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, 2012

 

OR

 

o

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

 

Commission File Number 1-15319

 

SENIOR HOUSING PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland

 

04-3445278

(State or Other Jurisdiction of Incorporation or
Organization)

 

(IRS Employer Identification No.)

 

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

 

02458-1634

(Address of Principal Executive Offices)

 

(Zip Code)

 

617-796-8350

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

Number of registrant’s common shares outstanding as of May 1, 2012:  162,666,508.

 

 

 



 

SENIOR HOUSING PROPERTIES TRUST

FORM 10-Q

 

March 31, 2012

 

INDEX

 

 

 

Page

PART I

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets — March 31, 2012 and December 31, 2011

1

 

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income — Three Months Ended March 31, 2012 and 2011

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2012 and 2011

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements

4

 

 

 

Item 2.

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

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 4.

Controls and Procedures

36

 

 

 

 

Warning Concerning Forward Looking Statements

37

 

 

 

 

Statement Concerning Limited Liability

40

 

 

 

PART II

Other Information

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

 

Item 6.

Exhibits

41

 

 

 

 

Signatures

43

 

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,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

Real estate properties:

 

 

 

 

 

Land

 

$

564,911

 

$

564,628

 

Buildings and improvements

 

4,172,776

 

4,156,963

 

 

 

4,737,687

 

4,721,591

 

Less accumulated depreciation

 

658,991

 

630,261

 

 

 

4,078,696

 

4,091,330

 

Cash and cash equivalents

 

25,302

 

23,560

 

Restricted cash

 

10,296

 

7,128

 

Deferred financing fees, net

 

24,402

 

25,434

 

Acquired real estate leases and other intangible assets, net

 

95,337

 

100,235

 

Loan receivable

 

38,000

 

38,000

 

Other assets

 

111,788

 

97,361

 

Total assets

 

$

4,383,821

 

$

4,383,048

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Unsecured revolving credit facility

 

$

265,000

 

$

 

Senior unsecured notes, net of discount

 

741,091

 

965,770

 

Secured debt and capital leases

 

845,708

 

861,615

 

Accrued interest

 

19,604

 

22,281

 

Assumed real estate lease obligations, net

 

16,756

 

17,778

 

Other liabilities

 

49,827

 

42,998

 

Total liabilities

 

1,937,986

 

1,910,442

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares of beneficial interest, $.01 par value: 174,700,000 shares authorized, 162,666,508 and 162,646,046 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

 

1,627

 

1,626

 

Additional paid in capital

 

2,944,664

 

2,944,212

 

Cumulative net income

 

940,289

 

907,937

 

Cumulative other comprehensive income

 

(1,542

)

(3,772

)

Cumulative distributions

 

(1,439,203

)

(1,377,397

)

Total shareholders’ equity

 

2,445,835

 

2,472,606

 

Total liabilities and shareholders’ equity

 

$

4,383,821

 

$

4,383,048

 

 

See accompanying notes.

 

1



 

SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Revenues:

 

 

 

 

 

Rental income

 

$

109,505

 

$

98,552

 

Residents fees and services

 

35,568

 

 

Total revenues

 

145,073

 

98,552

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Depreciation

 

33,377

 

26,361

 

Property operating expenses

 

39,334

 

10,433

 

General and administrative

 

7,685

 

6,156

 

Acquisition related costs

 

688

 

1,113

 

Impairment of assets

 

3,071

 

166

 

Total expenses

 

84,155

 

44,229

 

 

 

 

 

 

 

Operating income

 

60,918

 

54,323

 

 

 

 

 

 

 

Interest and other income

 

482

 

232

 

Interest expense

 

(28,889

)

(22,746

)

Equity in earnings of an investee

 

45

 

37

 

Income before income tax expense

 

32,556

 

31,846

 

Income tax expense

 

(204

)

(71

)

Net income

 

32,352

 

31,775

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Increase in net unrealized gain on investments

 

2,231

 

3,544

 

Share of comprehensive (loss) income of an investee

 

(1

)

4

 

Comprehensive income

 

$

34,582

 

$

35,323

 

 

 

 

 

 

 

Weighted average shares outstanding

 

162,647

 

141,855

 

 

 

 

 

 

 

Net income per share

 

$

0.20

 

$

0.22

 

 

See accompanying notes.

 

2



 

SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

32,352

 

$

31,775

 

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

 

 

 

 

 

Depreciation

 

33,377

 

26,361

 

Amortization of deferred financing fees and debt discounts

 

1,555

 

1,071

 

Straight line rental income

 

(2,858

)

(2,869

)

Amortization of acquired real estate leases and other intangible assets

 

546

 

(216

)

Impairment of assets

 

3,071

 

166

 

Equity in earnings of an investee

 

(45

)

(37

)

Change in assets and liabilities:

 

 

 

 

 

Restricted cash

 

(3,168

)

(164

)

Other assets

 

2,987

 

1,699

 

Accrued interest

 

(2,677

)

1,070

 

Other liabilities

 

7,234

 

5,918

 

Cash provided by operating activities

 

72,374

 

64,774

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Real estate acquisitions and deposits

 

(30,273

)

(147,357

)

Real estate improvements

 

(2,577

)

(881

)

Cash used for investing activities

 

(32,850

)

(148,238

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common shares, net

 

 

(103

)

Proceeds from issuance of unsecured senior notes, net of discount

 

 

247,327

 

Proceeds from borrowings on revolving credit facility

 

284,000

 

45,000

 

Repayments of borrowings on revolving credit facility

 

(19,000

)

(148,000

)

Redemption of senior notes

 

(225,000

)

 

Repayment of other debt

 

(15,907

)

(2,353

)

Payment of deferred financing fees

 

(69

)

(1,977

)

Distributions to shareholders

 

(61,806

)

(52,486

)

Cash (used for) provided by financing activities

 

(37,782

)

87,408

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

1,742

 

3,944

 

Cash and cash equivalents at beginning of period

 

23,560

 

10,866

 

Cash and cash equivalents at end of period

 

$

25,302

 

$

14,810

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

30,011

 

$

20,605

 

Income taxes paid

 

 

102

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Issuance of common shares

 

453

 

207

 

 

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

 

Note 2.  Recent Accounting Pronouncements

 

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

 

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

 

Note 3.  Real Estate Properties

 

At March 31, 2012, we owned 370 properties located in 38 states and Washington, D.C.

 

In March and April 2012, we entered three separate agreements to acquire four senior living communities and two properties leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or MOBs, for total purchase prices of $71,425, including the assumption of approximately $25,000 of mortgage debt and excluding closing costs.  The senior living communities are located in Colorado, Idaho and Washington and include a total of 511 living units, and the MOBs are located in Maryland and Massachusetts and include a total of 127,180 square feet.  The closings of these acquisitions are contingent upon

 

4



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

completion of our diligence and other customary closing conditions; accordingly, we can provide no assurance that we will purchase these properties.

