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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
 
FORM 10-Q
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2017
 
OR
 
☐ 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 ☒  No ☐
 
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 ☒  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check One):
 
Large accelerated filer ☒
 
Accelerated filer ☐
 
 
 
Non—accelerated filer ☐
 
Smaller reporting company ☐
(Do not check if a smaller reporting company)
 
 
 
 
 
Emerging growth company ☐
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒
 
Number of registrant’s common shares outstanding as of August 2, 2017: 237,558,963



Table of Contents

SENIOR HOUSING PROPERTIES TRUST
FORM 10-Q
 
June 30, 2017
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
References in this Quarterly Report on Form 10-Q to the Company, we, us or our include Senior Housing Properties Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.



Table of Contents

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,
 
 
2017
 
2016
ASSETS
 
 

 
 

Real estate properties:
 
 

 
 

Land
 
$
806,369

 
$
803,773

Buildings and improvements
 
6,993,451

 
6,926,750

 
 
7,799,820

 
7,730,523

Accumulated depreciation
 
(1,426,382
)
 
(1,328,011
)
 
 
6,373,438

 
6,402,512

 
 
 
 
 
Cash and cash equivalents
 
27,160

 
31,749

Restricted cash
 
13,776

 
3,829

Acquired real estate leases and other intangible assets, net
 
476,494

 
514,446

Other assets, net
 
292,752

 
275,218

Total assets
 
$
7,183,620

 
$
7,227,754

 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

Unsecured revolving credit facility
 
$
434,000

 
$
327,000

Unsecured term loans, net
 
547,434

 
547,058

Senior unsecured notes, net
 
1,724,210

 
1,722,758

Secured debt and capital leases, net
 
817,083

 
1,117,649

Accrued interest
 
17,486

 
18,471

Assumed real estate lease obligations, net
 
101,007

 
106,038

Other liabilities
 
201,621

 
189,375

Total liabilities
 
3,842,841

 
4,028,349

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Equity:
 
 

 
 

Equity attributable to common shareholders:
 
 
 
 
Common shares of beneficial interest, $.01 par value: 300,000,000 shares authorized, 237,558,963 and 237,544,479 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
 
2,376

 
2,375

Additional paid in capital
 
4,607,742

 
4,533,456

Cumulative net income
 
1,667,082

 
1,618,885

Cumulative other comprehensive income
 
58,861

 
34,549

Cumulative distributions
 
(3,175,144
)
 
(2,989,860
)
Total equity attributable to common shareholders
 
3,160,917

 
3,199,405

Noncontrolling interest:
 
 
 
 
Total equity attributable to noncontrolling interest
 
179,862

 

Total equity
 
3,340,779

 
3,199,405

Total liabilities and equity
 
$
7,183,620

 
$
7,227,754

 See accompanying notes.

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Table of Contents

SENIOR HOUSING PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands, except per share data)
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 

 
 

 
 

 
 

Rental income
 
$
166,647

 
$
163,997

 
$
333,090

 
$
325,419

Residents fees and services
 
98,366

 
97,370

 
196,484

 
194,323

Total revenues
 
265,013

 
261,367

 
529,574

 
519,742

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Property operating expenses
 
102,795

 
97,474

 
203,851

 
195,422

Depreciation and amortization
 
69,669

 
71,372

 
142,844

 
142,594

General and administrative
 
22,922

 
11,965

 
38,005

 
22,828

Acquisition and certain other transaction related costs
 

 
180

 
292

 
619

Impairment of assets
 
5,082

 
4,961

 
5,082

 
12,351

Total expenses
 
200,468

 
185,952

 
390,074

 
373,814

 
 
 
 
 
 
 
 
 
Operating income
 
64,545

 
75,415

 
139,500

 
145,928

 
 
 
 
 
 
 
 
 
Dividend income
 
659

 
789

 
1,319

 
789

Interest and other income
 
76

 
177

 
195

 
242

Interest expense
 
(40,800
)
 
(41,118
)
 
(84,289
)
 
(80,399
)
Loss on early extinguishment of debt
 
(7,353
)
 

 
(7,353
)
 
(6
)
Income from continuing operations before income tax expense and equity in earnings of an investee
 
17,127

 
35,263

 
49,372

 
66,554

Income tax expense
 
(99
)
 
(108
)
 
(191
)
 
(202
)
Equity in earnings of an investee
 
374

 
17

 
502

 
94

Income before gain on sale of properties
 
17,402

 
35,172

 
49,683

 
66,446

Gain on sale of properties
 

 
4,061

 

 
4,061

Net income
 
17,402

 
39,233

 
49,683

 
70,507

Net income attributable to noncontrolling interest
 
(1,360
)
 

 
(1,486
)
 

Net income attributable to common shareholders
 
$
16,042

 
$
39,233

 
$
48,197

 
$
70,507

 
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 

 
 

 
 

 
 

Unrealized gain (loss) on investments in available for sale securities
 
(4,995
)
 
15,931

 
19,050

 
40,118

Amounts reclassified from cumulative other comprehensive income to net income
 
5,082

 

 
5,082

 

Equity in unrealized gain of an investee
 
58

 
43

 
180

 
95

Other comprehensive income
 
145

 
15,974

 
24,312

 
40,213

Comprehensive income
 
17,547

 
55,207

 
$
73,995

 
$
110,720

Comprehensive income attributable to noncontrolling interest
 
(1,360
)
 

 
(1,486
)
 

Comprehensive income attributable to common shareholders
 
$
16,187

 
$
55,207

 
$
72,509

 
$
110,720

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding (basic)
 
237,399

 
237,325

 
237,395

 
237,320

Weighted average common shares outstanding (diluted)
 
237,445

 
237,363

 
237,433

 
237,349

 
 
 
 
 
 
 
 
 
Per common share amounts (basic and diluted):
 
 

 
 

 
 

 
 

Net income attributable to common shareholders
 
$
0.07

 
$
0.17

 
$
0.20

 
$
0.30

 
See accompanying notes.

