Business context and reporting period
Filing identity: The supplied filing is Senior Housing Properties Trust’s Form 10-K for the fiscal year ended December 31, 2018—not a filing under the name Diversified Healthcare Trust. The summary below reflects the filing text provided. It is an annual report, with fourth-quarter results separately noted where available.
The REIT owned 443 properties across 42 states and Washington, D.C.: 129 medical office buildings (MOBs), 304 senior living communities and 10 wellness centers. Its strategy included growing MOB investments as a share of the portfolio.
Financial results and position
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Total revenue | $1,117.2 million | $1,074.7 million | Up 3.9% |
| Net income attributable to common shareholders | $286.9 million; $1.21/share | $147.6 million; $0.62/share | Up substantially, primarily reflecting property-sale gains |
| FFO attributable to common shareholders | $356.3 million; $1.50/share | $367.1 million; $1.55/share | Down 2.9% in dollars |
| Normalized FFO attributable to common shareholders | $377.3 million; $1.59/share | $375.2 million; $1.58/share | Up 0.6% in dollars |
| Net operating income (NOI) | $665.6 million | $661.2 million | Up 0.7%; approximately 59.6% of revenue versus 61.5% in 2017 |
| Cash from operating activities | $392.8 million | $419.3 million | Down $26.5 million |
| Cash from investing activities | $99.1 million provided | $221.4 million used | 2018 included $332.4 million of property-sale proceeds |
| Cash used in financing activities | $469.2 million | $186.1 million | Higher debt repayments and shareholder distributions |
| Cash and cash equivalents | $55.0 million | $31.2 million | Plus $15.1 million restricted cash |
| Indebtedness | $3.65 billion | $3.67 billion | Debt to gross assets was 42.4%; $744.2 million of secured debt and capital leases on the balance sheet |
| Total assets / equity | $7.16 billion / $3.18 billion | $7.29 billion / $3.28 billion | Year-end 2018 |
At December 31, 2018, $861.0 million was available under the $1.0 billion revolving credit facility. The company reported covenant compliance. It expected to fund $400 million of notes maturing in May 2019 with revolver borrowings. Interest expense was $179.3 million, up from $165.0 million; the filing attributes the increase in part to the 2018 note issuance and higher LIBOR.
Common distributions declared were $1.56 per share for 2018, unchanged from 2017, totaling $370.7 million. Annual distributions exceeded reported FFO per share of $1.50 but were below Normalized FFO per share of $1.59. A $0.39-per-share fourth-quarter distribution was paid in February 2019.
Material changes versus prior comparable period
- Revenue rose 3.9%, including MOB revenue growth of 8.0%; comparable MOB NOI was nearly flat, down 0.2%.
- Triple-net senior-living rental income fell 4.0%, reflecting property sales, transfers to the managed segment and increased rent reserves associated with defaults. Occupancy declined to 81.9% from 83.5%, and reported rent coverage fell to 1.08x from 1.22x.
- Managed senior-living revenue increased 5.8%, but segment NOI declined 0.5%. On a comparable-property basis, NOI fell 6.8%, as staffing and other operating costs rose while average monthly rates declined.
- Net income included $261.9 million in gains on property sales, versus $46.1 million in 2017. The company also recorded $66.3 million in asset impairments, compared with $5.1 million in 2017, including $46.8 million related to Massachusetts MOBs and $19.5 million related to senior-living lease defaults.
- Fourth-quarter 2018 revenue was $285.2 million and net income attributable to common shareholders was a loss of $118.5 million, or $(0.50) per share. The comparable 2017 quarter reported $278.5 million revenue and $65.0 million net income.
- Operating cash flow declined, in part because the company paid a $55.7 million business-management incentive fee in January 2018. It issued $500 million of 4.75% notes due 2028 and used the net proceeds to reduce revolver borrowings.
Outlook, commentary, risks and unusual items
- Five Star exposure is the central risk. Five Star announced substantial doubt about its ability to continue as a going concern, citing recurring losses, industry challenges expected through at least 2019 and funding uncertainty. It represented 31.1% of annualized rental income and 19.0% of 2018 revenue as a tenant; its management of the company’s communities represented 37.3% of revenue. The parties’ independent directors were evaluating lease and management arrangements; changes could reduce income, cash flow and distributions.
- Management said available operating cash flows, cash and revolver capacity were expected to fund operations, capital needs, debt service and distributions for the next 12 months and the foreseeable future. This expectation is subject to tenant performance, property operations, capital needs and financing access.
- The stated 2019 acquisition focus was increasing the MOB segment as a percentage of the portfolio. No numerical earnings, revenue or FFO guidance is provided in the supplied text.
- The company expected two MOB tenants to vacate 526,518 square feet in the second quarter of 2019. Releasing or repositioning the space could take time and require significant capital. The filing also disclosed planned or pending sales of several properties.
- Other material risks include senior-living labor-cost inflation, new property supply and occupancy pressure, lease defaults, interest-rate and LIBOR transition risk, extensive healthcare regulation and reimbursement changes, and dependence on externally managed RMR LLC. Related-party relationships and potential conflicts are extensively disclosed.
- The 2018 net-income increase is not a clean measure of recurring performance: property-sale gains were large, while FFO declined. Unrealized equity-security losses of $20.7 million were recognized in earnings following adoption of a new accounting standard.
Important facts for investors to verify
- Confirm the issuer and ticker: this source identifies Senior Housing Properties Trust (Nasdaq: SNH), despite the request naming Diversified Healthcare Trust.
- Review subsequent Five Star developments, any restructuring of leases or management agreements, and the resulting rent collection and managed-community economics.
- Reconcile recurring earnings and cash available for distributions against property-sale gains, impairments, incentive fees, capital spending and debt service; assess the sustainability of the $1.56 annual distribution.
- Check refinancing of the $400 million 2019 notes, subsequent revolver balances, covenant headroom, debt maturities and floating-rate exposure.
- Verify the status, occupancy and leasing costs for departing MOB tenants and the Massachusetts properties impaired or classified as held for sale.
- Note that tenant operating statistics were supplied by tenants and were not independently verified. The independent auditor issued an unqualified opinion on the financial statements and internal controls.