 

In February 2012, we acquired a previously disclosed senior living community located in Priceville, Alabama with 92 living units for approximately $11,300, excluding closing costs.  We recorded intangible assets of approximately $583 related to this acquisition.  A subsidiary of Five Star Quality Care, Inc., which, together with its subsidiaries, we refer to in this report as Five Star, manages this community under a long term contract.  We funded this acquisition using cash on hand.  As of March 31, 2012, we own 23 communities that are managed by Five Star, or the Managed Communities.  We use the taxable REIT subsidiary, or TRS, structure authorized by the REIT Investment Diversification and Empowerment Act, or RIDEA, for our Managed Communities, which we began acquiring in June 2011.  The results of operations for the Managed Communities are included in our consolidated results of operations in our short and long term residential care communities segment.  See Note 11 for further information regarding the arrangements we have with Five Star regarding the lease, operations and management of our senior living communities.

 

We have previously disclosed agreements to acquire seven properties which have not yet closed, including four senior living communities and three MOBs for total purchase prices of $257,828, including the assumption of approximately $88,900 of mortgage debt and excluding closing costs.  The four senior living communities are located in Missouri, New York and South Carolina and include a total of 688 living units, and the three MOBs are located in Georgia and Hawaii and include a total of 343,198 square feet.  The closings of these acquisitions are contingent upon completion of our diligence and other customary closing conditions; accordingly, we can provide no assurance that we will purchase these properties.

 

We have entered an agreement to sell one MOB located in Massachusetts with approximately 18,900 square feet for a sale price of approximately $1,200.  The sale of this property is contingent upon completion of the buyer’s diligence and other customary closing conditions; accordingly, we can provide no assurance that we will sell this property.   At March 31, 2012, two of our properties, including one senior living community and this MOB, are classified as held for sale.  These two properties are included in real estate properties on our condensed consolidated balance sheets and have an aggregate net book value of approximately $1,715 at both March 31, 2012 and December 31, 2011.

 

We periodically evaluate our properties for impairments. Impairment indicators may include declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life and legislative, market or industry changes that could permanently reduce the value of a property. If indicators of impairment are present, we evaluate the carrying value of the affected property by comparing it to the expected future undiscounted net cash flows to be generated from that property. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value.  During the three months ended March 31, 2012, we recorded an impairment of assets charge of $3,071 to reduce the carrying value of one of our properties to its estimated sale price less costs to sell.  During the 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 sales prices less costs to sell.

 

During the three months ended March 31, 2012, pursuant to the terms of our existing leases with Five Star, we purchased $6,318 of improvements made to our properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $512.

 

5



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Note 4.  Unrealized Gain / Loss on Investments

 

As of March 31, 2012, we owned 250,000 common shares of CommonWealth REIT, or CWH, and 4,235,000 common shares of Five Star, which are carried at fair market value in other assets in our condensed consolidated balance sheets. Cumulative other comprehensive income shown in our condensed consolidated balance sheets includes the net unrealized loss on investments determined as the net difference between the value at quoted market prices of our CWH and Five Star shares on March 31, 2012 ($18.62 and $3.41 per share, respectively) and our weighted average costs on the dates we acquired these shares ($26.00 and $3.36 per share, respectively).

 

Note 5.  Loan Receivable

 

In May 2011, we and Five Star entered into a loan agreement, or the Bridge Loan, under which we lent Five Star $80,000 to fund Five Star’s purchase of six senior living communities that Five Star had agreed to acquire for total purchase prices of approximately $122,800.  By September 30, 2011, Five Star had completed its acquisition of these six communities and had borrowed all $80,000 of this Bridge Loan and had repaid $42,000 of those borrowings by December 31, 2011.  As of March 31, 2012, $38,000 was outstanding under the Bridge Loan.  In April 2012, Five Star repaid us $38,000 in aggregate principal amount, resulting in the termination of this Bridge Loan.  The Bridge Loan was secured by mortgages on three of the senior living communities that Five Star acquired and on four other senior living communities owned by Five Star.  The Bridge Loan bore interest at a rate equal to the annual rates of interest applicable to our borrowings under our revolving credit facility, plus 1%; as of March 31, 2012, the interest rate was 2.8% under the Bridge Loan.  We recognized interest income from this Bridge Loan of $275 for the three months ended March 31, 2012, which is included in interest and other income in our condensed consolidated statements of income and comprehensive income.

 

Note 6.  Indebtedness

 

Our principal debt obligations at March 31, 2012 were: our $750,000 unsecured revolving credit facility; three public issuances of unsecured senior notes, including: $250,000 principal amount due 2016 at an annual interest rate of 4.30%, $200,000 principal amount due 2020 at an annual interest rate of 6.75% and $300,000 principal amount due 2021 at an annual interest rate of 6.75%; and $831,599 aggregate principal amount of mortgages secured by 78 of our properties with maturity dates from 2012 to 2038.  The 78 mortgaged properties had a carrying value of $1,093,242 at March 31, 2012.  We also have two properties subject to capital leases totaling $14,109 at March 31, 2012; these two properties had a carrying value of $15,835 at March 31, 2012.

 

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

 

In February 2012, we paid in full a mortgage loan encumbering one of our properties that had a principal balance of approximately $12,400, an interest rate of 6.03% and a maturity date in March 2012.  In April 2012, we paid in full 17 mortgage loans with a weighted average interest rate of 6.95% encumbering 17 of our properties for $32,765, including accrued interest, that had maturity dates in June and July 2012.

 

The interest rate payable for amounts drawn under our $750,000 revolving credit facility is LIBOR plus 160 basis points, subject to adjustments based on our credit ratings.  We can borrow, repay and reborrow under the credit facility until maturity, and no principal repayment is due until maturity.  The interest rate payable on borrowings under our revolving credit facility was 1.80% at March 31, 2012.  In addition to

 

6



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

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, 2012, we had $265,000 outstanding and $485,000 available under this revolving credit facility.  Our revolving credit facility contains financial covenants that require us to maintain financial ratios and a minimum net worth.  We believe we were in compliance with these covenants during the periods presented.  Our revolving credit facility matures in June 2015 and includes an option for us to extend the facility for one year to June 2016 upon payment of a fee, and includes a feature under which maximum borrowings may be increased up to $1,500,000, subject to certain conditions.

