UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2013

 

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 July 31, 2013:  188,085,568.

 

 

 



 

SENIOR HOUSING PROPERTIES TRUST

FORM 10-Q

 

June 30, 2013

 

INDEX

 

 

 

Page

PART I

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets — June 30, 2013 and December 31, 2012

1

 

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income — Three and Six Months Ended June 30, 2013 and 2012

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2013 and 2012

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements

4

 

 

 

Item 2.

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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

 

 

 

Item 4.

Controls and Procedures

56

 

 

 

 

Warning Concerning Forward Looking Statements

57

 

 

 

 

Statement Concerning Limited Liability

61

 

 

 

PART II

Other Information

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

 

 

 

Item 6.

Exhibits

62

 

 

 

 

Signatures

64

 

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

 



 

PART I.  Financial Information

 

Item 1.     Financial Statements.

 

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

Real estate properties:

 

 

 

 

 

Land

 

$

618,391

 

$

615,623

 

Buildings and improvements

 

4,583,354

 

4,567,684

 

 

 

5,201,745

 

5,183,307

 

Less accumulated depreciation

 

(811,182

)

(750,903

)

 

 

4,390,563

 

4,432,404

 

Cash and cash equivalents

 

37,336

 

42,382

 

Restricted cash

 

12,405

 

9,432

 

Deferred financing fees, net

 

27,221

 

29,410

 

Acquired real estate leases and other intangible assets, net

 

111,924

 

115,837

 

Other assets

 

169,182

 

118,537

 

Total assets

 

$

4,748,631

 

$

4,748,002

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Unsecured revolving credit facility

 

$

30,000

 

$

190,000

 

Senior unsecured notes, net of discount

 

1,092,695

 

1,092,053

 

Secured debt and capital leases

 

720,231

 

724,477

 

Accrued interest

 

15,694

 

15,757

 

Assumed real estate lease obligations, net

 

14,165

 

13,692

 

Other liabilities

 

63,629

 

65,455

 

Total liabilities

 

1,936,414

 

2,101,434

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares of beneficial interest, $.01 par value: 199,700,000 shares authorized, 188,085,568 and 176,553,600 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively

 

1,880

 

1,765

 

Additional paid in capital

 

3,495,982

 

3,233,354

 

Cumulative net income

 

1,084,654

 

1,043,821

 

Cumulative other comprehensive income

 

8,841

 

4,562

 

Cumulative distributions

 

(1,779,140

)

(1,636,934

)

Total shareholders’ equity

 

2,812,217

 

2,646,568

 

Total liabilities and shareholders’ equity

 

$

4,748,631

 

$

4,748,002

 

 

See accompanying notes.

 

1



 

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental income

 

$

112,297

 

$

108,407

 

$

224,150

 

$

215,435

 

Residents fees and services

 

74,631

 

35,986

 

149,687

 

71,554

 

Total revenues

 

186,928

 

144,393

 

373,837

 

286,989

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Property operating expenses

 

74,484

 

39,818

 

148,163

 

78,304

 

Depreciation

 

38,296

 

34,624

 

75,999

 

67,397

 

General and administrative

 

8,168

 

8,068

 

16,816

 

15,753

 

Acquisition related costs

 

292

 

1,829

 

2,187

 

2,694

 

Impairment of assets

 

4,371

 

 

5,675

 

3,071

 

Total expenses

 

125,611

 

84,339

 

248,840

 

167,219

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

61,317

 

60,054

 

124,997

 

119,770

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

397

 

227

 

570

 

709

 

Interest expense

 

(29,567

)

(28,120

)

(59,131

)

(57,009

)

Loss on early extinguishment of debt

 

(105

)

 

(105

)

 

Equity in earnings of an investee

 

79

 

76

 

155

 

121

 

Income before income tax expense

 

32,121

 

32,237

 

66,486

 

63,591

 

Income tax expense

 

(140

)

(43

)

(280

)

(247

)

Income from continuing operations

 

31,981

 

32,194

 

66,206

 

63,344

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

1,513

 

1,057

 

2,523

 

2,259

 

Impairment of assets from discontinued operations

 

(27,896

)

 

(27,896

)

 

Net income

 

$

5,598

 

$

33,251

 

$

40,833

 

$

65,603

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Change in net unrealized gain / loss on investments

 

(4,404

)

(1,315

)

4,360

 

916

 

Share of comprehensive income of an investee

 

(73

)

(3

)

(81

)

(4

)

Comprehensive income

 

$

1,121

 

$

31,933

 

$

45,112

 

$

66,515

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

188,081

 

162,670

 

186,350

 

162,659

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations per share

 

0.17

 

0.20

 

0.36

 

0.39

 

(Loss) income from discontinued operations per share

 

(0.14

)

 

(0.14

)

0.01

 

Net income per share

 

$

0.03

 

$

0.20

 

$

0.22

 

$

0.40

 

 

See accompanying notes.

 

2



 

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

40,833

 

$

65,603

 

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

 

 

 

 

 

Depreciation

 

76,798

 

68,607

 

Amortization of deferred financing fees and debt discounts

 

2,068

 

3,024

 

Straight line rental income

 

(3,698

)

(6,062

)

Amortization of acquired real estate leases and other intangible assets

 

1,935

 

(170

)

Loss on early extinguishment of debt

 

105

 

 

Impairment of assets

 

33,571

 

3,071

 

Equity in earnings of an investee

 

(155

)

(121

)

Change in assets and liabilities:

 

 

 

 

 

Restricted cash

 

(2,973

)

(2,916

)

Other assets

 

1,135

 

10,719

 

Accrued interest

 

(63

)

(8,966

)

Other liabilities

 

1,376

 

13,740

 

Cash provided by operating activities

 

150,932

 

146,529

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Real estate acquisitions and deposits

