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 March 31, 2011

 

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 April 28, 2011: 141,863,596.

 

 

 



 

SENIOR HOUSING PROPERTIES TRUST

 

FORM 10-Q

 

March 31, 2011

 

INDEX

 

 

 

Page

PART I

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets — March 31, 2011 and December 31, 2010

1

 

 

 

 

Condensed Consolidated Statements of Income — Three Months Ended March 31, 2011 and 2010

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2011 and 2010

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements

4

 

 

 

Item 2.

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

13

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

 

Warning Concerning Forward Looking Statements

33

 

 

 

 

Statement Concerning Limited Liability

36

 

 

 

PART II

Other Information

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

 

Item 6.

Exhibits

37

 

 

 

 

Signatures

38

 

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 data)

(unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

ASSETS

 

 

 

 

 

Real estate properties:

 

 

 

 

 

Land

 

$

464,022

 

$

446,622

 

Buildings and improvements

 

3,409,096

 

3,315,090

 

 

 

3,873,118

 

3,761,712

 

Less accumulated depreciation

 

562,609

 

538,872

 

 

 

3,310,509

 

3,222,840

 

 

 

 

 

 

 

Cash and cash equivalents

 

14,810

 

10,866

 

Restricted cash

 

5,158

 

4,994

 

Deferred financing fees, net

 

17,372

 

16,262

 

Acquired real estate leases, net

 

72,339

 

63,593

 

Other assets

 

105,220

 

74,101

 

Total assets

 

$

3,525,408

 

$

3,392,656

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

25,000

 

$

128,000

 

Senior unsecured notes due 2012, 2016 and 2020, net of discount

 

670,410

 

422,880

 

Secured debt and capital leases

 

651,657

 

654,010

 

Accrued interest

 

16,063

 

14,993

 

Acquired real estate lease obligations, net

 

18,806

 

18,239

 

Other liabilities

 

32,554

 

26,557

 

Total liabilities

 

1,414,490

 

1,264,679

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares of beneficial interest, $0.01 par value: 149,700,000 shares authorized, 141,863,596 and 141,854,657 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively

 

1,419

 

1,418

 

Additional paid in capital

 

2,510,476

 

2,510,373

 

Cumulative net income

 

788,293

 

756,518

 

Cumulative distributions

 

(1,206,354

)

(1,153,868

)

Unrealized gain on investments

 

17,084

 

13,536

 

Total shareholders’ equity

 

2,110,918

 

2,127,977

 

Total liabilities and shareholders’ equity

 

$

3,525,408

 

$

3,392,656

 

 

See accompanying notes.

 

1



 

SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Rental income

 

$

98,077

 

$

80,447

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Depreciation

 

26,361

 

22,289

 

Property operating expenses

 

10,003

 

4,385

 

General and administrative

 

6,134

 

5,491

 

Acquisition costs

 

1,113

 

35

 

Total expenses

 

43,611

 

32,200

 

 

 

 

 

 

 

Operating income

 

54,466

 

48,247

 

 

 

 

 

 

 

Interest and other income

 

255

 

257

 

Interest expense

 

(22,746

)

(18,414

)

Impairment of assets

 

(166

)

 

Equity in earnings (losses) of an investee

 

37

 

(28

)

Income before income tax expense

 

31,846

 

30,062

 

Income tax expense

 

(71

)

(78

)

Net income

 

$

31,775

 

$

29,984

 

 

 

 

 

 

 

Weighted average shares outstanding

 

141,855

 

127,380

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Net income

 

$

0.22

 

$

0.24

 

 

See accompanying notes.

 

2



 

SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

31,775

 

$

29,984

 

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

 

 

 

 

 

Depreciation

 

26,361

 

22,289

 

Amortization of deferred financing fees and debt discounts

 

1,071

 

558

 

Amortization of acquired real estate leases

 

(216

)

275

 

Impairment of assets

 

166

 

 

Equity in (earnings) losses of an investee

 

(37

)

28

 

Change in assets and liabilities:

 

 

 

 

 

Restricted cash

 

(164

)

(421

)

Other assets

 

(1,170

)

747

 

Accrued interest

 

1,070

 

(2,857

)

Other liabilities

 

6,205

 

1,406

 

Cash provided by operating activities

 

65,061

 

52,009

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisitions

 

(148,525

)

(6,362

)

Investment in Affiliates Insurance Company

 

 

(20

)

Cash used for investing activities

 

(148,525

)

(6,382

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Costs of issuing common shares

 

(103

)

 

Proceeds from issuance of unsecured senior notes, net

 

247,327

 

 

Proceeds from borrowings on revolving credit facility

 

45,000

 

30,000

 

Repayments of borrowings on revolving credit facility

 

(148,000

)

(32,000

)

Repayment of other debt

 

(2,353

)

(2,196

)

Payment of deferred financing fees

 

(1,977

)

(583

)

Distributions to shareholders

 

(52,486

)

(45,856

)

Cash provided by (used for) financing activities

 

87,408

 

(50,635

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

3,944

 

(5,008

)

Cash and cash equivalents at beginning of period

 

10,866

 

10,494

 

Cash and cash equivalents at end of period

 

$

14,810

 

$

5,486

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

20,605

 

$

21,271

 

Income taxes paid

 

102

 

144

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Issuance of common shares

 

207

 

590

 

 

See accompanying notes.

 

3



 

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, have been prepared without audit.  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, 2010, 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 between 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 year property operating expenses to the current year classification.  These reclassifications had no effect on net income or shareholders’ equity.

 

Note 2.  Real Estate Properties

 

At March 31, 2011, we owned 327 properties located in 37 states and Washington, D.C.