 

Note 7.  Shareholders’ Equity

 

On February 9, 2012, we paid a $0.38 per share, or $61,806, distribution to our common shareholders with respect to our operating results for the quarter ended December 31, 2011.  On April 3, 2012, we declared a quarterly distribution of $0.38 per share, or $61,813, to our common shareholders of record on April 13, 2012, with respect to our operating results for the quarter ended March 31, 2012; we expect to pay this distribution on or about May 10, 2012.  On February 10, 2011, we paid a $0.37 per share, or $52,486, distribution to our common shareholders with respect to our operating results for the quarter ended December 31, 2010.  On May 11, 2011, we paid a $0.37 per share, or $52,490, distribution to our common shareholders with respect to our operating results for the quarter ended March 31, 2011.

 

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

 

Note 8.  Fair Value of Assets and Liabilities

 

The table below presents certain of the assets and liabilities that are measured at fair value on a recurring and non recurring basis at March 31, 2012 categorized by the level of inputs used in the valuation of each asset or liability.

 

 

 

 

 

Quoted Prices in
Active Markets for
Identical Assets

 

Significant Other
Observable
Inputs

 

Description

 

Total

 

(Level 1)

 

(Level 2)

 

 

 

 

 

 

 

 

 

Assets held for sale(1)

 

$

1,715

 

$

 

$

1,715

 

Long-lived assets held and used(2)

 

$

1,986

 

$

 

$

1,986

 

Investments in available for sale securities(3)

 

$

19,096

 

$

19,096

 

$

 

Unsecured senior notes(4)

 

$

787,077

 

$

787,077

 

$

 

 


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

 

7



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

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

(3)         Our investments in available for sale securities include our 250,000 common shares of CWH and 4,235,000 common shares of Five Star. The fair values of these shares are based on quoted prices at March 31, 2012 in active markets (Level 1 inputs).

(4)         We estimate the fair values of our unsecured senior notes using an average of the bid and ask price of our three issuances of senior notes (Level 1 inputs) on or about March 31, 2012.  The fair values of these senior note obligations exceed their book values of $741,091 by $45,986 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, a loan receivable, secured and unsecured debt and other liabilities. The fair values of these additional financial instruments approximate their carrying values at March 31, 2012 based upon their liquidity, short term maturity, variable rate pricing or our estimate of fair value using discounted cash flow analyses and prevailing interest rates.

 

Note 9.  Segment Reporting

 

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

 

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, 2012

 

 

 

Short and Long
Term Residential
Care
Communities

 

MOBs

 

All Other
Operations

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental income

 

$

58,824

 

$

46,261

 

$

4,420

 

$

109,505

 

Residents fees and services

 

35,568

 

 

 

35,568

 

Total revenues

 

94,392

 

46,261

 

4,420

 

145,073

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Depreciation

 

20,897

 

11,532

 

948

 

33,377

 

Property operating expenses

 

25,499

 

13,835

 

 

39,334

 

General and administrative

 

 

 

7,685

 

7,685

 

Acquisition related costs

 

 

 

688

 

688

 

Impairment of assets

 

 

3,071

 

 

3,071

 

Total expenses

 

46,396

 

28,438

 

9,321

 

84,155

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

47,996

 

17,823

 

(4,901

)

60,918

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

482

 

482

 

Interest expense

 

(13,178

)

(412

)

(15,299

)

(28,889

)

Equity in earnings of an investee

 

 

 

45

 

45

 

Income (loss) before income tax expense

 

34,818

 

17,411

 

(19,673

)

32,556

 

Income tax expense

 

 

 

(204

)

(204

)

Net income (loss)

 

$

34,818

 

$

17,411

 

$

(19,877

)

$

32,352

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,449,750

 

$

1,479,244

 

$

454,827

 

$

4,383,821

 

 

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, 2011

 

 

 

Short and Long
Term Residential
Care
Communities

 

MOBs

 

All Other
Operations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

57,109

 

$

37,090

 

$

4,353

 

$

98,552

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Depreciation

 

16,730

 

8,683

 

948

 

26,361

 

Property operating expenses

 

 

10,433

 

 

10,433

 

General and administrative

 

 

 

6,156

 

6,156

 

Acquisition related costs

 

 

 

1,113

 

1,113

 

Impairment of assets

 

 

166

 

 

166

 

Total expenses

 

16,730

 

19,282

 

8,217

 

44,229

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

40,379

 

17,808

 

(3,864

)

54,323

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

232

 

232

 

Interest expense

 

(10,274

)

(217

)

(12,255

)

(22,746

)

Equity in earnings of an investee

 

 

 

37

 

37

 

Income (loss) before income tax expense

 

30,105

 

17,591

 

(15,850

)

31,846

 

Income tax expense

 

 

 

(71

)

(71

)

Net income (loss)

 

$

30,105

 

$

17,591

 

$

(15,921

)

$

31,775

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,881,550

 

$

1,276,755

 

$

367,103

 

$

3,525,408

 

 

Note 10. Significant Tenant

 

Five Star is our former subsidiary and RMR provides management services to both us and Five Star.  Rental income from Five Star represented 44.7% of our annualized rental income and the properties Five Star leases from us represent 45.5% of our investments, at cost, as of March 31, 2012.  As of March 31, 2012, Five Star also manages a portfolio of 23 senior living communities for our account.  These properties leased and managed by Five Star are included in our short and long term residential care communities segment.  The following tables present summary financial information for Five Star for the three months ended March 31, 2012 and 2011, as reported in its Quarterly Report on Form 10-Q.

 

10



 

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,

 

Operations

 

2012

 

2011

 

Total revenues

 

$

346,121

 

$

307,616

 

Operating income

 

2,513

 

6,457

 

Income from continuing operations

 

746

 

5,907

 

Net income

 

369

 

4,133

 

 

 

 

For the Three Months Ended March 31,

 

Cash Flows

 

2012

 

2011

 

Cash provided by operating activities

 

$

7,329

 

$

20,834

 

Net cash provided by (used in) discontinued operations

 

269

 

(1,395

)

Cash used in investing activities

 

(9,041

)

(18,564

)

Cash (used in) provided by financing activities

 

(286

)

4,363

 

Change in cash and cash equivalents

 

(1,729

)

5,238

 

Cash and cash equivalents at beginning of period

 

28,374

 

20,770

 

Cash and cash equivalents at end of period

 

26,645

 

26,008

 

 

 

 

As of March 31,

 

Financial Position

 

2012

 

2011

 

Current assets

 

$

141,082

 

$

156,741

 

Non-current assets

 

444,185

 

244,954

 

Total indebtedness

 

122,426

 

50,073

 

Current liabilities

 

189,067

 

155,334

 

Non-current liabilities

 

115,233

 

76,863

 

Total shareholders’ equity

 

280,967

 

169,498

 

 

The summary financial information of Five Star is presented to comply with applicable accounting regulations of the Securities and Exchange Commission, or SEC.  References in these financial statements to the Quarterly Report on Form 10-Q for Five Star are included 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 11.  Related Person Transactions

 

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

 

11



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

directors or independent trustees of other public companies to which RMR provides management services.  Mr. Barry Portnoy serves as a managing director or managing trustee of those companies and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies.

