XNYS:SNH Senior Housing Properties Trust Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-15319

 

SENIOR HOUSING PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland

 

04-3445278

(State or Other Jurisdiction of Incorporation or
Organization)

 

(IRS Employer Identification No.)

 

Two Newton Place, 255 Washington Street, Suite 300, Newton, MA

 

02458-1634

(Address of Principal Executive Offices)

 

(Zip Code)

 

617-796-8350

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check One):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non–accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o  No x

 

Number of registrant’s common shares outstanding as of August 1, 2012:  176,475,108.

 

 

 



 

SENIOR HOUSING PROPERTIES TRUST

FORM 10-Q

 

June 30, 2012

 

INDEX

 

 

 

Page

 

 

 

PART I

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets — June 30, 2012 and December 31, 2011

1

 

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income — Three and Six Months Ended June 30, 2012 and 2011

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2012 and 2011

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

Item 4.

Controls and Procedures

50

 

 

 

 

Warning Concerning Forward Looking Statements

51

 

 

 

 

Statement Concerning Limited Liability

54

 

 

 

PART II

Other Information

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

 

 

 

Item 6.

Exhibits

55

 

 

 

 

Signatures

58

 

In this Quarterly Report on Form 10-Q, the terms “the Company”, “we”, “us” and “our” refer to Senior Housing Properties Trust and its consolidated subsidiaries, unless otherwise noted.

 



 

PART I.   Financial Information

 

Item 1.                   Financial Statements.

 

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share and per share data)

(unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

Real estate properties:

 

 

 

 

 

Land

 

$

583,683

 

$

564,628

 

Buildings and improvements

 

4,282,707

 

4,156,963

 

 

 

4,866,390

 

4,721,591

 

Less accumulated depreciation

 

688,407

 

630,261

 

 

 

4,177,983

 

4,091,330

 

Cash and cash equivalents

 

20,405

 

23,560

 

Restricted cash

 

10,044

 

7,128

 

Deferred financing fees, net

 

23,479

 

25,434

 

Acquired real estate leases and other intangible assets, net

 

100,619

 

100,235

 

Loan receivable

 

 

38,000

 

Other assets

 

134,022

 

97,361

 

Total assets

 

$

4,466,552

 

$

4,383,048

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Unsecured revolving credit facility

 

$

360,000

 

$

 

Senior unsecured notes, net of discount

 

741,412

 

965,770

 

Secured debt and capital leases

 

863,516

 

861,615

 

Accrued interest

 

13,315

 

22,281

 

Assumed real estate lease obligations, net

 

15,091

 

17,778

 

Other liabilities

 

57,059

 

42,998

 

Total liabilities

 

2,050,393

 

1,910,442

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares of beneficial interest, $.01 par value: 174,700,000 shares authorized, 162,675,108 and 162,646,046 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

 

1,627

 

1,626

 

Additional paid in capital

 

2,944,868

 

2,944,212

 

Cumulative net income

 

973,540

 

907,937

 

Cumulative other comprehensive income

 

(2,860

)

(3,772

)

Cumulative distributions

 

(1,501,016

)

(1,377,397

)

Total shareholders’ equity

 

2,416,159

 

2,472,606

 

Total liabilities and shareholders’ equity

 

$

4,466,552

 

$

4,383,048

 

 

See accompanying notes.

 

1



 

SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental income

 

$

110,986

 

$

100,318

 

$

220,491

 

$

198,870

 

Residents fees and services

 

35,986

 

844

 

71,554

 

844

 

Total revenues

 

146,972

 

101,162

 

292,045

 

199,714

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Depreciation

 

35,230

 

26,935

 

68,607

 

53,296

 

Property operating expenses

 

40,734

 

11,302

 

80,068

 

21,735

 

General and administrative

 

8,068

 

6,793

 

15,753

 

12,949

 

Acquisition related costs

 

1,829

 

2,814

 

2,517

 

3,927

 

Impairment of assets

 

 

 

3,071

 

166

 

Total expenses

 

85,861

 

47,844

 

170,016

 

92,073

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

61,111

 

53,318

 

122,029

 

107,641

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

227

 

244

 

709

 

476

 

Interest expense

 

(28,120

)

(23,361

)

(57,009

)

(46,107

)

Loss on early extinguishment of debt

 

 

(427

)

 

(427

)

Gain on sale of properties

 

 

21,315

 

 

21,315

 

Equity in earnings of an investee

 

76

 

46

 

121

 

83

 

Income before income tax expense

 

33,294

 

51,135

 

65,850

 

82,981

 

Income tax expense

 

(43

)

(87

)

(247

)

(158

)

Net income

 

33,251

 

51,048

 

65,603

 

82,823

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Change in net unrealized loss on investments

 

(1,315

)

(6,727

)

916

 

(3,183

)

Share of comprehensive (loss) income of an investee

 

(3

)

39

 

(4

)

43

 

Comprehensive income

 

$

31,933

 

$

44,360

 

$

66,515

 

$

79,683

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

162,670

 

141,869

 

162,659

 

141,862

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

$

0.20

 

$

0.36

 

$

0.40

 

$

0.58

 

 

See accompanying notes.

 

2



 

SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

 

Six Months Ended
 June 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

65,603

 

$

82,823

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

Depreciation

 

68,607

 

53,296

 

Amortization of deferred financing fees and debt discounts

 

3,024

 

2,144

 

Straight line rental income

 

(6,062

)

(5,725

)

Amortization of acquired real estate leases and other intangible assets

 

(170

)

(371

)

Loss on early extinguishment of debt

 

 

427

 

Impairment of assets

 

3,071

 

166

 

Gain on sale of properties

 

 

(21,315

)

Equity in earnings of an investee

 

(121

)

(83

)

Change in assets and liabilities:

 

 

 

 

 

Restricted cash

 

(2,916

)

(718

)

Other assets

 

10,719

 

3,120

 

Accrued interest

 

(8,966

)

5,100

 

Other liabilities

 

13,740

 

12,867

 

Cash provided by operating activities

 

146,529

 

131,731

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Real estate acquisitions and deposits

 

(123,867

)

(306,819

)

Real estate improvements

 

(20,015

)

(16,462

)

Loan receivable

 

 

(41,000

)

Principal payments on loan receivable

 

38,000

 

32,000

 

Investment in Five Star Quality Care, Inc.

 

 

(5,000

)

Proceeds from sale of properties

 

 

38,663

 

Cash used for investing activities

 

(105,882

)

(298,618

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common shares, net

 

 

(103

)

Proceeds from issuance of unsecured senior notes, net of discount

 

 

247,327

 

Proceeds from borrowings on revolving credit facility

 

434,000

 

365,000

 

Repayments of borrowings on revolving credit facility

 

(74,000

)

(309,000

)

Redemption of senior notes

 

(225,000

)

 

Repayment of other debt

 

(54,889

)

(4,541

)

Payment of deferred financing fees

 

(294

)

(9,604

)

Distributions to shareholders

 

(123,619

)

(104,976

)

Cash (used for) provided by financing activities

 

(43,802

)

184,103

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(3,155

)

17,216

 

Cash and cash equivalents at beginning of period

 

23,560

 

10,866

 

Cash and cash equivalents at end of period

 

$

20,405

 

$

28,082

 

 

3



 

SENIOR HOUSING PROPERTIES TRUST

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

62,951

 

$

38,863

 

Income taxes paid

 

378

 

256

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

Acquisitions funded by assumed debt

 

(56,789

)

(48,062

)

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Assumption of mortgage notes payable

 

56,789

 

48,062

 

Issuance of common shares

 

657

 

441

 

 

See accompanying notes.