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Table of Contents

SENIOR HOUSING PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
 
 
Six Months Ended
 
 
June 30,
 
 
2017
 
2016
Cash flows from operating activities:
 
 

 
 

Net income
 
$
49,683

 
$
70,507

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

 
 

Depreciation and amortization
 
142,844

 
142,594

Amortization of debt issuance costs and debt discounts and premiums
 
2,803

 
2,783

Straight line rental income
 
(6,865
)
 
(9,306
)
Amortization of acquired real estate leases and other intangible assets
 
(2,610
)
 
(2,558
)
Loss on early extinguishment of debt
 
7,353

 
6

Impairment of assets
 
5,082

 
12,351

Gain on sale of properties
 

 
(4,061
)
Other non-cash adjustments
 
(1,887
)
 
(1,886
)
Equity in earnings of an investee
 
(502
)
 
(94
)
Change in assets and liabilities:
 
 

 
 

Restricted cash
 
(9,947
)
 
(871
)
Other assets
 
7,094

 
6,202

Accrued interest
 
(985
)
 
1,459

Other liabilities
 
9,487

 
(955
)
Net cash provided by operating activities
 
201,550

 
216,171

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Real estate acquisitions and deposits
 
(15,146
)
 
(187,150
)
Real estate improvements
 
(57,067
)
 
(48,657
)
Proceeds from sale of properties
 

 
9,279

Net cash used for investing activities
 
(72,213
)
 
(226,528
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from issuance of senior unsecured notes
 

 
250,000

Proceeds from borrowings on revolving credit facility
 
501,000

 
340,000

Repayments of borrowings on revolving credit facility
 
(394,000
)
 
(366,000
)
Repayment of other debt
 
(302,476
)
 
(31,788
)
Loss on early extinguishment of debt settled in cash
 
(5,485
)
 

Payment of debt issuance costs
 

 
(8,650
)
Repurchase of common shares
 
(11
)
 

Proceeds from noncontrolling interest, net
 
255,813

 

Distributions to noncontrolling interest
 
(3,483
)
 

Distributions to shareholders
 
(185,284
)
 
(185,228
)
Net cash used for financing activities
 
(133,926
)
 
(1,666
)
 
 
 
 
 
Decrease in cash and cash equivalents
 
(4,589
)
 
(12,023
)
Cash and cash equivalents at beginning of period
 
31,749

 
37,656

Cash and cash equivalents at end of period
 
$
27,160

 
$
25,633

 
 
 
 
 
Supplemental cash flows information:
 
 

 
 

Interest paid
 
$
82,470

 
$
76,472

Income taxes paid
 
$
441

 
$
355


See accompanying notes.

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Table of Contents
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, 2016, 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 intercompany transactions and balances with or among 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.
 
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates.  Significant estimates in our condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and impairment of real estate and intangible assets.

In March 2017, we entered into a joint venture with a sovereign institutional investor for one of our properties leased to medical providers, medical related business, clinics and biotech laboratory tenants, or a MOB (two buildings), located in Boston, Massachusetts. We have determined that this joint venture is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC. We concluded that we must consolidate this VIE because we are the entity with the power to direct the activities that most significantly impact the VIE’s economic performance and we have the obligation to absorb losses of, and the right to receive benefits from, the VIE that could be significant to the VIE, and therefore are the primary beneficiary of the VIE. The assets of this VIE were $1,122,953 as of June 30, 2017 and consist primarily of the net real estate owned by the joint venture. The liabilities of this VIE were $723,417 as of June 30, 2017 and consist primarily of the mortgage debts on the property. The sovereign institutional investor's interest in this consolidated entity is reflected as noncontrolling interest in our condensed consolidated financial statements. See Note 7 for further information about this joint venture.

Note 2.  Recent Accounting Pronouncements
  
On January 1, 2017, we adopted FASB Accounting Standards Update, or ASU, No. 2017-01, Clarifying the Definition of a Business. This update provides additional guidance on evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or of a business. This update defines three requirements for a set of assets and activities (collectively referred to as a “set”) to be considered a business: inputs, processes and outputs. As a result of the implementation of this update, certain property acquisitions, which under previous guidance were accounted for as business combinations, are now accounted for as acquisitions of assets. In an acquisition of assets, certain acquisition costs are capitalized as opposed to expensed under previous guidance.

On January 1, 2017, we adopted FASB ASU No. 2016-09, Compensation - Stock Compensation, which identifies areas for simplification involving several aspects of accounting for share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The adoption of ASU No. 2016-09 did not have a material impact in our condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU No. 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While ASU No. 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. In August 2015, the FASB provided for a one-year deferral of the effective date for ASU No. 2014-09, which is now effective for us beginning January 1, 2018. A substantial portion of our revenue consists of rental income from leasing arrangements, including leases with residents at properties leased to our taxable REIT subsidiaries, or TRSs, which is specifically excluded from ASU No. 2014-09. We are continuing to evaluate ASU No. 2014-09 (and related clarifying guidance issued by the FASB); however, we do

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Table of Contents
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

not expect its adoption to have a significant impact on the amount or timing of our revenue recognition in our condensed consolidated financial statements. We currently expect to adopt the standard using the modified retrospective approach.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. This update is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted subject to certain conditions. Currently, changes in fair value of these investments are recorded through other comprehensive income. ASU No. 2016-01 states that these changes will be recorded through earnings. We are continuing to evaluate this guidance, but we expect the implementation of this guidance will affect how changes in the fair value of available for sale securities we hold are presented in our condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have in our condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-15 will have in our condensed consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which clarifies how companies should present restricted cash and restricted cash equivalents. Companies will show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheets. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon the adoption of ASU No. 2016-18, we will reconcile both cash and cash equivalents and restricted cash and restricted cash equivalents, whereas under the current guidance we explain the changes during the period for cash and cash equivalents only.

In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, which clarifies which changes to the terms or conditions of a share-based payment award are subject to the guidance on modification accounting under ASC 718. Entities would apply the modification accounting guidance unless the value, vesting requirements and classification of a share-based payment award are the same immediately before and after a change to the terms or conditions of the award. ASU No. 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are continuing to evaluate ASU No. 2017-09; however, we do not expect its adoption to have a material impact in our condensed consolidated financial statements.




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SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

Note 3.  Real Estate Properties
 
At June 30, 2017, we owned 434 properties (460 buildings) located in 42 states and Washington, D.C.