 

Pursuant to our business management agreement with RMR, we incurred expenses of $6,360 and $4,818 for the three months ended March 31, 2012 and 2011, respectively.  These amounts are included in general and administrative expenses in our condensed consolidated statements of income and comprehensive income.  In March 2012, we issued 20,462 common shares to RMR in satisfaction of the incentive fee RMR earned for services provided to us during 2011, in accordance with the terms of the business management agreement.  In connection with our property management agreement with RMR, we incurred property management and construction supervision fees of $1,346 and $1,024 for the three months ended March 31, 2012 and 2011, respectively.  These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

 

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

 

Five Star is our largest tenant and manages several senior living communities for us.  As of March 31, 2012, we leased 188 senior living communities and two rehabilitation hospitals to Five Star and Five Star managed 23 senior living communities for our account.

 

Under Five Star’s leases with us, Five Star pays us rent consisting of minimum annual rent amounts plus percentage rent based on increases in gross revenues at certain properties.  Five Star’s total minimum annual rent payable to us under those leases as of March 31, 2012 was $195,746, excluding percentage rent.  The total rent we recognized from Five Star for the three months ended March 31, 2012 and 2011 was $48,811 and $46,694, respectively, and as of March 31, 2012 and December 31, 2011, our rents receivable from Five Star were $17,483 and $17,313, respectively, and are included in other assets on our condensed consolidated balance sheets.  During the three months ended March 31, 2012 and 2011, pursuant to the terms of our existing leases with Five Star, we purchased $6,318 and $10,837, respectively, of improvements made to properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $512 and $869, respectively, pursuant to the terms of the leases.

 

Five Star manages certain of our senior living communities pursuant to management agreements.  We and Five Star have entered into a pooling agreement, which pools our managed assisted living communities, and pursuant to which the determinations of fees and expenses of the various communities that are subject to the pooled management contracts are aggregated, including determination of our return of our invested capital and Five Star’s incentive fees.  We expect communities with only independent living apartments will be subject to a future separate pooling agreement, which would similarly aggregate the managed independent living apartments.  Five Star began managing communities for our account in June 2011 in connection with our acquisition of certain senior living communities at that time.  Since that time, we have acquired additional communities that are being managed by Five Star, including a senior living community with 92 living units that we acquired in February 2012.  For the three months ended March 31, 2012, we incurred $1,068 in management fees and reimbursed $22,962 of costs to Five Star related to the communities it manages for our account.  We expect that we may enter into additional

 

12



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

management arrangements with Five Star for senior living communities that we may acquire in the future on terms similar to those management arrangements we currently have with Five Star, although there can be no assurances that we will do so.

 

As discussed above in Note 5—Loan Receivable, in May 2011, we and Five Star entered into the Bridge Loan, under which we lent to Five Star $80,000 to fund a portion of Five Star’s purchase of six senior living communities.  As of March 31, 2012, there was $38,000 aggregate principal amount outstanding under the Bridge Loan.  We recognized interest income from this Bridge Loan of $275 for the three months ended March 31, 2012, which is included in interest and other income in our condensed consolidated statements of income and comprehensive income.  In April 2012, Five Star repaid in full the outstanding principal amount under the Bridge Loan, resulting in the termination of the Bridge Loan.

 

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

 

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

 

We, RMR, Five Star, CWH and three other companies to which RMR provides management services each currently own approximately 14.3% of Affiliates Insurance Company, or AIC, an Indiana insurance company.  All of our Trustees, all of the trustees and directors of the other publicly held AIC shareholders and nearly all of the directors of RMR currently serve on the board of directors of AIC.  RMR provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC.  Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Trustees are also directors of AIC.  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.  Our investment in AIC had a carrying value of $5,335 and $5,291 as of March 31, 2012 and December 31, 2011, respectively.  During the three months ended March 31, 2012 and 2011, we recognized income of $45 and $37, respectively, related to this investment.  In June 2010, we and the other shareholders of AIC purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts.  This program was modified and extended in June 2011 for a one year term and we paid a premium of approximately $1,600 in connection with that renewal, which amount may be adjusted from time to time in response to our acquisition and disposition of properties that are included in this program.  We currently expect that we will renew this program, as it may be modified, in June 2012.  We are also 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

 

13



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro-rata share of any profits of this insurance business.

 

For further information about these and other such relationships and related person transactions, please see elsewhere in this Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” in Part I, Item 2 and “Warning Concerning Forward Looking Statements,” and our Annual Report, our Proxy Statement for our 2012 Annual Meeting of Shareholders dated February 21, 2012, or our Proxy Statement, and our other filings with the SEC, including Note 5 to our consolidated financial statements included in our Annual Report, the sections captioned  “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” and “Warning Concerning Forward Looking Statements” of our Annual Report and the section captioned “Related Person Transactions and Company Review of Such Transactions” and the information regarding our Trustees and executive officers in our Proxy Statement.  In addition, please see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise from these transactions and relationships.  Our filings with the SEC, including our Annual Report and our Proxy Statement, are available at the SEC’s website at www.sec.gov.  In addition, copies of certain of our agreements with these parties, including our business management agreement and property management agreement with RMR, our leases, forms of management agreements and related pooling agreement and Bridge Loan with Five Star, various agreements we have with CWH and our shareholders agreement with AIC and its shareholders, are also publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website.

 

Note 12.  Income Taxes

 

We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, and as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We do, however, lease certain managed senior living communities to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated corporate income tax return and are subject to federal and state income taxes.  Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state income taxes we incur despite our REIT status.  During the three months ended March 31, 2012 and 2011, we recognized current tax expense of $204 and $71, respectively.

 

14



 

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

 

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

 

PORTFOLIO OVERVIEW

 

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

 

(As of March 31, 2012)

 

Number of
Properties

 

Number of
Units/Beds or
Square Feet

 

Investment
Carrying Value
(1)

 

% of
Investment

 

Investment per
Unit / Bed or
Square Foot
(2)

 

Q1 2012
NOI
(3)

 

% of Q1 2012
NOI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facility Type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Independent living communities(4)

 

56

 

14,163

 

$

1,640,559

 

34.6%

 

$

115,834

 

$

35,323

 

33.4%

 

Assisted living facilities(4)

 

146

 

10,583

 

1,230,303

 

26.0%

 

$

116,253

 

26,694

 

25.2%

 

Skilled nursing facilities(4)

 

48

 

5,024

 

206,091

 

4.4%

 

$

41,021

 

4,260

 

4.0%

 

Rehabilitation hospitals

 

2

 

364

 

72,830

 

1.5%

 

$

200,082

 

2,616

 

2.5%

 

Wellness centers

 

10

 

812,000

 sq. ft.