 

4



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

Note 1.  Basis of Presentation

 

The accompanying condensed consolidated financial statements of Senior Housing Properties Trust and its subsidiaries, or we, us, or our, are unaudited.  Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted.  We believe the disclosures made are adequate to make the information presented not misleading.  However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2011, or our Annual Report.  In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.  All material intercompany transactions and balances among us and our consolidated subsidiaries have been eliminated.  Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.  Reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.  These reclassifications were made to conform the prior periods’ rental income, property operating expenses, general and administrative expenses, interest and other income and impairment of assets to the current classification.  These reclassifications had no effect on net income or shareholders’ equity.

 

Note 2.  Recent Accounting Pronouncements

 

In January 2012, we adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS.  This update clarified the application of existing fair value measurement requirements.  This update also required reporting entities to disclose additional information regarding fair value measurements categorized within Level 3 of the fair value hierarchy.  This update was effective for interim and annual reporting periods beginning after December 15, 2011.  The implementation of this update did not cause any material changes to the disclosures in, or presentation of, our condensed consolidated financial statements.

 

In January 2012, we adopted FASB Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income.  This update eliminated the option to report other comprehensive income and its components in the statement of shareholders’ equity.  This update was intended to enhance comparability between entities that report under GAAP and to provide a more consistent method of presenting non-owner transactions that affect an entity’s equity.  This standard was effective for interim and annual reporting periods beginning after December 15, 2011.  The implementation of this update did not cause any material changes to our condensed consolidated financial statements.

 

Note 3.  Real Estate Properties

 

At June 30, 2012, we owned 375 properties located in 39 states and Washington, D.C.

 

In February 2012, we acquired a previously disclosed senior living community located in Priceville, Alabama with 92 living units for approximately $11,300, excluding closing costs.  We recorded intangible assets of approximately $583 related to this acquisition.  A subsidiary of Five Star Quality Care, Inc., which, together with its subsidiaries, we refer to in this report as Five Star, manages this community for our account under a long term contract.  We funded this acquisition using cash on hand.  As of June 30, 2012, we own 24 communities that are managed by Five Star, or the Managed Communities.  We use the taxable REIT subsidiary, or TRS, structure authorized by the Real Estate Investment Trust Investment Diversification and Empowerment Act, or RIDEA, for our

 

5



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

Managed Communities, which we began acquiring in June 2011.  The results of operations for the Managed Communities are included in our short and long term residential care communities segment.  See Note 11 for further information regarding the arrangements we have with Five Star regarding the lease, operations and management of our senior living communities and see Note 9 for further information regarding our reportable operating segments.

 

In May 2012, we acquired a previously disclosed senior living community located in Charleston, South Carolina with 59 assisted living units for approximately $8,059, excluding closing costs.  We recorded intangible assets of approximately $362 related to this acquisition.  A subsidiary of Five Star manages this community for our account under a long term contract.  We funded this acquisition using cash on hand and by assuming approximately $4,789 of mortgage debt.

 

In May 2012, we acquired a previously disclosed property leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or an MOB, with 28,440 square feet located in Georgia for approximately $8,600, excluding closing costs.  We recorded intangible lease assets and liabilities of $1,392 and $10, respectively, related to this acquisition.  We funded this acquisition using cash on hand and borrowings under our revolving credit facility.

 

In May 2012, we acquired another previously disclosed MOB with 111,538 square feet located in Georgia for approximately $23,100, excluding closing costs.  We recorded intangible lease assets of $6,421 related to this acquisition.  We funded this acquisition using cash on hand and borrowings under our revolving credit facility.

 

In June 2012, we acquired a previously disclosed MOB with 204,429 square feet located in Hawaii for approximately $70,495, excluding closing costs.  We recorded intangible lease assets and liabilities of $4,306 and $629, respectively, related to this acquisition.  We funded this acquisition using cash on hand, borrowings under our revolving credit facility and by assuming approximately $52,000 of mortgage debt.

 

In June 2012, we acquired another previously disclosed MOB with 92,180 square feet located in Maryland for approximately $18,250, excluding closing costs.  We funded this acquisition using cash on hand and borrowings under our revolving credit facility.

 

In July 2012, we acquired a previously disclosed senior living community located in Mount Pleasant, South Carolina with 232 living units for approximately $37,273, excluding closing costs.  A subsidiary of Five Star manages this community for our TRS under a long term contract.  We funded this acquisition in escrow in June 2012 prior to and pending closing using cash on hand and borrowings under our revolving credit facility, and as of June 30, 2012, the amount funded is included in other assets on our condensed consolidated balance sheet.

 

In July 2012, we acquired one MOB with 63,082 square feet located in Houston, Texas for approximately $16,850, excluding closing costs.  We funded this acquisition using cash on hand.

 

In July 2012, we acquired another MOB with 52,858 square feet located in Boynton Beach, Florida for approximately $7,750, excluding closing costs.  We funded this acquisition using cash on hand.

 

On July 31, 2012, we acquired four previously disclosed senior living communities located in Colorado, Idaho and Washington with a total of 511 living units for total purchase prices of approximately $36,500, excluding closing costs.  We leased these properties to Stellar Senior Living, LLC, a third party operator, with a current term expiring in 2027 for initial rent of approximately $2,920 per year.  Percentage rent,

 

6



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

based on increases in gross revenues at these properties, will commence in 2014.  We funded this acquisition using cash on hand, borrowings under our revolving credit facility and by assuming approximately $6,876 of mortgage debt.

 

We have previously disclosed agreements to acquire three properties which have not yet closed, including two senior living communities and one MOB for total purchase prices of approximately $126,700, including the assumption of approximately $49,447 of mortgage debt and excluding closing costs.  The two senior living communities are located in Missouri and New York and include a total of 397 living units, and the MOB is located in Massachusetts and includes 35,000 square feet.  The closings of these acquisitions are contingent upon customary closing conditions; accordingly, we can provide no assurance that we will purchase these properties.

 

In July 2012, we entered an agreement to acquire one MOB for approximately $15,275, including the assumption of approximately $9,676 of mortgage debt and excluding closing costs.  The MOB is located in Minnesota and includes a total of 76,637 square feet.  This acquisition has not yet closed.  The closing of this acquisition is contingent upon completion of our diligence and other customary closing conditions; accordingly, we can provide no assurance that we will purchase this property.