 

(76,006

)

(123,867

)

Real estate improvements

 

(22,669

)

(20,015

)

Principal payments on loan receivable

 

 

38,000

 

Cash used for investing activities

 

(98,675

)

(105,882

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common shares, net

 

261,813

 

 

Proceeds from borrowings on revolving credit facility

 

45,000

 

434,000

 

Repayments of borrowings on revolving credit facility

 

(205,000

)

(74,000

)

Redemption of senior notes

 

 

(225,000

)

Repayment of other debt

 

(16,662

)

(54,889

)

Payment of deferred financing fees

 

(248

)

(294

)

Distributions to shareholders

 

(142,206

)

(123,619

)

Cash used for financing activities

 

(57,303

)

(43,802

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(5,046

)

(3,155

)

Cash and cash equivalents at beginning of period

 

42,382

 

23,560

 

Cash and cash equivalents at end of period

 

$

37,336

 

$

20,405

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

57,126

 

$

62,951

 

Income taxes paid

 

516

 

378

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

Acquisitions funded by assumed debt

 

(12,266

)

(56,789

)

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Assumption of mortgage notes payable

 

12,266

 

56,789

 

Issuance of common shares

 

929

 

657

 

 

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, 2012, or our Annual Report.  In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.  All material intercompany transactions and balances among us and our consolidated subsidiaries have been eliminated.  Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.  Reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.  These reclassifications were made to conform the prior periods’ rental income, property operating expenses, discontinued operations, 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 2013, we adopted Financial Accounting Standards Board, or FASB, Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update is the culmination of the FASB’s deliberation on reporting reclassification adjustments from accumulated other comprehensive income, or AOCI. This standard does not change the current requirements for reporting net income or other comprehensive income. However, it requires disclosure of amounts reclassified out of AOCI in their entirety, by component, on the face of the statement of operations or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross referenced to other disclosures that provide additional detail. This standard is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. This update has not caused any material changes to the disclosures in, or the presentation of, our condensed consolidated financial statements.

 

Note 3.  Real Estate Properties

 

At June 30, 2013, we owned 395 properties located in 40 states and Washington, D.C.

 

Triple Net Senior Living Communities Acquisitions:

 

In January 2013, we acquired a senior living community located in Redmond, WA with 150 living units for approximately $22,350, excluding closing costs.  We funded this acquisition using cash on hand, borrowings under our revolving credit facility, and by assuming approximately $12,266 of mortgage debt which was recorded at a fair value of $13,306.  Details of this acquisition are as follows:

 

4



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Triple Net Senior Living Communities Acquisitions since January 1, 2013:

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premium

 

 

 

 

 

of

 

Units/

 

Purchase

 

 

 

Buildings and

 

 

 

Intangible

 

Assumed

 

on Assumed

 

Date

 

Location

 

Properties

 

Beds

 

Price (1)

 

Land

 

Improvements

 

FF&E

 

Assets

 

Debt

 

Debt

 

January 2013 (2)

 

Redmond, WA

 

1

 

150

 

$

22,350

 

$

5,120

 

$

16,562

 

$

669

 

$

1,039

 

$

12,266

 

$

1,040

 

 


(1)             Purchase price includes the assumption of mortgage debt and excludes closing costs.  The allocation of the purchase price of our acquisition shown above is based upon preliminary estimates of the fair value of assets acquired and liabilities assumed.  Consequently, amounts preliminarily allocated to assets acquired and liabilities assumed could change significantly from those used in these condensed consolidated financial statements.

(2)             We leased this property to a subsidiary of Stellar Senior Living, LLC for an initial term expiring in 2028 for initial rent of approximately $1,732 per year.  Percentage rent, based on an increase in gross revenues at this property, will commence in 2016.

 

Managed Senior Living Communities Acquisitions:

 

In April 2013, we entered into an agreement to acquire one senior living community for approximately $22,030, excluding closing costs.  The senior living community is located in Cumming, GA and includes 93 private pay assisted living units. In July 2013, we entered into an agreement to acquire one senior living community for approximately $10,000, excluding closing costs.  The senior living community is located in Jefferson City, TN and includes 60 private pay assisted living units. In July 2013, we entered into an agreement to acquire two senior living communities for approximately $19,100, excluding closing costs.  The senior living communities are located in Canton and Ellijay, GA and include 153 private pay assisted living units. We expect that a subsidiary of Five Star Quality Care, Inc., which together with its subsidiaries, we refer to in this report as Five Star, will manage these communities for our account pursuant to a long term management agreement. 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, that our purchases will not be delayed or that the terms will not change. As of June 30, 2013, we own 39 communities that are managed by Five Star. We use the taxable REIT subsidiary, or TRS, structures authorized by the Real Estate Investment Trust Investment Diversification and Empowerment Act for our managed senior living communities, which we began acquiring in June 2011. See Note 11 for more information regarding our management arrangements with Five Star.

 

MOB Acquisitions:

 

In February 2013, we acquired two properties leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or MOBs, with a total of 144,900 square feet located in Bothell, WA for approximately $38,000, excluding closing costs.  We funded this acquisition using cash on hand. In March 2013, we acquired another MOB with 71,824 square feet located in Hattiesburg, MS for approximately $14,600, excluding closing costs. We funded this acquisition using cash on hand. Details of these acquisitions are as follows:

 

5



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

MOB Acquisitions since January 1, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

Acquired

 

Real Estate

 

 

 

 

 

of

 

Square

 

Purchase

 

 

 

Buildings and

 

Real Estate

 

Lease

 

Date

 

Location

 

Properties

 

Feet

 

Price (1)

 

Land

 

Improvements

 

Leases

 

Obligations

 

February 2013

 

Bothell, WA

 

2

 

145

 

$

38,000

 

$

5,639

 

$

25,239

 

$

8,442

 

$

1,539

 

March 2013

 

Hattiesburg, MS

 

1

 

72

 

$

14,600

 

$

1,269

 

$

11,691

 

$

2,323

 

$

683

 

 

 

 

 

3

 

217

 

$

52,600

 

$

6,908

 

$

36,930

 

$

10,765

 

$

2,222

 

 


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

 

In July 2013, we entered into an agreement to acquire a MOB for approximately $49,500, excluding closing costs. The MOB is located in Boston, MA and includes 105,462 square feet. The closing of this acquisition is contingent upon completion of our diligence and other customary closing conditions; accordingly, we can provide no assurance that we will purchase this property, that our purchase will not be delayed or that the terms will not change.

