Business context and reporting period
The supplied filing is Senior Housing Properties Trust (SNH), not Diversified Healthcare Trust. It is a 2014 Form 10-K for the fiscal year ended December 31, 2014, filed February 27, 2015; the filing does not identify the registrant as Diversified Healthcare Trust.
SNH was a REIT owning 370 properties in 38 states and Washington, D.C.: senior living communities, medical office buildings (MOBs), and wellness centers. It reported three principal segments: triple-net senior living, managed senior living, and MOBs. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and position
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Total revenue | $844.9 | $761.4 | +11.0% |
| Operating income | $291.4 | $264.5 | +10.2% |
| Net income | $158.6 | $151.2 | +4.9% |
| Net income per diluted share | $0.80 | $0.81 | Down $0.01 |
| FFO | $342.9 | $313.2 | +9.5% |
| Normalized FFO | $347.6 | $317.4 | +9.5% |
| Normalized FFO per diluted share | $1.75 | $1.69 | +3.6% |
| Cash from operating activities | $350.9 | $306.7 | +14.4% |
Operating margin was approximately 34.5% and net margin approximately 18.8%, calculated from reported revenue and income. Total NOI was $520.3 million, up 12.7%; NOI was approximately 61.6% of revenue. These are simple ratios, not company-reported margin measures.
- Segment NOI: triple-net senior living $230.7 million (down 2.7%); managed senior living $73.1 million (up 6.9%); MOBs $198.6 million (up 43.4%, primarily reflecting acquisitions); all other operations $17.9 million.
- Comparable managed-community occupancy rose to 88.2% from 87.3%, and comparable MOB occupancy to 95.1% from 94.7%. Triple-net senior living rent coverage declined to 1.34x from 1.39x; occupancy was 85.3% for comparable properties versus 85.5%.
- At year-end, total assets were $5.97 billion, total liabilities $3.02 billion, and shareholders’ equity $2.95 billion. Debt was approximately $2.80 billion, or 48.7% of total book capitalization. Cash and cash equivalents were $27.6 million.
- The $750 million unsecured revolver had $80 million drawn and $670 million available at year-end. The company also had a $350 million unsecured term loan and $611.4 million of secured mortgage debt.
- Cash used in investing was $1.264 billion, chiefly reflecting $1.226 billion of real estate acquisitions; financing provided $901.5 million, including equity and debt issuance. Capital expenditures and other real estate improvements were $64.8 million in the cash flow statement.
- Common distributions were $1.56 per share, unchanged from 2013, compared with net income of $0.80 and Normalized FFO of $1.75 per share. The filing reports that 46% of 2014 distributions were characterized as return of capital.
Material changes versus the prior comparable period
- Revenue growth reflected acquisitions and expansion of managed senior living and MOB activity. MOB revenue increased 35.9% year over year; comparable MOB NOI increased only 1.0%, distinguishing acquisition-driven growth from same-property performance.
- Net income rose modestly while diluted EPS slipped from $0.81 to $0.80, as weighted-average diluted shares increased to 198.9 million from 187.4 million.
- Interest expense rose to $135.1 million from $117.8 million, partly due to new 2014 debt. The company issued $650 million of senior notes and borrowed $350 million under a term loan; it also issued 15.525 million common shares, raising approximately $322.8 million net.
- 2014 included a $5.5 million gain on property sales and $4.4 million of impairment charges, including discontinued operations. In 2013, property-sale gains were $37.4 million and impairment charges totaled $45.6 million; these unusual items affected the year-over-year net income comparison.
- Cash used for investing increased substantially, from $153.0 million to $1.264 billion, reflecting major acquisitions. Operating cash flow increased by $44.2 million.
Outlook, risks, contingencies, and unusual items
- Management stated it believed operating cash flow would cover operating expenses, debt service, and distributions for the next 12 months and the foreseeable future. It intended to continue quarterly cash distributions of $0.39 per share, but future amounts remain at the board’s discretion; the filing gives no numerical earnings or FFO guidance.
- In December 2014, SNH agreed to acquire 38 senior living communities for approximately $790 million, including approximately $153 million of assumed mortgage debt. Closing was expected by the end of Q2 2015, subject to conditions. Failure to complete the transaction in certain circumstances could forfeit a $35 million deposit.
- After year-end, SNH acquired 23 MOBs from Select Income REIT for approximately $539 million, including about $30 million of assumed mortgage debt; it also issued 31.05 million shares in February 2015 for approximately $660 million net before expenses. These transactions materially affect the post-year-end capital and portfolio position.
- Five Star Quality Care was a major tenant and manager: it generated 37% of 2014 rental income and leased properties representing 34% of SNH’s investment at cost; it also managed 46 communities for SNH. SNH highlighted Five Star’s uneven profitability, operating and financing risks, and possible impact on rent and managed-property returns.
- Other key risks include leverage and refinancing needs, floating-rate exposure, tenant credit and lease renewals, healthcare reimbursement and regulation, property valuation and impairments, and related-party conflicts involving RMR and Five Star. Approximately 96% of NOI came from properties where most NOI was derived from private resources.
- At December 31, 2014, five properties (eight buildings) were held for sale; one senior living property was sold in February 2015. Management reported compliance with debt covenants and effective disclosure controls and internal control over financial reporting. Ernst & Young issued unqualified audit opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for Senior Housing Properties Trust (SNH), notwithstanding the request metadata naming Diversified Healthcare Trust.
- Review Five Star’s current financial condition, rent coverage, and ability to meet lease and management obligations; SNH noted tenant operating data was provided by tenants and not independently verified.
- Verify completion, financing, assumed debt, and final economics of the 38-community acquisition, including deposit exposure and the effects of the 2015 equity issuance and MOB acquisition.
- Assess debt maturities, covenant headroom, available revolver capacity, and sensitivity to interest-rate increases; the filing lists substantial scheduled maturities, including $688.5 million in 2019 and $550 million in 2020.
- Evaluate recurring same-property trends separately from acquisition effects and gains, impairments, and other nonrecurring items; compare GAAP earnings with FFO, Normalized FFO, and operating cash flow.
- Assess whether the $0.39 quarterly distribution is sustainable against cash flow, debt needs, and the reported return-of-capital portion of distributions.