Senior Housing Properties Trust — Q1 2017 Form 10-Q
Business context and reporting period. The filing is for the three months ended March 31, 2017. Although the request identifies Diversified Healthcare Trust, the registrant named in this filing is Senior Housing Properties Trust. It owned 434 properties across 42 states and Washington, D.C., spanning senior living communities, medical office buildings (MOBs) and wellness centers. About 97% of Q1 net operating income (NOI) came from properties where most revenue was funded by private sources.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $264.6 million | $258.4 million | +2.4% |
| Operating income | $75.0 million | $70.5 million | +6.3% |
| Net income attributable to common shareholders | $32.2 million | $31.3 million | +2.8% |
| Diluted net income per share | $0.14 | $0.13 | +$0.01 |
| FFO per share | $0.44 | $0.46 | -$0.02 |
| Normalized FFO per share | $0.46 | $0.46 | No change |
| NOI | $163.5 million | $160.4 million | +1.9% |
| Cash from operating activities | $114.8 million | $122.8 million | -$8.0 million |
| Cash and cash equivalents at quarter-end | $32.3 million | $31.7 million at year-end 2016 | +$0.5 million |
Revenue growth reflected higher rents from acquisitions, capital improvements and MOB leasing; operating income also benefited from no impairment charge in Q1 2017, compared with $7.4 million in Q1 2016. Interest expense rose to $43.5 million from $39.3 million. GAAP net income margin was approximately 12.2% of revenue, versus 12.1% a year earlier.
At March 31, total assets were $7.22 billion and total liabilities were $3.80 billion. Debt and capital lease carrying amounts included $97.0 million drawn on the revolving facility, $547.2 million of term loans, $1.72 billion of senior notes and $1.11 billion of secured debt and capital leases. The company reported $903.0 million of remaining revolver availability and said it was in compliance with debt covenants.
Q1 investing cash outflow was $44.5 million, including $14.3 million for acquisitions and $30.2 million for property improvements. Financing used $69.8 million; this included $92.6 million of shareholder distributions and $255.8 million of net proceeds from a joint venture, offset by substantial revolver repayments. The quarterly distribution was $0.39 per share, equal to reported FFO per share of $0.44 being higher than the distribution; normalized FFO per share was $0.46.
Material developments and operating trends
- In March, a sovereign institutional investor contributed approximately $260.9 million for a 45% interest in a Boston MOB joint venture. The trust retained 55% and consolidated the venture; net proceeds of approximately $255.8 million were used to reduce revolver borrowings. The transaction generated no gain.
- Senior living revenue increased, but operating indicators softened: triple-net senior living occupancy was 85.0% versus 85.4%, and rent coverage was 1.30x versus 1.34x. Managed senior living occupancy was 86.0% versus 87.5%; comparable-property NOI declined 3.1%.
- MOB occupancy was 96.4% versus 95.8% across all properties. Comparable MOB NOI declined 0.8%, as higher property costs outweighed modest rental income growth. Q1 MOB leases and renewals covered 237,000 square feet, at weighted-average rents 6.0% above prior rents for the same space.
- Five Star was the largest tenant and managed the trust’s managed senior living communities. Its rent represented 19.3% of total revenue; properties it leased represented 29.6% of real estate investment at cost. The trust also held approximately 8.5% of Five Star’s outstanding shares. These exposures and relationships create tenant concentration and related-party considerations.
- After quarter-end, the trust prepaid a $277.8 million mortgage at a $5.4 million premium, prepaid another $10.6 million mortgage at par, and announced an intended $8.8 million mortgage prepayment. As of May 4, revolver borrowings had risen to $384.0 million, leaving $616.0 million available.
Outlook, risks and contingencies
Management stated that operating cash flows, cash balances and financing access were expected to be sufficient for operating and capital expenses, debt service and distributions over the next 12 months and thereafter. This is management’s assessment, not a quantified earnings or FFO forecast. The revolving credit facility matures January 15, 2018, with a one-year extension option subject to conditions and a fee.
Management cited senior living competition and new supply, occupancy and rent pressure, tenant financial health, labor and operating costs, and changes to Medicare and Medicaid policy as risks. It noted uncertainty around healthcare reform and reimbursement; future rate or funding changes could adversely affect tenants and operators. Interest-rate exposure is also material: a 100-basis-point increase was estimated to add about $6.5 million to annual interest expense on then-outstanding floating-rate debt. Other risks include debt refinancing and access to capital, covenant restrictions, Five Star concentration, and transactions with related parties, including RMR LLC. No material change to previously disclosed risk factors was reported; no material off-balance-sheet arrangements were disclosed. Disclosure controls were assessed as effective.
Key facts for investors to verify
- Confirm the issuer and security identity: this filing is for Senior Housing Properties Trust, despite the request metadata naming Diversified Healthcare Trust.
- Track Five Star’s rent coverage, occupancy, financial condition and ability to meet lease and management obligations.
- Review the revolver’s 2018 maturity, extension conditions, subsequent borrowing level and the company’s refinancing plans.
- Assess whether senior living occupancy and comparable managed-community NOI stabilize, and whether MOB cost growth moderates.
- Verify the economics and consolidation treatment of the Boston MOB joint venture and the impact of subsequent mortgage prepayments and premiums.
- Compare distributions with recurring cash generation and FFO; FFO and Normalized FFO are non-GAAP measures and are not substitutes for operating cash flow.