 

In November 2010, we entered into a series of agreements to acquire 27 medical office buildings, or MOBs, located in 12 states from CommonWealth REIT, or CWH, for an aggregate purchase price of approximately $470,000, excluding closing costs.  Between November and December 31, 2010, we acquired 21 of these properties containing 2.1 million square feet for approximately $374,130, excluding closing costs.  In January 2011, we acquired the remaining six properties containing 737,000 square feet for approximately $95,870, excluding closing costs.  We recorded intangible lease assets and liabilities of approximately $9,217 and $1,600, respectively, related to these six MOB acquisitions in 2011.  We funded these acquisitions using cash on hand, proceeds from an equity issuance, proceeds from a debt issuance and borrowings under our revolving credit facility.

 

In January 2011, we acquired one MOB with 82,854 square feet located in Mendota Heights, Minnesota for approximately $14,150, excluding closing costs.  We recorded intangible lease assets of approximately $2,722 related to this acquisition.  We funded this acquisition using cash on hand and proceeds from a debt offering.

 

In March 2011, we agreed to acquire 20 senior living communities located in five states with an aggregate of 2,111 living units for approximately $304,000, excluding closing costs.  We expect to lease 15 of the 20 communities, costing approximately $211,500, to our taxable REIT subsidiary and that our former subsidiary, Five Star Quality Care, Inc., or Five Star, will manage them under a long term contract.  We expect to lease the remaining five communities, which will cost approximately $92,500, to Five Star and to add them to the combination leases currently in effect between us and Five Star.  We expect to acquire these communities during the second quarter of 2011, subject to required regulatory approvals and lender approval of our assumption of mortgage debts on certain properties.  We expect to fund this acquisition with cash on hand, borrowings under our revolving credit facility and the assumption of approximately $79,000 of mortgage debt.

 

As of April 28, 2011, we have agreed to acquire one additional senior living facility, with 73 living units, and five MOBs with an aggregate of approximately 206,900 square feet, for combined purchase prices totaling approximately $36,500, excluding closing costs.  We expect to acquire these properties during the second quarter of 2011 and to fund these acquisitions using cash on hand and borrowings under our revolving credit facility.  The purchase of these properties is contingent upon our completion of diligence and other customary closing conditions; accordingly, we can provide no assurance that we will purchase these properties.

 

4



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

At March 31, 2011, six of our properties are classified as held for sale.  These six properties are included in real estate properties on our consolidated balance sheets and have a net book value of approximately $9,192 and $9,422 at March 31, 2011 and December 31, 2010, respectively.  We have entered agreements to sell these six properties for combined sales prices totaling approximately $19,635.  We expect the sale of these properties to occur during the second quarter of 2011.  The sale of these properties is contingent upon the buyer’s completion of diligence and other customary closing conditions; accordingly, we can provide no assurance that we will sell these properties.

 

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 cash flows to be generated from that property. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value.  During the three months ended March 31, 2011, we recorded impairment of assets charges of $166 to reduce the carrying value of two of our properties to their estimated fair value based upon expected sales prices less costs to sell.

 

During the three months ended March 31, 2011, pursuant to the terms of our leases with Five Star, we purchased approximately $10,837 of improvements made to our properties which are leased by Five Star and the annual rent payable to us by Five Star increased by approximately $869 for the affected leases.

 

Note 3.  Unrealized Gain on Investments

 

On March 31, 2011, we owned 250,000 common shares of CWH, and 3,235,000 common shares of Five Star, which are carried at fair market value in other assets on our condensed consolidated balance sheets. The net unrealized gain on investments shown on our condensed consolidated balance sheets represents the difference between the value at quoted market prices of our CWH and Five Star shares on March 31, 2011 ($25.97 and $8.13 per share, respectively) and our weighted average costs on the dates we acquired these shares ($26.00 and $2.85 per share, respectively).

 

Note 4.  Indebtedness

 

Our principal debt obligations at March 31, 2011 were our $550,000 unsecured revolving credit facility, with $25,000 outstanding on March 31, 2011, three public issues of unsecured senior notes totaling $670,410 and $637,171 of mortgages secured by 62 of our properties.  These 62 collateralized properties had a carrying value of $735,425 at March 31, 2011.  We also have two properties recorded under capital leases totaling $14,486 at March 31, 2011.  These two properties had a carrying value of $17,510 at March 31, 2011.

 

The interest payable for amounts drawn under our $550,000 revolving credit facility is LIBOR plus a spread.  We can borrow, repay and reborrow until maturity, and no principal repayment is due until maturity.  The interest rate payable on borrowings under this revolving credit facility was 1.1% and 1.0% at March 31, 2011 and 2010, respectively.  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 March 31, 2011 and 2010, we had $25,000 and $58,000 outstanding under this revolving credit facility, respectively, and $525,000 and $492,000 available under this revolving credit facility, respectively.  Our revolving credit facility contains financial covenants and requires us to maintain financial ratios and a minimum net worth.  We believe we were in compliance with these covenants during the periods presented.  This revolving credit facility matures in December 2011.  We are currently monitoring market conditions for comparable revolving credit facilities and expect to refinance our revolving credit facility prior to its maturity.

 

5



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

In January 2011, we sold $250,000 of senior unsecured notes.  The notes require interest at a fixed rate of 4.30% per annum and are due in 2016.  Net proceeds from these sale of the notes, after underwriting discounts and fees and before other expenses, were approximately $245,828.  Interest on the notes is payable semi-annually in arrears.  No principal payments are due until maturity.  We used the net proceeds of this offering to repay $120,000 in borrowings under our revolving credit facility and for general business purposes, including funding in part the acquisitions described in Note 2 above.