 

In May 2012, we entered into an operations transfer agreement, or the Operations Transfer Agreement, with Sunrise Senior Living, Inc., or Sunrise, and Five Star related to 10 senior living communities, or the 10 Communities, that we currently lease to Sunrise.  The Operations Transfer Agreement provides that we and Sunrise will accelerate the December 31, 2013 termination date of these Sunrise leases, that we will lease the 10 Communities to our TRSs and that Five Star will manage the 10 Communities pursuant to long term contracts.  The Operations Transfer Agreement provides that these transactions will occur when we and Five Star have obtained required regulatory approvals to operate the 10 Communities.  Because of the required regulatory approval processes, we expect the transition of the 10 Communities’ operations to occur on various dates during the remainder of 2012.  Pursuant to the Operations Transfer Agreement, we paid Sunrise $1,000 to purchase the inventory and certain improvements owned by Sunrise at these 10 Communities, which will be transferred to our applicable TRSs when the leases of the 10 Communities commence.

 

In July 2012, we sold one MOB located in Massachusetts for a sale price of approximately $1,100.  At June 30, 2012, two of our properties, including one senior living community located in Pennsylvania and this MOB, are classified as held for sale.  These two properties are included in real estate properties on our condensed consolidated balance sheets and have an aggregate net book value of approximately $1,715 at both June 30, 2012 and December 31, 2011.

 

We periodically evaluate our properties for impairments. Impairment indicators may include declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life and legislative, market or industry changes that could permanently reduce the value of a property. If indicators of impairment are present, we evaluate the carrying value of the affected property by comparing it to the expected future undiscounted net cash flows to be generated from that property. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value.  During the six months ended June 30, 2012, we recorded an impairment of assets charge of $3,071 to reduce the carrying value of one of our properties to its estimated sale price less costs to sell.  During the six months ended June 30, 2011, we recorded impairment of assets charges of $166 to reduce the carrying value of two of our properties to their estimated sales prices less costs to sell.

 

7



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

During the three and six months ended June 30, 2012, pursuant to the terms of our existing leases with Five Star, we purchased $7,775 and $14,093, respectively, of improvements made to our properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $625 and $1,137, respectively.

 

The allocation of the purchase price of certain of our acquisitions described above is based upon preliminary estimates of the fair value of assets acquired and liabilities assumed.  Consequently, amounts preliminarily allocated to assets acquired and liabilities assumed could change significantly from those used in these condensed consolidated financial statements.

 

Note 4.  Unrealized Gain / Loss on Investments

 

As of June 30, 2012, we owned 250,000 common shares of CommonWealth REIT, or CWH, and 4,235,000 common shares of Five Star, which are carried at fair market value in other assets in our condensed consolidated balance sheets. Cumulative other comprehensive income shown in our condensed consolidated balance sheets includes the net unrealized loss on investments determined as the net difference between the value at quoted market prices of our CWH and Five Star shares on June 30, 2012 ($19.12 and $3.07 per share, respectively) and our weighted average costs on the dates we acquired these shares, as adjusted to reflect any share splits or combinations ($26.00 and $3.36 per share, respectively).

 

Note 5.  Loan Receivable

 

In May 2011, we and Five Star entered into a loan agreement, or the Bridge Loan, under which we agreed to lend Five Star up to $80,000 to fund a portion of Five Star’s purchase of a portfolio of six senior living communities.  By September 30, 2011, Five Star had completed its acquisition of these communities and had borrowed all $80,000 of this Bridge Loan.  By December 31, 2011, Five Star had repaid $42,000 of those borrowings.  In April 2012, Five Star paid the remaining balance of $38,000, resulting in the termination of this Bridge Loan.  The Bridge Loan was secured by mortgages on three of the senior living communities that Five Star acquired and on four other senior living communities owned by Five Star.  The Bridge Loan bore interest at a rate equal to the annual rates of interest applicable to our borrowings under our revolving credit facility, plus 1%.  We recognized interest income from this Bridge Loan of $39 and $314 for the three and six months ended June 30, 2012, respectively, and $58 for the three and six months ended June 30, 2011, which are included in interest and other income in our condensed consolidated statements of income and comprehensive income.

 

Note 6.  Indebtedness

 

Our principal debt obligations at June 30, 2012 were: our $750,000 unsecured revolving credit facility; three public issuances of unsecured senior notes, including: $250,000 principal amount due 2016 at an annual interest rate of 4.30%, $200,000 principal amount due 2020 at an annual interest rate of 6.75% and $300,000 principal amount due 2021 at an annual interest rate of 6.75%; and $849,511 aggregate principal amount of mortgages secured by 63 of our properties with maturity dates from 2013 to 2043.  The 63 mortgaged properties had a carrying value of $1,100,704 at June 30, 2012.  We also have two properties subject to capital leases totaling $14,005 at June 30, 2012; these two properties had a carrying value of $15,760 at June 30, 2012.

 

In connection with the acquisitions discussed in Note 3 above, during the six months ended June 30, 2012, we assumed $56,789 of mortgage debt with a weighted average interest rate of 5.54% and a weighted average maturity of 5.9 years.  We recorded the assumed mortgages at their fair value which

 

8



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

approximated their outstanding principal balances.  We determined the fair value of the assumed mortgages using a market approach based upon Level 2 inputs (significant other observable inputs) in the fair value hierarchy.

 

In January 2012, we repaid all $225,000 of our 8.625% unsecured senior notes at their maturity date.  We funded this repayment using borrowings under our revolving credit facility.

 

In February 2012, we paid in full a mortgage loan encumbering one of our properties that had a principal balance of approximately $12,400, an interest rate of 6.03% and a maturity date in March 2012.  In April 2012, we paid in full 17 mortgage loans encumbering 17 of our properties that had an aggregate principal balance of $32,576, weighted average interest rate of 6.95% and maturity dates in June and July 2012.  In June 2012, we paid in full a mortgage loan encumbering one of our properties that had a principal balance of approximately $3,140, an interest rate of 6.07% and a maturity date in September 2012.

 

In July 2012, we sold $350,000 of senior unsecured notes.  The notes require interest at a fixed rate of 5.625% per annum and are due in 2042.  Net proceeds from this sale of the notes, after underwriting discounts, fees and other expenses were approximately $338,800.  Interest on the notes is payable quarterly in arrears.  We used a part of the net proceeds of this offering to repay borrowings under our revolving credit facility and we expect to apply the remaining net proceeds to prepay the variable portion of our Federal National Mortgage Association, or FNMA, secured term loan and for general business purposes, which may include funding future acquisitions of properties.

 

The interest rate payable for amounts drawn under our $750,000 revolving credit facility is LIBOR plus 160 basis points, subject to adjustments based on our credit ratings.  We can borrow, repay and reborrow under the credit facility until maturity, and no principal repayment is due until maturity.  The interest rate payable on borrowings under our revolving credit facility was 1.80% at June 30, 2012.  In addition to interest, we pay certain fees to maintain this revolving credit facility and we amortize certain set up costs.  Our revolving credit facility is available for acquisitions, working capital and general business purposes. As of June 30, 2012, we had $360,000 outstanding and $390,000 available under this revolving credit facility.  Our revolving credit facility contains financial covenants that require us to maintain financial ratios and a minimum net worth.  We believe we were in compliance with these covenants during the periods presented.  Our revolving credit facility matures in June 2015 and includes an option for us to extend the facility for one year to June 2016 upon payment of a fee, and includes a feature under which maximum borrowings may be increased up to $1,500,000, subject to certain conditions.