 

Impairment

 

We periodically evaluate our properties for impairments. Impairment indicators may include declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life and legislative, market or industry changes that could permanently reduce the value of a property. If indicators of impairment are present, we evaluate the carrying value of the affected property by comparing it to the expected future undiscounted net cash flows to be generated from that property. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value.  During the six months ended June 30, 2013 and 2012, we recorded impairment of assets charges of $1,304 and $3,071, respectively, to reduce the carrying value of one of our properties to its estimated net sale price.

 

As of June 30, 2013, we had 18 properties held for sale, including 11 senior living communities with 856 units and seven MOBs with 831,499 square feet. During the six months ended June 30, 2013, we recorded impairment of assets charges of $32,267 to reduce the carrying value of 11of these 18 properties to their aggregate estimated net sale price. These properties are included in other assets in our condensed consolidated balance sheets and have a net book value (after impairment) of approximately $42,551 at June 30, 2013. As of December 31, 2012, we had one senior living community with 120 units held for sale (which is included within the 11 senior living communities held for sale as of June 30, 2013). This property is included in other assets in our condensed consolidated balance sheets and had a net book value (after impairment) of approximately $850 at December 31, 2012. We decided to sell these properties due to underlying conditions in the markets where these properties are located. We classify all properties that meet the criteria outlined in the Property, Plant and Equipment Topic of the FASB Accounting Standards Codification, or the Codification, as held for sale in our condensed consolidated balance sheets.

 

Results of operations for properties sold or held for sale are included in discontinued operations in our condensed consolidated statements of operations once the criteria for discontinued operations in the Presentation of Financial Statements Topic of the Codification are met. Summarized income statement

 

6



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

information for the seven MOBs that meet the criteria for discontinued operations is included in discontinued operations as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Rental income

 

$

2,574

 

$

2,579

 

$

5,095

 

$

5,056

 

Property operating expenses

 

(862

)

(916

)

(1,773

)

(1,587

)

Depreciation and amortization

 

(199

)

(606

)

(799

)

(1,210

)

Income from discontinued operations

 

$

1,513

 

$

1,057

 

$

2,523

 

$

2,259

 

 

One of the 11 senior living communities, a skilled nursing facility with 112 units, is held for sale under an agreement to be sold for $2,600. Completion of this sale is subject to customary closing conditions and we can provide no assurance that a sale of this community will occur, or will be completed at all or that the terms for the sale will not change.

 

Note 4.  Unrealized Gain / Loss on Investments

 

As of June 30, 2013, 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 gain or loss on investments determined as the net difference between the value at quoted market prices of our CWH and Five Star shares as of June 30, 2013 ($23.12 and $5.61 per share, respectively) and our weighted average costs at the time we acquired these shares, as adjusted to reflect any share splits or combinations ($26.00 and $3.36 per share, respectively).

 

Note 5.  Loan Receivable

 

In May 2011, we and Five Star entered into a loan agreement, or the Bridge Loan, under which we agreed to lend Five Star up to $80,000 to fund a portion of Five Star’s purchase of a portfolio of six senior living communities.  By September 30, 2011, Five Star had completed its acquisition of these communities and had borrowed all $80,000 of this Bridge Loan.  By December 31, 2011, Five Star had repaid $42,000 of those borrowings.  In April 2012, Five Star paid the remaining balance of $38,000, resulting in the termination of this Bridge Loan.  The Bridge Loan was secured by mortgages on three of the senior living communities that Five Star acquired and on four other senior living communities owned by Five Star.  The Bridge Loan required interest payable to us at a rate equal to the annual rates of interest applicable to our borrowings under our revolving credit facility, plus 1%.  We recognized interest income from this Bridge Loan of $39 and $314 for the three and six months ended June 30, 2012, respectively, 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 June 30, 2013 were: (1) outstanding borrowings under our $750,000 unsecured revolving credit facility; (2) four public issuances of unsecured senior notes, including: (a) $250,000 principal amount due 2016 at an annual interest rate of 4.30%, (b) $200,000 principal amount due 2020 at an annual interest rate of 6.75%, (c) $300,000 principal amount due 2021 at an annual interest

 

7



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

rate of 6.75% and (d) $350,000 principal amount due 2042 at an annual interest rate of 5.625%; and (3) $701,094 aggregate principal amount of mortgages secured by 53 of our properties with maturity dates from 2013 to 2043.  The 53 mortgaged properties had a carrying value of $977,692 at June 30, 2013.  We also had two properties subject to capital leases totaling $13,557 at June 30, 2013; these two properties had a carrying value of $17,984 at June 30, 2013.

 

In connection with the acquisitions discussed in Note 3 above, during the six months ended June 30, 2013, we assumed $12,266 of mortgage debt, which was recorded at a fair value of $13,306.  This mortgage has a contractual interest rate of 6.25% and matures in May 2015.  We recorded the assumed mortgage at its fair value, which exceeded its outstanding principal balance by $1,040.  We determined the fair value of the assumed mortgages using a market approach based upon Level 3 inputs (significant other unobservable inputs) in the fair value hierarchy.

