Business context and reporting period
Filing identity: The supplied filing is Senior Housing Properties Trust’s unaudited Form 10-Q for the quarter ended March 31, 2016—not a filing under the metadata name Diversified Healthcare Trust. Investors should verify the issuer and ticker before relying on this summary.
The REIT owned 428 properties across 43 states and Washington, D.C., including senior living communities, medical office buildings (MOBs) and wellness centers. The filing reports three months ended March 31, 2016, compared with the same 2015 quarter. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $258.4m | $228.6m |
| Operating income | $70.5m | $77.3m |
| Net income | $31.3m; $0.13/share | $39.8m; $0.18/share |
| FFO / Normalized FFO | $109.9m / $112.9m; $0.46 / $0.48 per share | $93.5m / $98.6m; $0.42 / $0.45 per share |
| Cash from operating activities | $122.8m | $105.5m |
| Cash used for investing activities | $46.2m | $521.1m |
| Cash used for financing activities | $75.1m | Cash provided: $465.8m |
| Cash and cash equivalents | $39.2m | $37.7m at Dec. 31, 2015 |
| Total debt, carrying value | Approximately $3.50bn | Approximately $3.48bn at Dec. 31, 2015 |
Revenue increased 13.0%, while net income declined 21.4%. Operating margin was approximately 27.3%, down from 33.8%; net margin was approximately 12.1%, down from 17.4%. Total NOI rose to $160.4m from $142.8m. The $24.2m other comprehensive gain, primarily related to available-for-sale securities, raised comprehensive income to $55.5m; it was not net income.
At March 31, the company had $561m drawn on its $1bn revolving credit facility, leaving $439m available; cash plus undrawn revolver capacity was approximately $478m. The revolver rate was 1.7%, and the company reported compliance with debt covenants. Debt included $1.72bn of senior unsecured notes, $546.5m of term loans and $669.3m of secured debt and capital leases. The February issuance of $250m of 6.25% notes due 2046 generated approximately $241.5m net proceeds, used to repay revolver borrowings and for general purposes.
The quarterly distribution was $0.39 per share, or approximately $92.6m. That equaled about 81% of Normalized FFO but substantially exceeded GAAP net income. Management stated it believed available funding sources would cover operations, debt service and distributions for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth reflected acquisitions made since January 2015, including senior living communities and MOBs. Comparable managed-community NOI increased 3.3%; comparable MOB NOI increased 1.2%.
- Managed senior living occupancy was 87.5% for all properties versus 88.0% a year earlier; occupancy at comparable managed communities was 87.1% versus 88.0%. Comparable MOB occupancy declined to 94.8% from 95.3%.
- Triple-net senior living NOI increased 17.5%, substantially reflecting acquired properties. Comparable triple-net tenant occupancy was 84.8% versus 85.7%; rent coverage was unchanged at 1.35x.
- Depreciation increased $17.5m, and the company recorded $7.4m of impairment charges, neither of which occurred in Q1 2015. Interest expense increased $3.3m to $39.3m. These items contributed to lower operating and net income despite higher revenue.
- Operating cash flow increased $17.3m. Investing outflows fell sharply because Q1 2015 included much heavier acquisition spending; financing shifted from a large inflow in 2015, which included $659.8m of share issuance proceeds, to an outflow in 2016.
Outlook, commentary, risks and unusual items
- Outlook: No numerical earnings or FFO guidance was provided. Management said it expected liquidity to be sufficient for the next 12 months and the foreseeable future, but noted access to capital, operating performance and future distributions are not assured.
- Tenant and operating exposure: Five Star was the largest tenant; its rent represented 18.6% of total revenue, and properties it leased represented 28.7% of investment at cost. Five Star also managed 60 communities for the company. Two third-party tenants defaulted on leases at senior living communities; one lease was terminated after quarter-end and operations transferred to Five Star, with a similar transition expected for the other property.
- Impairments and dispositions: $4.4m of impairment related to acquired lease intangibles at the two defaulted communities; $3.0m reduced the carrying value of a MOB and land parcel. The land was sold in March for approximately $0.7m. One senior living community and one MOB were classified as held for sale; a proposed senior-community sale was conditional and not assured.
- After-quarter activity: In April, the company prepaid an $18m mortgage and reached the lease-termination/operations-transfer agreement described above. In May, it acquired a 38-unit Georgia community for approximately $8.4m and a Florida MOB for approximately $45m, funded with cash and revolver borrowings.
- Industry and regulatory risks: Management cited weak or uncertain senior-living demand, pressure on occupancy and rates, and new senior-living supply expected to add competition. Medicare and Medicaid rate changes, reimbursement shortfalls, compliance requirements and enforcement could raise operating costs or weaken tenants’ ability to pay rent. Approximately 97% of Q1 NOI came from properties where most revenues were paid from private resources.
- Interest-rate exposure: Floating-rate debt totaled $1.111bn at quarter-end. A 100-basis-point rate increase was estimated to add approximately $11.1m to annual interest expense at then-current borrowings; the filing also presented a higher-impact fully drawn scenario. Related-party arrangements with Five Star and RMR entities are material and create potential conflicts of interest.
- Cash flow detail: Operating cash flow included a $16.7m increase in accrued interest payable. Investors should distinguish reported operating cash flow from recurring property cash generation and capital needs.
Most important facts to verify
- Confirm the issuer: the filing names Senior Housing Properties Trust, while the request metadata names Diversified Healthcare Trust.
- Review Five Star’s financial capacity, rent-payment record, lease coverage and the economics of communities transferred from defaulting tenants to management arrangements.
- Check debt maturities, covenant headroom, revolver utilization and sensitivity to higher floating interest rates and refinancing conditions.
- Assess whether the $0.39 quarterly distribution is sustainable against Normalized FFO, capital spending, debt service and working-capital needs.
- Verify occupancy, comparable-property trends, held-for-sale transactions and the effect of the reported impairments and post-quarter acquisitions.
- Review healthcare reimbursement and regulatory developments, and the company’s related-party governance and management agreements.