DIVERSIFIED HEALTHCARE TRUST annual report, FY2017

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Business context and reporting period

The supplied filing is Senior Housing Properties Trust’s Form 10-K for the fiscal year ended December 31, 2017, not a filing under the name Diversified Healthcare Trust. It is an annual report, with unaudited quarterly data including Q4. SNH was a REIT owning 440 properties in 42 states and Washington, D.C.: senior living communities, medical office buildings (MOBs), and wellness centers.

Financial results and key metrics

  • Revenue: $1.075 billion, up 1.6% from $1.058 billion in 2016. Rental income was $681.0 million; resident fees and services were $393.8 million.
  • Profit: Net income attributable to common shareholders was $147.6 million, or $0.62 per share, versus $141.3 million, or $0.60 per share. The 2017 result included a $46.1 million property-sale gain.
  • Property performance: NOI was $661.4 million, up 0.5%; NOI margin was approximately 61.5% of revenue, compared with 62.2% in 2016. Managed senior living NOI fell 5.4% to $93.3 million; triple-net senior living NOI rose 2.1% to $280.6 million; MOB NOI rose 1.0% to $269.2 million.
  • FFO: Nareit FFO was $367.1 million, or $1.55 per share, versus $443.7 million, or $1.87 per share. Normalized FFO was $375.3 million, or $1.58 per share, versus $446.4 million, or $1.88 per share.
  • Cash flow and distributions: Operating cash flow was $407.1 million, down from $426.8 million. Cash distributions paid were $370.6 million; declared distributions remained $1.56 per share for the year.
  • Debt and liquidity: Consolidated indebtedness was $3.675 billion, about 42.0% of gross assets. Cash and cash equivalents were $31.2 million, with $404.0 million available under the $1.0 billion revolving facility at year-end. The company reported compliance with debt covenants.
  • Occupancy and coverage: Senior living occupancy was 84.1%, down from 85.4%; MOB occupancy was 95.0%, down from 96.5%. Triple-net senior living rent coverage declined to 1.21x from 1.28x.

Material changes versus the prior comparable period

  • Revenue increased modestly, but operating income decreased to $275.2 million from $303.1 million. Higher general and administrative expense—primarily a $55.7 million incentive management fee—was a significant factor.
  • Net income increased partly because of the $46.1 million gain on property sales, compared with a $4.1 million gain in 2016. Debt-extinguishment losses rose to $7.6 million from $0.5 million.
  • Normalized FFO fell 15.9% per share. The 2017 amount included the incentive management fee under the company’s normalization method.
  • Operating cash flow declined, while investing cash outflow narrowed to $221.4 million from $292.9 million. Financing cash outflow increased to $186.1 million, mainly due to net debt repayments.
  • In March 2017, SNH sold a 45% interest in a Boston MOB joint venture for net proceeds of approximately $255.9 million and continued consolidating the property. The transaction added noncontrolling interest and secured debt remained on the consolidated balance sheet.

Outlook, commentary, risks and unusual items

  • Management said operating cash flows, cash balances and financing access should meet operating and capital expenses, debt service and distributions for the next 12 months and the foreseeable future. No numerical earnings or FFO guidance was provided.
  • SNH said it intended to continue quarterly cash distributions, but future amounts are at the trustees’ discretion and are not assured. The $0.39-per-share Q4 distribution was paid in February 2018.
  • Five Star was the largest tenant and managed SNH’s managed senior living communities. Its leases represented 31.2% of annualized rental income; its rent coverage was 1.15x, down from 1.22x, and occupancy was 82.6%, down from 83.9%. The filing highlights Five Star’s history of inconsistent profitability and risk of rent default.
  • Senior living competitive supply, labor and insurance costs, lower occupancy, regulatory and reimbursement changes, and possible reductions in Medicare or Medicaid rates could pressure operators and SNH’s property returns. Approximately 97% of NOI came from properties where most revenue was derived from private resources.
  • SNH agreed to sell three remaining Sunrise-leased communities for $313.0 million, expected by the end of Q1 2018, and had pending acquisitions, including the balance of a six-community purchase from Five Star. These transactions were conditional and could be delayed or not completed.
  • Other notable items: $5.1 million impairment of the Five Star investment; $20.7 million of estimated unspent tenant-related obligations; and February 2018 issuance of $500 million of 4.75% notes due 2028, with proceeds used to reduce revolver borrowings. Barry Portnoy, a managing trustee and related-party executive, died on February 25, 2018.

Important facts for investors to verify

  • Confirm issuer identity: this source is SNH’s 2017 10-K, despite the request naming Diversified Healthcare Trust.
  • Review Five Star’s current financial condition, lease payment capacity, rent coverage and occupancy, and the impact of its concentration in SNH’s portfolio.
  • Reconcile FFO and normalized FFO with GAAP results, especially the incentive fee, property-sale gain and debt-extinguishment losses.
  • Check subsequent completion and final economics of the Sunrise sales and pending acquisitions, as well as use of the 2028 note proceeds and updated revolver balance.
  • Assess debt maturities, floating-rate exposure, covenant headroom, and whether operating cash flow sustainably supports distributions and capital spending.