Senior Housing Properties Trust (registrant name in filing) — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. The filing identifies the registrant as Senior Housing Properties Trust; the request metadata names Diversified Healthcare Trust.
Business context and financial performance
The REIT owned 300 properties in 35 states and Washington, D.C., across senior residential care, rehabilitation hospitals, wellness centers and medical office buildings (MOBs). Amounts below are in millions except per-share data.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Rental income | $80.8 | $69.4 | $161.2 | $137.8 |
| Operating income | $48.5 | $41.2 | $96.7 | $83.4 |
| Net income | $24.6 | $30.5 | $54.5 | $62.0 |
| Net income per share | $0.19 | $0.25 | $0.43 | $0.52 |
| Cash from operating activities | — | $106.7 | $107.9 |
Quarterly rental income rose 16.4%, while net income fell 19.5%; six-month rental income rose 17.0% and net income declined 12.1%. Operating margin was approximately 60.0% in Q2 2010 versus 59.4% a year earlier. Lower acquisition costs and higher rent supported operating income, but sharply higher interest expense, a debt-redemption loss and an impairment charge reduced net income.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $25.2 million, up from $10.5 million at year-end 2009. Six-month operating cash flow was $106.7 million; investing used $31.3 million and financing used $60.6 million. Shareholder distributions used $91.7 million.
- Balance-sheet liabilities totaled $1.131 billion. These included $422.7 million of unsecured senior notes, $658.3 million of secured debt and capital leases, and no revolving-credit borrowings. The filing separately reports $643.5 million of mortgages and $14.7 million of capital-lease properties.
- The $550 million revolving facility had no borrowings and was fully available at June 30 and August 2, 2010. It matures in December 2010; the company had not decided whether to refinance or exercise a conditional one-year extension.
- In April, the company issued $200 million of 6.75% senior notes due 2020. Proceeds helped repay revolver borrowings and redeem all $97.5 million of 7.875% notes due 2015. The redemption resulted in a $2.4 million loss.
- Management said it believed operating cash flow would cover operating expenses, debt service and distributions for the foreseeable future, and reported compliance with debt covenants.
Changes, outlook and material risks
- Revenue growth primarily reflected property acquisitions: MOB rental income increased 78.9% in Q2 and 82.9% for the first half. The company acquired two MOBs during Q2, in Colorado and Texas.
- Interest expense rose to $20.5 million in Q2 from $10.7 million, and to $38.9 million for six months from $21.5 million. The filing attributes the increase chiefly to 2009 FNMA financing and the new 2020 notes.
- Five Star Quality Care accounted for 57% of annualized rents; the company leased it 192 senior-living and rehabilitation properties. Five Star’s reported minimum annual rent was $185.6 million. This concentration, and Five Star’s exposure to Medicare and Medicaid reimbursement and operating costs, are material tenant risks.
- Six properties were held for sale, with a $3.2 million carrying value after a $1.1 million current-period impairment charge. Management also disclosed $10.5 million of cumulative impairments on those properties.
- A quarterly distribution of $0.36 per share, approximately $45.9 million, was declared after quarter-end for payment in August 2010. No formal earnings or revenue guidance is provided.
- The company cited uncertainty around healthcare reimbursement changes under the Affordable Care Act, including possible pressure on tenant rent-paying capacity. It also warned that tighter capital markets or higher credit spreads could make refinancing more costly or unavailable.
- Related-party matters merit attention: RMR managed both the trust and Five Star; the trust had invested about $5.2 million in Affiliates Insurance, whose board included all the trust’s trustees, and purchased insurance through its program. The filing describes potential conflicts and warns expected benefits may not materialize.
Key investor verification points
- Confirm progress and terms for refinancing or extending the revolving facility before its December 2010 maturity.
- Assess Five Star’s rent coverage, liquidity and ability to meet rent obligations, given its 57% share of annualized rents.
- Reconcile rental growth from acquisitions with rising interest, depreciation and property operating costs; review the sustainability of net income and distributions.
- Monitor Medicare and Medicaid policy changes and their possible effect on tenants’ margins and rent coverage.
- Review the held-for-sale portfolio, impairment assumptions, and governance and financial exposures involving RMR and Affiliates Insurance.