Business context and reporting period
Filing identity: The supplied filing is Senior Housing Properties Trust’s (SNH) Form 10-K for the year ended December 31, 2015, not a filing identified as Diversified Healthcare Trust. The metadata company name and filing registrant do not match.
SNH was a REIT owning 427 properties in 43 states and Washington, D.C.: 296 senior living communities, 121 medical office buildings (MOBs), and 10 wellness centers. The filing reports full-year results; fourth-quarter figures are separately available.
Financial and operating highlights
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $998.8 million | $844.9 million |
| Net income | $124.0 million | $158.6 million |
| Net income per diluted share | $0.53 | $0.80 |
| Net operating income (NOI) | $621.2 million | $520.3 million |
| Funds from operations (FFO) | $382.5 million; $1.64 per share | $342.9 million; $1.72 per share |
| Normalized FFO | $429.7 million; $1.84 per share | $347.6 million; $1.75 per share |
| Cash from operating activities | $405.5 million | $350.9 million |
| Cash used for investing activities | $1,213.1 million | $1,264.0 million |
| Cash from financing activities | $817.6 million | $901.5 million |
| Total indebtedness at year-end | $3,503.0 million | $2,800.7 million |
Revenue increased 18.2%, while net income fell 21.9%. NOI increased 19.4%; the implied NOI margin was approximately 62.2%, versus 61.6% in 2014. Growth largely reflected acquisitions. Net income included a $38.4 million non-cash loss on the distribution of RMR Inc. shares and $1.9 million of losses on early debt extinguishment. Normalized FFO excludes specified items, including the RMR distribution loss and acquisition costs.
Segment results: triple-net senior living revenue and NOI were each $256.0 million, up 11.0%; managed senior living revenue rose 15.6% to $367.9 million and NOI rose 22.6% to $89.6 million; MOB revenue increased 28.2% to $356.6 million and NOI increased 29.6% to $257.2 million. Acquisition-driven growth was partly offset by weaker comparable-property MOB NOI, down 3.4%.
At year-end, cash and cash equivalents were $37.7 million and availability under the $1.0 billion revolving credit facility was $225.0 million. Debt was 51.0% of total book capitalization. The company reported compliance with debt covenants. In February 2016, it issued $250 million of 6.25% notes due 2046; proceeds were used to repay revolving-credit borrowings and for general purposes.
Cash distributions were $1.56 per common share for 2015, unchanged from 2014; the fourth-quarter cash distribution was $0.39 per share. Shareholders also received an in-kind RMR Inc. distribution valued at $0.1320 per SNH share. Weighted-average shares rose to 232.9 million from 198.9 million, reflecting equity issuance.
Material changes, outlook, risks and unusual items
- SNH acquired 23 MOBs in January 2015 and 39 senior living communities during 2015. It funded acquisitions with cash, debt, assumed mortgages and equity; a February 2015 share offering raised about $659.5 million net.
- Five Star was SNH’s largest tenant and managed 60 of its senior living communities. It represented approximately 30.8% of annualized rental income; Five Star’s operating data showed aggregate rent coverage of 1.23x and occupancy of 84.6% for the reported periods. Management cautioned that Five Star had limited resources, substantial lease obligations and a history of inconsistent profitability.
- Portfolio occupancy at year-end was 86.0% for senior living communities and 96.4% for MOBs. Comparable managed-community occupancy declined from 88.5% to 87.7%; comparable MOB NOI declined 3.4%.
- Management stated that operating cash flows, cash balances and borrowing capacity were expected to cover operating costs, debt service and distributions for the next 12 months and the foreseeable future. This is management’s assessment, not a guarantee. The filing provides no earnings or FFO guidance.
- Key risks include tenant and manager financial weakness, labor and insurance costs, occupancy and lease-renewal risk, healthcare regulation and reimbursement changes, interest-rate exposure, refinancing and covenant constraints, and SNH’s dependence on externally provided management services.
- Related-party arrangements are significant: SNH has no employees and relies on RMR LLC; management agreements were extended to rolling 20-year terms and can carry substantial termination fees. The RMR Inc. investment and transactions involving Five Star, RMR LLC, AIC and affiliated REITs create conflicts-of-interest and valuation risks.
- SNH reported no litigation expected to have a material adverse effect, no material off-balance-sheet arrangements, and effective disclosure controls and internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the issuer: this filing is for Senior Housing Properties Trust, not Diversified Healthcare Trust.
- Review the full-year and quarterly earnings reconciliation, especially the $38.4 million RMR share-distribution loss and the gap between GAAP net income, FFO and Normalized FFO.
- Assess Five Star’s current financial condition, rent-paying capacity, lease coverage and the performance of SNH-managed communities.
- Reconcile debt maturities, floating-rate exposure, revolver availability and post-year-end note proceeds against the company’s liquidity and distribution needs.
- Evaluate the sustainability of the $1.56 annual cash distribution relative to cash flow, FFO, capital spending and debt obligations; note that 2015 distributions included a substantial return-of-capital component.
- Examine acquisition returns and comparable-property trends, including weaker comparable MOB NOI and lower managed senior living occupancy.
- Review related-party management terms, termination provisions, and the valuation and tax treatment of the RMR Inc. investment.