 

In June 2013, we repaid mortgage notes that encumbered four of our properties that had an aggregate principal balance of $10,377, a weighted average interest rate of 6.1% and maturity dates later in 2013. As a result, we recognized a loss on early extinguishment of debt of $105 for the three months ended June 30, 2013.

 

We have a $750,000 unsecured revolving credit facility that is available for general business purposes, including acquisitions.  The maturity date of our revolving credit facility is June 24, 2015 and, subject to the payment of an extension fee and meeting certain other conditions, includes an option for us to extend the stated maturity date of our revolving credit facility by one year to June 24, 2016.  In addition, our revolving credit facility includes a feature under which maximum borrowings may be increased to up to $1,500,000 in certain circumstances.  Borrowings under our revolving credit facility bear interest at LIBOR plus a premium, which was 160 basis points as of June 30, 2013.  We also pay a facility fee of 35 basis points per annum on the total amount of lending commitments under our revolving credit facility.  Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings.  We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity.  The weighted average annual interest rate for borrowings under our revolving credit facility was 1.85% for the six months ended June 30, 2013.  We incurred interest expense and other associated costs related to our revolving credit facility of $74 and $305 for the three and six months ended June 30, 2013.  As of June 30, 2013 and July 31, 2013, we had $30,000 and $10,000 outstanding and $720,000 and $740,000 available under our revolving credit facility, respectively.

 

Note 7.  Shareholders’ Equity

 

On February 19, 2013, we paid a $0.39 per share, or $68,857, distribution to our common shareholders with respect to our operating results for the quarter ended December 31, 2012.  On May 21, 2013, we paid a $0.39 per share, or $73,349, distribution to our common shareholders with respect to our operating results for the quarter ended March 31, 2013.  On July 3, 2013, we declared a quarterly distribution of $0.39 per share, or $73,353, to our common shareholders of record on July 17, 2013, with respect to our operating results for the quarter ended June 30, 2013; we expect to pay this distribution on or about August 21, 2013.

 

In January 2013, we issued 11,500,000 common shares in a public offering, raising net proceeds of approximately $262,068 after underwriting discounts but before expenses. We used the net proceeds from this offering to repay borrowings outstanding under our revolving credit facility and for general business

 

8



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

purposes, including the partial funding of the acquisitions described above with the remainder to be used for general business purposes, including possible future acquisitions.

 

Under the terms of our business management agreement with Reit Management & Research LLC, or RMR, on March 27, 2013, we issued 21,968 common shares in payment of an incentive fee of approximately $582 for services rendered to us by RMR during 2012.

 

On May 9, 2013, we granted 2,000 common shares of beneficial interest, par value $.01 per share, valued at $28.64 per share, the closing price of our common shares on the New York Stock Exchange, or the NYSE, on that day, to each of our five Trustees.

 

Note 8.  Fair Value of Assets and Liabilities

 

The following table presents certain of our assets and liabilities that are measured at fair value on a recurring and non recurring basis at June 30, 2013 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

 

Significant
Unobservable
Inputs

 

Description

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Assets held for sale(1)

 

$

42,551

 

$

 

$

42,551

 

$

 

Long-lived assets held and used(2)

 

$

653

 

$

 

$

653

 

$

 

Investments in available for sale securities(3)

 

$

29,538

 

$

29,538

 

$

 

$

 

Unsecured senior notes(4)

 

$

1,139,302

 

$

1,139,302

 

$

 

$

 

Secured debt(5)

 

$

773,974

 

$

 

$

 

$

773,974

 

 


(1)             Assets held for sale consist of eighteen of our properties that we expect to sell that are reported at fair value less costs to sell.  We used offers to purchase these 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 $38,005 to these properties in order to reduce their book value to fair value.

 

(2)             Long-lived assets held and used consist of one of our properties.  We used broker information and comparable sales transactions (Level 2 inputs) to determine the fair value of this property.  We have previously recorded impairment of assets charges of $1,304 and $3,071 for the six months ended June 30, 2013 and 2012, respectively, for this property in order to reduce its carrying value to the amount stated.

 

(3)             Our investments in available for sale securities include our 250,000 common shares of CWH and 4,235,000 common shares of Five Star. The fair values of these shares are based on quoted prices at June 30, 2013 in active markets (Level 1 inputs).

 

(4)             We estimate the fair values of our unsecured senior notes using an average of the bid and ask price of our then outstanding four issuances of senior notes (Level 1 inputs) on or about June 30, 2013.  The fair values of these senior note obligations exceed their aggregate book values of $1,092,695 by $46,607 because these notes were trading at a premium to their face amounts.

 

(5)             We estimate the fair values of our secured debt by using discounted cash flow analyses and currently prevailing market terms at June 30, 2013 (Level 3 inputs).  Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

 

9



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

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, unsecured debt and other liabilities. The fair values of these additional financial instruments approximate their carrying values at June 30, 2013 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 four operating segments, of which three are reportable operating segments: (i) triple net senior living communities that provide short term and long term residential care and dining services for residents, (ii) managed senior living communities that provide short term and long term residential care and dining services for residents and (iii) MOBs. Our triple net and managed senior living communities include independent living communities and assisted living communities, skilled nursing facilities, or SNFs, and two 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.