 

Note 5.  Shareholders’ Equity

 

On February 11, 2011, we paid a $0.37 per share, or $52,486, distribution to our common shareholders with respect to our operating results in the quarter ended December 31, 2010.  On April 4, 2011, we declared a distribution of $0.37 per share, or $52,490, to be paid to common shareholders of record on April 15, 2011, with respect to our results for the quarter ended March 31, 2011; we expect to pay this distribution on or about May 12, 2011.  On May 14, 2010, we paid a $0.36 per share, or $45,865, distribution to our common shareholders for the quarter ended March 31, 2010.

 

Under the terms of our business management agreement with Reit Management & Research LLC, or RMR, on March 30, 2011, we issued 8,939 common shares in payment of an incentive fee of approximately $207 for services rendered to us by RMR during 2010. We issued these shares pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended, or the Securities Act.

 

Note 6.  Comprehensive Income

 

Cumulative other comprehensive income represents the net unrealized gain on the shares of CWH and Five Star common stock we own and our share of the comprehensive income of Affiliates Insurance Company, or AIC.  See Note 3 and Note 10 for a description of these investments.  The following is a reconciliation of net income to comprehensive income for the three months ended March 31, 2011 and 2010:

 

 

 

Three Months Ended 
March 31,

 

 

 

2011

 

2010

 

Net income

 

$

31,775

 

$

29,984

 

Other comprehensive income:

 

 

 

 

 

Change in net unrealized gain (loss) on CWH and Five Star investments

 

3,544

 

(49

)

Increase in share of investees other comprehensive income

 

4

 

 

Comprehensive income

 

$

35,323

 

$

29,935

 

 

Note 7.  Fair Value of Assets and Liabilities

 

The table below presents certain of our assets and liabilities measured at fair value at March 31, 2011 categorized by the level of inputs used in the valuation of each asset or liability.

 

6



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Description

 

Total

 

Quoted Prices in Active
Markets for Identical
Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

 

 

 

 

 

 

 

 

Assets held for sale (1)

 

$

9,192

 

$

 

$

9,192

 

Investments in available for sale securities (2) 

 

32,793

 

32,793

 

 

Senior notes (3)

 

700,566

 

700,566

 

 

 


(1) Assets held for sale consist of six 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 fair value of these properties.  We have recorded cumulative impairments of approximately $5,006 to three of these properties in order to reduce their book values to fair values.

 

(2) Our investments in available for sale securities include our 250,000 common shares of CWH and 3,235,000 common shares of Five Star. The fair values of these shares are based on quoted prices at March 31, 2011 in active markets (level 1 inputs).

 

(3) We estimate the fair values of our senior notes using an average of the bid and ask price of our three issues of senior notes (level 1 inputs) on or about March 31, 2011.  The fair values of these senior note obligations exceed their book values of $670,410 by $30,156 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 liabilities. The fair values of these additional financial instruments approximate their carrying values at March 31, 2011 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 8.  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 facilities that offer dining for residents and (ii) MOBs where medical related services are offered that do not provide residential overnight stays or dining services.  Properties in the short term and long term residential care facilities segment include independent living communities, assisted living communities, skilled nursing facilities and rehabilitation hospitals.  Properties in the MOB segment include medical office, clinic and biotech laboratory buildings.  The “All Other” 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.

 

7



 

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 March 31, 2011

 

 

 

Short and
Long Term
Residential
Care Facilities

 

MOB

 

All Other

 

Consolidated

 

Rental income

 

$

57,108

 

$

36,616

 

$

4,353

 

$

98,077

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Depreciation expense

 

16,730

 

8,683

 

948

 

26,361

 

Property operating expenses

 

 

10,003

 

 

10,003

 

General and administrative

 

 

 

6,134

 

6,134

 

Acquisition related costs

 

 

1,113

 

 

1,113

 

Total expenses

 

16,730

 

19,799

 

7,082

 

43,611

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

40,378

 

16,817

 

(2,729

)

54,466

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

255

 

255

 

Interest expense

 

(10,274

)

(217

)

(12,255

)

(22,746

)

Impairment of assets

 

 

(166

)

 

(166

)

Equity in earnings of an investee

 

 

 

37

 

37

 

Income (loss) before income tax expense

 

30,104

 

16,434

 

(14,692

)

31,846

 

Income tax expense

 

 

 

(71

)

(71

)

Net income (loss)

 

$

30,104

 

$

16,434

 

$

(14,763

)

$

31,775

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,883,430

 

$

1,276,755

 

$

365,223

 

$

3,525,408

 

 

8



 

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 March 31, 2010

 

 

 

Short and
Long Term
Residential
Care Facilities

 

MOB

 

All Other

 

Consolidated

 

Rental income

 

$

56,597

 

$

19,560

 

$

4,290

 

$

80,447

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Depreciation expense

 

16,435

 

4,906

 

948

 

22,289

 

Property operating expenses

 

 

4,385

 

 

4,385

 

General and administrative

 

 

 

5,491

 

5,491

 

Acquisition costs

 

 

35

 

 

35

 

Total expenses

 

16,435

 

9,326

 

6,439

 

32,200

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

40,162

 

10,234

 

(2,149

)

48,247

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

257

 

257

 

Interest expense

 

(10,243

)

(169

)

(8,002

)

(18,414

)

Equity in losses of an investee

 

 

 

(28

)

(28

)

Income (loss) before income tax expense

 

29,919

 

10,065

 

(9,922

)

30,062

 

Income tax expense

 

 

 

(78

)

(78

)

Net income (loss)

 

$

29,919

 

$

10,065

 

$

(10,000

)

$

29,984

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,959,151

 

$

733,703

 

$

273,168

 

$

2,966,022

 

 

Note 9. Significant Tenant

 

Rent from Five Star was 47% of our annual rents as of March 31, 2011.  The following tables present summary financial information for Five Star for the three months ended March 31, 2011 and 2010, as reported in its Quarterly Report on Form 10-Q.

