Business context and reporting period
The filing is Senior Housing Properties Trust’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The request identifies Diversified Healthcare Trust, but the filing itself is under the name Senior Housing Properties Trust. The REIT owned 436 properties across 43 states and Washington, D.C., spanning senior living communities, medical office buildings (MOBs) and wellness centers.
Financial performance and condition
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $261.4m | $247.4m | $519.7m | $476.0m |
| Operating income | $75.4m | $75.0m | $145.9m | $152.4m |
| Net income | $39.2m | $36.4m | $70.5m | $76.2m |
| FFO per share | $0.47 | $0.42 | $0.93 | $0.84 |
| Normalized FFO per share | $0.47 | $0.44 | $0.94 | $0.88 |
Q2 revenue increased 5.6% and net income increased 7.8%; operating margin was approximately 28.9%, versus 30.3%. For the first six months, revenue rose 9.2%, while net income declined 7.4%; operating margin fell to approximately 28.1% from 32.0%. The six-month decline reflected higher depreciation and amortization, impairment charges and interest expense. Net operating income (NOI), a non-GAAP measure, increased 6.6% in Q2 to $163.9m and 9.3% for the half to $324.3m.
Operating cash flow was $216.2m for the six months, nearly unchanged from $216.5m a year earlier. Investing used $226.5m, compared with $1.147bn in the prior-year period; financing used $1.7m, versus $955.4m provided. Cash and equivalents were $25.6m at June 30, down from $37.7m at year-end 2015.
At June 30, total assets were $7.266bn, total liabilities $3.980bn and shareholders’ equity $3.286bn. Debt carrying amounts included $749.0m drawn on the $1.0bn revolver, $546.7m in term loans, $1.721bn in senior notes and $647.2m in secured debt and capital leases. The revolver had $251m available at quarter-end; by August 4, reported borrowings had fallen to $100m. The quarterly distribution was $0.39 per share; $0.78 per share was declared for the first half.
Material changes and operating trends
- Revenue growth reflected acquisitions and growth in rental income and resident fees. Managed senior living comparable-property occupancy weakened: 86.6% in Q2 versus 87.9%, while average monthly rates increased. Comparable MOB NOI was essentially flat in Q2; MOB occupancy was 95.9%, down from 96.4%.
- Triple-net senior living tenant rent coverage declined to 1.33x from 1.38x, and occupancy to 85.4% from 85.8%. Five Star, the largest tenant, accounted for 18.5% of first-half revenue and leased properties representing 29.7% of investment at cost.
- Impairment charges totaled $12.4m in the first half, including $5.0m in Q2 to mark five MOBs held for sale down to estimated sale value. Four were sold in July for about $20.2m. A senior living property sale generated a $4.1m gain in Q2.
- The company acquired seven senior living communities from Five Star for $112.4m and leased them back to Five Star under a long-term lease; it also acquired a managed community and two MOBs. In February it issued $250m of 6.25% notes due 2046. In July, it obtained $620m of secured financing at a weighted average fixed rate of 3.53%, using proceeds partly to reduce revolver borrowings.
Outlook, risks and unusual items
Management stated it believed available cash, operating cash flow and financing sources would cover operating and capital needs, debt service and distributions for the next 12 months and foreseeable future. This is not earnings guidance, and the filing provides no specific forward financial targets. Management cautioned that interim results may not indicate full-year performance.
Key risks include dependence on Five Star as major tenant and manager, senior living occupancy and rent coverage pressure, operating costs and labor requirements, healthcare regulation and potential Medicare or Medicaid changes, refinancing and interest-rate exposure, and related-party relationships involving Five Star and RMR. The new Department of Labor overtime rule, effective December 1, 2016, could increase tenant and manager labor costs; the REIT expected to reimburse qualifying increases at managed properties. A 100-basis-point rise in floating rates was estimated to increase annual interest expense by about $13.0m at June 30 borrowings, or $15.5m if the revolver were fully drawn. The company reported covenant compliance and effective disclosure controls at quarter-end.
Unusual and nonrecurring items included the $12.4m impairment charge, $4.1m property-sale gain, and the prior-year $1.4m debt extinguishment loss. The company noted that FFO, Normalized FFO and NOI are non-GAAP measures and may not be comparable across REITs.
Investor facts to verify
- Confirm the issuer identity and any subsequent name change, since this filing is headed Senior Housing Properties Trust.
- Review Five Star’s financial condition, rent coverage, lease obligations and the effects of the June 2016 transaction and management arrangements.
- Track senior living occupancy, comparable-property performance, and the ability to recover labor and other operating-cost increases.
- Verify the use of July’s $620m secured financing, the reduction in revolver borrowings, and remaining debt maturities and covenant headroom.
- Check completion proceeds and realized results for the MOB and other property dispositions, against the recorded impairments and estimates.