180,017

 

3.8%

 

$

222

 

4,420

 

4.2%

 

MOBs

 

108

 

7,630,000

 sq. ft.

1,407,887

 

29.7%

 

$

185

 

32,426

 

30.7%

 

Total

 

370

 

 

 

$

4,737,687

 

100.0%

 

 

 

$

105,739

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant / Operator / Managed Properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Five Star (Lease No. 1)

 

89

 

6,539

 

$

674,040

 

14.2%

 

$

103,080

 

$

13,986

 

13.2%

 

Five Star (Lease No. 2)

 

48

 

6,140

 

559,527

 

11.8%

 

$

91,128

 

13,136

 

12.4%

 

Five Star (Lease No. 3)

 

28

 

5,618

 

652,212

 

13.8%

 

$

116,093

 

15,743

 

14.9%

 

Five Star (Lease No. 4)

 

25

 

2,614

 

271,262

 

5.7%

 

$

103,773

 

5,930

 

5.6%

 

Sunrise / Marriott(5)

 

14

 

4,091

 

325,165

 

6.9%

 

$

79,483

 

7,013

 

6.6%

 

Brookdale

 

18

 

894

 

61,122

 

1.3%

 

$

68,369

 

1,754

 

1.7%

 

5 private companies (combined)

 

7

 

959

 

36,087

 

0.8%

 

$

37,630

 

1,262

 

1.2%

 

TRS Managed(6)

 

23

 

3,279

 

570,368

 

12.0%

 

$

173,946

 

10,069

 

9.5%

 

Wellness centers

 

10

 

812,000

 sq. ft.

180,017

 

3.8%

 

$

222

 

4,420

 

4.2%

 

Multi-tenant MOBs

 

108

 

7,630,000

 sq. ft.

1,407,887

 

29.7%

 

$

185

 

32,426

 

30.7%

 

Total

 

370

 

 

 

$

4,737,687

 

100%

 

 

 

$

105,739

 

100%

 

 

Tenant / Managed Property Operating Statistics(7)

 

 

 

Rent Coverage

 

Occupancy

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Five Star (Lease No. 1)

 

1.20x

 

1.31x

 

84.1%

 

86.9%

 

Five Star (Lease No. 2)

 

1.39x

 

1.37x

 

82.5%

 

81.9%

 

Five Star (Lease No. 3)

 

1.44x

 

1.53x

 

86.0%

 

87.7%

 

Five Star (Lease No. 4)

 

1.14x

 

1.11x

 

85.4%

 

83.4%

 

Sunrise / Marriott(5)

 

1.58x

 

1.40x

 

89.5%

 

89.8%

 

Brookdale

 

2.23x

 

2.21x

 

92.1%

 

92.9%

 

5 private companies (combined)

 

2.80x

 

2.42x

 

84.0%

 

84.0%

 

TRS Managed(6)

 

NA

 

NA

 

84.2%

 

NA

 

Wellness centers

 

2.15x

 

2.18x

 

100.0%

 

100.0%

 

Multi-tenant MOBs (8)

 

NA

 

NA

 

95.9%

 

97.0%

 

 


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

(2)         Represents investment carrying value divided by the number of living units, beds or leased square feet at March 31, 2012.

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

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

(5)         Marriott International, Inc. guarantees the lessee’s obligations under this lease.

(6)         These 23 senior living communities acquired since June 2011 are leased to our TRSs and managed by Five Star.

(7)         Operating data for TRS managed properties are presented from the date of acquisitions through March 31, 2012 and operating data for multi-tenant MOBs are presented as of March 31, 2012 and 2011; operating data for other properties and tenants are presented based upon the operating results provided by our tenants for the 12 months ended December 31, 2011 and 2010, or the most recent prior period for which tenant operating results are available to us.  Rent coverage is calculated as operating cash flow from our tenants’ operations of our properties, before subordinated charges, divided by minimum rents payable to us.  We have not independently verified our tenants’ operating data.  The table excludes data for periods prior to our ownership of some of these properties.

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

 

15



 

The following tables set forth information regarding our lease expirations as of March 31, 2012 (dollars in thousands):

 

 

 

Annualized Rental Income(1)

 

Percent of

 

Cumulative

 

Year

 

Short and Long
Term Residential
Care
Communities
(2)

 

MOBs

 

Wellness
Centers

 

Total

 

Total
Annualized
Rental Income
Expiring

 

Percentage of
Annualized
Rental Income
Expiring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

$

 

$

15,606

 

$

 

$

15,606

 

3.5%

 

3.5%

 

2013

 

18,254

 

15,223

 

 

33,477

 

7.5%

 

11.0%

 

2014

 

 

21,919

 

 

21,919

 

4.9%

 

15.9%

 

2015

 

3,034

 

17,590

 

 

20,624

 

4.6%

 

20.5%

 

2016

 

 

17,022

 

 

17,022

 

3.8%

 

24.3%

 

2017

 

32,954

 

18,945

 

 

51,899

 

11.6%

 

35.9%

 

2018

 

14,454

 

6,871

 

 

21,325

 

4.7%

 

40.6%

 

2019

 

599

 

27,036

 

 

27,635

 

6.2%

 

46.8%

 

2020

 

 

9,603

 

 

9,603

 

2.1%

 

48.9%

 

2021 and thereafter

 

177,891

 

34,552

 

17,536

 

229,979

 

51.1%

 

100.0%

 

Total

 

$

247,186

 

$

184,367

 

$

17,536

 

$

449,089

 

100.0%

 

 

 

 

Average remaining lease term for all properties (weighted by annualized rental income):  9.5 years

 

16



 


(1)               Annualized rental income is rents pursuant to existing leases as of March 31, 2012, including expense reimbursements for certain net and modified gross leases and excluding lease value amortization at certain of our MOBs and wellness centers.

(2)               Excludes rent received from our TRSs.