 

Summary Financial Information of Five Star Quality Care, Inc.

(unaudited)

 

 

 

For the Three Months Ended March 30,

 

Operations

 

2011

 

2010

 

Total revenues

 

$

308,341

 

$

298,844

 

Operating income

 

6,070

 

5,111

 

Income from continuing operations

 

5,622

 

4,592

 

Net income

 

4,133

 

4,085

 

 

9



 

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
March 31,

 

Cash Flows

 

2011

 

2010

 

Cash provided by operating activities

 

$

20,360

 

$

15,173

 

Net cash used in discontinued operations

 

(1,114

)

(92

)

Cash used in investing activities

 

(18,371

)

(6,127

)

Cash provided by (used in) financing activities

 

4,363

 

(2,831

)

Change in cash and cash equivalents

 

5,238

 

6,123

 

Cash and cash equivalents at beginning of period

 

20,770

 

5,017

 

Cash and cash equivalents at end of period

 

26,008

 

11,140

 

 

 

 

As of March 31,

 

Financial Position

 

2011

 

2010

 

Current assets

 

$

156,741

 

$

182,574

 

Non-current assets

 

244,954

 

230,412

 

Total indebtedness

 

50,073

 

98,458

 

Current liabilities

 

155,334

 

175,315

 

Non-current liabilities

 

76,863

 

93,216

 

Total shareholders’ equity

 

169,498

 

144,455

 

 

The summary financial information of Five Star is presented to comply with applicable 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 as textual references only, and the information in Five Star’s Quarterly Report on Form 10-Q is not incorporated by reference into these financial statements.

 

Note 10.  Related Person Transactions

 

Five Star is our former subsidiary, Five Star is our largest tenant, and we are Five Star’s largest shareholder.  As of March 31, 2011, we owned 3.2 million shares of common stock of Five Star, which represented approximately 9.0% of Five Star’s outstanding shares of common stock.  RMR provides management services to both us and Five Star.  As of March 31, 2011, we leased 186 senior living communities and two rehabilitation hospitals to Five Star.  Under Five Star’s leases with us, Five Star pays us rent based on 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 March 31, 2011 was $187,656, excluding percentage rent.  The total rent we recognized from Five Star for the three months ended March 31, 2011 and 2010 was $46,694 and $46,089, respectively, and as of March 31, 2011 and December 31, 2010, our rents receivable from Five Star were $16,819 and $16,762, respectively, and are included in other assets on our condensed consolidated balance sheets.  Additional information regarding our leases with Five Star appears in our Annual Report.

 

Since January 2011, pursuant to the terms of our leases with Five Star, we purchased approximately $10,837 of improvements made to our properties leased by Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $869.

 

In March 2011, we agreed to acquire 20 senior living communities located in five states with an aggregate of 2,111 living units for approximately $304,000, excluding closing costs.  We expect to lease 15 of the 20 communities, costing approximately $211,500, to our taxable REIT subsidiary and that Five Star will manage them under a long term contract.  We expect to lease the remaining five communities, which will cost approximately $92,500, to Five Star and to add them to the combination leases currently in effect between us and Five Star.  The terms of the agreements between us and Five Star are subject to approval by special committees of each of our Board of Trustees and Five Star’s Board of Directors composed solely of Independent Trustees / Directors who are not also Trustees / Directors of the other party.  We expect to acquire these communities during the second quarter of 2011, subject to required regulatory approvals and lender approval of our assumption of mortgage debts on certain properties.

 

10



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

In November 2010, at Five Star’s request, we agreed to sell three skilled nursing facilities in Georgia with a total of 329 licensed beds that are leased to Five Star for an aggregate sales price of approximately $18,000, and we expect Five Star’s annual rent to us to decrease by approximately $1,800 if and after this sale closes.  We expect the sale of these properties to occur during the second quarter of 2011.  The sale of these properties is contingent upon the buyer’s completion of diligence and other customary closing conditions; accordingly, we can provide no assurance that the closing of our sale of these properties will be completed.

 

In January 2011, at Five Star’s request, we agreed to sell one assisted living community in Pennsylvania with 70 licensed living units that is leased to Five Star for a sales price of approximately $800, and we expect Five Star’s annual rent to us to decrease by approximately $72 if and after this sale closes.  We expect the sale of this property to occur during the second quarter of 2011.  The sale of this property is contingent upon the buyer’s completion of diligence and other customary closing conditions; accordingly, we can provide no assurance that the closing of our sale of this property will be completed.

 

CWH was formerly our parent.  We were spun off to CWH’s shareholders in 1999.  In November 2010, we entered into a series of agreements for our purchase from CWH of 27 properties which are majority leased as MOBs for an aggregate purchase price of approximately $470,000, excluding closing costs.  These properties include approximately 2.8 million square feet and were subject to our rights of first refusal to purchase in the event CWH determined to sell these properties.  In November and December 2010, we acquired 21 of these properties; in January 2011, we acquired the remaining six properties containing 737,000 square feet for approximately $95,870, excluding closing costs.

 

Pursuant to our business management agreement with RMR, we recognized expenses of $4,818 and $4,218 for the three months ended March 31, 2011 and 2010, respectively.  These amounts are included in general and administrative expenses in our condensed consolidated statements of income.  Pursuant to our property management agreement with RMR, we recognized expenses of $1,024 and $552 for the three months ended March 31, 2011 and 2010, respectively.  These amounts are included in property operating expenses in our condensed consolidated statements of income.  Under the terms of our business management agreement with RMR, on March 30, 2011, we issued 8,939 common shares to RMR in payment of an incentive fee of approximately $207 for services rendered to us by RMR during 2010.

