Business context and reporting period
The supplied filing is Senior Housing Properties Trust (SNH), not Diversified Healthcare Trust. It is SNH’s Form 10-K for the fiscal year ended December 31, 2011, with comparative results for 2010 and 2009; the filing also reports fourth-quarter results. SNH was a healthcare real estate investment trust with 369 properties in 38 states and Washington, D.C.: 249 senior living communities, two rehabilitation hospitals, 108 medical office buildings (MOBs), and 10 wellness centers.
SNH’s senior living and wellness properties were generally leased to operators under triple-net leases; it also began operating certain senior living properties through taxable REIT subsidiaries (TRSs) in 2011. RMR provided management services. The filing describes this business model and risks as of 2011 and should not be treated as a filing by the company named in the request.
Financial performance and position
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Total revenue | $450.0 million | $340.1 million | Up 32.3%; growth chiefly reflected acquisitions and $27.9 million of resident fees from managed communities. |
| Net income | $151.4 million | $116.5 million | Up 30.0%; 2011 included a $21.3 million property-sale gain. |
| Diluted earnings per share | $1.01 | $0.91 | Up from the prior year. |
| Funds from operations (FFO) per share | $1.64 | $1.66 | Down despite higher total FFO, alongside increased weighted-average shares. |
| Normalized FFO per share | $1.73 | $1.71 | Up; company-defined non-GAAP measure. |
| Property NOI | $381.1 million | $319.9 million | Up 19.1%; acquisition-driven growth. Comparable MOB NOI rose 0.9%. |
| Cash from operating activities | $255.6 million | $215.3 million | Up 18.7%. |
| Cash used for investing activities | $842.1 million | $466.1 million | Primarily reflected property acquisitions. |
| Cash from financing activities | $599.2 million | $251.1 million | Included equity and note offerings and revolving-credit activity. |
| Total assets / shareholders’ equity | $4.383 billion / $2.473 billion | $3.393 billion / $2.128 billion | Assets expanded with portfolio growth. |
| Total indebtedness | $1.827 billion | $1.205 billion | Increased by approximately $622.5 million. |
| Cash and revolving-credit availability | $23.6 million cash; $750 million facility available at year-end | $10.9 million cash | No revolver borrowings outstanding at December 31, 2011. |
NOI was approximately 84.7% of revenue, and net income was approximately 33.6% of revenue; these are simple ratios calculated from reported amounts, not company-reported GAAP margins. The company declared $1.50 per common share in 2011 distributions, versus normalized FFO of $1.73 per share. The fourth quarter generated $136.6 million in revenue and $38.6 million in net income, or $0.24 per share; the declared quarterly distribution was $0.38 per share.
Material changes versus the prior period
- SNH acquired 56 properties in 2011 for approximately $991.6 million, including 28 senior living communities and 28 MOBs; it sold seven properties for $39.5 million and recorded a $21.3 million gain.
- Portfolio carrying value before depreciation rose to $4.722 billion from $3.762 billion. MOB revenue increased 90.0%, largely due to acquisitions; occupancy across all MOBs fell to 95.9% from 97.0%. Comparable MOB NOI grew only 0.9%.
- Senior living rental income increased 2.1%; leased-community occupancy declined to 85.2% from 86.2%. Reported rent coverage for leased communities increased to 1.44x from 1.40x, based on tenant-provided data that SNH did not independently verify.
- SNH launched 22 managed communities during 2011, reporting $27.9 million of resident fees and services and $21.6 million of related property operating expenses. It reported no additional returns above the minimum returns due under these management arrangements in 2011.
- Funding included $432.2 million net proceeds from common-share issuances and $542.0 million net proceeds from unsecured senior notes. The share count increased to 162.6 million at year-end from 141.9 million.
- Interest expense rose to $98.3 million from $80.0 million. Acquisition-related costs rose to $12.2 million from $3.6 million. Impairment charges declined to $2.0 million from $6.0 million.
Outlook, risks, contingencies and unusual items
Management said operating cash flow was expected to cover operating expenses, debt service and distributions for the next 12 months and foreseeable future. This is a management expectation, not formal earnings guidance; the filing gives no specific forward revenue, earnings or FFO targets. SNH reported $750 million available on its new revolving facility at year-end, with a June 2015 maturity and a one-year extension option. In January 2012, it repaid $225 million of 8.625% notes at maturity; as of February 17, 2012, it reported $276 million outstanding on the revolver and $1.9 billion of debt.
- Tenant concentration: Five Star accounted for 44.6% of annualized rents at December 31, 2011 and leased properties representing 46% of SNH’s investment at cost. The filing cites Five Star’s operating and financial risks, including reimbursement, labor, insurance and occupancy pressures.
- Sunrise lease exposure: Sunrise gave notice that it would terminate leases for 10 of 14 communities effective December 31, 2013; four communities were extended. Marriott guaranteed the rent, but the filing describes uncertainty over future operations and replacement income.
- Policy and operating risks: Medicare and Medicaid reductions, healthcare regulation, weak economic conditions, occupancy and resident demand, tenant defaults, rising labor and insurance costs, and capital-market access could affect rent collection, managed-community results, asset values and distributions. Approximately 8% of property NOI came from properties whose majority of NOI depended on Medicare or Medicaid.
- Debt, liquidity and distributions: Debt increased materially to finance growth. Covenants restrict borrowing and distributions, and variable-rate debt creates interest-rate exposure. Distributions are discretionary and are not assured.
- Acquisitions and related parties: Several announced acquisitions remained subject to closing conditions. Transactions, management and financing involve RMR, Five Star and other affiliates; the filing highlights potential conflicts despite independent committee review. A $38 million secured loan to Five Star matured July 1, 2012.
- Unusual items and other disclosures: 2011 included a $21.3 million sale gain, $2.0 million impairment charge and $0.4 million loss on early debt extinguishment. Two properties were classified as held for sale. The filing reported no legal proceedings, stated that debt covenants were met at year-end, and included unqualified audit opinions and an effective internal-control assessment.
Most important facts for investors to verify
- Confirm the issuer identity: this filing is for Senior Housing Properties Trust (SNH), not Diversified Healthcare Trust.
- Review Five Star’s ability to meet lease obligations and the exposure represented by its 44.6% share of annualized rent.
- Assess the 2013 Sunrise lease expirations, Marriott guarantee, and prospects for replacing the rent from the 10 communities.
- Reconcile acquisition-driven revenue and NOI growth with comparable-property performance, occupancy, per-share FFO and the increased share count.
- Check debt maturities, post-year-end repayment and revolver borrowing, covenant headroom, and the cost and availability of refinancing.
- Evaluate whether operating cash flow and normalized FFO support distributions and planned investment, accounting for capital needs and the dividend’s discretionary status.
- Review the terms and performance of related-party arrangements, including the Five Star loan and managed-community contracts, and the assumptions behind property impairments and purchase-price allocations.