 

 

 

Number of Tenants

 

 

 

Cumulative

 

Year

 

Short and Long
Term
Residential
Care
Communities
(1)

 

MOBs

 

Wellness
Centers

 

Total

 

Percent of
Total
Number of
Tenancies
Expiring

 

Percentage
of Number
of
Tenancies
Expiring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012 

 

 

112

 

 

112

 

20.9%

 

20.9%

 

2013 

 

1

 

70

 

 

71

 

13.2%

 

34.1%

 

2014 

 

 

82

 

 

82

 

15.3%

 

49.4%

 

2015 

 

3

 

65

 

 

68

 

12.7%

 

62.1%

 

2016 

 

 

61

 

 

61

 

11.4%

 

73.5%

 

2017 

 

2

 

41

 

 

43

 

8.0%

 

81.5%

 

2018 

 

1

 

24

 

 

25

 

4.7%

 

86.2%

 

2019 

 

1

 

22

 

 

23

 

4.3%

 

90.5%

 

2020 

 

 

17

 

 

17

 

3.2%

 

93.7%

 

2021 and thereafter

 

4

 

29

 

2

 

35

 

6.3%

 

100.0%

 

Total

 

12

 

523

 

2

 

537

 

100.0%

 

 

 

 


(1)               Excludes our TRSs as tenants.

 

17



 

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

 

 

 

Living Units / Beds

 

Square Feet

 

Year

 

Short and Long
Term
Residential
Care
Communities
(Units / Beds)
(1)

 

Percent of
Total Living
Units / Beds
Expiring

 

Cumulative
Percentage of
Living Units /
Beds
Expiring

 

MOBs
(Square
Feet)

 

Wellness
Centers
(Square
Feet)

 

Total
Square
Feet

 

Percent of
Total
Square Feet
Expiring

 

Cumulative
Percent of
Total Square
Feet Expiring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012 

 

 

0.0%

 

0.0%

 

594,358

 

 

594,358

 

7.4%

 

7.4%

 

2013 

 

2,472

 

9.2%

 

9.2%

 

536,515

 

 

536,515

 

6.7%

 

14.1%

 

2014 

 

 

0.0%

 

9.2%

 

985,598

 

 

985,598

 

12.3%

 

26.4%

 

2015 

 

423

 

1.6%

 

10.8%

 

766,135

 

 

766,135

 

9.6%

 

36.0%

 

2016 

 

 

0.0%

 

10.8%

 

763,477

 

 

763,477

 

9.5%

 

45.5%

 

2017 

 

3,508

 

13.1%

 

23.9%

 

833,561

 

 

833,561

 

10.4%

 

55.9%

 

2018 

 

1,619

 

6.0%

 

29.9%

 

210,905

 

 

210,905

 

2.6%

 

58.5%

 

2019 

 

175

 

0.7%

 

30.6%

 

893,402

 

 

893,402

 

11.3%

 

69.8%

 

2020 

 

 

0.0%

 

30.6%

 

454,610

 

 

454,610

 

5.7%

 

75.5%

 

2021 and thereafter

 

18,658

 

69.4%

 

100.0%

 

1,150,608

 

812,000

 

1,962,608

 

24.5%

 

100.0%

 

Total

 

26,855

 

100.0%

 

 

 

7,189,169

 

812,000

 

8,001,169

 

100.0%

 

 

 

 


(1)          Excludes 3,279 living units leased to our TRSs.

 

During the three months ended March 31, 2012, we entered into MOB lease renewals for 22,287 square feet and new leases for 23,926 square feet, at weighted average rental rates that were 17.2% above rents previously charged for the same space.  These leases have average net rent of $36.96 per square foot.  Average lease terms for leases entered into during the first quarter of 2012 were 9.7 years.  Commitments for tenant improvement and leasing costs for leases we entered into during the first quarter of 2012 totaled $1.3 million, or $28.96 per square foot on average (approximately $2.99 per square foot per year of the lease term).

 

RESULTS OF OPERATIONS (dollars and square feet in thousands, unless otherwise noted)

 

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

 

18



 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Short term and long term residential care communities

 

$

94,392

 

$

57,109

 

MOBs

 

46,261

 

37,090

 

All other operations

 

4,420

 

4,353

 

Total revenues

 

$

145,073

 

$

98,552

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

Short term and long term residential care communities

 

$

34,818

 

$

30,105

 

MOBs

 

17,411

 

17,591

 

All other operations

 

(19,877

)

(15,921

)

Net income

 

$

32,352

 

$

31,775

 

 

The following sections analyze and discuss the results of operations of each of our segments for the periods presented.

 

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011:

 

Short and long term residential care communities:

 

 

 

All Properties

 

Comparable Properties (1)

 

 

 

As of the Three Months
Ended March 31,

 

As of the Three Months
Ended March 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Total properties

 

252

 

228

 

223

 

223

 

# of units / beds

 

30,134

 

26,744

 

26,176

 

26,176

 

Occupancy:

 

 

 

 

 

 

 

 

 

Leased communities(2)

 

85.3%

 

86.2%

 

85.3%

 

86.1%

 

TRS managed communities(3)

 

85.8%

 

 

 

 

Rent coverage(2)

 

1.42x

 

1.43x

 

1.43x

 

1.43x

 

Rental income(2)

 

$

58,824

 

$

57,109

 

$

56,930

 

$

57,097

 

Residents fees and services(3)

 

$

35,568

 

$

 

$

 

$

 

 


(1)         Consists of short and long term residential care communities we have owned continuously since January 1, 2011.

(2)         Excludes rents from our Managed Communities.  All tenant operating data presented are based upon the operating results provided by our tenants for the 12 months ended December 31, 2011 and 2010, 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 triple-net tenants’ operations of our properties, before subordinated charges, divided by triple-net 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.

 

19



 

(3)         Represents the average occupancy for our 23 Managed Communities from the date of acquisitions through March 31, 2012 and our revenues for the three months ended March 31, 2012.

 

Short and long term residential care communities, all properties:

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

58,824

 

$

57,109

 

$

1,715

 

3.0%

 

Residents fees and services(1)

 

35,568

 

 

35,568

 

 

Property operating expenses(1)

 

(25,499

)

 

(25,499

)

 

Net operating income (NOI)

 

68,893

 

57,109

 

11,784

 

20.6%

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

(20,897

)

(16,730

)

(4,167

)

(24.9)%

 

Operating income

 

47,996

 

40,379

 

7,617

 

18.9%

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(13,178

)

(10,274

)

(2,904

)

(28.3)%

 

Net income

 

$

34,818

 

$

30,105

 

$

4,713

 

15.7%

 

 


(1)         Includes data for our Managed Communities.

 

Rental income.  Rental income increased because of rents from our acquisition of five communities during the second quarter of 2011 for approximately $89,600 and one community during the third quarter of 2011 for approximately $10,235 which are leased by Five Star and our purchase of approximately $39,600 of improvements made to our properties which are leased by Five Star since January 1, 2011, partially offset by a reduction in rental income resulting from the sale of five properties during the second quarter of 2011 for approximately $38,625.  Rental income includes non-cash straight line rent adjustments totaling approximately $505 and $508 for the three months ended March 31, 2012 and 2011, respectively.  Rental income decreased year over year on a comparable basis related to a rent reduction from the sale of five communities during the second quarter of 2011 partially offset by improvement purchases at certain of the 223 communities we have owned continuously since January 1, 2011.