Acquisitions:
 
MOBs:
 
In January 2017, we acquired one MOB (one building) located in Kansas with approximately 117,000 square feet for a purchase price of approximately $15,106, including closing costs of $35. We funded this asset acquisition using cash on hand and borrowings under our revolving credit facility. The allocation of the purchase price for this acquisition is as follows:
Date
 
Location
 
Number of Properties
 
Number of Buildings
 
Square Feet (000’s)
 
Cash Paid plus Assumed Debt (1)
 
Land
 
Building and Improvements
 
Acquired Real Estate Leases (2)
 
Acquired Real Estate Lease Obligations (2)
 
Assumed Debt
 
Premium on Assumed Debt
Jan-17
 
Kansas
 
1
 
1
 
117

 
$
15,106

 
$
1,522

 
$
7,246

 
$
6,338

 
$

 
$

 
$

(1)
Amount includes the cash we paid and various closing settlement adjustments, as well as closing costs.
(2)
The weighted average amortization periods for acquired real estate leases at the time of this acquisition was 10.3 years.

In July 2017, we acquired one MOB (one building) located in Maryland with approximately 59,000 square feet for a purchase price of approximately $16,400, excluding closing costs.
    
Also in July 2017, we entered an agreement to acquire one MOB (one building) located in Minnesota with approximately 150,000 square feet for a purchase price of approximately $16,650, excluding closing costs. This acquisition is subject to conditions; accordingly, we may not acquire this property, this acquisition may be delayed or the terms may change.

Impairment:
 
We periodically evaluate our assets for impairments. Impairment indicators may include declining tenant or resident occupancy, weak or declining profitability from the property, decreasing tenant cash flows 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 an asset. If indicators of impairment are present, we evaluate the carrying value of the affected asset by comparing it to the expected future undiscounted net cash flows to be generated from that asset. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the asset to its estimated fair value. We did not record any impairment charges for our real estate properties during the six months ended June 30, 2017. See Note 4 for further information regarding other than temporary impairment losses recorded in 2017 on our investments in available for sale securities.

Note 4.  Investments in Available for Sale Securities
 
At June 30, 2017, we owned 2,637,408 shares of class A common stock of The RMR Group Inc., or RMR Inc. We classify these shares as available for sale securities and carry them at fair value in other assets in our condensed consolidated balance sheets, with unrealized gains and losses reported as a component of shareholders’ equity. Our historical cost basis for these shares is $69,826. At June 30, 2017, our investment in RMR Inc. had a fair value of $128,310, resulting in a cumulative unrealized gain of $58,484 based on RMR Inc.’s quoted share price at June 30, 2017 ($48.65 per share).

At June 30, 2017, we owned 4,235,000 common shares of Five Star Senior Living Inc., or Five Star. We classify these shares as available for sale securities and carry them at fair value in other assets in our condensed consolidated balance sheets, with unrealized gains and losses reported as a component of shareholders’ equity. In performing our periodic evaluation of other than temporary impairment on our investment in Five Star for the second quarter of 2017, we determined that, based upon the length of time and the extent to which the market value of our Five Star investment was below the carrying value of our Five Star investment, the decline in fair value should be deemed to be other than temporary at June 30, 2017. Accordingly, we recorded a loss on impairment of $5,082 to reduce the carrying value of our Five Star investment to its estimated fair value during the second quarter of 2017. We estimated fair value using the closing price of Five Star's common shares on The NASDAQ Stock Market LLC, or the Nasdaq, on June 30, 2017 ($1.50 per share). At June 30, 2017, our Five Star investment had an adjusted cost basis and estimated fair value of $6,353.

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SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)


See Notes 6 and 12 below for further information regarding our investments in available for sale securities.
 
Note 5.  Indebtedness
 
Our principal debt obligations at June 30, 2017 were: (1) outstanding borrowings under our $1,000,000 unsecured revolving credit facility; (2) six public issuances of senior unsecured notes, including: (a) $400,000 principal amount at an annual interest rate of 3.25% due 2019, (b) $200,000 principal amount at an annual interest rate of 6.75% due 2020, (c) $300,000 principal amount at an annual interest rate of 6.75% due 2021, (d) $250,000 principal amount at an annual interest rate of 4.75% due 2024, (e) $350,000 principal amount at an annual interest rate of 5.625% due 2042 and (f) $250,000 principal amount at an annual interest rate of 6.25% due 2046; (3) our $350,000 principal amount unsecured term loan due 2020; (4) our $200,000 principal amount unsecured term loan due 2022; and (5) $807,775 aggregate principal amount of mortgages (excluding premiums, discounts and net debt issuance costs) secured by 24 of our properties (25 buildings) with maturity dates between 2018 and 2043.  The 24 mortgaged properties (25 buildings) had a carrying value (before accumulated depreciation) of $1,232,046 at June 30, 2017.  We also had two properties subject to capital leases with lease obligations totaling $11,022 at June 30, 2017; these two properties had a carrying value (before accumulated depreciation) of $36,173 at June 30, 2017, and the capital leases expire in 2026.

In April 2017, we prepaid a mortgage note secured by 17 of our properties with an outstanding principal balance of approximately $277,837 plus an aggregate premium of $5,449 plus accrued interest, a maturity date in September 2019 and an annual interest rate of 6.71%. In May 2017, we prepaid, at par plus accrued interest, a mortgage note secured by one of our properties with an outstanding principal balance of approximately $10,579, a maturity date in August 2017 and an annual interest rate of 6.15%. In June 2017, we prepaid, at par plus accrued interest, a mortgage note secured by one of our properties with an outstanding principal balance of approximately $8,807, a maturity date in August 2037 and an annual interest rate of 5.95%. We recorded loss on early extinguishment of debt of $7,353 for the three and six months ended June 30, 2017 related to these prepayments.

We have a $1,000,000 revolving credit facility that is available for general business purposes, including acquisitions. Our revolving credit facility provides that we can borrow, repay and re-borrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity.  Our revolving credit facility required annual interest to be paid on borrowings at LIBOR plus a premium, which was 130 basis points as of June 30, 2017, plus a facility fee of 30 basis points per annum (as of June 30, 2017) on the total amount of lending commitments.  