 

We, RMR, Five Star, CWH and other companies to which RMR provides management services each currently owns approximately 14.29% of AIC.  All of our Trustees and nearly all of the trustees and directors of the other shareholders of AIC currently serve on the board of directors of AIC.  RMR, in addition to being a shareholder, 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 each of our Trustees is a director of AIC.  As of March 31, 2011, we have invested approximately $5,209 in AIC.  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.  We carry this investment on our condensed consolidated balance sheets in other assets at $5,117 and $5,076 as of March 31, 2011 and December 31, 2010, respectively.  During the three months ended March 31, 2011 and 2010, we recognized income of $37 and a loss of $(28), respectively, related to this investment.  In 2010, AIC designed a combination property insurance program for us and other AIC shareholders in which AIC participated as a reinsurer. Our total premiums paid under this program in 2010 were approximately $275.  We are currently investigating the possibilities to expand our insurance relationships with AIC to include other types of insurance. 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.

 

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 more information about our related person transactions, including our dealings with Five Star, CWH, RMR, AIC, our Managing Trustees and their affiliates and about the risks which may arise as a result of these and other related person transactions, please see our Annual Report and our other filings made with the SEC, and, in particular, the sections captioned “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Related Person Transactions” in our Annual Report and the section captioned “Related Person Transactions and Company Review of Such Transactions” in our Proxy Statement dated February 24, 2011 relating to our 2011 Annual Meeting of Shareholders and our Current Report on Form 8-K filed on March 8, 2011.  Our Annual Report, Current Report and Proxy Statement are available at the SEC’s website: www.sec.gov.

 

12



 

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):

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Units/Beds or

 

Investment

 

% of

 

 

 

% of Q1

 

(As of March 31, 2011)

 

Properties

 

Square Feet

 

Carrying Value (1)

 

Investment

 

Q1 2011 NOI (2)

 

2011 NOI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facility Type

 

 

 

 

 

 

 

 

 

 

 

 

 

Independent living communities (3)

 

43

 

11,524

 

$

1,143,052

 

29.5%

 

$

26,619

 

30.2 %

 

Assisted living facilities (3)

 

131

 

9,342

 

1,039,257

 

26.8%

 

23,283

 

26.4 %

 

Skilled nursing facilities (3)

 

52

 

5,514

 

226,410

 

5.9%

 

4,625

 

5.3 %

 

Rehabilitation hospitals

 

2

 

364

 

69,654

 

1.8%

 

2,581

 

2.9 %

 

Wellness centers

 

10

 

812,000

 sq. ft.

180,017

 

4.6%

 

4,353

 

5.0 %

 

MOBs

 

89

 

5,982,000

 sq. ft.

1,214,728

 

31.4%

 

26,613

 

30.2 %

 

Total

 

327

 

 

 

$

3,873,118

 

100.0%

 

$

88,074

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant / Operator

 

 

 

 

 

 

 

 

 

 

 

 

 

Five Star (Lease No. 1)

 

88

 

6,421

 

$

633,535

 

16.3%

 

$

13,252

 

15.0 %

 

Five Star (Lease No. 2)

 

46

 

5,885

 

515,005

 

13.3%

 

12,281

 

13.9 %

 

Five Star (Lease No. 3)

 

28

 

5,618

 

637,997

 

16.5%

 

15,392

 

17.4 %

 

Five Star (Lease No. 4)

 

26

 

2,720

 

256,455

 

6.6%

 

5,769

 

6.6 %

 

Sunrise / Marriott (4)

 

14

 

4,091

 

325,165

 

8.4%

 

7,025

 

8.0 %

 

Brookdale

 

18

 

894

 

61,122

 

1.6%

 

1,758

 

2.0 %

 

6 private companies (combined)

 

8

 

1,115

 

49,094

 

1.3%

 

1,631

 

1.9 %

 

Wellness centers

 

10

 

812,000

 sq. ft.

180,017

 

4.6%

 

4,353

 

5.0 %

 

Multi-tenant MOBs

 

89

 

5,982,000

 sq. ft.

1,214,728

 

31.4%

 

26,613

 

30.2 %

 

Total

 

327

 

 

 

$

3,873,118

 

100.0%

 

$

88,074

 

100.0%

 

 

Tenant Operating Statistics (5)

 

 

 

 

 

 

 

 

 

 

 

Q1 NOI per Living Unit, Bed

 

 

 

Rent Coverage

 

Occupancy

 

or Square Foot (6)

 

 

 

2010

 

2009

 

2010

 

2009

 

2011

 

2010

 

Five Star (Lease No. 1)

 

1.30x

 

1.27x

 

86.9%

 

87.7%

 

$

2,064

 

$

2,040

 

Five Star (Lease No. 2) (7)

 

1.37x

 

1.31x

 

81.9%

 

82.1%

 

$

1,757

 

$

1,700

 

Five Star (Lease No. 3)

 

1.53x

 

1.51x

 

87.7%

 

88.8%

 

$

2,740

 

$

2,671

 

Five Star (Lease No. 4)

 

1.15x

 

1.05x

 

83.8%

 

84.5%

 

$

2,121

 

$

2,144

 

Sunrise / Marriott (4)

 

1.40x

 

1.39x

 

89.8%

 

89.3%

 

$

1,717

 

$

1,712

 

Brookdale

 

2.21x

 

2.11x

 

92.9%

 

91.2%

 

$

1,966

 

$

1,973

 

6 private companies (combined)

 

2.30x

 

1.94x

 

85.3%

 

83.7%

 

$

1,463

 

$

1,561

 

Wellness centers (8)

 

2.18x

 

2.27x

 

100.0%

 

100.0%

 

NA

 

NA

 

Multi-tenant MOBs (9)

 

NA

 

NA

 

97.0%

 

96.4%

 

$

4

 

$

5

 

 

 

13



 

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

 


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

(2)          Property net operating income, or NOI, is defined as rental income from real estate less our property operating expenses.  We consider NOI to be appropriate supplemental information to net income because it helps both investors and management to understand the operations of our properties.  We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are incurred at the property level.  NOI excludes certain components from net income in order to provide results that are more closely related to our properties’ results of operations.  NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income or cash flow from operating activities as a measure of financial performance.  See below for the calculation of NOI and a reconciliation of NOI to Net Income.

