Senior Housing Properties Trust — Q1 2014 Form 10-Q
Entity note: The filing is for Senior Housing Properties Trust, the registrant named in the source, rather than Diversified Healthcare Trust. Period ended March 31, 2014; amounts below are in millions unless stated otherwise.
Business context and reporting period
The REIT owned 374 properties (400 buildings) across 40 states and Washington, D.C.; 13 properties were classified as held for sale. Its portfolio included senior living communities, medical office buildings (MOBs) and wellness centers. About 96% of net operating income (NOI) came from properties where most charges were paid from private resources. The statements are unaudited, and management cautioned that quarterly results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $191.5 | $186.9 |
| Operating income | $66.9 | $63.7 |
| Net income | $38.6 | $35.2 |
| Net income per share | $0.21 | $0.19 |
| Cash from operating activities | $90.1 | $73.7 |
| FFO per share | $0.41 | $0.41 |
| Normalized FFO per share | $0.43 | $0.43 |
Revenue grew 2.5% year over year; operating income rose 5.1% and net income rose 9.5%. Reported operating margin was approximately 35.0% versus 34.1%, and net margin approximately 20.1% versus 18.9%. NOI was $113.7, up from $113.2. The $80.1 of Normalized FFO included a $2.5 adjustment for estimated percentage rent; FFO and Normalized FFO are non-GAAP measures and are not substitutes for cash flow or net income.
Revenue mix shifted: managed senior living revenue increased 5.8% to $79.4, while triple-net senior living rental income decreased 3.3% to $54.9; MOB rental income increased 4.1% to $52.8. Comparable managed-community NOI rose 4.4%, while comparable MOB NOI fell 1.4%. MOB occupancy was 95.0%, compared with 94.5% a year earlier. Comparable triple-net occupancy declined to 85.1% from 85.9%.
At March 31, cash and cash equivalents were $33.0 and restricted cash was $10.5. The $750.0 revolving facility had $145.0 drawn and $605.0 available; its weighted-average borrowing rate was 1.42%. Debt and capital leases on the balance sheet totaled $1,934.3: $145.0 revolver, $1,093.7 senior notes and $695.7 secured debt and capital leases. Total liabilities were $2,038.0 and shareholders’ equity was $2,740.7. Management reported compliance with debt covenants.
Operating cash flow exceeded the $73.4 of shareholder distributions paid during the quarter. Investing activities used $64.8, including $50.1 for acquisitions and deposits and $17.1 for property improvements. The company declared a further quarterly distribution of $0.39 per share, payable in May 2014.
Material changes, outlook and notable items
- Management said operating cash flow, cash, facility availability and anticipated financing sources should cover operations, debt service, distributions and planned needs for the next 12 months and foreseeable future; this is an expectation, not a guarantee. No specific full-year earnings or FFO guidance was provided.
- After quarter-end, the company acquired a Texas MOB for about $32.7, including assumption of about $15.6 of mortgage debt. It also agreed to acquire a Massachusetts MOB for about $1.125 billion, subject to closing conditions. An $800 million term-loan commitment was obtained for that transaction; management expected to use about $350 million, but availability and final terms were conditional.
- In April, the company issued 15.525 million common shares for net proceeds of about $323.3 million and issued $650 million of senior notes: $400 million at 3.25% due 2019 and $250 million at 4.75% due 2024. Proceeds were intended for general purposes, including the pending acquisition; share-offering proceeds also repaid revolver borrowings.
- Thirteen properties, with net book value of about $25.6 million in the financial statements, were held for sale. A $0.7 impairment was recorded on two MOBs in discontinued operations. The company warned that sales may not occur, may be delayed or may have different terms.
- Tenant concentration is significant: Five Star generated 42.1% of rental income and leased properties representing 40.0% of investment carrying value. Five Star also managed 44 communities for the company. Five Star had restated prior financial statements, disclosed material weaknesses in internal control, and had not yet filed its 2013 Form 10-K; the company therefore did not report current-period Five Star rent coverage.
- Healthcare reimbursement, regulation and tenant operating performance are key risks. The filing discusses potential Medicare and Medicaid payment changes and cautions that inadequate reimbursement could affect tenants’ ability to pay rent, managed-community profitability and property values. Interest-rate exposure includes floating-rate revolver borrowings; a 100-basis-point increase on the quarter-end $145 million balance was estimated to add about $1.45 million of annual interest expense.
- Related-party relationships include management by RMR, leases and community management involving Five Star, and the company’s investment in AIC. Management asserted these arrangements were commercially reasonable, while identifying potential conflicts as a risk. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: the source filing names Senior Housing Properties Trust, although the request identifies Diversified Healthcare Trust.
- Review Five Star’s restated results, control weaknesses, 2013 filing status and ability to meet lease and management obligations; assess the company’s concentration exposure.
- Check whether the Massachusetts MOB acquisition closed, its final purchase price and financing, and the terms and use of post-quarter equity and debt proceeds.
- Track disposition progress and any changes in rent from Five Star, impairment charges or realized sale gains and losses.
- Evaluate distribution sustainability against cash flow, capital spending, debt maturities, covenant limits and the company’s reliance on future capital-market access.
- Assess healthcare reimbursement and regulatory developments, lease renewals and tenant operating data; some tenant information was not independently verified.