Filing summary
Entity-name discrepancy: The request identifies Diversified Healthcare Trust, but the supplied 10-Q is filed by Senior Housing Properties Trust (SNH). The summary below reflects the filing text; verify the intended registrant before relying on it.
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2019, compared with the same periods in 2018. SNH was a healthcare real estate investment trust with 436 properties, including eight held for sale, across 41 states and Washington, D.C. Its portfolio included medical office buildings (MOBs), leased and managed senior living communities, and wellness centers.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $255.8 million | $279.0 million | $784.1 million | $831.9 million |
| Net income (loss) attributable to common shareholders | $(29.4) million | $45.8 million | $(36.5) million | $405.4 million |
| FFO per share | $0.28 | $0.34 | $0.96 | $1.10 |
| Normalized FFO per share | $0.29 | $0.42 | $1.01 | $1.31 |
| NOI | $130.7 million | $163.0 million | $421.6 million | $497.8 million |
Revenue fell 8.3% in Q3 and 5.7% for the nine-month period. NOI margin was approximately 51.1% in Q3 versus 58.4% a year earlier, and 53.8% year to date versus 59.8%. Nine-month operating cash flow was $195.7 million, down from $286.0 million. Investing used $26.2 million, compared with $136.9 million provided in 2018; financing used $176.1 million, versus $314.3 million used. Cash and cash equivalents were $49.5 million at quarter-end.
At September 30, 2019, debt included $589.0 million drawn on a $1.0 billion revolving facility, $1.85 billion principal of senior notes, $550.0 million of term loans and $690.0 million of mortgages. The balance sheet reported $3.66 billion of debt net of discounts and issuance costs. Revolver availability was $411.0 million. Total assets were $6.92 billion and total liabilities $3.95 billion. The company reported compliance with debt covenants. Its $350 million term loan matured in January 2020.
Material changes and unusual items
- The principal business change was an April 2019 agreement to restructure arrangements with Five Star Senior Living, SNH’s largest tenant and manager of its managed senior living communities. Minimum monthly rent was reduced to about $10.8 million by September 30, following dispositions. Subject to approvals and other conditions, leases and management agreements were to convert to new management agreements effective January 1, 2020, potentially delayed to January 1, 2021.
- The restructuring and lower Five Star rent contributed to weaker operating cash flow and lower revenue. Triple-net senior living revenue declined 32.9% in Q3; management cited the rent reduction, property sales and portfolio transfers.
- Quarterly distributions were reduced from $0.39 to $0.15 per share in 2019. Management said it planned to maintain an annualized rate of $0.60, targeting approximately 80% of projected cash available for distribution, but stated future distributions could change.
- Net losses included $33.1 million of Q3 impairment charges and $41.5 million for nine months. The nine-month result also reflected a $41.5 million net loss on equity securities. Comparisons with 2018 are affected by substantially larger prior-year property-sale gains ($261.9 million for nine months) and equity-security gains ($85.6 million).
- SNH sold 33 properties in the first nine months for $53.0 million and reported 40 properties under sale agreements as of November 6, with aggregate expected proceeds of approximately $452.8 million. These sales were conditional and could be delayed, changed or not completed. The company had identified additional dispositions aggregating approximately $900 million as part of its leverage-reduction strategy.
- Credit ratings were downgraded in 2019: S&P lowered the issuer rating to BB+ and Moody’s lowered the senior unsecured rating to Ba1. The filing said the changes did not increase the applicable interest-rate premiums at that time.
Outlook, risks and contingencies
Management believed available operating cash flow, cash, asset-sale proceeds and borrowing capacity would meet operating needs, debt service and distributions for the next 12 months and foreseeable future. This outlook depends on property occupancy and rents, expense control, access to capital, successful dispositions, and tenant and manager performance. Five Star’s operating and financial challenges, completion of the restructuring, senior-living occupancy and costs, refinancing needs, floating-rate debt exposure, and related-party relationships are significant risks. The filing notes that approximately 97% of Q3 NOI came from properties whose revenues were primarily derived from private resources. A one-percentage-point rise in rates was estimated to increase annual floating-rate interest expense by $11.4 million at quarter-end debt levels. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm whether the intended filing is SNH’s 10-Q or a filing for Diversified Healthcare Trust.
- Track conditions, timing and final economics of the Five Star restructuring, including the rent reduction, planned share issuances, and transition to management agreements.
- Assess Five Star’s ability to meet rent and operating obligations and the effects of the proposed restructuring on SNH’s cash flow and earnings variability.
- Monitor the January 2020 term-loan maturity, debt refinancing, credit ratings, covenant headroom and remaining revolver availability.
- Verify completion and proceeds of pending property sales, associated rent reductions, and whether the planned distribution remains supported by cash generation.
- Distinguish recurring operating performance from impairments, asset-sale gains and losses, and equity-security valuation changes when comparing periods.