(3)          Properties are categorized by the type of living units or beds which constitute a majority of the living units or beds at the property.

(4)          Marriott International, Inc. guarantees this lease.

(5)          All tenant operating data presented are based upon the operating results provided by our tenants for the 12 months ended December 31, 2010 and 2009, 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.

(6)          Represents Q1 NOI by lease divided by the number of living units, beds or square feet leased at March 31, 2011 and 2010.

(7)          Q1 NOI per living unit, bed or square foot excludes the two rehabilitation hospitals because these properties have extensive clinic space for services to both overnight patients and patients who receive treatment and do not stay overnight, and these properties are not comparable to residential senior living properties.

(8)          Q1 NOI per living unit, bed or square foot excludes the wellness centers because these properties have extensive indoor and outdoor recreation space which is not comparable to properties where rent is based on interior space only.

(9)          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 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.

 

14



 

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

 

The following table shows our calculation of NOI and reconciles NOI to net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, for the three months ended March 31, 2011 and 2010.

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Rental income

 

$

98,077

 

$

80,447

 

Property operating expenses

 

(10,003

)

(4,385

)

Property net operating income (NOI)

 

$

88,074

 

$

76,062

 

 

 

 

 

 

 

NOI

 

$

88,074

 

$

76,062

 

Depreciation

 

(26,361

)

(22,289

)

General and administrative

 

(6,134

)

(5,491

)

Acquisition costs

 

(1,113

)

(35

)

Operating income

 

54,466

 

48,247

 

 

 

 

 

 

 

Interest and other income

 

255

 

257

 

Interest expense

 

(22,746

)

(18,414

)

Impairment of assets

 

(166

)

 

Equity in earnings (losses) of an investee

 

37

 

(28

)

Income before income tax expense

 

31,846

 

30,062

 

Income tax expense

 

(71

)

(78

)

Net income

 

$

31,775

 

$

29,984

 

 

15



 

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

 

The following tables set forth information regarding our lease expirations as of March 31, 2011 (dollars in thousands):

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

 

Percent of

 

Percentage

 

 

 

 

 

 

 

 

 

 

 

Total

 

of

 

 

 

Annualized Rental Income (1)

 

Annualized

 

Annualized

 

 

 

Short and Long

 

 

 

 

 

 

 

Rental

 

Rental

 

 

 

Term Residential

 

 

 

Wellness

 

 

 

Income

 

Income

 

Year

 

Care Facilities

 

MOBs

 

Centers

 

Total

 

Expiring

 

Expiring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

$

 

$

5,236

 

$

 

$

5,236

 

1.3%

 

1.3%

 

2012

 

 

16,688

 

 

16,688

 

4.1%

 

5.4%

 

2013

 

32,919

 

9,212

 

 

42,131

 

10.3%

 

15.7%

 

2014

 

 

19,399

 

 

19,399

 

4.8%

 

20.5%

 

2015

 

3,013

 

15,089

 

 

18,102

 

4.4%

 

24.9%

 

2016

 

2,912

 

10,607

 

 

13,519

 

3.3%

 

28.2%

 

2017

 

32,148

 

9,809

 

 

41,957

 

10.3%

 

38.5%

 

2018

 

 

4,513

 

 

4,513

 

1.1%

 

39.6%

 

2019

 

599

 

26,039

 

 

26,638

 

6.5%

 

46.1%

 

2020 and thereafter

 

169,120

 

32,960

 

17,337

 

219,417

 

53.9%

 

100.0%

 

Total

 

$

240,711

 

$

149,552

 

$

17,337

 

$

407,600

 

100.0%

 

 

 

 

Average remaining lease term for all properties (weighted by rent):  10.4 years

 


(1)                Annualized rental income is rents pursuant to signed leases as of March 31, 2011, including estimated expense reimbursements for certain net and modified gross leases and excluding lease value amortization in certain of our MOBs and wellness centers.

 

 

 

Number of Tenants

 

 

 

Cumulative

 

 

 

Short and

 

 

 

 

 

 

 

Percent of

 

Percentage

 

 

 

Long Term

 

 

 

 

 

 

 

Total Number

 

of Number

 

 

 

Residential

 

 

 

Wellness

 

 

 

of Tenants

 

of Tenants

 

Year

 

Care Facilities

 

MOBs

 

Centers

 

Total

 

Expiring

 

Expiring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

69

 

 

69

 

16.3%

 

16.3%

 

2012

 

 

76

 

 

76

 

17.9%

 

34.2%

 

2013

 

1

 

46

 

 

47

 

11.1%

 

45.3%

 

2014

 

 

65

 

 

65

 

15.3%

 

60.6%

 

2015

 

3

 

51

 

 

54

 

12.7%

 

73.3%

 

2016

 

2

 

29

 

 

31

 

7.3%

 

80.6%

 

2017

 

2

 

21

 

 

23

 

5.4%

 

86.0%

 

2018

 

 

15

 

 

15

 

3.5%

 

89.5%

 

2019

 

1

 

16

 

 

17

 

4.0%

 

93.5%

 

2020 and thereafter

 

3

 

22

 

2

 

27

 

6.5%

 

100.0%

 

Total

 

