Senior Housing Properties Trust — Form 10-Q Summary
Entity and period: The supplied filing is for Senior Housing Properties Trust, for the quarter ended September 30, 2010; it is not filed under the name Diversified Healthcare Trust. Unless noted otherwise, figures below are in millions of dollars.
Business context and reporting period
The REIT owned 298 properties in 35 states and Washington, D.C., across residential care facilities, medical office buildings (MOBs), wellness centers and rehabilitation hospitals. The statements are unaudited and cover the three and nine months ended September 30, 2010, compared with the same 2009 periods.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Rental income | $81.0 | $72.0 | $242.2 | $209.8 |
| Operating income | $48.0 | $42.5 | $144.7 | $125.9 |
| Interest expense | $20.2 | $15.9 | $59.2 | $37.4 |
| Net income | $28.1 | $15.6 | $82.6 | $77.6 |
| Net income per share | $0.22 | $0.13 | $0.65 | $0.65 |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $161.4 | $160.5 |
Q3 operating margin was approximately 59.3% versus 59.0%; nine-month operating margin was approximately 59.8% versus 60.0%. Net margin was approximately 34.7% versus 21.6% for Q3 and 34.1% versus 37.0% for the nine-month periods.
- At September 30, cash and cash equivalents were $8.5; the revolving facility had $12.0 drawn and $538.0 available. The facility limit was $550.0 and its stated maturity was December 31, 2010; management intended to exercise a one-year extension option.
- Reported liabilities included $422.8 of senior notes, $656.2 of secured debt and capital leases, and $12.0 on the revolver. Total reported liabilities were $1,146.9. The filing separately describes $641.6 of mortgage debt and $14.7 of capital leases.
- Cash used for investing was $66.8 and cash used for financing was $96.6 over the first nine months. Shareholder distributions used $137.6 of cash.
- Total assets were $2,999.7 and shareholders’ equity was $1,852.8 at September 30, 2010.
Material changes versus prior comparable periods
- Rental income increased 12.4% in Q3 and 15.4% year to date, primarily reflecting acquisitions: MOB rents rose 44.0% in Q3 and 67.8% year to date; residential care rents rose 5.4% and 5.3%, respectively.
- Operating income rose 13.0% in Q3 and 15.0% year to date. Net income rose 80.4% in Q3, helped by the absence of the prior-year $11.2 impairment charge; nine-month net income rose 6.5%. Nine-month earnings per share remained $0.65 as average shares outstanding increased 6.2%.
- Interest expense increased 26.8% in Q3 and 58.0% year to date, largely due to the 2009 FNMA mortgage financing and $200.0 of 6.75% senior notes issued in April 2010. The company redeemed $97.5 of 7.875% notes in May 2010 and recorded a $2.4 early-extinguishment loss.
- Cash from operations was nearly unchanged year to date. Acquisitions used $68.1, substantially below the $423.9 used in the prior-year period; 2010 financing included $195.4 net proceeds from senior notes, alongside debt repayments and distributions.
Outlook, risks, contingencies and unusual items
- Management said it believed operating cash flow would be sufficient for operating costs, debt service and distributions for the foreseeable future. No quantified earnings or acquisition guidance was provided.
- The company declared a $0.37-per-share distribution, approximately $47.2, payable in November 2010. This was up from the $0.36-per-share distribution for the prior-year quarter.
- Tenant concentration is material: Five Star accounted for 56% of annualized current rents and owed $16.6 in rent receivable. Five Star’s minimum annual rent was $186.1. Its ability to pay is exposed to operating conditions and Medicare and Medicaid reimbursement changes.
- The filing discusses potential pressure on healthcare tenants from PPACA, future Medicare payment adjustments and state Medicaid budget constraints. Such pressures could impair tenants’ ability to pay rent.
- Related-party relationships warrant attention: RMR manages both the trust and Five Star; the trust also invests in an insurance company connected with RMR and other managed companies. The filing identifies potential conflicts of interest.
- Other notable items: five properties were impaired by $1.1 during the first nine months; two Pennsylvania properties with a $1.9 carrying value were held for sale. Four Nebraska skilled nursing facilities were sold for $1.45, with a $0.109 gain. A subsequent MOB acquisition for $15.0 was completed after quarter-end.
- Management reported compliance with debt covenants and effective disclosure controls. Risks include refinancing and credit-spread conditions, variable interest rates, lease renewals, tenant occupancy and reimbursement changes. The filing states that the revolving facility and other debt contain specified cross-default provisions.
Investor verification priorities
- Confirm the registrant identity: this filing names Senior Housing Properties Trust, despite the request identifying Diversified Healthcare Trust.
- Review Five Star’s rent coverage, liquidity and operating performance, given its 56% share of annualized rents and related-party connections.
- Verify the revolving facility extension or refinancing, resulting borrowing costs, and subsequent borrowings and acquisitions.
- Assess whether operating cash flow can sustain distributions while funding debt service, property needs and acquisitions.
- Examine exposure to Medicare and Medicaid reimbursement changes, lease expirations and the held-for-sale properties.