 

Residents fees and services.  Residents fees and services are the revenues earned at our 23 senior living communities that we acquired for approximately $567,715 since June 2011 that are leased to our TRSs.  We recognize these revenues as services are provided.  Lease agreements with residents generally have a term of one year and are cancelable by the residents with 30 days’ notice.

 

Property operating expenses.  Property operating expenses include expenses incurred at our 23 senior living communities that are leased to our TRSs acquired since June 2011.  Property operating expenses consist of management fees, real estate taxes, utility expense, salaries and benefits of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating properties.

 

Net operating income.  NOI increased because of the changes in rental income, residents fees and services and property operating expenses described above.  The reconciliation of NOI to net income for our short and long

 

20



 

term residential care communities segment is shown in the table above.  Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in “Non-GAAP Financial Measures”.

 

Depreciation expense.  Depreciation expense increased as a result of our acquisition of 29 communities acquired since January 1, 2011 and our purchase of improvements made to our properties which are leased by Five Star since January 1, 2011, partially offset by the sale of five properties during the second quarter of 2011.

 

Interest expense.  Interest expense for our short and long term residential care communities arises from mortgage debt secured by certain of these properties.  The increase in interest expense is the result of the assumption of $204,000 of mortgage debt in connection with certain of our 2011 acquisitions occurring in the second, third and fourth quarter of that year, partially offset by the repayment of one mortgage loan in February 2012 that had a principal balance of approximately $12,400 and an interest rate of 6.03%, the amortization of the principal balance of our mortgage debt and the reduction in a variable rate of interest applicable to one mortgage debt.

 

MOBs:

 

 

 

All Properties

 

Comparable Properties (1)

 

 

 

As of the Three Months
Ended March 31,

 

As of the Three Months
Ended March 31,

 

 

 

2012

 

2011

 

2012

 

2011

 

Total properties

 

108

 

89

 

80

 

80

 

Total square feet(2)

 

7,630

 

5,984

 

5,150

 

5,150

 

Occupancy(3)

 

94.2%

 

97.8%

 

94.2%

 

97.2%

 

Rental income

 

$

46,261

 

$

37,090

 

$

35,256

 

$

34,432

 

 


(1)         Consists of MOBs we have owned continuously since January 1, 2011.

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

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

 

21



 

MOBs, all properties:

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

46,261

 

$

37,090

 

$

9,171

 

24.7%

 

Property operating expenses

 

(13,835

)

(10,433

)

(3,402

)

(32.6)%

 

Net operating income (NOI)

 

32,426

 

26,657

 

5,769

 

21.6%

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

(11,532

)

(8,683

)

(2,849

)

(32.8)%

 

Impairment of assets

 

(3,071

)

(166

)

(2,905

)

(1750.0)%

 

Operating income

 

17,823

 

17,808

 

15

 

0.1%

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(412

)

(217

)

(195

)

(89.9)%

 

Net income

 

$

17,411

 

$

17,591

 

$

(180

)

(1.0)%

 

 

Rental income.  Rental income increased because of rents from 28 MOBs we acquired for approximately $336,400 since January 1, 2011, partially offset by the sale of two MOBs for approximately $835 during the second quarter of 2011.  Rental income includes non-cash straight line rent adjustments totaling $2,000 and amortization of approximately $(602) and $161 of acquired real estate leases and obligations for the three months ended March 31, 2012 and 2011, respectively.

 

Property operating expenses.  Property operating expenses consist of property management fees, real estate taxes, utility expense, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating properties.  Property operating expenses increased because of our MOB acquisitions since January 1, 2011, partially offset by the sale of two MOBs during the second quarter of 2011.

 

Net operating income.  NOI increased because of the changes in rental income and property operating expenses described above.  The reconciliation of NOI to net income for our MOB segment is shown in the table above.  Our definition of NOI and our consolidated reconciliation of NOI to net income is included below in “Non-GAAP Financial Measures”.

 

Depreciation expense.  Depreciation expense increased because of our MOB acquisitions since January 1, 2011, partially offset by the sale of two MOBs during the second quarter of 2011.

 

Impairment of assets.  During the three months ended March 31, 2012, we recorded an impairment of assets charge of $ 3,071 related to one property to reduce the carrying value of this property to its estimated fair value.  During the three months ended March 31, 2011, we recorded an impairment of assets charge of $166 related to two properties to reduce the carrying value of these properties to their estimated sales prices less costs to sell.

 

Interest expense.  Interest expense for our MOBs arises from mortgage debt secured by certain of these properties.  The change in interest expense is the result of our assumption of $13,300 of mortgage debt in connection with our acquisition of one MOB in July 2011 and one MOB in November 2011, partially offset by the amortization of our mortgage debt.

 

22



 

MOBs, comparable properties (MOBs we have owned continuously since January 1, 2011):

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

35,256

 

$

34,432

 

$

824

 

2.4%

 

Property operating expenses

 

(9,412

)

(9,540

)

128

 

1.3%

 

Net operating income (NOI)

 

25,844

 

24,892

 

952

 

3.8%

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

(8,243

)

(8,120

)

(123

)

(1.5)%

 

Operating income

 

17,601

 

16,772

 

829

 

4.9%

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(210

)

(217

)

7

 

3.2%

 

Net income

 

$

17,391

 

$

16,555

 

$

836

 

5.0%

 

 

Rental income.  Rental income includes non-cash straight line rent adjustments totaling $1,300 and $1,800 and amortization of approximately $164 and $239 of acquired real estate leases and obligations for the three months ended March 31, 2012 and 2011, respectively.

 

Property operating expenses.  Property operating expenses consist of property management fees, real estate taxes, utility expense, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating properties.  Property operating expenses decreased slightly due to our more effective control of expenses.

 

Net operating income.  NOI increased because of the changes in rental income and property operating expenses described above.  The reconciliation of NOI to net income for our MOB segment for comparable properties is shown in the table above.  Our definition of NOI and our consolidated reconciliation of NOI to net income is included below in “Non-GAAP Financial Measures”.

 

Depreciation expense.  Depreciation expense increased primarily because of improvements we made on certain of these properties since January 1, 2011, and the amortization of leasing costs partially offset by a reduction in amortization of above and below market lease adjustments that we amortize over the respective lease terms.

