Business context and reporting period
The filing is an unaudited Form 10-Q for the three months ended March 31, 2013. The registrant named in the filing is Senior Housing Properties Trust; the request metadata identifies Diversified Healthcare Trust. The REIT owned 395 properties across 40 states and Washington, D.C., including senior living communities, medical office buildings (MOBs) and wellness centers.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Total revenue | $189.4 million | $145.1 million |
| Operating income | $64.7 million | $60.9 million |
| Net income | $35.2 million | $32.4 million |
| Net income per share | $0.19 | $0.20 |
| FFO / normalized FFO | $74.8 million / $78.9 million | $68.8 million / $72.4 million |
| FFO / normalized FFO per share | $0.41 / $0.43 | $0.42 / $0.45 |
| Cash from operating activities | $73.7 million | $72.4 million |
| Cash and cash equivalents | $39.0 million | $42.4 million at Dec. 31, 2012 |
| Total assets | $4.81 billion | $4.75 billion at Dec. 31, 2012 |
| Total liabilities | $1.93 billion | $2.10 billion at Dec. 31, 2012 |
Revenue increased 30.6% and net income increased 8.9% year over year. Operating margin was approximately 34.2%, versus 42.0% in Q1 2012, reflecting the larger contribution from managed senior living operations, where residents’ fees are reported alongside property-level expenses. Consolidated NOI was $114.8 million, up from $105.7 million. Cash used in investing was $76.7 million, principally for property acquisitions; cash used in financing was $0.4 million, including $68.9 million of shareholder distributions and $190.0 million of revolver repayments, offset by approximately $261.9 million of share issuance proceeds.
At March 31, debt included $1.092 billion carrying value of senior notes, $734.2 million of secured debt and capital leases, and no revolver borrowings. The company reported $750 million available under its revolving credit facility. The notes had principal maturities of 2016, 2020, 2021 and 2042, with stated rates of 4.30%, 6.75%, 6.75% and 5.625%, respectively. The company said it was in compliance with debt covenants. The quarterly distribution declared after quarter-end was $0.39 per share, payable in May.
Material changes versus the prior comparable period
- Managed senior living revenue more than doubled to $75.1 million, mainly reflecting acquisitions and the transfer of ten formerly Sunrise-leased communities to company TRSs in 2012. Managed segment NOI rose 70.3% to $17.2 million; comparable-property NOI increased 3.2%.
- MOB revenue increased 15.0% to $53.2 million, primarily due to acquisitions. On a comparable-property basis, MOB NOI declined 3.8%, as rental income fell and property operating expenses rose.
- Triple-net senior living revenue fell 3.5% to $56.8 million, largely because ten communities shifted to managed operations. Comparable-property rental income increased, supported in part by purchased improvements.
- Interest expense rose to $29.6 million from $28.9 million, including the effect of $350 million of 5.625% notes issued in July 2012. The company also repaid the $190 million revolver balance during Q1 after issuing 11.5 million shares in a public offering.
- Weighted-average shares increased to 184.6 million from 162.6 million; accordingly, FFO and normalized FFO per share declined despite higher aggregate amounts.
Outlook, commentary, risks and unusual items
Management said operating cash flow and available liquidity should be sufficient for operating costs, debt service, distributions and planned activities for at least the next 12 months; this is a management expectation, not quantitative earnings guidance. It identified occupancy, rents, property cost control and acquisition returns as important to future cash generation. The company acquired four properties for approximately $75 million in Q1, at an estimated initial NOI yield of 8.6%. Two additional acquisitions announced in April were subject to diligence and customary closing conditions.
Material risks include tenant concentration and related-party relationships. Five Star generated 43.4% of annualized rental income and leased properties representing 41.5% of investments at cost; it also managed 39 communities for the company. The filing describes extensive management, leasing and other dealings involving Five Star, RMR and affiliated parties. Healthcare reimbursement changes are another risk: Medicare sequestration reduced payments by 2% beginning April 1, 2013, and state Medicaid rates may be constrained. The company warned these developments could affect tenant rent-paying capacity, managed-property profitability and asset values. It reported $1.3 million of Q1 impairment charges, compared with $3.1 million a year earlier, and one property held for sale with an $850,000 net book value. No material off-balance-sheet arrangements were reported.
The filing states that fixed-rate debt refinancing at rates 100 basis points higher or lower would change annual interest cost by approximately $18.1 million. It had no floating-rate debt outstanding at quarter-end, but a fully drawn revolver would have annual interest expense of $13.6 million at the stated 1.81% rate; a 100-basis-point increase would raise that amount by $7.5 million.
Important facts for investors to verify
- Confirm the registrant and period: this source is Senior Housing Properties Trust’s Q1 2013 filing, although the request metadata names Diversified Healthcare Trust.
- Assess Five Star’s ability to meet lease obligations and sustain operations, given its concentration in rent and management activity; tenant operating data was not independently verified by the company.
- Review the dilution from the Q1 share offering against per-share FFO and the $0.39 quarterly distribution.
- Check debt maturities, covenant headroom and refinancing needs, including mortgages with maturities beginning in 2013 and the revolver’s June 2015 maturity.
- Monitor Medicare/Medicaid policy effects, property occupancy and comparable-property performance, and whether announced acquisitions close on expected terms.