 

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 June 30, 2013

 

 

 

Triple Net
Senior Living
Communities

 

Managed
Senior Living
Communities

 

MOBs

 

All Other
Operations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

56,957

 

$

 

$

50,899

 

$

4,441

 

$

112,297

 

Residents fees and services

 

 

74,631

 

 

 

74,631

 

Total revenues

 

56,957

 

74,631

 

50,899

 

4,441

 

186,928

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

58,231

 

16,253

 

 

74,484

 

Depreciation

 

17,019

 

7,028

 

13,301

 

948

 

38,296

 

General and administrative

 

 

 

 

8,168

 

8,168

 

Acquisition related costs

 

 

 

 

292

 

292

 

Impairment of assets

 

4,371

 

 

 

 

4,371

 

Total expenses

 

21,390

 

65,259

 

29,554

 

9,408

 

125,611

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

35,567

 

9,372

 

21,345

 

(4,967

)

61,317

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

 

397

 

397

 

Interest expense

 

(6,596

)

(3,073

)

(1,387

)

(18,511

)

(29,567

)

Loss on early extinguishment of debt

 

 

 

 

(105

)

(105

)

Equity in earnings of an investee

 

 

 

 

79

 

79

 

Income (loss) before income tax expense

 

28,971

 

6,299

 

19,958

 

(23,107

)

32,121

 

Income tax expense

 

 

 

 

(140

)

(140

)

Income (loss) from continuing operations

 

28,971

 

6,299

 

19,958

 

(23,247

)

31,981

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

1,513

 

 

1,513

 

Impairment of assets from discontinued operations

 

 

 

(27,896

)

 

(27,896

)

Net income (loss)

 

$

28,971

 

$

6,299

 

$

(6,425

)

$

(23,247

)

$

5,598

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,829,372

 

$

964,610

 

$

1,742,120

 

$

212,529

 

$

4,748,631

 

 

11



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

 

 

For the Three Months Ended June 30, 2012

 

 

 

Triple Net
Senior Living
Communities

 

Managed
Senior Living
Communities

 

MOBs

 

All Other
Operations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

59,643

 

$

 

$

44,306

 

$

4,458

 

$

108,407

 

Residents fees and services

 

 

35,986

 

 

 

35,986

 

Total revenues

 

59,643

 

35,986

 

44,306

 

4,458

 

144,393

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

26,244

 

13,574

 

 

39,818

 

Depreciation

 

17,191

 

3,874

 

12,611

 

948

 

34,624

 

General and administrative

 

 

 

 

8,068

 

8,068

 

Acquisition related costs

 

 

 

 

1,829

 

1,829

 

Total expenses

 

17,191

 

30,118

 

26,185

 

10,845

 

84,339

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

42,452

 

5,868

 

18,121

 

(6,387

)

60,054

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

 

227

 

227

 

Interest expense

 

(10,163

)

(2,813

)

(381

)

(14,763

)

(28,120

)

Equity in earnings of an investee

 

 

 

 

76

 

76

 

Income (loss) before income tax expense

 

32,289

 

3,055

 

17,740

 

(20,847

)

32,237

 

Income tax expense

 

 

 

 

(43

)

(43

)

Income (loss) from continuing operations

 

32,289

 

3,055

 

17,740

 

(20,890

)

32,194

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

1,057

 

 

1,057

 

Net income (loss)

 

$

32,289

 

$

3,055

 

$

18,797

 

$

(20,890

)

$

33,251

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,756,892

 

$

623,653

 

$

1,885,994

 

$

200,013

 

$

4,466,552

 

 

12



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

 

 

For the Six Months Ended June 30, 2013

 

 

 

Triple Net
Senior Living
Communities

 

Managed
Senior Living
Communities

 

MOBs

 

All Other
Operations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

113,723

 

$

 

$

101,582

 

$

8,845

 

$

224,150

 

Residents fees and services

 

 

149,687

 

 

 

149,687

 

Total revenues

 

113,723

 

149,687

 

101,582

 

8,845

 

373,837

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

116,135

 

32,028

 

 

148,163

 

Depreciation

 

33,936

 

13,877

 

26,290

 

1,896

 

75,999

 

General and administrative

 

 

 

 

16,816

 

16,816

 

Acquisition related costs

 

 

 

 

2,187

 

2,187

 

Impairment of assets

 

4,371

 

 

1,304

 

 

5,675

 

Total expenses

 

38,307

 

130,012

 

59,622

 

20,899

 

248,840

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

75,416

 

19,675

 

41,960

 

(12,054

)

124,997

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

 

570

 

570

 

Interest expense

 

(13,060

)

(6,141

)

(2,734

)

(37,196

)

(59,131

)

Loss on early extinguishment of debt

 

 

 

 

(105

)

(105

)

Equity in earnings of an investee

 

 

 

 

155

 

155

 

Income (loss) before income tax expense

 

62,356

 

13,534

 

39,226

 

(48,630

)

66,486

 

Income tax expense

 

 

 

 

(280

)

(280

)

Income (loss) from continuing operations

 

62,356

 

13,534

 

39,226

 

(48,910

)

66,206

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

2,523

 

 

2,523

 

Impairment of assets from discontinued operations

 

 

 

(27,896

)

 

(27,896

)

Net income (loss)

 

$

62,356

 

$

13,534

 

$

13,853

 

$

(48,910

)

$

40,833

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,829,372

 

$

964,610

 

$

1,742,120

 

$

212,529

 

$

4,748,631

 

 

13



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

 

 

For the Six Months Ended June 30, 2012

 

 

 

Triple Net
Senior Living
Communities

 

Managed
Senior Living
Communities

 

MOBs

 

All Other
Operations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

118,467

 

$

 

$

88,090

 

$

8,878

 

$

215,435

 

Residents fees and services

 

 

71,554

 

 

 

71,554

 

Total revenues

 

118,467

 

71,554

 

88,090

 

8,878

 

286,989

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

51,743

 

26,561

 

 

78,304

 

Depreciation

 

34,383

 

7,580

 

23,538

 

1,896

 

67,397

 

General and administrative

 

 

 

 

15,753

 

15,753

 

Acquisition related costs

 

 

 

 

2,694

 

2,694

 

Impairment of assets

 

 

 

3,071

 

 

3,071

 

