DIVERSIFIED HEALTHCARE TRUST quarterly report, Q1 FY2012

Business context and reporting period

This is Senior Housing Properties Trust’s unaudited Form 10-Q for the three months ended March 31, 2012. The filing identifies the registrant as Senior Housing Properties Trust, not Diversified Healthcare Trust, as stated in the request metadata. The REIT owned 370 properties in 38 states and Washington, D.C., including senior living and rehabilitation properties, medical office buildings (MOBs), and wellness centers.

Key financial metrics

Amounts are in U.S. dollars. Total NOI was $105.7 million, up from $88.1 million. Net income margin was approximately 22.3%, versus 32.2% in Q1 2011; the comparison is affected by the addition of managed-community resident revenues and expenses. The filing reports no consolidated gross-margin measure.

At March 31, 2012, total assets were $4.384 billion and total liabilities were $1.938 billion. Balance-sheet debt and capital lease obligations were approximately $1.852 billion, including $265 million drawn on a $750 million revolving facility, $741.1 million of senior notes net of discount, and $845.7 million of secured debt and capital leases. The company had $485 million of revolver availability. Its quarterly $61.8 million shareholder distribution exceeded GAAP net income but was below Normalized FFO.

Changes versus the prior comparable period

• Revenue increased 47%, primarily reflecting acquisitions and the inclusion of resident fees and expenses from 23 managed senior living communities acquired since June 2011.
• NOI rose 20%. Residential-care NOI increased 21%, while MOB NOI increased 22%; comparable-property MOB NOI grew 4%.
• Net income increased only 2%, and per-share income fell from $0.22 to $0.20, as weighted-average shares grew from 141.9 million to 162.6 million and interest and other costs increased.
• Interest expense rose to $28.9 million from $22.7 million, reflecting debt issued to fund acquisitions and higher revolving borrowings, partly offset by redemption of the 8.625% notes.
• Operating cash flow increased to $72.4 million. Investing used $32.9 million, substantially less than the $148.2 million used in Q1 2011, when acquisition spending was higher.

Outlook, risks, and notable items

• Management said operating cash flow should be sufficient to cover operating expenses, debt service, and distributions for the next 12 months and thereafter, but provided no quantitative earnings or acquisition guidance.
• The board declared a $0.38-per-share distribution for Q1, payable on or about May 10, 2012. Management expected to fund it from cash and, if needed, revolver borrowings.
• The company repaid $225 million of 8.625% senior notes at maturity in January using its revolver, and repaid a $12.4 million mortgage in February. In April, it repaid another $32.8 million of mortgages, including accrued interest.
• Pending acquisitions included six properties for $71.4 million and seven previously announced properties for $257.8 million; closings remained conditional. A proposed $1.2 million MOB sale was also conditional. Five Star repaid the remaining $38 million balance of the company’s bridge loan in April.
• Tenant concentration is material: Five Star accounted for 44.7% of annualized rental income and leased properties representing 45.5% of investment at cost. Five Star also managed the 23 communities operated for the company’s account. Its own Q1 operating income and net income declined year over year.
• Management cited risks from Medicare and Medicaid reimbursement changes, tenant operating performance, occupancy and leasing, financing and interest rates, pending transactions, and related-party relationships involving RMR, Five Star, CWH, and AIC. About 6% of property NOI came from properties where most NOI was derived from Medicare and Medicaid; the balance was primarily private-pay sourced.
• The company recorded a $3.1 million impairment on one property. It reported compliance with debt covenants and effective disclosure controls, with no material change in internal control over financial reporting.

Important facts for investors to verify

• Confirm issuer identity: this filing is for Senior Housing Properties Trust; verify whether it is the intended filing for the requested company.
• Assess Five Star’s capacity to meet lease obligations and the company’s exposure to this tenant and manager.
• Review debt maturities, covenant headroom, variable-rate exposure, and the company’s reliance on revolver capacity and capital markets.
• Check whether pending acquisitions and the proposed property sale closed, and whether their financing and returns met expectations.
• Evaluate whether recurring cash generation can sustain the $0.38-per-share distribution alongside capital needs and debt service.