 

Note 7.  Shareholders’ Equity

 

On May 9, 2012, we paid a $0.38 per share, or $61,813, distribution to our common shareholders with respect to our operating results for the quarter ended March 31, 2012.  On July 9, 2012, we declared a quarterly distribution of $0.38 per share, or $67,061, to our common shareholders of record on July 26, 2012, with respect to our operating results for the quarter ended June 30, 2012; we expect to pay this distribution on or about August 24, 2012.

 

On May 12, 2011, we paid a $0.37 per share, or $52,490, distribution to our common shareholders with respect to our operating results for the quarter ended March 31, 2011.  On August 11, 2011, we paid a $0.37 per share, or $56,748, distribution to our common shareholders with respect to our operating results for the quarter ended June 30, 2011.

 

9



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

Under the terms of our business management agreement with Reit Management & Research LLC, or RMR, on March 29, 2012, we issued 20,462 common shares in payment of an incentive fee of approximately $453 for services rendered to us by RMR during 2011.

 

On May 17, 2012, we granted 2,000 common shares of beneficial interest, par value $.01 per share, valued at $20.48 per share, the closing price of our common shares on the New York Stock Exchange, or the NYSE, on that day, to each of our five Trustees.

 

In July 2012, we issued 13,800,000 common shares in a public offering, raising net proceeds of approximately $287,100.  We used the net proceeds of this offering to repay borrowings outstanding under our revolving credit facility.

 

Note 8.  Fair Value of Assets and Liabilities

 

The following table presents certain of the assets and liabilities that are measured at fair value on a recurring and non recurring basis at June 30, 2012 categorized by the level of inputs used in the valuation of each asset or liability.

 

 

 

 

 

Quoted Prices in
Active Markets for
Identical Assets

 

Significant Other
Observable
Inputs

 

Description

 

Total

 

(Level 1)

 

(Level 2)

 

 

 

 

 

 

 

 

 

Assets held for sale(1)

 

$

1,715

 

$

 

$

1,715

 

Long-lived assets held and used(2)

 

$

1,982

 

$

 

$

1,982

 

Investments in available for sale securities(3)

 

$

17,781

 

$

17,781

 

$

 

Unsecured senior notes(4)

 

$

  823,480

 

$

  823,480

 

$

 

 


(1)

Assets held for sale consist of two of our properties that we expect to sell that are reported at fair value. We used offers to purchase the properties made by third parties or comparable sales transactions (Level 2 inputs) to determine the fair value of these properties. We have previously recorded cumulative impairments of approximately $8,621 to these properties in order to reduce their book values to fair value.

(2)

Long-lived assets held and used consist of one of our properties. We used broker information and comparable sales transactions (Level 2 inputs) to determine the fair value of this property and recognized an impairment of assets charge of $3,071 during the six months ended June 30, 2012 to reduce its carrying value to the amount stated.

(3)

Our investments in available for sale securities include our 250,000 common shares of CWH and 4,235,000 common shares of Five Star. The fair values of these shares are based on quoted prices at June 30, 2012 in active markets (Level 1 inputs).

(4)

We estimate the fair values of our unsecured senior notes using an average of the bid and ask price of our then outstanding three issuances of senior notes (Level 1 inputs) on or about June 30, 2012. The fair values of these senior note obligations exceed their book values of $741,412 by $82,068 because these notes were trading at a premium to their face amounts.

 

In addition to the assets and liabilities described in the above table, our additional financial instruments include rents receivable, cash and cash equivalents, restricted cash, secured and unsecured debt and other

 

10



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

liabilities. The fair values of these additional financial instruments approximate their carrying values at June 30, 2012 based upon their liquidity, short term maturity, variable rate pricing or our estimate of fair value using discounted cash flow analyses and prevailing interest rates.

 

Note 9.  Segment Reporting

 

We have three operating segments, of which two are reportable operating segments.  The two reportable operating segments are: (i) short term and long term residential care communities that offer dining for residents and (ii) properties where medical related activities occur but where residential overnight stays and dining services are not provided, or MOBs.  Properties in the short term and long term residential care communities segment include leased and managed independent living communities, assisted living communities, skilled nursing facilities and rehabilitation hospitals.  We earn rental income revenues from the tenants that lease and operate our leased communities and we earn fees and services revenues from the residents of our Managed Communities.  Five Star began managing our Managed Communities for our account in June 2011.  Properties in the MOB segment include those leased to medical providers, medical related businesses, clinics and biotech laboratory tenants.  We earn rental income revenues from tenants of our MOBs.  The “All Other Operations” category in the following table includes amounts related to corporate business activities and the operating results of certain properties that offer fitness, wellness and spa services to members.

 

11



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

 

 

For the Three Months Ended June 30, 2012

 

 

 

Short and Long
Term Residential
Care
Communities

 

MOBs

 

All Other
Operations

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental income

 

$

59,643

 

$

46,885

 

$

4,458

 

$

110,986

 

Residents fees and services

 

35,986

 

 

 

35,986

 

Total revenues

 

95,629

 

46,885

 

4,458

 

146,972

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Depreciation

 

21,065

 

13,217

 

948

 

35,230

 

Property operating expenses

 

26,244

 

14,490

 

 

40,734

 

General and administrative

 

 

 

8,068

 

8,068

 

Acquisition related costs

 

 

 

1,829

 

1,829

 

Total expenses

 

47,309

 

27,707

 

10,845

 

85,861

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

48,320

 

19,178

 

(6,387

)

61,111

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

227

 

227

 

Interest expense

 

(12,976

)

(381

)

(14,763

)

(28,120

)

Equity in earnings of an investee

 

 

 

76

 

76

 

Income (loss) before income tax expense

 

35,344

 

18,797

 

(20,847

)

33,294

 

Income tax expense

 

 

 

(43

)

(43

)

Net income (loss)

 

$

35,344

 

$

18,797

 

$

(20,890

)

$

33,251

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,449,845

 

$

1,587,430

 

$

429,277

 

$

4,466,552

 

 

12



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

 

 

For the Three Months Ended June 30, 2011

 

 

 

Short and Long
Term Residential
Care
Communities

 

MOBs

 

All Other
Operations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

57,186

 

$

38,658

 

$

4,474

 

$

100,318

 

Residents fees and services

 

844

 

 

 

844

 

Total revenues

 

58,030

 

38,658

 

4,474

 

101,162

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Depreciation

 

17,014

 

8,973

 

948

 

26,935

 

Property operating expenses

 

609

 

10,693

 

 

11,302

 

General and administrative

 

 

 

6,793

 

6,793

 

Acquisition related costs

 

 

 

2,814

 

2,814

 

Total expenses

 

17,623

 

19,666

 

10,555

 

47,844

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

40,407

 

18,992

 

(6,081

)

53,318

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

244

 

244

 

Interest expense

 

(10,326

)

(215

)

(12,820

)

(23,361

)

Loss on early extinguishment of debt

 

 

 

(427

)