In August 2017, we amended the agreement governing our revolving credit facility. As a result of the amendment, the interest rate payable on borrowings under the facility is reduced from LIBOR plus a premium of 130 basis points per annum (as of June 30, 2017) to LIBOR plus a premium of 120 basis points per annum, and the facility fee is reduced from 30 basis points per annum (as of June 30, 2017) to 25 basis points per annum on the total amount of lending commitments under the facility. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. Also as a result of the amendment, the stated maturity date of the facility was extended from January 15, 2018 to January 15, 2022, and, subject to the payment of an extension fee and meeting other conditions, we have the option to extend the maturity date of the facility for an additional year. The facility also includes a feature pursuant to which in certain circumstances maximum borrowings under the facility may be increased to up to $2,000,000.

As of June 30, 2017, the annual interest rate payable on borrowings under our revolving credit facility was 2.5%. The weighted average annual interest rates for borrowings under our revolving credit facility were 2.3% and 1.7% for the three months ended June 30, 2017 and 2016, respectively, and 2.2% and 1.7% for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, we had $434,000 outstanding and $566,000 available for borrowing, and as of August 2, 2017, we had $415,000 outstanding and $585,000 available for borrowing under our revolving credit facility. We incurred interest expense and other associated costs related to our revolving credit facility of $2,662 and $3,454 for the three months ended June 30, 2017 and 2016, respectively, and $5,026 and $7,136 for the six months ended June 30, 2017 and 2016, respectively.
 
We have a $350,000 term loan, which we borrowed in 2014. This term loan matures in January 2020, and is prepayable without penalty at any time. This term loan requires annual interest to be paid at LIBOR plus a premium of 140 basis points that is subject to adjustment based upon changes to our credit ratings. At June 30, 2017, the annual interest rate payable on amounts outstanding under this term loan was 2.5%.  The weighted average annual interest rate for amounts outstanding under this term loan was 2.5% and 1.9% for the three months ended June 30, 2017 and 2016, respectively, and 2.3% and 1.9% for the six months ended June 30, 2017 and 2016, respectively. We incurred interest expense and other associated costs related to this term loan of $2,140 and $1,635 for the three months ended June 30, 2017 and 2016, respectively, and $4,056 and $3,249 for the six months ended June 30, 2017

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SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

and 2016, respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances.

We also have a $200,000 term loan, which we borrowed in 2015. This term loan matures in September 2022, and is prepayable without penalty at any time beginning in September 2017. At June 30, 2017, the annual interest rate payable on amounts outstanding under this term loan was 3.0%. The weighted average annual interest rate for amounts outstanding under this term loan was 2.9% and 2.3% for the three months ended June 30, 2017 and 2016, respectively, and 2.8% and 2.3% for the six months ended June 30, 2017 and 2016, respectively. We incurred interest expense and other associated costs related to this term loan of $1,427 and $1,133 for the three months ended June 30, 2017 and 2016, respectively, and $2,725 and $2,260 for the six months ended June 30, 2017 and 2016, respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $400,000 in certain circumstances. In August 2017, we amended the agreement governing this term loan. As a result of the amendment, the interest rate payable is reduced from LIBOR plus a premium of 180 basis points per annum (as of June 30, 2017) to LIBOR plus a premium of 135 basis points per annum, subject to adjustment based upon changes to our credit ratings.
 
Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our revolving credit facility and term loan agreements, a change of control of us, as defined, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business and property manager. Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements also contain a number of covenants, including covenants that restrict our ability to incur debts, and generally require us to maintain certain financial ratios, and our revolving credit facility and term loan agreements restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements at June 30, 2017.

Note 6.  Fair Value of Assets and Liabilities
 
The table below presents certain of our assets measured at fair value at June 30, 2017, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset: 
 
 
 
 
 
 
 
 
Significant
 
 
Total as of
 
Quoted Prices in Active
 
Significant Other
 
Unobservable
 
 
June 30,
 
Markets for Identical
 
Observable Inputs
 
Inputs
Description
 
2017
 
Assets (Level 1)
 
(Level 2)
 
(Level 3)
Recurring Fair Value Measurements
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
        Investments in available for sale securities (1)
 
$
134,662

 
$
134,662

 
$

 
$

(1)
Our investments in available for sale securities include our 2,637,408 shares of RMR Inc. class A common stock and our 4,235,000 Five Star common shares. The fair values of these shares are based upon quoted prices at June 30, 2017 in active markets (Level 1 inputs). See Note 4 for further information on our investments in available for sale securities.
 
In addition to the assets described in the table above, our financial instruments at June 30, 2017 and December 31, 2016 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, term loans, senior unsecured notes, secured debt and capital leases and other unsecured obligations and liabilities. The fair values of these financial instruments approximated their carrying values in our condensed consolidated financial statements as of such dates, except as follows: 
 
 
As of June 30, 2017
 
As of December 31, 2016
Description
 
Carrying Amount (1)
 
Estimated Fair Value
 
Carrying Amount (1)
 
Estimated Fair Value
Senior unsecured notes
 
$
1,724,210

 
$
1,819,342

 
$
1,722,758

 
$
1,755,715

Secured debt (2)
 
806,061

 
784,752

 
1,106,183

 
1,090,515

 
 
$
2,530,271

 
$
2,604,094

 
$
2,828,941

 
$
2,846,230

(1)
Includes unamortized debt issuance costs, premiums and discounts.

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SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

(2)
We assumed certain of these secured debts in connection with our acquisitions of certain properties. We recorded the assumed mortgage debts at estimated fair value on the date of acquisition and we are amortizing the fair value adjustments, if any, to interest expense over the respective terms of the mortgage debts to reduce interest expense to the estimated market interest rates as of the date of acquisition.
 
We estimated the fair value of our two issuances of senior unsecured notes due 2042 and 2046 based on the closing price on the Nasdaq (a Level 1 input) as of June 30, 2017. We estimated the fair values of our four issuances of senior unsecured notes due 2019, 2020, 2021 and 2024 using an average of the bid and ask price on or about June 30, 2017 (Level 2 inputs as defined in the fair value hierarchy under GAAP).  We estimated the fair values of our secured debts by using discounted cash flows analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

Note 7. Noncontrolling Interest

In March 2017, we entered into a joint venture with a sovereign institutional investor for one of our MOBs (two buildings) located in Boston, Massachusetts. The investor contributed approximately $260,891 for a 45% equity interest in the joint venture, and we retained the remaining 55% equity interest in the joint venture. Net proceeds from this transaction were approximately $255,813, after transaction costs. We continue to effectively control this property and therefore continue to account for this property on a consolidated basis in our condensed consolidated financial statements under the VIE model.

