Senior Housing Properties Trust (SNH) — Form 10-Q summary
Company-name note: The supplied filing is for Senior Housing Properties Trust, not Diversified Healthcare Trust. The summary below reflects the registrant named in the filing.
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2011, compared with the corresponding 2010 periods. SNH owned 339 properties in 37 states and Washington, D.C., across senior living and care communities, medical office buildings (MOBs), and wellness centers. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $100.7 | $80.8 | $198.8 | $161.2 |
| Operating income | $53.3 | $47.4 | $107.6 | $95.6 |
| Net income | $51.0 | $24.6 | $82.8 | $54.5 |
| Net income per share | $0.36 | $0.19 | $0.58 | $0.43 |
| Cash from operations | — | $133.2 | $106.7 |
Revenue rose 24.7% in Q2 and 23.3% for the half year, largely reflecting acquisitions. Q2 net income included a $21.3 million gain on property sales; the prior-year quarter included a $2.4 million debt-extinguishment loss. Operating margin was 52.9% in Q2 2011 versus 58.6% in Q2 2010; net margin was 50.7% versus 30.4%. For the six-month periods, operating margin was 54.1% versus 59.3%, and net margin was 41.6% versus 33.8%.
For Q2, FFO was $56.7 million ($0.40 per share) and Normalized FFO was $62.6 million ($0.44 per share), compared with $46.9 million ($0.37) and $53.3 million ($0.42), respectively, in 2010. These are non-GAAP measures. Q2 distributions declared were $0.37 per share; six-month distributions declared were $0.74 per share versus Normalized FFO of $0.88 per share.
At June 30, total assets were $3,733.4 million; total liabilities were $1,630.4 million and shareholders’ equity was $2,103.0 million. Balance-sheet debt and capital leases comprised $184.0 million drawn on the revolving facility, $670.6 million of unsecured notes (net of discount), and $697.5 million of secured debt and capital leases. Cash and cash equivalents were $28.1 million. The new $750 million revolving facility had $566 million available. Cash increased by $17.2 million in the first half; investing activities used $300.1 million and financing activities provided $184.1 million.
Material changes versus the prior comparable period
- Q2 rental income increased to $99.9 million from $80.8 million. MOB rental income nearly doubled, primarily because of acquisitions; comparable MOB NOI was nearly flat, down 0.1% in Q2 and 0.4% for the half year.
- SNH acquired 14 of 20 agreed Southeast senior living communities in June for about $196.6 million, and three more in July for about $44.7 million. It also acquired MOBs and other properties. Seven properties were sold in Q2 for $39.5 million, generating the $21.3 million gain.
- Interest expense increased to $23.4 million in Q2 from $20.5 million and to $46.1 million for the half year from $38.9 million, reflecting new notes and higher revolving borrowings, partly offset by prior debt redemption.
- Debt rose from $1,204.9 million at year-end 2010 to $1,552.2 million at June 30, 2011, using balance-sheet categories. The company issued $250 million of 4.30% notes in January and replaced its $550 million revolving facility with a $750 million facility in June.
Outlook, risks, contingencies, and unusual items
- Management said operating cash flow should be sufficient for operating costs, debt service, and distributions for the next 12 months and foreseeable future. This is an expectation, not earnings guidance.
- A $0.37-per-share distribution for Q2 was declared July 1, payable around August 12. In July, SNH also issued 11.5 million shares, raising approximately $247.5 million net, primarily to repay revolving borrowings and fund business needs and acquisitions.
- Five Star was the largest tenant and accounted for 47.7% of annualized rental income. SNH also held an 8.9% stake in Five Star and had a secured bridge loan to it: $9 million outstanding at June 30 and $24 million at July 28. The related-party relationships with Five Star and manager RMR are material considerations.
- Management cited Medicare and Medicaid reimbursement uncertainty. A proposed SNF payment recalibration could, if adopted as described, reduce aggregate Medicare SNF rates by an estimated 11.3% in fiscal 2012; the final impact was uncertain. The filing also warns that some leased hospitals and certain senior-care properties may not generate sufficient cash flow to consistently cover rent.
- Three remaining communities from the Southeast acquisition and other proposed acquisitions were subject to customary closing conditions. The filing identifies tenant/operator performance, labor and operating costs, lease renewals, capital-market access, interest rates, and REIT qualification as risks. Management reported compliance with debt covenants at June 30.
Most important facts for investors to verify
- Confirm the issuer identity: this filing names Senior Housing Properties Trust, notwithstanding the request metadata naming Diversified Healthcare Trust.
- Review Five Star’s ability to meet rent obligations, given its concentration in SNH’s rental income, reimbursement exposure, and related-party lending and management arrangements.
- Assess recurring operating performance separately from the $21.3 million property-sale gain and acquisition-driven growth; compare comparable-property NOI with reported results.
- Check debt maturities and refinancing needs, especially the $225 million of 8.625% notes due in 2012, and confirm liquidity after the July equity proceeds and subsequent acquisitions.
- Track whether the declared distribution remains supported by recurring cash generation and FFO, and whether pending acquisitions close on expected terms.