(427

)

Gain on sale of properties

 

21,236

 

79

 

 

21,315

 

Equity in earnings of an investee

 

 

 

46

 

46

 

Income (loss) before income tax expense

 

51,317

 

18,856

 

(19,038

)

51,135

 

Income tax expense

 

 

 

(87

)

(87

)

Net income (loss)

 

$

51,317

 

$

18,856

 

$

(19,125

)

$

51,048

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,060,845

 

$

1,288,412

 

$

384,161

 

$

3,733,418

 

 

13



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

 

 

For the Six Months Ended June 30, 2012

 

 

 

Short and Long
Term Residential
Care
Communities

 

MOBs

 

All Other
Operations

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental income

 

$

118,467

 

$

93,146

 

$

8,878

 

$

220,491

 

Residents fees and services

 

71,554

 

 

 

71,554

 

Total revenues

 

190,021

 

93,146

 

8,878

 

292,045

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Depreciation

 

41,962

 

24,749

 

1,896

 

68,607

 

Property operating expenses

 

51,743

 

28,325

 

 

80,068

 

General and administrative

 

 

 

15,753

 

15,753

 

Acquisition related costs

 

 

 

2,517

 

2,517

 

Impairment of assets

 

 

3,071

 

 

3,071

 

Total expenses

 

93,705

 

56,145

 

20,166

 

170,016

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

96,316

 

37,001

 

(11,288

)

122,029

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

709

 

709

 

Interest expense

 

(26,153

)

(793

)

(30,063

)

(57,009

)

Equity in earnings of an investee

 

 

 

121

 

121

 

Income (loss) before income tax expense

 

70,163

 

36,208

 

(40,521

)

65,850

 

Income tax expense

 

 

 

(247

)

(247

)

Net income (loss)

 

$

70,163

 

$

36,208

 

$

(40,768

)

$

65,603

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,449,845

 

$

1,587,430

 

$

429,277

 

$

4,466,552

 

 

14



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

 

 

For the Six Months Ended June 30, 2011

 

 

 

Short and Long
Term Residential
Care
Communities

 

MOBs

 

All Other
Operations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

114,296

 

$

75,748

 

$

8,826

 

$

198,870

 

Residents fees and services

 

844

 

 

 

844

 

Total revenues

 

115,140

 

75,748

 

8,826

 

199,714

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Depreciation

 

33,743

 

17,657

 

1,896

 

53,296

 

Property operating expenses

 

609

 

21,126

 

 

21,735

 

General and administrative

 

 

 

12,949

 

12,949

 

Acquisition related costs

 

 

 

3,927

 

3,927

 

Impairment of assets

 

 

166

 

 

166

 

Total expenses

 

34,352

 

38,949

 

18,772

 

92,073

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

80,788

 

36,799

 

(9,946

)

107,641

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

476

 

476

 

Interest expense

 

(20,599

)

(432

)

(25,076

)

(46,107

)

Loss on early extinguishment of debt

 

 

 

(427

)

(427

)

Gain on sale of properties

 

21,236

 

79

 

 

21,315

 

Equity in earnings of an investee

 

 

 

83

 

83

 

Income (loss) before income tax expense

 

81,425

 

36,446

 

(34,890

)

82,981

 

Income tax expense

 

 

 

(158

)

(158

)

Net income (loss)

 

$

81,425

 

$

36,446

 

$

(35,048

)

$

82,823

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,060,845

 

$

1,288,412

 

$

384,161

 

$

3,733,418

 

 

Note 10. Significant Tenant

 

Five Star is our former subsidiary and RMR provides management services to both us and Five Star.  Rental income from Five Star represented 40.3% of our annualized rental income and the properties Five Star leases from us represent 44.5% of our investments, at cost, as of June 30, 2012.  As of June 30, 2012, Five Star also manages a portfolio of 24 senior living communities for our account.  These properties leased and managed by Five Star are included in our short and long term residential care communities segment.  The following tables present summary financial information for Five Star for the three and six months ended June 30, 2012 and 2011, as reported in its Quarterly Report on Form 10-Q.

 

15



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

 

 

For the Three Months Ended June 30,

 

Operations

 

2012

 

2011

 

Total revenues

 

$

349,094

 

$

311,884

 

Operating income

 

6,611

 

8,072

 

Income from continuing operations

 

4,931

 

5,987

 

Net income

 

4,638

 

5,196

 

 

 

 

For the Six Months Ended June 30,

 

 

 

2012

 

2011

 

Total revenues

 

$

695,215

 

$

619,500

 

Operating income

 

9,124

 

14,531

 

Income from continuing operations

 

5,677

 

11,896

 

Net income

 

5,007

 

9,329

 

 

 

 

For the Six Months Ended June 30,

 

Cash Flows

 

2012

 

2011

 

Cash provided by operating activities

 

$

30,748

 

$

31,445

 

Net cash used in discontinued operations

 

(316

)

(2,365

)

Cash used in investing activities

 

(22,057

)

(69,354

)

Cash (used in) provided by financing activities

 

(13,114

)

62,662

 

Change in cash and cash equivalents

 

(4,739

)

22,388

 

Cash and cash equivalents at beginning of period

 

28,374

 

20,770

 

Cash and cash equivalents at end of period

 

23,635

 

43,158

 

 

 

 

As of June 30,

 

Financial Position

 

2012

 

2011

 

Current assets

 

$

138,739

 

$

160,156

 

Non-current assets

 

442,946

 

321,395

 

Total indebtedness

 

109,226

 

73,975

 

Current liabilities

 

195,735

 

160,174

 

Non-current liabilities

 

99,981

 

91,748

 

Total shareholders’ equity

 

285,969

 

229,629

 

 

The summary financial information of Five Star is presented to comply with applicable accounting regulations of the Securities and Exchange Commission, or SEC.  References in these financial statements to the Quarterly Report on Form 10-Q for Five Star are included to show the source of the information only, and the information in Five Star’s Quarterly Report on Form 10-Q is not incorporated by reference into these financial statements.  See Note 11 for further information regarding our leases with Five Star.

 

16



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

Note 11.  Related Person Transactions

 

We have no employees.  Personnel and various services we require to operate our business are provided to us by RMR.  We have two agreements with RMR to provide management and administrative services to us: (1) a business management agreement and (2) a property management agreement.  Under our business management agreement with RMR, we acknowledge that RMR also provides management services to other companies, which include Five Star and CWH.  One of our Managing Trustees, Mr. Barry Portnoy, is Chairman, majority owner and an employee of RMR.  Our other Managing Trustee, Mr. Adam Portnoy, is the son of Mr. Barry Portnoy, and an owner, President, Chief Executive Officer and a director of RMR.  Each of our executive officers is also an officer of RMR, and our President and Chief Operating Officer, Mr. David Hegarty, is a director of RMR.  Certain of Five Star’s executive officers and CWH’s executive officers are officers of RMR.  Our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR provides management services.  Mr. Barry Portnoy serves as a managing director or managing trustee of those companies and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies.

 

Pursuant to our business management agreement with RMR, we incurred expenses of $6,367 and $5,572 for the three months ended June 30, 2012 and 2011, respectively, and $12,727 and $10,390 for the six months ended June 30, 2012 and 2011, respectively.  These amounts are included in general and administrative expenses in our condensed consolidated statements of income and comprehensive income.  In March 2012, we issued 20,462 common shares to RMR in satisfaction of the incentive fee RMR earned for services provided to us during 2011, in accordance with the terms of the business management agreement.  In connection with our property management agreement with RMR, we incurred property management and construction supervision fees of $1,424 and $1,057 for the three months ended June 30, 2012 and 2011, respectively, and $2,770 and $2,081 for the six months ended June 30, 2012 and 2011, respectively.  These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

 

Five Star is our former 100% owned subsidiary.  In 2001, we distributed substantially all of Five Star’s then outstanding shares of common stock to our shareholders.  We are Five Star’s largest stockholder and, as of the date of this report, we owned 4,235,000 shares of common stock of Five Star, or approximately 8.8% of Five Star’s outstanding shares of common stock.  One of our Managing Trustees, Mr. Barry Portnoy, is also a managing director of Five Star.  RMR provides management services to both us and Five Star.

 

Five Star is our largest tenant and manages several senior living communities for us.  As of June 30, 2012, we leased 188 senior living communities and two rehabilitation hospitals to Five Star and Five Star managed 24 senior living communities for our account.

 

Under Five Star’s leases with us, Five Star pays us rent consisting of minimum annual rent amounts plus percentage rent based on increases in gross revenues at certain properties.  Five Star’s total minimum annual rent payable to us under those leases as of June 30, 2012 was $196,371, excluding percentage rent.  We recognized total rent from Five Star of $48,942 and $46,789 for the three months ended June 30, 2012 and 2011, respectively, and $97,753 and $93,488 for the six months ended June 30, 2012 and 2011, respectively.  As of June 30, 2012 and December 31, 2011, our rents receivable from Five Star were $17,518 and $17,313, respectively, and are included in other assets on our condensed consolidated balance sheets.  During the six months ended June 30, 2012, pursuant to the terms of our existing leases with Five Star, we purchased $14,093 of improvements made to properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $1,137.

 

17



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

Five Star began managing communities for our account in June 2011 in connection with our acquisition of certain senior living communities at that time.  Since that time, we have acquired additional communities that are being managed by Five Star.  Five Star manages our managed communities pursuant to long term management agreements.  We and Five Star have entered into a pooling agreement that combines our management agreements with Five Star.  The pooling agreement aggregates the determination of fees and expenses of the various communities that are subject to that pooling agreement, including determination of our return of our invested capital and Five Star’s incentive fees.  We incurred management fees of $1,080 and $2,148 for the three and six months ended June 30, 2012, respectively, and $25 for the three and six months ended June 30, 2011, with respect to the communities Five Star manages for our account.  We expect that we may enter into additional management arrangements with Five Star for senior living communities that we may acquire in the future on terms similar to those management arrangements we currently have with Five Star, including, as further disclosed in Note 3—Real Estate Properties and below, with respect to the 10 Communities we currently lease to Sunrise.  Five Star’s management of the 10 Communities we currently lease to Sunrise is subject to conditions and may not occur; there can be no assurances that Five Star will manage additional senior living communities for our account.

 

We currently lease 14 senior living communities to a subsidiary of Sunrise.  As previously reported, in May 2012, we and Five Star entered into the Operations Transfer Agreement with Sunrise.  Pursuant to the Operations Transfer Agreement, we and Sunrise agreed to accelerate the December 31, 2013 termination date of 10 of our leases with Sunrise, which leases relate to the 10 Communities.  The Operations Transfer Agreement also contemplates that we will lease the 10 Communities to our TRSs and Five Star will begin to operate the 10 Communities as a manager for our account, pursuant to long term management agreements.  The Operations Transfer Agreement provides that these transactions will occur when we and Five Star have obtained regulatory approvals to operate the applicable 10 Communities.  We expect the long term management agreement with Five Star for each of the 10 Communities will be on terms substantially similar to the management agreements previously entered into between us and Five Star for communities that include assisted living units and which are owned by our TRSs and managed by Five Star, and may be included in our pooling agreement with Five Star for our managed communities.

 

In May 2012, we acquired a senior living community in South Carolina that we previously disclosed we had agreed to acquire, with 59 assisted living units, for approximately $8,059, excluding closing costs, and entered into a long term management agreement with Five Star to manage this community for our account on terms substantially consistent with the terms of our other management agreements that we have previously entered into with Five Star for communities that include assisted living units.  Also, in July 2012, we acquired a senior living community in South Carolina that we previously disclosed we had agreed to acquire, with 232 assisted living units, for approximately $37,273, excluding closing costs, and entered into a long term management agreement with Five Star to manage this community for our account on terms substantially consistent with the terms of our other management agreements with Five Star for communities that include assisted living units and these management agreements were added to our pooling agreement with Five Star for our managed communities.

 

As discussed above in Note 5—Loan Receivable, in May 2011, we and Five Star entered into the Bridge Loan, under which we lent to Five Star $80,000 to fund a portion of Five Star’s purchase of six senior living communities.  In April 2012, Five Star repaid in full the $38,000 principal amount then outstanding under the Bridge Loan, resulting in the termination of the Bridge Loan.  We recognized interest income from the Bridge Loan of $39 and $314 for the three and six months ended June 30, 2012, respectively, and we recognized interest income of $58 for the three and six months ended June 30, 2011.

 

18



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

CWH was formerly our parent.  We were spun off to CWH’s shareholders in 1999.  As of the date of this report, we owned 250,000 common shares of CWH.  One of our Managing Trustees, Mr. Barry Portnoy, is a managing trustee of CWH.  Our other Managing Trustee, Mr. Adam Portnoy, is a managing trustee and the President of CWH.  In addition, one of our Independent Trustees, Mr. Frederick Zeytoonjian, is also an independent trustee of CWH.  RMR provides management services to both us and CWH.

 

As previously reported, CWH previously granted us a right of first refusal to purchase certain of CWH’s properties if CWH sought to sell them.  Between November 2010 and January 2011, we purchased 27 properties (approximately 2,803,000 square feet of rental space), which were majority leased as MOBs from CWH for total sale prices of $470,000, excluding closing costs.  In September 2011, we acquired from CWH 13 additional properties (approximately 1,310,000 square feet), which were located in eight states and majority leased as MOBs for total sale prices of $167,000, excluding closing costs.  Certain of the properties included in these purchases were subject to the right of first refusal granted to us by CWH referred to above.  In connection with our September 2011 purchase of 13 properties from CWH, we and CWH terminated our existing right of first refusal, as we have purchased substantially all of the properties that were subject to that right of first refusal.