This transaction was considered a partial sale of real estate that did not result in profit recognition under the full accrual method due to our continuing involvement in the entity. We recognized a noncontrolling interest in our condensed consolidated balance sheets of approximately $181,859, which is equal to 45% of the aggregate carrying value of the total equity of the property immediately prior to the transaction. The difference between the net proceeds received from this transaction and the noncontrolling interest recognized, which was approximately $73,954, has been reflected as an increase in additional paid in capital in our condensed consolidated balance sheets. The portion of the joint venture's net income and comprehensive income not attributable to us, or $1,360 and $1,486 for the three and six months ended June 30, 2017, respectively, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income. We made aggregate cash distributions to our joint venture partner of $3,483 during the three and six months ended June 30, 2017, which are reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. As of June 30, 2017, this joint venture held real estate assets with an aggregate net book value of $999,346, subject to mortgage debts of $620,000.

In assessing whether we have a controlling interest in this joint venture arrangement and the requirement to consolidate the accounts of the joint venture entity, we considered the members' rights to residual gains and obligation to absorb losses, which activities most significantly impact the economic performance of the entity and which member has the power to direct those activities.

Note 8.  Shareholders’ Equity

Share Issuances and Repurchases:

On May 18, 2017, we granted 3,000 of our common shares, valued at $21.25 per share, the closing price of our common shares on the Nasdaq on that day, to each of our five Trustees as part of their annual compensation.

On June 30, 2017, we purchased 516 of our common shares valued at $20.44 per share, the closing price of our common shares on the Nasdaq on that day, from employees of our manager, RMR LLC, in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of restricted common shares.
    
Distributions:
 
On February 21, 2017, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,642, that was declared on January 13, 2017 and was payable to shareholders of record on January 23, 2017. On May 18, 2017, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,642, that was declared on April 11, 2017 and was payable to shareholders of record on April 21, 2017. On July 12, 2017, we declared a regular quarterly distribution payable to common shareholders of record on July 24, 2017 of $0.39 per share, or approximately $92,648. We expect to pay this distribution on or about August 17, 2017.



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SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

Note 9.  Segment Reporting
 
As of June 30, 2017, we have four operating segments, of which three are separate reporting segments. We aggregate our triple net leased senior living communities, our managed senior living communities and our MOBs into three reporting segments, based on their similar operating and economic characteristics. The first reporting segment includes triple net leased senior living communities that provide short term and long term residential care and other services for residents and with respect to which we receive rents from the operators. The second reporting segment includes managed senior living communities that provide short term and long term residential care and other services for residents where we pay fees to the operator to manage the communities for our account. The third reporting segment includes MOBs where the tenants pay us rent. Our fourth segment includes all of our other operations, including certain properties that offer wellness, fitness and spa services to members and with respect to which we receive rents from operators, which we do not consider to be sufficiently material to constitute a separate reporting segment.
 
 
 
For the Three Months Ended June 30, 2017
 
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
MOBs
 
All Other Operations
 
Consolidated
Revenues:
 
 

 
 

 
 

 
 

 
 

Rental income
 
$
67,426

 
$

 
$
94,651

 
$
4,570

 
$
166,647

Residents fees and services
 

 
98,366

 

 

 
98,366

Total revenues
 
67,426

 
98,366

 
94,651

 
4,570

 
265,013

 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

 
 

Property operating expenses
 

 
75,149

 
27,646

 

 
102,795

Depreciation and amortization
 
20,470

 
16,390

 
31,861

 
948

 
69,669

General and administrative
 

 

 

 
22,922

 
22,922

Impairment of assets
 

 

 

 
5,082

 
5,082

Total expenses
 
20,470

 
91,539

 
59,507

 
28,952

 
200,468

 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
46,956

 
6,827

 
35,144

 
(24,382
)
 
64,545

 
 
 
 
 
 
 
 
 
 
 
Dividend income
 

 

 

 
659

 
659

Interest and other income
 

 

 

 
76

 
76

Interest expense
 
(2,211
)
 
(1,176
)
 
(6,250
)
 
(31,163
)
 
(40,800
)
Loss on early extinguishment of debt
 
(7,294
)
 

 
(59
)
 

 
(7,353
)
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee
 
37,451

 
5,651

 
28,835

 
(54,810
)
 
17,127

Income tax expense
 

 

 

 
(99
)
 
(99
)
Equity in earnings of an investee
 

 

 

 
374

 
374

Net income (loss)
 
37,451

 
5,651

 
28,835

 
(54,535
)
 
17,402

Net income attributable to noncontrolling interest
 

 

 
(1,360
)
 

 
(1,360
)
Net income (loss) attributable to common shareholders
 
$
37,451

 
$
5,651

 
$
27,475

 
$
(54,535
)
 
$
16,042

 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2017
 
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
MOBs
 
All Other Operations
 
Consolidated
Total assets
 
$
2,276,979

 
$
1,238,723

 
$
3,309,089

 
$
358,829

 
$
7,183,620



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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, 2016
 
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
MOBs
 
All Other Operations
 
Consolidated
Revenues:
 
 

 
 

 
 

 
 

 
 

Rental income
 
$
66,441

 
$

 
$
92,978

 
$
4,578

 
$
163,997

Residents fees and services
 

 
97,370

 

 

 
97,370

Total revenues
 
66,441

 
97,370

 
92,978

 
4,578

 
261,367

 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

 
 

Property operating expenses
 
423

 
71,642

 
25,409

 

 
97,474

Depreciation and amortization
 
19,273

 
20,140

 
31,011

 
948

 
71,372

General and administrative
 

 

 

 
11,965

 
11,965

Acquisition and certain other transaction related costs
 

 

 

 
180

 
180

Impairment of assets
 

 

 
4,961

 

 
4,961

Total expenses
 
19,696

 
91,782


61,381


13,093


185,952

 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
46,745

 
5,588

 
31,597

 
(8,515
)
 
75,415

 
 