 

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

 

23



 

All other operations: (1)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

4,420

 

$

4,353

 

$

67

 

1.5%

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Depreciation

 

948

 

948

 

 

 

General and administrative

 

7,685

 

6,156

 

1,529

 

24.8%

 

Acquisition related costs

 

688

 

1,113

 

(425

)

(38.2)%

 

Total expenses

 

9,321

 

8,217

 

1,104

 

13.4%

 

Operating loss

 

(4,901

)

(3,864

)

(1,037

)

26.8%

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

482

 

232

 

250

 

107.8%

 

Interest expense

 

(15,299

)

(12,255

)

(3,044

)

(24.8)%

 

Equity in earnings of an investee

 

45

 

37

 

8

 

21.6%

 

Loss before income tax expense

 

(19,673

)

(15,850

)

(3,823

)

24.1%

 

Income tax expense

 

(204

)

(71

)

(133

)

-187.3%

 

Net loss

 

$

(19,877

)

$

(15,921

)

$

(3,956

)

(24.8)%

 

 


(1)         All other operations includes our wellness center operations that we do not consider a significant, separately reportable segment of our business and corporate business activities, and our operating expenses that are not attributable to a reportable specific segment.

 

Rental income.  Rental income for our wellness centers increased because of consumer price index based rent increases since January 1, 2011 at certain of our wellness centers.  Rental income includes non-cash straight line rent adjustments totaling approximately $365 and amortization of approximately $55 of acquired real estate leases and obligations in both the three months ended March 31, 2012 and 2011.

 

Depreciation expense.  Depreciation expense remained consistent as there were no wellness center acquisitions nor capital improvement funding for the three months ended March 31, 2012 and 2011 as we generally depreciate our long-lived wellness center assets on a straight line basis.

 

General and administrative expense.  General and administrative expenses consist of fees pursuant to our business management agreement with RMR, equity compensation expense, legal and accounting fees and other costs relating to our status as a publicly traded company.  General and administrative expenses increased principally as a result of acquisitions of senior living communities and MOBs for approximately $1,004,000 since January 1, 2011, partially offset by the sale of seven properties during the second quarter of 2011 for approximately $39,460.

 

Acquisition related costs.  Acquisition related costs represent legal and other due diligence costs incurred in connection with our acquisition activity during the three months ended March 31, 2012 and 2011.  Acquisition related costs decreased because of a lower number and value of senior living and MOB acquisitions during the three months ended March 31, 2012 than the prior year period.

 

24



 

Interest and other income.  The increase in interest and other income is mainly due to $275 of interest received from our Bridge Loan with Five Star during the three months ended March 31, 2012.  Interest and other income also includes interest on our investable cash and dividend income related to the 250,000 common shares of CWH that we own.

 

Interest expense.  Interest expense increased because of our issuance of $250,000 of unsecured senior notes with an interest rate of 4.30% in January 2011, our issuance of $300,000 of unsecured senior notes with an interest rate of 6.75% in December 2011 and greater amounts outstanding under our revolving credit facility at higher weighted average interest rates, partially offset by reduced interest expense because of the redemption in January 2012 of all $225,000 of our 8.625% unsecured senior notes.  Our weighted average balance outstanding and interest rate under our revolving credit facility was $221,600 and 1.8%, and $29,600 and 1.1%, for the three months ended March 31, 2012 and 2011, respectively.

 

Equity in earnings of an investee.  Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC.

 

25



 

Non-GAAP Financial Measures

 

We provide below calculations of our funds from operations, or FFO, Normalized FFO and NOI for the three months ended March 31, 2012 and 2011.  We believe that this data may facilitate an understanding of our consolidated historical operating results.  These measures should be considered in conjunction with net income, operating income and cash flow from operating activities as presented in our condensed consolidated statements of income and comprehensive income and condensed consolidated statements of cash flows.  These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income, operating income or cash flow from operating activities determined in accordance with GAAP, as indicators of our financial performance or liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of our needs.  Other REITs and real estate companies may calculate FFO, Normalized FFO or NOI differently than we do.

 

Funds From Operations and Normalized Funds From Operations

 

We calculate FFO and Normalized FFO as shown below.  FFO is calculated on the basis defined by the National Association of Real Estate Investment Trusts, or NAREIT, which is net income, calculated in accordance with GAAP, excluding any gain or loss on sale of properties and impairment of assets, plus real estate depreciation and amortization.  Our calculation of Normalized FFO differs from the NAREIT definition of FFO because we include percentage rent and exclude acquisition related costs and loss on early extinguishment of debt, if any. We consider FFO and Normalized FFO to be appropriate measures of performance for a REIT, along with net income, operating income and cash flow from operating, investing and financing activities.  We believe that FFO and Normalized FFO provides useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO and Normalized FFO can facilitate a comparison of operating performances between periods.  FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to shareholders.  Other factors include, but are not limited to, requirements to maintain our status as a REIT, limitations in our revolving credit facility and public debt covenants, the availability of equity and debt capital to us and our expectation of our future capital requirements and operating performance.

 

Our calculations of FFO and Normalized FFO for the three months ended March 31, 2012 and 2011 and reconciliations of FFO and Normalized FFO to net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, appear in the following table.

 

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Three Months Ended
March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net income

 

$

32,352

 

$

31,775

 

Depreciation expense

 

33,377

 

26,361

 

Impairment of assets

 

3,071

 

166

 

FFO

 

68,800

 

58,302

 

Acquisition related costs

 

688

 

1,113

 

Percentage rent adjustment(1)

 

2,900

 

2,700

 

Normalized FFO

 

$

72,388

 

$

62,115

 

 

 

 

 

 

 

Weighted average shares outstanding

 

162,647

 

141,855

 

 

 

 

 

 

 

FFO per share

 

$

0.42

 

$

0.41

 

Normalized FFO per share

 

$

0.45

 

$

0.44

 

Net income per share

 

$

0.20

 

$

0.22

 

Distributions declared per share

 

$

0.38

 

$

0.37

 

 


(1)         Our percentage rents are generally determined on an annual basis. We defer recognition of percentage rental income we receive during the first, second and third quarters until the fourth quarter when all contingencies related to percentage rents are satisfied.  Although recognition of this revenue is deferred until the fourth quarter, our Normalized FFO calculation for the first three quarters includes estimated amounts of percentage rents with respect to those periods.  When we calculate our Normalized FFO for the fourth quarter, we exclude percentage rents we presented for the first three quarters.

 

Property Net Operating Income (NOI)

 

We calculate NOI as shown below.  We define NOI as 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 to evaluate individual and company wide property level performance 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 and may facilitate comparisons of our operating performance between periods.  The calculation of NOI excludes depreciation and amortization, acquisition related costs, and general and administrative expenses from the calculation of net income in order to provide results that are more closely related to our properties’ results of operations.

 

The calculation of NOI by reportable segment is included above in this Item 2.  The following table includes the reconciliation of 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, 2012 and 2011.

 

27



 

 

 

Three Months Ended
March 31,

 

 

 

2012 

 

2011

 

Reconciliation of NOI to Net Income: