Business context and reporting period
The supplied filing is Senior Housing Properties Trust (NYSE: SNH), not Diversified Healthcare Trust. It is a Form 10-K for the fiscal year ended December 31, 2012; the filing also provides unaudited fourth-quarter results. Unless otherwise noted, amounts below are in millions of dollars.
SNH was a REIT owning 392 properties in 40 states and Washington, D.C.: 260 senior living communities, two rehabilitation hospitals, 120 medical office buildings (MOBs), and 10 wellness centers. Its properties had $5.18 billion of undepreciated carrying value. Operations are conducted through tenants and managers; RMR provides management services.
Financial and operating performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $644.8 | $450.0 |
| Net income | $135.9 | $151.4 |
| Net income per share | $0.80 | $1.01 |
| Net operating income (NOI) | $443.6 | $381.1 |
| Funds from operations (FFO) | $280.5; $1.66 per share | $245.4; $1.64 per share |
| Normalized FFO | $295.9; $1.75 per share | $258.0; $1.73 per share |
| Cash from operations | $283.3 | $254.2 |
| Common distributions declared per share | $1.54 | $1.50 |
Revenue increased 43.3%, primarily reflecting acquisitions and the expansion of managed-community operations. NOI rose 16.4%, while net income fell 10.3%, partly because 2011 included a $21.3 million property-sale gain and 2012 included a $6.3 million debt-extinguishment loss. Approximate NOI and net income margins were 68.8% and 21.1%, respectively; these are calculated from reported revenue and are not company-reported margin measures.
FY 2012 NOI was $292.2 million from residential care communities, $133.7 million from MOBs, and $17.8 million from other operations. Same-property MOB occupancy declined to 92.0% from 96.7%, and comparable MOB NOI was essentially flat. Leased senior-community rent coverage declined to 1.40x from 1.46x; portfolio occupancy for leased communities was 85.6%, versus 85.0%. Managed-community occupancy was 87.4%.
Fourth-quarter revenue was $194.2 million and net income was $44.6 million, or $0.25 per share, compared with $136.6 million, $38.6 million, and $0.24 per share, respectively, in fourth-quarter 2011.
Debt, liquidity, and capital
- At year-end, total indebtedness was approximately $2.01 billion, equal to 43.1% of total book capitalization; total assets were $4.75 billion and shareholders’ equity was $2.65 billion.
- Cash and cash equivalents were $42.4 million. The $750 million unsecured revolving facility had $190 million drawn and $560 million available at December 31, 2012; it matures in June 2015, with a conditional one-year extension option. The year-end borrowing rate was 1.80%.
- Cash from operations of $283.3 million exceeded cash distributions paid of $259.5 million. Investing activities used $327.9 million, including acquisitions and improvements.
- SNH issued 13.8 million common shares in July 2012, receiving $287.1 million net, and issued $350 million of 5.625% senior notes due 2042. It prepaid approximately $199.2 million of FNMA debt, repaid $225 million of 8.625% notes at maturity, and reported compliance with debt covenants.
- Management stated it believed operating cash flow and available funding sources would cover operating costs, debt service, distributions, and other needs for the next 12 months and the foreseeable future. This is management’s assessment, not a guarantee.
Material changes, outlook, and risks
- FY 2012 acquisitions totaled approximately $449.7 million for 24 properties. After year-end, SNH acquired a senior living community and two MOBs, and signed a conditional agreement for another MOB.
- Ten communities previously leased to Sunrise transferred to SNH’s taxable REIT subsidiaries and Five Star management during 2012. This shifted revenue and operating expenses into managed operations; the filing reports a $0.4 million lease-termination gain. No additional returns from managed communities were earned in 2012.
- Five Star is the most significant tenant and operator concentration: it represented approximately 44.2% of annualized rental income and leased properties equal to 42% of SNH’s investment carrying value. Five Star also managed 39 communities for SNH. SNH disclosed Five Star’s limited resources and historical inconsistency in profitability; Five Star reported 2012 net income of $24.9 million, down from $64.2 million in 2011.
- Key risks include tenant rent-paying capacity, healthcare reimbursement and regulatory changes, labor and insurance costs, occupancy and lease renewals, economic weakness, interest-rate and refinancing exposure, and access to capital. Medicare/Medicaid-sensitive properties generated about 7% of SNH’s NOI; management highlighted potential payment reductions, including Medicare sequestration scheduled to begin in 2013.
- SNH intends to continue quarterly distributions, but they are discretionary and depend on cash availability, earnings, financing restrictions, capital needs, and REIT requirements. The fourth-quarter 2012 distribution was declared at $0.39 per share for payment in February 2013. No specific earnings or FFO guidance was provided.
- Related-party governance is a material consideration: RMR manages SNH and other companies, and SNH has substantial business dealings with Five Star and an insurance investment in AIC. The filing describes potential conflicts of interest. One property was classified as held for sale; the filing states no assurance it would be sold on acceptable terms. No legal proceedings were reported. The independent auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Confirm the issuer and period: this is SNH’s FY 2012 Form 10-K, not a Diversified Healthcare Trust filing or a standalone Q4 report.
- Assess Five Star’s current liquidity, rent coverage, operating performance, and capacity to meet lease obligations; verify how much SNH’s income depends on this tenant and manager.
- Review debt maturities, covenant headroom, refinancing plans, and the effect of higher interest rates on variable-rate borrowings and future financing costs.
- Reconcile acquisition-driven revenue and NOI growth with same-property trends, especially the fall in comparable MOB occupancy and the lower senior-community rent coverage.
- Evaluate whether operating cash flow can support distributions, capital expenditures, and debt service without continued equity or debt issuance; note that annual distributions declared exceeded GAAP net income per share.
- Review the related-party agreements, REIT qualification assumptions for taxable subsidiaries, and the status and expected proceeds of the held-for-sale property.