Total expenses

 

34,383

 

59,323

 

53,170

 

20,343

 

167,219

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

84,084

 

12,231

 

34,920

 

(11,465

)

119,770

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

 

709

 

709

 

Interest expense

 

(20,287

)

(5,866

)

(793

)

(30,063

)

(57,009

)

Equity in earnings of an investee

 

 

 

 

121

 

121

 

Income (loss) before income tax expense

 

63,797

 

6,365

 

34,127

 

(40,698

)

63,591

 

Income tax expense

 

 

 

 

(247

)

(247

)

Income (loss) from continuing operations

 

63,797

 

6,365

 

34,127

 

(40,945

)

63,344

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

2,259

 

 

2,259

 

Net income (loss)

 

$

63,797

 

$

6,365

 

$

36,386

 

$

(40,945

)

$

65,603

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,756,892

 

$

623,653

 

$

1,885,994

 

$

200,013

 

$

4,466,552

 

 

Note 10. Significant Tenant

 

Five Star is our former subsidiary.  Rental income from Five Star represented 44.0% of our annualized rental income and the properties Five Star leases from us represented 41.9% of our investments, at cost, as of June 30, 2013.  As of June 30, 2013, Five Star also managed 39 senior living communities for our account.

 

14



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Additional financial information about Five Star may be found on the Securities and Exchange Commission, or the SEC’s, website by entering Five Star’s name at http://www.sec.gov/edgar/searchedgar/companysearch.html.  Reference to Five Star’s financial information on this external website is presented to comply with applicable accounting regulations of the SEC.  Except for such financial information contained therein as is required to be included herein under such regulations, Five Star’s public filings and other information located in external websites are not incorporated by reference into these financial statements.  See Note 11 for further information relating to our leases and management arrangements with Five Star.

 

Note 11. Related Person Transactions

 

Five Star was formerly our 100% owned subsidiary.  Five Star is our largest tenant, we are Five Star’s largest stockholder and Five Star manages several senior living communities for us.  In 2001, we distributed substantially all of Five Star’s then outstanding common shares to our shareholders.  As of June 30, 2013, 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.

 

As of June 30, 2013, we leased 188 senior living communities and two rehabilitation hospitals to Five Star.  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 as of June 30, 2013 was $198,984, excluding percentage rent.  We recognized total rental income from Five Star of $49,595 and $48,942 for the three months ended June 30, 2013 and 2012, respectively, and $99,027 and $97,753 for the six months ended June 30, 2013 and 2012, respectively.  As of June 30, 2013 and December 31, 2012, our rents receivable from Five Star were $17,804 and $17,680, respectively, and those amounts are included in other assets in our condensed consolidated balance sheets.  We had deferred percentage rent under our Five Star leases of $1,268 and $1,201 for the three months ended June 30, 2013 and 2012, respectively, and $2,517 and $2,412 for the six months ended June 30, 2013 and 2012, respectively.  We determine percentage rent due under our Five Star leases annually and recognize it at year end when all contingencies are met.  During the six months ended June 30, 2013, pursuant to the terms of our leases with Five Star, we purchased $15,901 of improvements made to properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $1,272.

 

As of June 30, 2013, Five Star managed 39 senior living communities for our account.  We lease our senior living communities that are managed by Five Star that include assisted living units to our TRSs, and Five Star manages these communities pursuant to long term management agreements on substantially similar terms.  In connection with the management agreements, we and Five Star have entered into three pooling agreements: two pooling agreements which pool our management agreements for communities that include assisted living units, or the AL Pooling Agreements, and a third pooling agreement, which pools our management agreements for communities consisting only of independent living units, or the IL Pooling Agreement.  We entered into the initial AL Pooling Agreement in May 2011 and the second AL Pooling Agreement in October 2012.  In connection with entering into the second AL Pooling Agreement, we and Five Star amended and restated the initial AL Pooling Agreement so that it includes only the management agreements for 20 identified communities.  The second AL Pooling Agreement includes the management agreements for the remaining communities that include assisted living units that Five Star currently manages (other than with respect to the senior living community in New York described below).  We entered into the IL Pooling Agreement in August 2012 and that agreement currently includes management agreements for two communities that have only independent living units.  Each of the AL Pooling Agreements and the IL Pooling Agreement aggregates the determination of fees and expenses of

 

15



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

the various communities that are subject to the applicable pooling agreement, including determinations of our return on our invested capital and Five Star’s incentive fees.  We incurred management fees of $2,281 and $4,576 for the three and six months ended June 30, 2013, respectively, and $1,080 and $2,148 for the three and six months ended June 30, 2012, respectively, with respect to the communities Five Star manages.  These amounts are included in property operating expenses in our condensed consolidated statements of income and comprehensive income.  We expect that we may enter into additional management arrangements with Five Star for senior living communities that we may acquire in the future on terms similar to those management arrangements we currently have with Five Star.  For example, as noted in Note 3, we have entered into agreements to acquire five senior living communities.  If these acquisitions are completed, we will lease these communities to one or more of our TRSs and we expect to enter into long term management agreements with Five Star to manage these communities on terms similar to those management arrangements we currently have with Five Star for communities that include assisted living units and that these management agreements would be added to the second AL Pooling Agreement or a new pooling agreement after the number of communities included in the second AL Pooling Agreement equals 20.  These acquisitions are subject to due diligence and other conditions and there can be no assurance that these acquisitions will be completed, that they will not be delayed or that their terms will not change.

