Business context and reporting period
Filing identity: The supplied filing is Senior Housing Properties Trust’s unaudited Form 10-Q for the quarter ended June 30, 2015. This does not match the request metadata naming Diversified Healthcare Trust; confirm the intended registrant.
At June 30, SNH owned 428 properties in 43 states and Washington, D.C., across triple-net senior living, managed senior living, medical office buildings (MOBs) and wellness centers. The filing says 97% of net operating income (NOI) came from properties where most charges were paid from private resources. Dollar amounts below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $247.4 | $206.7 | $476.0 | $398.2 |
| Operating income | $75.0 | $68.1 | $152.4 | $135.1 |
| Net income | $36.4 | $37.7 | $76.2 | $76.2 |
| Diluted net income per share | $0.15 | $0.19 | $0.33 | $0.39 |
| FFO per share (non-GAAP) | $0.42 | $0.41 | $0.84 | $0.82 |
| Normalized FFO per share (non-GAAP) | $0.45 | $0.43 | $0.90 | $0.86 |
- Q2 revenue increased 19.7% year over year; six-month revenue increased 19.5%. Management attributed much of the growth to acquisitions. Q2 net income fell 3.4%, while six-month net income was essentially unchanged. Higher depreciation, interest and share count contributed to lower reported EPS.
- Q2 NOI was $153.8 million, versus $126.9 million a year earlier, about 62.2% of revenue. NOI is a company-defined non-GAAP measure, not a substitute for GAAP results.
- For the first six months, cash from operations was $216.5 million, versus $179.0 million. Investing used $1.147 billion, mainly for acquisitions; financing provided $955.4 million. Cash and cash equivalents ended June at $52.2 million.
- Balance-sheet total assets were $7.348 billion and total liabilities $3.782 billion. Debt carrying amounts included $615 million drawn on the revolver, a $350 million term loan, $1.744 billion of senior notes and $730.2 million of secured debt and capital leases. The $750 million revolver had $135 million available at June 30.
- Quarterly distributions remained $0.39 per share; $0.78 per share was declared for the first half. Cash distributions paid in the first half totaled $171.2 million.
Material changes versus the prior comparable period
- SNH acquired 23 MOBs in January for a contractual price of about $539 million and 37 senior living communities in May for about $762.6 million, including assumed mortgage debt. The May portfolio comprised 18 triple-net leased and 19 managed communities.
- MOB revenue rose 31.7% in Q2 and 45.4% for the first half, primarily due to acquisitions. On a comparable-property basis, MOB NOI declined 2.3% in Q2 and 2.4% for the first half.
- Comparable managed senior living NOI grew 1.4% in Q2 and 3.2% for the first half. Comparable triple-net senior living occupancy was broadly stable; rent coverage for the overall triple-net portfolio was 1.37x.
- Depreciation rose to $62.5 million in Q2 from $46.7 million, reflecting acquired properties and improvements. Interest expense rose to $37.9 million from $34.1 million.
- SNH issued 31.05 million shares in February, generating approximately $659.5 million net, and outstanding shares increased to 237.4 million by June 30. The filing’s pro forma six-month results, which assume specified acquisitions and financings occurred earlier, show revenue of $508.4 million and net income of $77.8 million for 2015; these are not actual reported results or a forecast.
Outlook, commentary, risks and unusual items
- Management said operating cash flow should cover operating expenses, debt service and distributions for the next 12 months and the foreseeable future. This is an expectation, not a guarantee; no specific earnings or revenue guidance was provided.
- SNH expected to pay the declared $0.39 distribution in August using cash and revolver borrowings. It also expected to close the delayed acquisition of one additional senior living community by year-end, subject to conditions. A separate July agreement to acquire an 84-unit community was also conditional.
- Five Star was a significant tenant: it accounted for 30.8% of rental income in the first half and leased properties representing 28.9% of SNH’s investments at cost. Five Star also managed 60 communities for SNH. Tenant financial health and ability to pay rent are material risks.
- In June, SNH acquired a 33% shareholding in RMR Inc., representing an indirect 17.0% economic interest in its manager, RMR LLC. The transaction involved related parties. Management agreements were amended to 20-year terms, with termination rights and potentially substantial termination fees. SNH agreed to distribute half its RMR Inc. shares to shareholders, subject to SEC registration and exchange-listing requirements; timing and market value were uncertain.
- Other risks include interest-rate exposure on floating-rate debt, capital-market access, lease renewals and occupancy, healthcare reimbursement and regulatory changes, and possible effects on operators’ ability to pay rent. The filing noted a proposed CMS rule that could increase SNF operating costs and stated that the effects of reimbursement changes could not be predicted. SNH reported compliance with debt covenants and effective disclosure controls at quarter-end.
- Unusual items included a $1.4 million first-quarter loss from terminating a bridge-loan commitment and a $0.6 million impairment charge on a MOB sold in April. Three senior living communities were classified as held for sale at June 30; two were sold after quarter-end.
Most important facts an investor should verify
- Confirm the registrant and whether this SNH filing—not a Diversified Healthcare Trust filing—is the intended document.
- Review Five Star’s financial condition, lease coverage and rent concentration, and confirm the basis and date of the tenant operating data, which SNH had not independently verified.
- Assess acquisition-related growth separately from comparable-property performance, particularly the comparable MOB NOI declines and managed-community operating costs.
- Verify debt maturities, revolver usage and covenant headroom, and evaluate sensitivity to higher LIBOR and refinancing rates.
- Review the RMR Inc. investment, related-party governance, management-agreement termination provisions and conditions for the proposed share distribution.
- Check whether pending acquisitions and dispositions closed, whether the declared distribution was paid, and whether subsequent events changed reported liquidity or obligations.