Senior Housing Properties Trust — Form 10-Q summary
Business context and period. The supplied filing is for Senior Housing Properties Trust (the registrant named in the filing), for the quarter ended September 30, 2017; it does not identify the registrant as Diversified Healthcare Trust. The REIT owned 435 properties in 42 states and Washington, D.C., spanning senior living communities, medical office buildings (MOBs), and wellness centers. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $266.7 | $264.0 | $796.3 | $783.7 |
| Operating income | $75.5 | $70.8 | $215.0 | $216.7 |
| Net income attributable to common shareholders | $34.4 | $27.9 | $82.6 | $98.4 |
| Basic and diluted earnings per share | $0.14 | $0.12 | $0.35 | $0.41 |
| FFO per share | $0.40 | $0.44 | $1.20 | $1.37 |
| Normalized FFO per share | $0.44 | $0.45 | $1.33 | $1.38 |
Q3 revenue increased about 1.0% year over year, while net income attributable to common shareholders rose about 23%. Nine-month revenue rose about 1.6%, but common-shareholder net income fell about 16%. The prior-year nine-month result included a $4.1 million property-sale gain; 2017 included a $5.1 million impairment of Five Star shares and a $7.6 million loss on early debt extinguishment. These non-GAAP FFO measures are not substitutes for GAAP earnings or cash flow.
- Margins and property performance: Q3 operating margin was about 28.3% versus 26.8% in 2016; NOI was $162.0 million versus $160.6 million. Managed senior living NOI declined 4.0% to $22.8 million, while MOB NOI increased 1.7% to $67.0 million. Triple-net senior living NOI increased 1.8% to $67.7 million.
- Cash flow: Nine-month operating cash flow was $324.4 million, down from $342.4 million. Investing used $123.9 million, mainly for acquisitions and improvements; financing used $203.3 million. Cash and cash equivalents were $28.9 million at September 30, 2017, excluding restricted cash of $14.1 million.
- Debt and liquidity: Balance-sheet debt included $471.0 million drawn on a $1.0 billion revolving facility, $547.3 million in term loans, $1,724.9 million in senior notes, and $815.5 million in secured debt and capital leases. The filing separately reports $806.4 million principal of mortgages, excluding accounting adjustments. Revolver availability was $529.0 million at quarter-end. Total liabilities were $3,900.2 million and total assets $7,187.7 million.
- Distributions: The quarterly distribution remained $0.39 per share; $1.17 per share was declared for the first nine months. The October 2017 declaration was also $0.39 per share.
Material changes and operating trends
- Senior living occupancy and tenant rent coverage weakened: triple-net senior living occupancy was 84.3% versus 85.3%, and coverage was 1.26x versus 1.33x. Managed senior living occupancy was 85.8% versus 86.7% for Q3; comparable-property occupancy also declined.
- MOB occupancy was 95.8% versus 95.9% overall, but comparable MOB occupancy was 95.7% versus 96.4%. Comparable MOB NOI was essentially flat for Q3 and down 0.8% for the nine-month period.
- Managed senior living operating costs rose, with management citing additional staffing and costs associated with 2017 hurricanes in the Southeast and Texas, as well as higher real estate taxes. Comparable managed-community NOI declined 3.8% in Q3 and 5.1% for nine months.
- General and administrative expense rose to $19.9 million from $12.1 million in Q3, largely reflecting higher RMR LLC business management fees, including $8.0 million of estimated incentive fees. Nine-month estimated incentive fees were $22.0 million; the actual 2017 amount, if any, was to be determined after year-end.
- The company prepaid approximately $297.2 million of mortgage principal in 2017, including a $277.8 million mortgage bearing 6.71% interest, and recorded related debt-extinguishment costs. It amended its revolving facility and $200 million term loan, reducing rate spreads and extending the revolver maturity to January 2022.
- In March, the company sold a 45% interest in a Boston MOB joint venture to a sovereign investor for approximately $260.9 million gross proceeds and retained control, so the property remained consolidated. The investor’s share is presented as noncontrolling interest.
Outlook, risks and unusual items
- Management said operating cash flow, cash, and revolver availability were expected to meet operating and capital expenses, debt service, and distributions for the next 12 months and foreseeable future. This is a forward-looking expectation, not a guarantee.
- After quarter-end, the company acquired two MOBs for approximately $38.7 million and signed conditional agreements for two more MOBs for approximately $71.1 million. In November it agreed to acquire six senior living communities from Five Star for approximately $104.0 million, including assumption of about $33.7 million of mortgage debt. Those transactions remained subject to conditions and approvals.
- Five Star was the company’s largest tenant and managed its senior living communities. Five Star represented 19.2% of Q3 revenue; its leased properties were 27.5% of gross real estate book value. The filing identifies potential tenant financial distress, rent default, and management performance as material risks.
- Other risks include senior living competition and new supply, labor and operating costs, occupancy and resident affordability, healthcare regulation and reimbursement changes, interest-rate exposure, access to financing, lease expirations, and related-party conflicts. About 97% of NOI came from properties where most revenue was paid from private resources. The filing notes uncertainty around proposed healthcare policy changes.
- The company reported compliance with debt covenants and no material off-balance-sheet arrangements. It stated disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: the filing itself 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, given its concentration in the portfolio.
- Assess whether weaker senior living occupancy and managed-community NOI stabilize, and whether hurricane-related and other operating costs persist.
- Review debt maturities, floating-rate exposure, covenant headroom, and refinancing needs. The filing estimates a 100-basis-point rate increase would add about $10.2 million to annual interest expense on then-outstanding floating-rate debt.
- Verify completion, funding, and economics of the announced acquisitions, including assumed debt, required capital spending, and Five Star management and pooling terms.
- Compare distributions with recurring cash generation: Q3 distribution of $0.39 per share versus Normalized FFO of $0.44 per share; evaluate the limitations of FFO and the impact of estimated incentive fees.