 

We own a senior living community in New York with 310 living units, a portion of which is managed by Five Star pursuant to a long term management agreement with us with respect to the living units at this community that are not subject to the requirements of New York healthcare licensing laws.  The terms of this management agreement are substantially consistent with the terms of our other management agreements with Five Star for communities that include assisted living units, except the management fee we pay is equal to 5% of the gross revenues realized at that portion of the community and there is no incentive fee payable by us to Five Star.  In order to accommodate certain requirements of New York healthcare licensing laws, one of our TRSs subleases the portion of this community that is subject to those requirements to an entity, D&R Yonkers LLC, which is owned by our President and Chief Operating Officer and our Treasurer and Chief Financial Officer.  Five Star manages this portion of the community pursuant to a long term management agreement with D&R Yonkers LLC.  Under the sublease agreement, D&R Yonkers LLC is obligated to pay rent only from available revenues generated by the subleased community and our TRS is obligated to advance any rent shortfalls to D&R Yonkers LLC.

 

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

 

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, which relates to our business generally, and (2) a property management agreement, which relates to the property level operations of our MOBs.

 

Under our business management agreement with RMR, we acknowledge that RMR also provides management services to other companies, which include Five Star.  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.  Five Star’s President and Chief Executive Officer and its Chief Financial Officer and Treasurer are officers of RMR.  Our Independent Trustees also

 

16



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

serve as independent directors or independent trustees of other public companies to which RMR provides management services.  Mr. Barry Portnoy serves as a managing director or managing trustee of those companies, including Five Star, and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies, but not Five Star.  In addition, officers of RMR serve as officers of those companies.

 

Pursuant to our business management agreement with RMR, we recognized business management fees of $6,691 and $6,367 for the three months ended June 30, 2013 and 2012, respectively, and $13,241 and $12,727 for the six months ended June 30, 2013 and 2012, respectively.  These amounts are included in general and administrative expenses in our condensed consolidated statements of income and comprehensive income.  In March 2013, we issued 21,968 of our common shares to RMR for an incentive fee payable to RMR for 2012 services, in accordance with the terms of our business management agreement.

 

In connection with our property management agreement with RMR, we recognized aggregate property management and construction supervision fees of $1,659 and $1,424 for the three months ended June 30, 2013 and 2012, respectively, and $3,259 and $2,770 for the six months ended June 30, 2013 and 2012, respectively.  These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated balance sheets.

 

We, RMR, Five Star and five other companies to which RMR provides management services each currently own 12.5% 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.

 

As of June 30, 2013, we have invested $5,209 in AIC since its formation in November 2008.  Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Trustees are also directors of AIC.  Our investment in AIC had a carrying value of $5,703 and $5,629 as of June 30, 2013 and December 31, 2012, respectively, which amounts are include in other assets on our condensed consolidated balance sheets.  We recognized income of $79 and $76 for the three months ended June 30, 2013 and 2012, respectively, and $155 and $121 for the six months ended June 30, 2013 and 2012, respectively, related to our investment in AIC.  We and the other shareholders of AIC have purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts.  This program was modified and extended in June 2013 for a one year term, and we paid a premium, including taxes and fees, of $4,748 in connection with that renewal, which amount may be adjusted from time to time as we acquire or dispose of properties that are included in this program.  We periodically consider the possibilities for expanding our insurance relationships with AIC to include other types of insurance and may in the future participate in additional insurance offerings AIC may provide or arrange.  We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.  By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro rata share of any profits of this insurance business.

 

17



 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

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 federal corporate income tax return and are subject to federal and state income taxes.  Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state income taxes we incur despite our REIT status.  During the three and six months ended June 30, 2013, we recognized current income tax expense of $140 and $280, respectively. During the three and six months ended 2012, we recognized current income tax expense of $43 and $247, respectively.

 

18



 

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. We are a REIT organized under Maryland law.

 

PORTFOLIO OVERVIEW (1)

 

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

 

(As of June 30, 2013)

 

Number of
Properties

 

Number of
Units/Beds or
Square Feet

 

Investment
Carrying Value
(2)

 

% of Total
Investment

 

Investment per
Unit / Bed or
Square Foot
(3)

 

Q2 2013
NOI
(4)

 

% of Q2 2013
NOI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facility Type

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Independent living(5)

 

62

 

15,176

 

$

1,864,628

 

35.6%

 

$

122,867

 

$

33,228

 

29.6%

 

Assisted living(5)

 

151

 

11,158

 

1,284,412

 

24.5%

 

$

115,111

 

33,040

 

29.4%

 

Nursing homes(5)

 

48

 

5,024

 

210,348

 

4.0%

 

$

41,869

 

4,359

 

3.9%

 

Rehabilitation hospitals

 

2

 

364

 

78,382

 

1.5%

 

$

215,335

 

2,730

 

2.4%

 

Subtotal senior living communities

 

263

 

31,722

 

3,437,770

 

65.6%

 

$

108,372

 

73,357

 

65.3%

 

MOBs

 

115

 

7,714,000

 sq. ft.

1,599,417

 

30.8%

 

$

207

 

34,646

 

30.8%

 

Wellness centers

 

10

 

812,000

 sq. ft.

180,017

 

3.6%

 

$

222

 

4,441

 

3.9%

 

Total

 

388

 

 

 

$

5,217,204

 

100.0%

 

 

 

$

112,444

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant / Operator / Managed Properties(8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Five Star (Lease No. 1)

 

91

 

6,731

 

699,268

 

13.3%

 

$

103,888

 

14,712

 

13.1%

 

Five Star (Lease No. 2)

 

53

 

7,564

 

755,440

 

14.4%

 

$

99,873

 

17,730

 

15.7%

 

Five Star (Lease No. 3)

 

17

 

3,281

 

350,993

 

6.7%

 

$

106,977

 

8,518

 

7.5%

 

Five Star (Lease No. 4)

 

29

 

3,335

 

387,361

 

7.4%

 

$

116,150

 

8,634

 

7.7%

 

Subtotal Five Star

 

190

 

20,911

 

2,193,062

 

41.8%

 

$

104,876

 

49,594

 

44.0%

 

Sunrise / Marriott(6)

 

4

 

1,619

 

126,326

 

2.4%

 

$

78,027

 

3,133

 

2.9%

 

Brookdale

 

18

 

894

 

61,122

 

1.2%

 

$

68,369

 

1,754

 

1.5%

 

6 private senior living companies (combined)

 

12

 

1,620

 

94,170

 

1.8%

 

$

58,130

 

2,476

 

2.2%

 

Managed senior living communities(7)

 

39

 

6,678

 

963,090

 

18.4%

 

$

144,218

 

16,400

 

14.7%

 

Subtotal senior living communities

 

263

 

31,722

 

3,437,770

 

65.6%

 

$

108,372

 

73,357

 

65.3%

 

Multi-tenant MOBs

 

115

 

7,714,000

 sq. ft.