 
 
 
 
 
 
 
 
 
Dividend income
 

 

 

 
789

 
789

Interest and other income
 

 

 

 
177

 
177

Interest expense
 
(6,282
)
 
(2,663
)
 
(844
)
 
(31,329
)
 
(41,118
)
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee
 
40,463

 
2,925

 
30,753

 
(38,878
)
 
35,263

Income tax expense
 

 

 

 
(108
)
 
(108
)
Equity in earnings of an investee
 

 

 

 
17

 
17

Income (loss) before gain on sale of properties
 
40,463

 
2,925

 
30,753

 
(38,969
)
 
35,172

Gain on sale of properties
 
4,061

 

 

 

 
4,061

Net income (loss)
 
$
44,524

 
$
2,925

 
$
30,753

 
$
(38,969
)
 
$
39,233

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
MOBs
 
All Other Operations
 
Consolidated
Total assets
 
$
2,289,045

 
$
1,260,032

 
$
3,333,141

 
$
345,536

 
$
7,227,754














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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, 2017
 
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
MOBs
 
All Other Operations
 
Consolidated
Revenues:
 
 

 
 

 
 

 
 

 
 

Rental income
 
$
134,678

 
$

 
$
189,297

 
$
9,115

 
$
333,090

Residents fees and services
 

 
196,484

 

 

 
196,484

Total revenues
 
134,678

 
196,484

 
189,297

 
9,115

 
529,574

 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

 
 

Property operating expenses
 

 
149,028

 
54,823

 

 
203,851

Depreciation and amortization
 
40,804

 
36,605

 
63,539

 
1,896

 
142,844

General and administrative
 

 

 

 
38,005

 
38,005

Acquisition and certain other transaction related costs
 

 

 

 
292

 
292

Impairment of assets
 

 

 

 
5,082

 
5,082

Total expenses
 
40,804

 
185,633

 
118,362

 
45,275

 
390,074

 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
93,874

 
10,851

 
70,935

 
(36,160
)
 
139,500

 
 
 
 
 
 
 
 
 
 
 
Dividend income
 

 

 

 
1,319

 
1,319

Interest and other income
 

 

 

 
195

 
195

Interest expense
 
(7,550
)
 
(2,352
)
 
(12,570
)
 
(61,817
)
 
(84,289
)
Loss on early extinguishment of debt
 
(7,294
)
 

 
(59
)
 

 
(7,353
)
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee
 
79,030

 
8,499

 
58,306

 
(96,463
)
 
49,372

Income tax expense
 

 

 

 
(191
)
 
(191
)
Equity in earnings of an investee
 

 

 

 
502

 
502

Net income (loss)
 
79,030

 
8,499

 
58,306

 
(96,152
)
 
49,683

Net income attributable to noncontrolling interest
 

 

 
(1,486
)
 

 
(1,486
)
Net income (loss) attributable to common shareholders
 
$
79,030

 
$
8,499

 
$
56,820

 
$
(96,152
)
 
$
48,197

 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2017
 
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
MOBs
 
All Other Operations
 
Consolidated
Total assets
 
$
2,276,979

 
$
1,238,723

 
$
3,309,089

 
$
358,829

 
$
7,183,620














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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, 2016
 
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
MOBs
 
All Other Operations
 
Consolidated
Revenues:
 
 

 
 

 
 

 
 

 
 

Rental income
 
$
131,749

 
$

 
$
184,559

 
$
9,111

 
$
325,419

Residents fees and services
 

 
194,323

 

 

 
194,323

Total revenues
 
131,749

 
194,323

 
184,559

 
9,111

 
519,742

 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

 
 

Property operating expenses
 
786

 
143,820

 
50,816

 

 
195,422

Depreciation and amortization
 
38,674

 
40,158

 
61,866

 
1,896

 
142,594

General and administrative
 

 

 

 
22,828

 
22,828

Acquisition and certain other transaction related costs
 

 

 

 
619

 
619

Impairment of assets
 
4,391

 

 
7,960

 

 
12,351

Total expenses
 
43,851

 
183,978

 
120,642

 
25,343

 
373,814

 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
87,898

 
10,345

 
63,917

 
(16,232
)
 
145,928

 
 
 
 
 
 
 
 
 
 
 
Dividend income
 

 

 

 
789

 
789

Interest and other income
 

 

 

 
242

 
242

Interest expense
 
(12,665
)
 
(5,227
)
 
(1,798
)
 
(60,709
)
 
(80,399
)
Loss on early extinguishment of debt
 

 
(6
)
 

 

 
(6
)
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee
 
75,233

 
5,112

 
62,119

 
(75,910
)
 
66,554

Income tax expense
 

 

 

 
(202
)
 
(202
)
Equity in earnings of an investee
 

 

 

 
94

 
94

Income (loss) from before gain on sale of properties
 
75,233

 
5,112

 
62,119

 
(76,018
)
 
66,446

Gain on sale of properties
 
4,061

 

 

 

 
4,061

Net income (loss)
 
$
79,294

 
$
5,112

 
$
62,119

 
$
(76,018
)
 
$
70,507

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
MOBs
 
All Other Operations
 
Consolidated
Total assets
 
$
2,289,045

 
$
1,260,032

 
$
3,333,141

 
$
345,536

 
$
7,227,754


Note 10. Leases and Management Agreements with Five Star
Our Senior Living Communities Leased by Five Star. We are Five Star’s largest landlord and Five Star is our largest tenant. As of June 30, 2017 and 2016, we leased 185 and 184 senior living communities to Five Star, respectively. We lease senior living communities to Five Star pursuant to five leases with Five Star. We recognized total rental income from Five Star of $51,123, and $48,234 for the three months ended June 30, 2017 and 2016, respectively, and $102,108 and $96,341 for the six months ended June 30, 2017 and 2016, respectively. These amounts exclude percentage rent payments we received from Five Star of $1,392 and $1,388 for the three months ended June 30, 2017 and 2016, respectively, and $2,837 and $2,861 for the six months ended June 30, 2017 and 2016, respectively. We determine actual percentage rent due under our Five Star leases annually and recognize any resulting amount as rental income at year end when all contingencies are met. As of June 30, 2017 and December 31, 2016, we