 

We, RMR, Five Star, CWH and four other companies to which RMR provides management services each currently own 12.5% of Affiliates Insurance Company, or AIC, an Indiana insurance company.  One of those four other companies became a shareholder of AIC during the quarter ended June 30, 2012.  All of our Trustees and nearly all of the trustees and directors of the other AIC shareholders currently serve on the board of directors of AIC.  RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC.  Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Trustees are also directors of AIC.  Our investment in AIC had a carrying value of $5,408 and $5,291 as of June 30, 2012 and December 31, 2011, respectively.  We recognized income of $76 and $46 for the three months ended June 30, 2012 and 2011, respectively, and $121 and $83 for the six months ended June 30, 2012 and 2011, respectively, related to this investment.  We and the other shareholders of AIC have purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts.  This program was modified and extended in June 2012 for a one year term and we paid a premium, including taxes and fees, of $4,438 in connection with that renewal, which amount may be adjusted from time to time in response to our acquisition and disposition of properties that are included in this program.  We are also currently investigating the possibilities to expand our insurance relationships with AIC to include other types of insurance.  We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.  By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro-rata share of any profits of this insurance business.

 

For further information about these and other such relationships and related person transactions, please see elsewhere in this Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” in Part I, Item 2 and “Warning Concerning Forward Looking Statements,” and our Annual Report, our Proxy Statement for our 2012 Annual Meeting of Shareholders dated February 21, 2012, or our Proxy Statement, and our other filings with the SEC, including Note 5 to our consolidated financial statements included in our Annual Report, the sections captioned “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” and “Warning Concerning Forward Looking Statements” of our Annual Report and the section captioned “Related Person

 

19



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

 

Transactions and Company Review of Such Transactions” and the information regarding our Trustees and executive officers in our Proxy Statement.  In addition, please see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise from these transactions and relationships.  Our filings with the SEC, including our Annual Report and our Proxy Statement, are available at the SEC’s website at www.sec.gov.  In addition, copies of certain of our agreements with these parties, including our business management agreement and property management agreement with RMR, our leases, forms of management agreements and related pooling agreement and Bridge Loan with Five Star, various agreements we have with CWH and our shareholders agreement with AIC and its shareholders, are also publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website.

 

Note 12.  Income Taxes

 

We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, and as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We do, however, lease certain managed senior living communities to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated corporate income tax return and are subject to federal and state income taxes.  Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state income taxes we incur despite our REIT status.  During the three and six months ended June 30, 2012, we recognized current tax expense of $43 and $247, respectively.  During the three and six months ended June 30, 2011, we recognized current tax expense of $87 and $158, respectively.

 

20



 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and our Annual Report.

 

PORTFOLIO OVERVIEW

 

The following tables present an overview of our portfolio (dollars in thousands except per living unit / bed or square foot data):

 

(As of June 30, 2012)

 

Number of
Properties

 

Number of
Units/Beds or
Square Feet

 

Investment
Carrying Value
(1)

 

% of Total
Investment

 

Investment per
Unit / Bed or
Square Foot
(2)

 

Q2 2012
NOI
(3)

 

% of Q2 2012
Total NOI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facility Type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Independent living communities(4)

 

 56

 

14,163

 

$

1,647,313

 

33.9%

 

$

  116,311  

 

$

35,493

 

33.4%

 

Assisted living facilities(4)

 

 147

 

10,642

 

1,239,770

 

25.5%

 

$

  116,498  

 

26,962

 

25.4%

 

Skilled nursing facilities(4)

 

 48

 

5,024

 

206,735

 

4.2%

 

$

  41,149  

 

4,274

 

4.0%

 

Rehabilitation hospitals

 

 2

 

364

 

73,692

 

1.5%

 

$

  202,451  

 

2,656

 

2.5%

 

Wellness centers

 

 10

 

812,000

 sq. ft.

180,017

 

3.7%

 

$

  222  

 

4,458

 

4.2%

 

MOBs

 

 112

 

8,066,000

 sq. ft.

1,518,863

 

31.2%

 

$

  188  

 

32,395

 

30.5%

 

Total

 

 375

 

 

 

$

4,866,390

 

100.0%

 

 

 

$

106,238

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant / Operator / Managed Properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Five Star (Lease No. 1)

 

 89

 

6,539

 

$

674,880

 

13.9%

 

$

  103,208  

 

$

14,026

 

13.2%

 

Five Star (Lease No. 2)

 

 48

 

6,140

 

561,645

 

11.5%

 

$

  91,473  

 

13,186

 

12.4%

 

Five Star (Lease No. 3)

 

 28

 

5,618

 

656,871

 

13.5%

 

$

  116,923  

 

15,794

 

14.9%

 

Five Star (Lease No. 4)

 

 25

 

2,614

 

271,419

 

5.6%

 

$

  103,833  

 

5,936

 

5.6%

 

Sunrise / Marriott(5)

 

 14

 

4,091

 

325,165

 

6.7%

 

$

  79,483  

 

7,681

 

7.2%

 

Brookdale

 

 18

 

894

 

61,122

 

1.3%

 

$

  68,369  

 

1,754

 

1.6%

 

5 private companies (combined)

 

 7

 

959

 

36,087

 

0.7%

 

$

  37,630  

 

1,266

 

1.2%

 

TRS Managed(6)

 

 24

 

3,338

 

580,321

 

11.9%

 

$

  173,853  

 

9,742

 

9.2%

 

Wellness centers

 

 10

 

812,000

 sq. ft.

180,017

 

3.7%

 

$

  222  

 

4,458

 

4.2%

 

Multi-tenant MOBs

 

 112

 

8,066,000

 sq. ft.

1,518,863

 

31.2%

 

$

  188  

 

32,395

 

30.5%

 

Total

 

 375

 

 

 

$

4,866,390

 

100%

 

 

 

$

106,238

 

100%

 

 

Tenant / Managed Property Operating Statistics(7)

 

 

 

Rent Coverage

 

Occupancy

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Five Star (Lease No. 1)

 

1.17x

 

1.31x

 

84.1%

 

86.5%

 

Five Star (Lease No. 2)

 

1.38x

 

1.39x

 

82.6%

 

82.1%

 

Five Star (Lease No. 3)

 

1.40x

 

1.52x

 

85.7%

 

87.2%

 

Five Star (Lease No. 4)

 

1.20x

 

1.12x

 

86.5%

 

83.4%

 

Sunrise / Marriott(5)

 

1.53x

 

1.46x

 

89.6%

 

89.8%

 

Brookdale

 

2.25x

 

2.22x

 

92.7%

 

92.6%

 

5 private companies (combined)

 

2.78x

 

2.50x

 

83.8%

 

84.1%

 

TRS Managed(6)

 

NA

 

NA

 

86.5%

 

80.8%

 

Wellness centers

 

2.16x

 

2.16x

 

100.0%

 

100.0%

 

Multi-tenant MOBs (8)

 

NA

 

NA

 

94.5%

 

96.6%

 

 

21



 


(1)

Amounts are before depreciation, but after impairment write downs, if any.

(2)

Represents investment carrying value divided by the number of living units, beds or leased square feet at June 30, 2012.

(3)

Net operating income, or NOI, is defined and calculated by reportable segment and reconciled to net income below in this Item 2.

(4)

Senior living properties are categorized by the type of living units or beds which constitute a majority of the living units or beds at the property.

