interest-rate exposure is also material: the filing estimates a one-percentage-point increase would add about $6.1 million in annual interest expense on then-outstanding floating-rate debt.
- SNH reported no material change in previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls. Related-party relationships with RMR, Five Star and others remain relevant to governance and expenses.
Most important facts for investors to verify
- Confirm the filing is for the intended issuer: its registrant is Senior Housing Properties Trust, not Diversified Healthcare Trust.
- Assess how much reported earnings depended on the property-sale gain and unrealized equity-security gains; compare recurring FFO and Normalized FFO.
- Monitor Five Star’s rent coverage, SNH’s tenant concentration, occupancy trends, and resolution of the Pacifica rent default.
- Verify completion, timing and economics of pending acquisitions and dispositions, which were subject to conditions.
- Review debt maturities, floating-rate exposure, covenant headroom, and whether operating cash flow supports distributions and planned capital spending.