Business context and reporting period
This is Senior Housing Properties Trust’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The filing describes a REIT owning senior living communities, medical office buildings (MOBs) and wellness centers, with 428 properties in 43 states and Washington, D.C. The request identifies Diversified Healthcare Trust; the filing itself is under the name Senior Housing Properties Trust (SNH), so investors should confirm the intended issuer and any subsequent name change.
Financial results and key metrics
Amounts below are in millions, except per-share data and where noted.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $255.3 | $216.9 | $731.3 | $615.1 |
| Operating income | $77.4 | $73.7 | $229.7 | $208.8 |
| Net income | $38.2 | $37.1 | $114.4 | $113.4 |
| Diluted net income per share | $0.16 | $0.18 | $0.49 | $0.57 |
| FFO per share | $0.46 | $0.43 | $1.30 | $1.25 |
| Normalized FFO per share | $0.47 | $0.44 | $1.37 | $1.30 |
| Cash from operating activities | — | $320.8 | $281.5 |
For Q3, consolidated NOI was $158.3 million versus $134.2 million a year earlier; nine-month NOI was $454.9 million versus $374.8 million. Reported operating margin was approximately 30% in Q3 2015, down from 34% in Q3 2014, primarily reflecting higher depreciation. Net margin was approximately 15% versus 17%. FFO and NOI are non-GAAP measures and should not be treated as substitutes for GAAP earnings or operating cash flow.
At September 30, total assets were $7.35 billion, total liabilities $3.85 billion and shareholders’ equity $3.51 billion. Cash and cash equivalents were $61.4 million, with $532.2 million available on the revolving facility. Debt-related balance-sheet amounts included $467.8 million drawn on the revolver, $550 million of term loans, $1.745 billion of senior notes and $739.1 million of secured debt and capital leases. The $1 billion revolver matured in January 2018, with a conditional one-year extension option. The company reported covenant compliance.
Investing cash outflow was $1.196 billion and financing cash inflow was $909.0 million for the first nine months. Real estate acquisitions and deposits used $1.133 billion; common-share issuance generated $659.5 million net. Cash at period-end was $61.4 million, up from $27.6 million at year-end 2014. Quarterly distributions were $0.39 per share; declared distributions were $1.17 per share for the first nine months.
Material changes versus prior comparable periods
- Revenue grew 17.7% in Q3 and 18.9% for the first nine months, substantially reflecting acquisitions: 23 MOBs acquired in January for about $539 million and 39 senior living communities acquired during the year for about $818 million.
- Q3 managed-community NOI rose 36.3% overall, mainly due to acquired properties; comparable managed-community NOI increased 11.0%. However, total managed-community net income fell 67.0% to $2.5 million, as depreciation rose sharply with acquisitions.
- Q3 MOB NOI rose 15.4% overall, primarily due to acquisitions, while comparable MOB NOI increased only 0.5%. Nine-month comparable MOB NOI declined 2.3%.
- Net income increased modestly in Q3 but diluted EPS declined from $0.18 to $0.16, reflecting a larger weighted-average share count. Nine-month net income was nearly flat while diluted EPS declined from $0.57 to $0.49.
- Interest expense increased to $39.0 million in Q3 from $36.2 million; nine-month expense rose to $112.8 million from $99.2 million. The company also recorded $1.5 million of early debt-extinguishment losses year to date.
- In February, SNH issued 31.05 million common shares and raised approximately $659.5 million net. In September it entered a $200 million floating-rate term loan and increased revolving-credit capacity from $750 million to $1 billion.
Outlook, commentary, risks and unusual items
- Management said operating cash flow and available liquidity should be sufficient for operating and capital costs, debt service and distributions for the next 12 months and the foreseeable future. This is an expectation, not a guarantee; the filing gives no specific earnings or FFO guidance.
- After quarter-end, SNH prepaid $52 million of mortgages in October and redeemed $250 million of 4.30% notes due January 2016 in November, funding payments with cash and revolver borrowings. As of November 3, revolver borrowings had risen to $745 million, leaving $255 million available.
- Five Star was the largest tenant: it generated 19.6% of nine-month rental income, leased 178 communities and managed 60 communities for SNH. Five Star’s leases represented 28.8% of SNH investments at cost. Five Star rent coverage was 1.21x overall; occupancy was 84.5%. Tenant operating data were supplied by tenants and were not independently verified.
- Related-party arrangements are significant. SNH acquired an indirect 17% economic interest in manager RMR LLC through the June 2015 RMR Inc. transaction. Management agreements with RMR LLC were extended to terms ending in 2035, with specified termination rights and potentially substantial termination fees. SNH planned to distribute approximately half of its RMR Inc. shares to shareholders, subject to SEC registration effectiveness and exchange listing; timing and value were uncertain.
- Healthcare reimbursement, regulation and operating costs pose risks to tenants and managed properties. The filing notes that about 97% of NOI came from properties where most charges were paid from private resources, while Medicare/Medicaid-related changes could still affect operators, rents and property values.
- Unusual reported items include acquisition costs of $6.5 million year to date, a $1.4 million loss tied to termination of a bridge-loan commitment, and a $76.6 million unamortized liability related to the RMR Inc. share acquisition, amortized as a reduction of management fees. Two senior living communities, with net book value of approximately $5.1 million, were held for sale.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for Senior Housing Properties Trust, not under the Diversified Healthcare Trust name stated in the request.
- Assess Five Star’s ability to meet lease obligations and sustain operations, given its tenant concentration and reported rent coverage.
- Check acquisition integration, comparable-property trends and whether reported growth translates into durable cash flow after capital spending and debt service.
- Monitor leverage, floating-rate exposure, revolver usage, refinancing needs and compliance with debt covenants; a 100-basis-point rate increase was estimated to add about $10.2 million in annual interest expense on then-outstanding floating-rate debt.
- Verify the status, timing and market value of the proposed RMR Inc. share distribution, and review related-party management fees, termination provisions and governance arrangements.
- Compare distributions with recurring cash generation: the $0.39 quarterly distribution exceeded GAAP diluted EPS, while reported normalized FFO per share was $0.47.