(5)

Marriott International, Inc. guarantees the lessee’s obligations under this lease. In December 2011, Sunrise extended the leases to December 31, 2018 for four of these senior living communities. In May 2012, we entered agreements with Sunrise for early terminations of leases for the remaining 10 senior living communities currently leased to Sunrise and which were scheduled to terminate at the end of their current term of December 31, 2013; we expect the lease terminations and the transfer of these 10 senior living communities’ operations to our TRS and Five Star management to occur on various dates during the remainder of 2012.

(6)

These 24 senior living communities acquired since June 2011 are leased to our TRSs and managed by Five Star.

(7)

Operating data for TRS managed properties are presented for the 12 month period ended or, if shorter, from the date of acquisitions through June 30, 2012 and operating data for multi-tenant MOBs are presented as of June 30, 2012 and 2011; operating data for other properties and tenants are presented based upon the operating results provided by our tenants for the 12 months ended March 31, 2012 and 2011, or the most recent prior period for which tenant operating results are available to us. Rent coverage is calculated as operating cash flow from our tenants’ operations of our properties, before subordinated charges, divided by minimum rents payable to us. We have not independently verified our tenants’ operating data. The table excludes data for periods prior to our ownership of some of these properties.

(8)

Our MOB leases include both triple-net leases where, in addition to paying fixed rents, the tenants assume the obligation to operate and maintain the properties at their expense, and some net and modified gross leases where we are responsible to operate and maintain the properties and we charge tenants for some or all of the property operating costs. A small percentage of our MOB leases are so-called “full-service” leases where we receive fixed rent from our tenants and no reimbursement for our property operating costs.

 

22



 

The following tables set forth information regarding our lease expirations as of June 30, 2012 (dollars in thousands):

 

 

 

Annualized Rental Income(1)

 

Percent of

 

Cumulative

 

Year

 

Short and Long
Term Residential
Care
Communities
(2)

 

MOBs

 

Wellness
Centers

 

Total

 

Total
Annualized
Rental Income
Expiring

 

Percentage of
Annualized
Rental Income
Expiring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

$

 

$

18,766

 

$

 

$

18,766

 

4.1%

 

4.1%

 

2013

 

18,303

 

15,844

 

 

34,147

 

7.4%

 

11.5%

 

2014

 

 

22,433

 

 

22,433

 

4.9%

 

16.4%

 

2015

 

3,034

 

18,023

 

 

21,057

 

4.6%

 

21.0%

 

2016

 

 

15,539

 

 

15,539

 

3.4%

 

24.4%

 

2017

 

33,034

 

25,308

 

 

58,342

 

12.7%

 

37.1%

 

2018

 

14,445

 

6,913

 

 

21,358

 

4.6%

 

41.7%

 

2019

 

599

 

27,983

 

 

28,582

 

6.2%

 

47.9%

 

2020

 

 

7,659

 

 

7,659

 

1.7%

 

49.6%

 

Thereafter

 

178,493

 

36,709

 

17,536

 

232,738

 

50.4%

 

100.0%

 

Total

 

$

247,908

 

$

195,177

 

$

17,536

 

$

460,621

 

100.0%

 

 

 

 

Average remaining lease term for all properties (weighted by annualized rental income):  9.2 years

 


(1)

Annualized rental income is rents pursuant to existing leases as of June 30, 2012, including estimated percentage rent adjustments, straight line rent adjustments, recurring expense reimbursements for certain net and modified gross leases and excluding lease value amortization at certain of our MOBs and wellness centers.

(2)

Excludes rent received from our TRSs. If the NOI from our TRSs (three months ended June 30, 2012, annualized) were included in the foregoing table, the percent of total annualized rental income expiring would be: 2012 – 3.8%; 2013 – 6.8%; 2014 – 4.5%; 2015 – 4.2%, 2016 – 3.1%; 2017 – 11.7%; 2018 – 4.3%; 2019 – 5.7%; 2020 – 1.5%; and thereafter – 54.4%.

 

23



 

 

 

Number of Tenants

 

 

 

Cumulative

 

Year

 

Short and Long
Term
Residential
Care
Communities
(1)

 

MOBs

 

Wellness
Centers

 

Total

 

Percent of
Total
Number of
Tenancies
Expiring

 

Percentage
of Number
of
Tenancies
Expiring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

 

65

 

 

65

 

12.3%

 

12.3%

 

2013

 

1

 

70

 

 

71

 

13.4%

 

25.7%

 

2014

 

 

88

 

 

88

 

16.6%

 

42.3%

 

2015

 

3

 

76

 

 

79

 

14.9%

 

57.2%

 

2016

 

 

63

 

 

63

 

11.9%

 

69.1%

 

2017

 

2

 

48

 

 

50

 

9.5%

 

78.6%

 

2018

 

1

 

31

 

 

32

 

6.0%

 

84.6%

 

2019

 

1

 

26

 

 

27

 

5.1%

 

89.7%

 

2020

 

 

16

 

 

16

 

3.0%

 

92.7%

 

Thereafter

 

4

 

32

 

2

 

38

 

7.3%

 

100.0%

 

Total

 

12

 

515

 

2

 

529

 

100.0%

 

 

 

 


(1)                   Excludes our TRSs as tenants.

 

24



 

 

 

Number of Living Units / Beds or Square Feet with Leases Expiring

 

 

 

Living Units / Beds(1)

 

Square Feet

 

Year

 

Short and Long
Term
Residential
Care
Communities
(Units / Beds)

 

Percent of
Total Living
Units / Beds
Expiring

 

Cumulative
Percentage of
Living Units /
Beds
Expiring

 

MOBs
(Square
Feet)

 

Wellness
Centers
(Square
Feet)

 

Total
Square
Feet

 

Percent of
Total
Square Feet
Expiring

 

Cumulative
Percent of
Total Square
Feet Expiring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

 

0.0%

 

0.0%

 

427,278

 

 

427,278

 

5.1%

 

5.1%

 

2013

 

2,472

 

9.2%

 

9.2%

 

601,220

 

 

601,220

 

7.1%

 

12.2%

 

2014

 

 

0.0%

 

9.2%

 

995,083

 

 

995,083

 

11.8%

 

24.0%

 

2015

 

423

 

1.6%

 

10.8%

 

799,482

 

 

799,482

 

9.5%

 

33.5%

 

2016

 

 

0.0%

 

10.8%

 

880,401

 

 

880,401

 

10.4%

 

43.9%

 

2017

 

3,508

 

13.1%

 

23.9%

 

861,903

 

 

861,903

 

10.2%

 

54.1%

 

2018

 

1,619

 

6.0%

 

29.9%

 

343,859

 

 

343,859

 

4.1%

 

58.2%

 

2019

 

175

 

0.7%

 

30.6%

 

904,037

 

 

904,037

 

10.8%

 

69.0%

 

2020

 

 

0.0%

 

30.6%

 

465,440

 

 

465,440

 

5.5%

 

74.5%

 

Thereafter

 

18,658

 

69.4%

 

100.0%

 

1,342,067

 

812,000

 

2,154,067

 

25.5%

 

100.0%

 

Total

 

26,855

 

100.0%

 

 

 

7,620,770

 

812,000

 

8,432,770

 

100.0%