Business context and reporting period
The filing is Senior Housing Properties Trust’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The company owned 384 properties across 40 states and Washington, D.C., including senior living and care facilities, medical office buildings (MOBs), and wellness centers. The filing is by Senior Housing Properties Trust, notwithstanding the request metadata naming Diversified Healthcare Trust.
Financial performance and position
Amounts below are in millions, except per-share data and where otherwise noted.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $158.6 | $113.7 | $450.7 | $313.4 |
| Operating income | $62.3 | $54.5 | $184.3 | $162.2 |
| Net income | $25.6 | $30.0 | $91.2 | $112.8 |
| Net income per share | $0.15 | $0.20 | $0.55 | $0.77 |
| Operating cash flow | Not stated | Not stated | $239.0 | $167.8 |
| FFO per share | $0.35 | $0.39 | $1.19 | $1.20 |
| Normalized FFO per share | $0.43 | $0.43 | $1.32 | $1.30 |
Q3 total NOI was $110.8 million, compared with $93.5 million; nine-month NOI was $322.8 million versus $271.5 million. Revenue growth reflected acquisitions and the inclusion of managed-community resident fees and expenses. Consequently, headline operating margins are less comparable across periods as the portfolio’s managed operations expanded.
At September 30, 2012, total assets were $4.65 billion and shareholders’ equity was $2.67 billion. Cash and cash equivalents were $21.0 million, with $695.0 million available on the $750 million revolving credit facility. Debt included $55.0 million drawn on the revolver, $1.092 billion carrying value of unsecured notes, and $721.6 million of secured debt and capital leases. The company reported compliance with its debt covenants.
Changes versus prior comparable period
- Q3 revenue rose 39.5%, while net income fell 14.5%; nine-month revenue rose 43.8%, while net income fell 19.1%. Net income comparisons reflect higher interest and depreciation costs and, for 2011, a $21.3 million gain on property sales.
- Q3 and nine-month interest expense increased to $30.4 million and $87.4 million, respectively, from $24.7 million and $70.8 million.
- Normalized FFO per share was flat at $0.43 for Q3 and rose to $1.32 from $1.30 for the first nine months. Share count increased following a July offering of 13.8 million shares.
- Comparable MOB occupancy weakened: 93.1% versus 96.7% for Q3 and 92.6% versus 97.1% for the nine-month comparison. Comparable MOB NOI was down 1.6% in Q3 and essentially flat for nine months.
Outlook, commentary, risks and unusual items
- Management said operating cash flow should cover operating expenses, debt service and distributions for the next 12 months and foreseeable future. No formal earnings or FFO guidance was provided.
- The company acquired 16 properties for approximately $364.9 million in the first nine months, at a stated weighted-average capitalization rate of 7.9%. Additional announced acquisitions remained contingent on customary conditions and due diligence.
- In August, the company prepaid approximately $199.2 million of its FNMA secured loan, releasing 11 properties from the mortgage. It recorded a $6.35 million early-extinguishment loss. July financing included a $350 million, 5.625% note issuance due 2042 and a common-share offering that generated $287.1 million net proceeds.
- Sunrise lease transfers to the company’s taxable REIT subsidiaries and Five Star management were completed for eight of 10 communities by the report date; the remaining two were subject to regulatory and payer approvals. A $0.39 per-share quarterly distribution was declared after quarter-end.
- Five Star was the largest tenant: its rent represented 39.6% of annualized rental income, and properties it leased represented 42.6% of investments at cost. Tenant performance, occupancy, rent coverage, healthcare reimbursement changes and potential Medicare or Medicaid reductions are material risks.
- Related-party arrangements with RMR, Five Star, AIC and others include management, leasing, insurance and property arrangements; executives also have interests in a subtenant related to a New York community. These relationships create potential conflicts of interest.
- The company cited floating-rate exposure to LIBOR, access to debt and equity markets, lease renewals, tenant capacity, acquisition execution, regulatory approvals, and REIT qualification as risks. It reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the filing entity and reporting period: the supplied filing is for Senior Housing Properties Trust, not Diversified Healthcare Trust.
- Assess Five Star’s ability to meet rent obligations and operate managed communities, given its tenant concentration and the reported operating statistics.
- Review comparable-property occupancy and NOI trends, particularly the decline in MOB occupancy.
- Reconcile GAAP earnings with FFO and Normalized FFO, including acquisition costs, debt-prepayment loss, percentage-rent adjustments and the prior-year property-sale gain.
- Track debt maturities, variable-rate exposure, covenant headroom, distribution coverage and the funding of future acquisitions and capital needs.
- Verify completion and terms of pending acquisitions and remaining Sunrise transfers, including required approvals and related-party safeguards.