Business context and reporting period
The supplied filing is Senior Housing Properties Trust’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012, filed August 1, 2012. This differs from the request metadata, which names Diversified Healthcare Trust; the filing itself identifies Senior Housing Properties Trust. The REIT owned 375 properties across 39 states and Washington, D.C., including senior living and care communities, medical office buildings (MOBs), and wellness centers.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $147.0 million | $101.2 million | $292.0 million | $199.7 million |
| Operating income | $61.1 million | $53.3 million | $122.0 million | $107.6 million |
| Net income | $33.3 million | $51.0 million | $65.6 million | $82.8 million |
| Net income per share | $0.20 | $0.36 | $0.40 | $0.58 |
| Operating cash flow | Not separately stated | Not separately stated | $146.5 million | $131.7 million |
| FFO per share | $0.42 | $0.40 | $0.84 | $0.81 |
| Normalized FFO per share | $0.45 | $0.44 | $0.90 | $0.88 |
At June 30, total assets were $4.47 billion, total liabilities $2.05 billion, and shareholders’ equity $2.42 billion. Cash and cash equivalents were $20.4 million; restricted cash was $10.0 million. Debt on the balance sheet included $360.0 million drawn on the revolver, $741.4 million of senior notes net of discount, and $863.5 million of secured debt and capital leases. The $750 million revolver had $390 million available, matured in June 2015, and bore interest at 1.80% at quarter-end. The company reported compliance with debt covenants.
Six-month investing cash outflow was $105.9 million, principally for property acquisitions and improvements; financing cash outflow was $43.8 million, including $123.6 million of shareholder distributions. The quarterly distribution was $0.38 per share, versus $0.37 a year earlier. The filing reports no operating margin percentage; calculated operating margin was approximately 41.6% in Q2 2012 versus 52.7% in Q2 2011. NOI, a non-GAAP measure, was $106.2 million versus $89.9 million.
Material changes versus prior comparable periods
- Q2 revenue increased 45% and six-month revenue increased 46%, primarily reflecting acquisitions and the inclusion of resident fees and operating expenses from 24 communities managed through taxable REIT subsidiaries. The prior-year comparison included only $0.8 million of resident fees.
- Net income declined 35% in Q2 and 21% for the first half. The 2011 periods included a $21.3 million gain on property sales; 2012 did not. Q2 2012 also had higher interest expense and depreciation. Q2 operating income nevertheless increased 15%.
- Q2 NOI for residential care communities rose 21% and MOB NOI rose 16% on an all-properties basis, largely reflecting acquisitions. For comparable MOBs, Q2 NOI decreased 0.6%; occupancy was 94.2% versus 96.8%. Leased-community occupancy was 85.4% versus 86.0%.
- Interest expense rose to $28.1 million in Q2 from $23.4 million, and to $57.0 million for the first half from $46.1 million, reflecting debt issued for acquisitions and higher revolver borrowings, partly offset by repayment of $225 million of 8.625% notes.
Outlook, risks, contingencies and unusual items
- Management said operating cash flow should cover operating costs, debt service, and distributions for the next 12 months and foreseeable future. This is a belief, not formal earnings guidance; future cash generation depends on occupancy, rents, cost control, and acquisition returns.
- After quarter-end, the company issued 13.8 million shares for approximately $287.1 million net and $350 million of 5.625% notes due 2042 for approximately $338.8 million net. These proceeds repaid the $360 million revolver balance; management expected to use some debt proceeds to prepay the variable-rate portion of its FNMA loan. That prepayment was not assured.
- Five Star was the largest tenant: it accounted for 40.3% of annualized rental income and leased properties representing 44.5% of investments at cost. Five Star also managed 24 communities for the company. Five Star’s reported operating income and net income declined year over year in the first half. Tenant performance, reimbursement rates, and related-party arrangements merit attention.
- The planned transfer of operations at 10 communities from Sunrise to the company’s TRSs and Five Star management was subject to regulatory and payer approvals. Several announced property acquisitions remained conditional or unclosed. The filing also reports a $3.1 million impairment charge for one property and two properties held for sale.
- Healthcare reimbursement and regulatory changes could affect tenant ability to pay rent and the profitability of managed communities. Approximately 6% of NOI came from properties where a majority of NOI depended on Medicare or Medicaid. The company also identified floating-rate exposure, including LIBOR risk, and potential limits on access or cost of future capital.
- The company has no employees; RMR provides management services. The filing describes overlapping relationships among RMR, trustees, Five Star, CommonWealth REIT, and Affiliates Insurance Company, and identifies potential conflicts of interest. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the filing entity and its relationship, if any, to the Diversified Healthcare Trust named in the request metadata.
- Assess Five Star’s rent coverage, financial condition, and capacity to meet lease and management obligations given its concentration in the portfolio.
- Reconcile reported earnings with FFO and normalized FFO, including the effects of acquisitions, managed-community costs, noncash rent adjustments, and the prior-year property-sale gain.
- Review debt maturity and interest-rate exposure, the post-quarter equity and note offerings, intended FNMA loan prepayment, and covenant headroom.
- Track occupancy and renewal performance, particularly comparable MOB occupancy and lease renewals, and confirm the status and economics of pending acquisitions and the Sunrise transition.
- Evaluate whether the $0.38 quarterly distribution is supported by recurring cash flow after property investment, debt service, and planned acquisitions; FFO and NOI are non-GAAP measures and are not substitutes for cash flow.