12

 

410

 

2

 

424

 

100.0%

 

 

 

 

16



 

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

 

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

 

 

 

Living Units / Beds

 

Square Feet

 

Year

 

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

 

Percent
of Total
Living
Units /
Beds
Expiring

 

Cumulative
Percentage
of Total
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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

0.0%

 

0.0%

 

119,882

 

 

119,882

 

1.8%

 

1.8%

 

2012

 

 

0.0%

 

0.0%

 

778,687

 

 

778,687

 

11.8%

 

13.6%

 

2013

 

4,091

 

15.3%

 

15.3%

 

279,883

 

 

279,883

 

4.2%

 

17.8%

 

2014

 

 

0.0%

 

15.3%

 

1,001,903

 

 

1,001,903

 

15.1%

 

32.9%

 

2015

 

423

 

1.6%

 

16.9%

 

636,315

 

 

636,315

 

9.6%

 

42.5%

 

2016

 

517

 

1.9%

 

18.8%

 

417,905

 

 

417,905

 

6.3%

 

48.8%

 

2017

 

3,614

 

13.5%

 

32.3%

 

402,154

 

 

402,154

 

6.1%

 

54.9%

 

2018

 

 

0.0%

 

32.3%

 

141,139

 

 

141,139

 

2.1%

 

57.0%

 

2019

 

175

 

0.7%

 

33.0%

 

879,028

 

 

879,028

 

13.3%

 

70.3%

 

2020 and thereafter

 

17,924

 

67.0%

 

100.0%

 

1,152,371

 

812,000

 

1,964,371

 

29.7%

 

100.0%

 

Total

 

26,744

 

100.0%

 

 

 

5,809,267

 

812,000

 

6,621,267

 

100.0%

 

 

 

 

During the three months ended March 31, 2011, we signed MOB lease renewals for 16,795 square feet and new leases for 145,734 square feet, at weighted average rental rates that were 18.4% below rents previously charged for the same space.  These leases have average rent of $22.74 per square foot.  Average lease terms for leases signed during the first quarter of 2011 were 6.8 years.  Commitments for tenant improvement and leasing costs for leases signed during the first quarter of 2011 totaled $2.0 million, or $12.21 per square foot on average (approximately $1.80 per square foot per year of the lease term).

 

17



 

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

 

RESULTS OF OPERATIONS

 

The following tables present a summary of our operations for the three months ended March 31, 2011 and 2010:

 

Consolidated (dollars in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

Change

 

% Change

 

 

 

(in thousands, except per share amounts)

 

 

 

Rental income

 

$

98,077

 

$

80,447

 

$

17,630

 

21.9%

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Depreciation

 

26,361

 

22,289

 

4,072

 

18.3%

 

Property operating expenses

 

10,003

 

4,385

 

5,618

 

128.1%

 

General and administrative

 

6,134

 

5,491

 

643

 

11.7%

 

Acquisition related costs

 

1,113

 

35

 

1,078

 

3,008.0%

 

Total expenses

 

43,611

 

32,200

 

11,411

 

35.4%

 

Operating income

 

54,466

 

48,247

 

6,219

 

12.9%

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

255

 

257

 

(2

)

(0.8)%

 

Interest expense

 

(22,746

)

(18,414

)

(4,332

)

(23.5)%

 

Impairment of assets

 

(166

)

 

(166

)

 

Equity in earnings (losses) of an investee

 

37

 

(28

)

65

 

232.1%

 

Income before income tax expense

 

31,846

 

30,062

 

1,784

 

5.9%

 

Income tax expense

 

(71

)

(78

)

7

 

9.0%

 

Net income

 

$

31,775

 

$

29,984

 

$

1,791

 

6.0%

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

141,855

 

127,380

 

14,475

 

11.4%

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

$

0.22

 

$

0.24

 

$

(0.02

)

(8.3)%

 

 

Our results of operations and our explanation of changes in our results of operations by segment follows.

 

Short and long term residential care facilities (dollars in thousands):

 

 

 

All Properties

 

Comparable Properties (1)

 

 

 

As of the Three Months Ended
March 31,

 

As of the Three Months
Ended March 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

Total properties

 

228

 

232

 

228

 

228

 

# of units / beds

 

26,744

 

26,937

 

26,744

 

26,744

 

Occupancy (2)

 

86.2%

 

86.2%

 

86.2%

 

86.4%

 

Rent coverage (2)

 

1.43x

 

1.39x

 

1.43x

 

1.40x

 

Rental income (3)

 

$

57,108

 

$

56,597

 

$

57,108

 

$

56,491

 

 


(1)          Represents short and long term residential care facilities we have owned continuously since January 1, 2010.

 

(2)          All tenant operating data presented are based upon the operating results provided by our tenants for the 12 months ended December 31, 2010 and 2009, 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.

 

(3)          Rental income increased year over year on a comparable basis related to improvement funding at certain of the 228 facilities we have owned continuously since January 1, 2010.

 

18



 

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

 

Short and long term residential care facilities, all properties (dollars in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

57,108

 

$

56,597

 

$

511

 

0.9%

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Depreciation

 

16,730

 

16,435

 

295

 

1.8%

 

Total expenses

 

16,730

 

16,435

 

295

 

1.8%

 

Operating income

 

40,378

 

40,162

 

216

 

0.5%

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(10,274

)

(10,243

)

(31

)

(0.3)%

 

Net income

 

$

30,104

 

$

29,919

 

$

185

 

0.6%

 

 

Rental income.  Rental income increased because of rents from the purchase of approximately $42.7 million of improvements made to our properties which are leased by Five Star since January 1, 2010, offset by a reduction in rental income resulting from the sale of four facilities in August 2010.  Rental income includes non cash straight line rent adjustments (reductions) totaling $508,042 and $(245,950) for the three months ended March 31, 2011 and 2010, respectively.  Rental income increased year over year on a comparable basis related to improvement funding at certain of the 228 facilities we have owned continuously since January 1, 2010.