1,599,417

 

30.8%

 

$

207

 

34,646

 

30.8%

 

Wellness centers

 

10

 

812,000

 sq. ft.

180,017

 

3.6%

 

$

222

 

4,441

 

3.9%

 

Total

 

388

 

 

 

$

5,217,204

 

100.0%

 

 

 

$

112,444

 

100.0%

 

 

Tenant / Managed Property Operating Statistics(8)

 

 

 

Rent Coverage

 

Occupancy

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Five Star (Lease No. 1)

 

1.21x

 

1.18x

 

84.7%

 

84.1%

 

Five Star (Lease No. 2)

 

1.17x

 

1.27x

 

81.2%

 

81.9%

 

Five Star (Lease No. 3)

 

1.67x

 

1.71x

 

88.8%

 

89.6%

 

Five Star (Lease No. 4)

 

1.18x

 

1.17x

 

85.7%

 

85.4%

 

Subtotal Five Star

 

1.27x

 

1.30x

 

84.2%

 

84.4%

 

Sunrise / Marriott(6)

 

1.89x

 

1.97x

 

93.2%

 

93.0%

 

Brookdale

 

2.48x

 

2.24x

 

95.2%

 

92.7%

 

6 private senior living companies (combined)

 

2.12x

 

2.78x

 

83.6%

 

83.8%

 

Managed senior living communities(7)

 

NA

 

NA

 

87.3%

 

86.6%

 

Subtotal senior living communities

 

1.38x

 

1.41x

 

85.6%

 

85.4%

 

Multi-tenant MOBs

 

NA

 

NA

 

94.1%

 

93.9%

 

Wellness centers

 

2.21x

 

2.16x

 

100.0%

 

100.0%

 

Total

 

1.44x

 

1.46x

 

 

 

 

 

 

19



 


(1)             Excludes properties classified in discontinued operations.

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

(3)             Represents investment carrying value divided by the number of living units, beds or leased square feet at June 30, 2013.

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

(5)             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.

(6)             Marriott International, Inc. guarantees the lessee’s obligations under these leases.

(7)             These 39 managed senior living communities are leased to our TRSs and managed by Five Star.  The occupancy for the twelve month period ended, or, if shorter, from the date of acquisitions through June 30, 2013 was 87.3%.

(8)             Operating data for multi-tenant MOBs are presented as of June 30, 2013 and 2012; operating data for other properties, tenants and managers are presented based upon the operating results provided by our tenants and managers for the 12 months ended March 31, 2013 and 2012, 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, if any, divided by 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.

 

20



 

The following tables set forth information regarding our lease expirations as of June 30, 2013 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

Percent of

 

Cumulative

 

 

 

Annualized Rental Income(1) (2)

 

Total

 

Percentage of

 

Year

 

Triple Net Senior
Living
Communities

 

MOBs

 

Wellness
Centers

 

Total

 

Annualized
Rental Income
Expiring

 

Annualized
Rental Income
Expiring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013 

 

$

 

$

11,905

 

$

 

$

11,905

 

2.6%

 

2.6%

 

2014 

 

 

18,167

 

 

18,167

 

4.0%

 

6.6%

 

2015 

 

3,039

 

20,571

 

 

23,610

 

5.1%

 

11.8%

 

2016 

 

 

21,314

 

 

21,314

 

4.6%

 

16.4%

 

2017 

 

44,392

 

25,594

 

 

69,986

 

15.2%

 

31.6%

 

2018 

 

14,477

 

20,606

 

 

35,083

 

7.6%

 

39.2%

 

2019 

 

599

 

29,691

 

 

30,290

 

6.6%

 

45.8%

 

2020 

 

 

11,849

 

 

11,849

 

2.6%

 

48.3%

 

2021 

 

1,424

 

5,131

 

 

6,555

 

1.4%

 

49.7%

 

Thereafter

 

173,572

 

39,289

 

17,536

 

230,397

 

50.3%

 

100.0%

 

Total

 

$

237,503

 

$

204,117

 

$

17,536

 

$

459,156

 

100.0%

 

 

 

 

Average remaining lease term for all properties (weighted by annualized rental income):  8.5 years

 


(1)                   Annualized rental income is rents pursuant to existing leases as of June 30, 2013, including estimated percentage rents, straight line rent adjustments, estimated recurring expense reimbursements for certain net and modified gross leases and excluding lease value amortization at certain of our MOBs and wellness centers. Excludes properties classified in discontinued operations.

(2)                   Excludes rent received from our managed senior living communities leased to our TRSs.  If the NOI from our TRSs (three months ended June 30, 2013, annualized) were included in the foregoing table, the percent of total annualized rental income expiring would be: 2013 – 2.3%; 2014 – 3.5%; 2015 – 4.5%, 2016 – 4.1%; 2017 – 13.3%; 2018 – 6.7%; 2019 – 5.8%; 2020 – 2.3%; 2021 – 1.2% and thereafter – 56.5%.

 

21