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

had rents receivable from Five Star of $17,044 and $18,320, respectively, which amounts are included in other assets in our condensed consolidated balance sheets. Rental income from Five Star represented 19.3% of our total revenues for both the three and six months ended June 30, 2017, respectively, and the properties Five Star leases from us represented 27.5% of our total gross book value of real estate assets as of June 30, 2017.
Pursuant to the terms of our leases with Five Star, for the six months ended June 30, 2017 and 2016, we funded $19,308 and $11,836, respectively, of improvements to communities leased to Five Star. As a result, the annual rent payable to us by Five Star increased by approximately $1,547 and $949, respectively. During the quarter ended June 30, 2017, we and Five Star agreed to amend the applicable lease for certain construction, expansion and development projects at two senior living communities we own and lease to Five Star. If and when Five Star requests that we purchase improvements related to these specific projects from them, Five Star’s annual rent payable to us will increase by an amount equal to the interest rate then applicable to our borrowings under our revolving credit facility plus 2% per annum of the amount we purchased. This amount of increased rent will apply until 12 months after a certificate of occupancy is issued with respect to the project; thereafter, Five Star’s annual rent payable to us will be revised to equal the amount determined pursuant to the capital improvement formula specified in the applicable lease.

In June 2016, we entered into an agreement with Five Star pursuant to which, on June 29, 2016, we purchased seven senior living communities from Five Star for an aggregate purchase price of $112,350, and we simultaneously leased these communities back to Five Star under a new long term lease agreement.

Our Senior Living Communities Managed by Five Star. Five Star managed 68 and 62 senior living communities for our account as of June 30, 2017 and 2016, respectively. We lease our senior living communities that are managed by Five Star and include assisted living units or skilled nursing facility, or SNF, beds to our TRSs and Five Star manages these communities pursuant to long term management agreements. We incurred management fees payable to Five Star of $3,554 and $2,819 for the three months ended June 30, 2017 and 2016, respectively, and $7,117 and $5,623 for the six months ended June 30, 2017 and 2016, respectively. These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.
During the quarter ended June 30, 2017, we and Five Star agreed to amend the applicable management and pooling agreements for a construction, expansion and development project at a senior living community that we own and is managed by Five Star. Our minimum return of invested capital for this specific project will increase by an amount equal to the interest rate then applicable to our borrowings under our revolving credit facility plus 2% per annum. This amount of increased minimum return will apply until 12 months after a certificate of occupancy is issued with respect to the project; thereafter, the amount of annual minimum return of invested capital will be revised to equal the amount determined pursuant to the applicable management and pooling agreements. We and Five Star also agreed that the commencement of the measurement period for determining whether the specified annual minimum return under the applicable management and pooling agreements has been achieved will be deferred until 12 months after a certificate of occupancy is issued with respect to the project.
Simultaneously with the June 2016 sale and leaseback transaction, we and Five Star terminated three of our four then existing pooling agreements and entered into 10 new pooling agreements that combine our management agreements with Five Star for senior living communities that include assisted living units. Pursuant to these management agreements and the pooling agreements, Five Star receives management fees equal to either 3% or 5% of the gross revenues realized at the applicable communities, reimbursement for its direct costs and expenses related to such communities, annual incentive fees if certain operating results at those communities are achieved and fees for its supervision of capital expenditure projects at those communities equal to 3% of amounts funded by us.
Under the pooling agreements, the calculations of Five Star's fees and of our annual minimum returns related to management agreements that include assisted living units that became effective before May 2015 and had been pooled under one of the previously existing pooling agreements are generally the same as they were under the previously existing pooling agreements. However, for certain communities, the pooling agreements reduced our annual minimum returns, and also, with respect to 10 communities, reset the annual minimum returns we receive before Five Star is paid incentive fees to specified amounts. For those management agreements that include assisted living units that became effective from and after May 2015, the pooling agreements increased the management fees Five Star receives from 3% to 5% of the gross revenues realized at the applicable communities, and changed the potential annual incentive fees from 35% to 20% of the annual net operating income, or NOI, of the applicable communities remaining after we realize our requisite annual minimum returns.




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Table of Contents
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. Business and Property Management Agreements with RMR LLC
We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to the property level operations of our MOBs. We also have a subsidiary level management agreement with RMR LLC related to one of our MOBs located in Boston, Massachusetts, which we entered in connection with the joint venture arrangement for that MOB. Under that agreement, our subsidiary pays RMR LLC certain business management fees directly, which fees are credited against the business management fees payable by us to RMR LLC.
Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $20,431 and $9,243 for the three months ended June 30, 2017 and 2016, respectively, and $33,212 and $17,590 for the six months ended June 30, 2017 and 2016, respectively. The business management fees for the three and six months ended June 30, 2017 include $725 and $787, respectively, of management fees related to our subsidiary level management agreement with RMR LLC entered into in connection with our joint venture arrangement, as well as $10,760 and $14,026, respectively, of estimated 2017 incentive fees based on our common share total return as of June 30, 2017. Although we recognized estimated incentive fees in accordance with GAAP, the actual amount of incentive fees payable to RMR LLC for 2017, if any, will be based on our common share total return, as defined, for the three year period ending December 31, 2017, and will be payable in 2018. The net business management fees we recognized for the 2017 and 2016 periods are included in general and administrative expense in our consolidated statements of comprehensive income.
Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $2,708 and $2,686 for the three months ended June 30, 2017 and 2016, respectively, and $4,888 and $5,232 for the six months ended June 30, 2017 and 2016, respectively, which amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.
We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. Our property level operating expenses, including certain payroll and related costs incurred by RMR LLC, are generally incorporated into rents charged to our tenants. We reimbursed RMR LLC $2,383 and $2,171 for property management related expenses for the three months ended June 30, 2017 and 2016, respectively, and $4,763 and $4,299 for the six months ended June 30, 2017 and 2016, respectively, which amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income. In addition, we are responsible for our share of RMR LLC's costs for providing our internal audit function. The amounts recognized as expense for internal audit costs were $67 for each of the three months ended June 30, 2017 and 2016, and $134 for each of the six months ended June 30, 2017 and 2016, which amounts are included in general and administrative expense in our condensed consolidated statements of comprehensive income.

Note 12. Related Person Transactions
 
We have relationships and historical and continuing transactions with Five Star, RMR LLC, RMR Inc., Affiliates Insurance Company, or AIC, and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also our Trustees or officers. 
Five Star.  We are currently one of Five Star’s largest stockholders. As of June 30, 2017, we owned 4,235,000 of Five Star’s common shares, or approximately 8.5% of Five Star’s outstanding common shares.  Five Star is our largest tenant and the manager of our managed senior living communities. As of June 30, 2017, our Managing Trustees, the controlling shareholders of RMR LLC's parent, beneficially owned, directly and indirectly, 36.7% of Five Star's outstanding common shares. RMR LLC provides management services to both us and Five Star. See Note 10 for further information regarding our relationships, agreements and transactions with Five Star and Note 4 for further information regarding our investment in Five Star.
Our Manager, RMR LLC. See Note 11 for further information regarding our management agreements with RMR LLC.
RMR Inc. RMR LLC is a subsidiary of RMR Inc. and RMR Inc. is the managing member of RMR LLC. The controlling shareholder of RMR Inc., ABP Trust, is owned by our Managing Trustees. As of June 30, 2017, we owned 2,637,408 shares of class A common stock of RMR Inc.  See Note 4 for further information regarding our investment in RMR Inc.

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Table of Contents
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

AIC. We, ABP Trust, Five Star and four other companies to which RMR LLC provides management services currently own AIC, an Indiana insurance company, in equal amounts. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC; we also have a one year standalone insurance policy that provides coverage for our MOB (two buildings) located in Boston, Massachusetts that is subject to our joint venture arrangement, which we obtained as a part of this insurance program. We currently expect to pay aggregate annual premiums, including taxes and fees, of approximately $2,453 in connection with this insurance program for the policy year ending June 30, 2018, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.
As of June 30, 2017 and December 31, 2016, our investment in AIC had a carrying value of $7,798 and $7,116, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income related to our investment in AIC, which amounts are presented as equity in earnings of an investee in our condensed consolidated statements of comprehensive income. Our other comprehensive income includes our proportionate part of unrealized gains on securities which are owned and held for sale by AIC.
For further information about these and certain other related person relationships and transactions, please refer to our Annual Report.

Note 13.  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 federal 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 taxation as a REIT.  During the three months ended June 30, 2017 and 2016, we recognized income tax expense of $99 and $108, respectively, and during the six months ended June 30, 2017 and 2016, we recognized income tax expense of $191 and $202, respectively.

Note 14. Weighted Average Common Shares
 
The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands): 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Weighted average common shares for basic earnings per share
 
237,399

 
237,325

 
237,395

 
237,320

Effect of dilutive securities: unvested share awards
 
46

 
38

 
38

 
29

Weighted average common shares for diluted earnings per share
 
237,445

 
237,363

 
237,433

 
237,349



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Table of Contents

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 with our Annual Report. We are a REIT organized under Maryland law. At June 30, 2017, we owned 434 properties (460 buildings) located in 42 states and Washington, D.C.  At June 30, 2017, the undepreciated carrying value of our real estate assets was $8.4 billion. For the three months ended June 30, 2017, 97% of our NOI came from properties where a majority of the revenues are paid from our residents’ and tenants’ private resources.
 
PORTFOLIO OVERVIEW
 
The following tables present an overview of our portfolio (dollars in thousands, except investment per unit / bed or square foot data):
 
 
 
 
Number of
 
 
 
 
 
 
 
Investment per
 
 
 
% of
 
 
Number of
 
Units/Beds or
 
 
 
Carrying Value
 
% of Total
 
Unit / Bed or
 
Q2 2017
 
Q2 2017
(As of June 30, 2017)
 
Properties
 
Square Feet
 
 
 
of Investment (1)
 
Investment
 
Square Foot (2)
 
NOI (3)
 
NOI (3)
Facility Type
 
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 

Independent living (4)
 
68

 
16,452

 
 
 
$
2,360,927

 
28.0
%
 
$
143,504

 
$
45,652

 
28.1
%
Assisted living (4)
 
197

 
14,443

 
 
 
2,115,511

 
25.1
%
 
$
146,473

 
40,750

 
25.1
%
Skilled nursing facilities (4)
 
39

 
4,131

 
 
 
186,802

 
2.2
%
 
$
45,220

 
4,241

 
2.6
%
Subtotal senior living communities
 
304

 
35,026

 
 
 
4,663,240

 
55.3
%
 
$
133,137

 
90,643

 
55.8
%
MOBs (5)
 
120

 
11,552,323

 
sq. ft.  
 
3,598,811

 
42.6
%
 
$
312

 
67,005

 
41.4
%
Wellness centers
 
10

 
812,000

 
sq. ft.
 
178,172

 
2.1
%
 
$
219

 
4,570

 
2.8
%
Total
 
434

 
 

 
 
 
$
8,440,223

 
100.0
%
 
 

 
$
162,218

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tenant / Operator / Managed Properties
 
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Five Star
 
185

 
20,187

 
 
 
$
2,314,805

 
27.5
%
 
$
114,668

 
$
51,124

 
31.5
%
Sunrise / Marriott (6)
 
4

 
1,619

 
 
 
126,326

 
1.5
%
 
$
78,027

 
3,132

 
1.9
%
Brookdale
 
18

 
894

 
 
 
69,669

 
0.8
%
 
$
77,930

 
1,813

 
1.1
%
11 private senior living companies (combined)
 
29

 
3,520

 
 
 
567,507

 
6.7
%
 
$
161,224

 
11,357

 
7.0
%
Subtotal triple net leased senior living communities
 
236

 
26,220

 
 
 
3,078,307

 
36.5
%
 
$
117,403

 
67,426

 
41.5
%
Managed senior living communities (7)
 
68

 
8,806

 
 
 
1,584,933

 
18.8
%
 
$
179,983

 
23,217

 
14.3
%
Subtotal senior living communities
 
304

 
35,026

 
 
 
4,663,240

 
55.3
%
 
$
133,137

 
90,643

 
55.8
%
MOBs (5)
 
120

 
11,552,323

 
sq. ft.
 
3,598,811

 
42.6
%
 
$
312

 
67,005

 
41.4
%
Wellness centers
 
10

 
812,000

 
sq. ft.