 

Total expenses.  Depreciation expense increased as a result of our purchase of approximately $42.7 million of improvements made to our properties which are leased by Five Star since January 1, 2010, offset by a reduction in rental income resulting from the sale of four facilities in August 2010.

 

Interest expense.  Interest expense for our short and long term residential care facilities arises from mortgage debts secured by certain of these properties.  The change in interest expense is the result of an increase in a variable rate of interest applicable to one mortgage debt.

 

MOBs (dollars and square feet in thousands):

 

 

 

All Properties

 

Comparable Properties (1)

 

 

 

As of the Three Months Ended
March 31,

 

As of the Three Months
Ended March 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

Total properties

 

89

 

56

 

56

 

56

 

Total square feet (2)

 

5,982

 

2,868

 

2,864

 

2,868

 

Occupancy (3)

 

97.1%

 

96.7%

 

98.6%

 

96.7%

 

Rental income

 

$

36,616

 

$

19,560

 

$

19,358

 

$

19,560

 

Property operating expenses

 

$

10,003

 

$

4,385

 

$

4,295

 

$

4,385

 

 


(1)          Represents MOBs we have owned continuously since January 1, 2010.

(2)          Prior periods exclude space remeasurements made during the current period.

(3)          MOB occupancy includes (i) space being fitted out for occupancy pursuant to signed leases and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants.

 

19



 

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

 

MOBs, all properties (dollars in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

36,616

 

$

19,560

 

$

17,056

 

87.2%

 

Property operating expenses

 

10,003

 

4,385

 

5,618

 

128.1%

 

Property net operating income (NOI)

 

26,613

 

15,175

 

11,438

 

75.4%

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

(8,683

)

(4,906

)

(3,777

)

(77.0)%

 

Acquisition related costs

 

(1,113

)

(35

)

(1,078

)

(3,008.0)%

 

Operating income

 

16,817

 

10,234

 

6,583

 

64.3%

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(217

)

(169

)

(48

)

(28.4)%

 

Impairment of assets

 

(166

)

 

(166

)

 

Net income

 

$

16,434

 

$

10,065

 

$

6,369

 

63.3%

 

 

Rental income.  Rental income increased because of rents from 33 MOBs we acquired since January 1, 2010.  Rental income includes non cash straight line rent adjustments totaling $2.0 million and $1.4 million and amortization of acquired real estate leases and obligations of $160,700 and $(329,870) for the three months ended March 31, 2011 and 2010, respectively.

 

Property operating expenses.  Property operating expenses increased because of our MOB acquisitions since January 1, 2010.

 

Property net operating income.  NOI increased because of the changes in rental income and property operating expenses described above.

 

Depreciation expense.  Depreciation expense increased because of our MOB acquisitions since January 1, 2010.

 

Acquisition related costs.  Acquisition related costs increased because of a higher volume of acquisitions in the first quarter of 2011 than the same quarter last year.

 

Interest expense.  Interest expense for our MOBs arises from mortgage debts secured by certain of these properties.  Interest expense increased because of a $2.5 million mortgage debt at interest of 6.73% that we assumed in April 2010.

 

Impairment of assets.  During the three months ended March 31, 2011, we recorded an impairment of assets charge of $166,000 related to two properties to reduce the carrying value of these properties to their estimated sales price less costs to sell.

 

20



 

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

 

MOBs, comparable properties (MOBs we have owned continuously since January 1, 2010) (square feet and dollars in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

19,358

 

$

19,560

 

$

(202

)

(1.0)%

 

Property operating expenses

 

4,295

 

4,385

 

(90

)

(2.1)%

 

Property net operating income (NOI)

 

15,063

 

15,175

 

(112

)

(0.7)%

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

(4,868

)

(4,906

)

38

 

0.8%

 

Acquisition related costs

 

 

(35

)

35

 

 

Operating income

 

10,195

 

10,234

 

(39

)

(0.4)%

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(173

)

(169

)

(4

)

(2.3)%

 

Impairment of assets

 

(166

)

 

(166

)

 

Net income

 

$

9,856

 

$

10,065

 

$

(209

)

(2.1)%

 

 

Rental income.  The 1.0% decrease in rental income at the properties that we have owned continuously since January 1, 2010 was primarily due to a decrease in rental income at one MOB located in Lexington, Massachusetts.  Rental income includes non cash straight line rent adjustments totaling $1.2 million and $1.4 million and amortization of acquired real estate leases and obligations of $(261,050) and $(329,870) for the three months ended March 31, 2011 and 2010, respectively.

 

Property operating expenses.  The 2.1% decrease in property operating expenses at the properties we have owned continuously since January 1, 2010 was mainly due to real estate tax reductions offset by increases in utility costs.

 

Property net operating income.  NOI decreased because of the changes in rental income and property operating expenses described above.

 

Depreciation expense.  Depreciation expense decreased primarily because of the amortization of above and below market lease adjustments that we amortize over the respective lease term.

 

Interest expense.  Interest expense for our MOBs arises from mortgage debts secured by certain of these properties.  The change in interest expense is the result of the amortization of our mortgage debt.

 

Impairment of assets.  During the three months ended March 31, 2011, we recorded an impairment of assets charge of $166,000 related to two properties to reduce the carrying value of these properties to their estimated sales price less costs to sell.

 

21



 

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

 

All other operations (dollars in thousands): (1)

 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

4,353

 

$

4,290

 

$

63

 

1.5%

 

 

 

 

 

 

 

 

 

 

 

Expenses: