snh_Current folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2014

 

OR

 

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

 

Commission File Number 1-15319

 

SENIOR HOUSING PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

Maryland

 

04-3445278

(State or Other Jurisdiction of Incorporation or

Organization)

 

(IRS Employer Identification No.)

 

Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634

(Address of Principal Executive Offices) (Zip Code)

 

617-796-8350

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

Accelerated filer

 

 

 

Non—accelerated filer

 

Smaller reporting company

(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   No 

 

Number of registrant’s common shares outstanding as of November 3, 2014: 203,885,292.

 

 

 


 

Table of Contents

 

SENIOR HOUSING PROPERTIES TRUST

FORM 10-Q

 

September 30, 2014

 

INDEX

 

 

 

 

 

 

Page

PART I 

Financial Information

 

 

 

 

Item 1. 

Financial Statements (unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets — September 30, 2014 and December 31, 2013

1

 

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income — Three and Nine Months Ended September 30, 2014 and 2013

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Three and Nine Months Ended September 30, 2014 and 2013

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements

4

 

 

 

Item 2. 

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

20

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

Item 4. 

Controls and Procedures

50

 

 

 

 

Warning Concerning Forward Looking Statements

51

 

 

 

 

Statement Concerning Limited Liability

55

 

 

 

PART II 

Other Information

56

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

56

 

 

 

Item 6. 

Exhibits

56

 

 

 

 

Signatures

58

 

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

 

 

 

 


 

Table of Contents

PART I.  Financial Information

 

Item 1.    Financial Statements.

 

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

 

 

Real estate properties:

 

 

 

 

 

 

 

Land

 

$

680,994 

 

$

623,756 

 

Buildings and improvements

 

 

5,503,074 

 

 

4,639,869 

 

 

 

 

6,184,068 

 

 

5,263,625 

 

Less accumulated depreciation

 

 

(946,566)

 

 

(840,760)

 

 

 

 

5,237,502 

 

 

4,422,865 

 

Cash and cash equivalents

 

 

80,750 

 

 

39,233 

 

Restricted cash

 

 

10,986 

 

 

12,514 

 

Deferred financing fees, net

 

 

32,021 

 

 

27,975 

 

Acquired real estate leases and other intangible assets, net

 

 

482,564 

 

 

103,494 

 

Other assets

 

 

145,299 

 

 

158,585 

 

Total assets

 

$

5,989,122 

 

$

4,764,666 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

 

$

100,000 

 

Unsecured term loan

 

 

350,000 

 

 

 

Senior unsecured notes, net of discount

 

 

1,743,272 

 

 

1,093,337 

 

Secured debt and capital leases

 

 

669,011 

 

 

699,427 

 

Accrued interest

 

 

32,555 

 

 

15,839 

 

Assumed real estate lease obligations, net

 

 

125,493 

 

 

12,528 

 

Other liabilities

 

 

84,576 

 

 

66,546 

 

Total liabilities

 

 

3,004,907 

 

 

1,987,677 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common shares of beneficial interest, $.01 par value: 220,000,000 shares authorized, 203,872,829 and 188,167,643 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

 

2,039 

 

 

1,882 

 

Additional paid in capital

 

 

3,824,237 

 

 

3,497,589 

 

Cumulative net income

 

 

1,308,333 

 

 

1,194,985 

 

Cumulative other comprehensive income

 

 

1,736 

 

 

8,412 

 

Cumulative distributions

 

 

(2,152,130)

 

 

(1,925,879)

 

Total shareholders’ equity

 

 

2,984,215 

 

 

2,776,989 

 

Total liabilities and shareholders’ equity

 

$

5,989,122 

 

$

4,764,666 

 

 

See accompanying notes.

1


 

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

137,614 

 

$

112,319 

 

$

377,339 

 

$

336,468 

 

Residents fees and services

 

 

79,259 

 

 

74,946 

 

 

237,740 

 

 

224,634 

 

Total revenues

 

 

216,873 

 

 

187,265 

 

 

615,079 

 

 

561,102 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

82,706 

 

 

74,729 

 

 

240,297 

 

 

222,893 

 

Depreciation

 

 

50,074 

 

 

38,473 

 

 

135,132 

 

 

114,472 

 

General and administrative

 

 

10,384 

 

 

7,798 

 

 

28,250 

 

 

24,615 

 

Acquisition related costs

 

 

15 

 

 

396 

 

 

2,649 

 

 

2,590 

 

Impairment of assets

 

 

 

 

 —

 

 

 

 

5,675 

 

Total expenses

 

 

143,179 

 

 

121,396 

 

 

406,328 

 

 

370,245 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

73,694 

 

 

65,869 

 

 

208,751 

 

 

190,857 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

78 

 

 

42 

 

 

336 

 

 

612 

 

Interest expense

 

 

(36,201)

 

 

(29,405)

 

 

(99,213)

 

 

(88,536)

 

Loss on early extinguishment of debt

 

 

 

 

(692)

 

 

 

 

(797)

 

Income from continuing operations before income tax expense and equity in earnings of an investee

 

 

37,571 

 

 

35,814 

 

 

109,874 

 

 

102,136 

 

Income tax expense

 

 

(156)

 

 

(125)

 

 

(502)

 

 

(405)

 

Equity in earnings of an investee

 

 

38 

 

 

64 

 

 

59 

 

 

219 

 

Income from continuing operations

 

 

37,453 

 

 

35,753 

 

 

109,431 

 

 

101,950 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations

 

 

(557)

 

 

1,231 

 

 

1,484 

 

 

3,762 

 

Impairment of assets from discontinued operations

 

 

216 

 

 

 

 

(117)

 

 

(27,896)

 

Income before gain on sale of properties

 

 

37,112 

 

 

36,984 

 

 

110,798 

 

 

77,816 

 

Gain on sale of properties

 

 

 —

 

 

1,141 

 

 

2,552 

 

 

1,141 

 

Net income

 

$

37,112 

 

$

38,125 

 

$

113,350 

 

$

78,957 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized (loss) / gain on investments

 

 

(5,404)

 

 

(2,166)

 

 

(6,684)

 

 

2,195 

 

Share of comprehensive (loss) income of an investee

 

 

(33)

 

 

13 

 

 

17 

 

 

(68)

 

 Comprehensive income

 

$

31,675 

 

$

35,972 

 

$

106,683 

 

$

81,084 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

203,792 

 

 

188,102 

 

 

197,317 

 

 

186,942 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations per share

 

 

0.18 

 

 

0.19 

 

 

0.56 

 

 

0.55 

 

Income (loss) from discontinued operations per share

 

 

 —

 

 

0.01 

 

 

0.01 

 

 

(0.13)

 

Basic and diluted net income per share

 

$

0.18 

 

$

0.20 

 

$

0.57 

 

$

0.42 

 

 

See accompanying notes.

 

2


 

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(amounts in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2014

    

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

113,350 

 

$

78,957 

 

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

 

 

 

 

 

 

 

Depreciation

 

 

135,132 

 

 

115,274 

 

Amortization of deferred financing fees and debt discounts

 

 

4,709 

 

 

4,559 

 

Straight line rental income

 

 

(6,814)

 

 

(5,256)

 

Amortization of acquired real estate leases and other intangible assets

 

 

(1,110)

 

 

2,793 

 

Loss on early extinguishment of debt

 

 

 

 

797 

 

Impairment of assets

 

 

117 

 

 

33,571 

 

Gain on sale of properties

 

 

(2,552)

 

 

(1,141)

 

Equity in earnings of an investee

 

 

(59)

 

 

(219)

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

 

1,528 

 

 

(614)

 

Other assets

 

 

331 

 

 

569 

 

Accrued interest

 

 

16,716 

 

 

6,006 

 

Other liabilities

 

 

20,175 

 

 

12,884 

 

Cash provided by operating activities

 

 

281,523 

 

 

248,180 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Real estate acquisitions and deposits

 

 

(1,146,840)

 

 

(148,775)

 

Real estate improvements

 

 

(53,197)

 

 

(36,820)

 

Investment in Affiliates Insurance Company

 

 

(825)

 

 

 

Proceeds from sale of properties

 

 

18,575 

 

 

2,550 

 

Cash used for investing activities

 

 

(1,182,287)

 

 

(183,045)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common shares, net

 

 

322,962 

 

 

261,813 

 

Proceeds from issuance of unsecured senior notes, net of discount

 

 

648,914 

 

 

 

Proceeds from unsecured term loan

 

 

350,000 

 

 

 

Proceeds from borrowings on revolving credit facility

 

 

90,000 

 

 

160,000 

 

Repayments of borrowings on revolving credit facility

 

 

(190,000)

 

 

(225,000)

 

Repayment of other debt

 

 

(45,304)

 

 

(33,261)

 

Payment of deferred financing fees

 

 

(8,039)

 

 

(3,252)

 

Distributions to shareholders

 

 

(226,252)

 

 

(215,559)

 

Cash provided by (used for) financing activities

 

 

942,281 

 

 

(55,259)

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

41,517 

 

 

9,876 

 

Cash and cash equivalents at beginning of period

 

 

39,233 

 

 

42,382 

 

Cash and cash equivalents at end of period

 

$

80,750 

 

$

52,258 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

77,788 

 

$

79,552 

 

Income taxes paid

 

 

152 

 

 

536 

 

 

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

 

 

Acquisitions funded by assumed debt

 

 

(15,630)

 

 

(12,266)

 

 

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

 

 

Assumption of mortgage notes payable

 

 

15,630 

 

 

12,266 

 

Issuance of common shares

 

 

3,997 

 

 

2,538 

 

 

See accompanying notes.

 

 

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Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 1.  Basis of Presentation

 

The accompanying condensed consolidated financial statements of Senior Housing Properties Trust and its subsidiaries, or we, us, or our, are unaudited.  Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted.  We believe the disclosures made are adequate to make the information presented not misleading.  However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2013, or our Annual Report.  In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.  All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated.  Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.  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.

 

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

 

Note 2.  Recent Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  This update amends the criteria for reporting discontinued operations to, among other things, raise the threshold for disposals to qualify as discontinued operations. This update is effective for interim and annual reporting periods, beginning after December 15, 2014, with early adoption permitted.  We currently expect that, when adopted, this update will reduce the number of any future property dispositions to be presented as discontinued operations in our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. This update is effective for interim and annual reporting periods beginning after December 15, 2016.  We are currently in the process of evaluating the impact, if any, the adoption of this ASU will have on our consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  The update requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances.  The update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter with early adoption permitted.  The implementation of this update is not expected to cause any significant changes to our condensed consolidated financial statements.

 

Note 3.  Real Estate Properties

 

At September 30, 2014, we owned 371 properties (398 buildings) located in 38 states and Washington, D.C. We have accounted, or expect to account for, the following acquisitions as business combinations unless otherwise noted.

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Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

MOB Acquisitions:

 

In April 2014, we acquired one property (one building) leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or an MOB, for approximately $32,658, including the assumption of approximately $15,630 of mortgage debt, and excluding closing costs. This MOB is located in Texas and includes 125,240 square feet of leasable space. We funded this acquisition using cash on hand and borrowings under our revolving credit facility. In May 2014, we acquired one MOB (two buildings) for approximately $1,125,420, excluding closing costs. This MOB is located in Massachusetts and includes approximately 1,651,037 gross building square feet. We funded this acquisition using the proceeds of equity and debt offerings and borrowings under our revolving credit facility.

 

MOB Acquisitions since January 1, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

    

    

    

Cash Paid

    

    

 

    

    

 

    

    

 

    

Acquired

    

    

 

    

    

 

 

 

 

 

 

Number

 

 

 

plus

 

 

 

 

 

 

 

Acquired

 

Real Estate

 

 

 

 

Premium

 

 

 

 

 

of

 

Square

 

Assumed

 

 

 

 

Buildings and

 

Real Estate

 

Lease

 

Assumed

 

on Assumed

 

Date

 

Location

 

Properties

 

Feet (000’s)

 

Debt (1)

 

Land

 

Improvements

 

Leases

 

Obligations

 

Debt

 

Debt

 

Apr-14

 

San Antonio, TX

 

 1

 

125 

 

$

32,932 

 

$

3,141 

 

$

26,421 

 

$

4,393 

 

$

10 

 

$

15,630 

 

$

1,013 

 

May-14

 

Boston, MA

 

 1

 

1,651 

 

 

1,124,031 

 

 

52,643 

 

 

944,362 

 

 

245,511 

 

 

118,485 

 

 

 

 

 

 

 

 

 

 2

 

1,776 

 

$

1,156,963 

 

$

55,784 

 

$

970,783 

 

$

249,904 

 

$

118,495 

 

$

15,630 

 

$

1,013 

 

 


(1)

These amounts include the cash we paid plus debt we assumed, if any, as well as other settlement adjustments with respect to the acquisitions but exclude 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 may change from those used in these condensed consolidated financial statements.

 

In July 2014, we entered into an agreement to acquire one senior living community for approximately $7,000, excluding closing costs.  The senior living community is located in Jackson, Wisconsin and includes 52 assisted living units.  In September 2014, we entered into an agreement to acquire one senior living community for approximately $40,430, excluding closing costs. The senior living community is located in Madison, Wisconsin and includes 176 independent and assisted living units. If these acquisitions are completed, we expect that a subsidiary of Five Star Quality Care, Inc. will manage these communities for our account pursuant to long term management agreements. In this Quarterly Report on Form 10-Q, we refer to Five Star Quality Care, Inc. and its applicable subsidiaries as Five Star.

 

In August 2014, we entered into an agreement to acquire the entities owning 23 MOBs for approximately $539,000, including the assumption of approximately $30,000 of mortgage debt. The MOBs contain approximately 2,200,000 square feet and are located in 12 states. The closing of this acquisition is subject to various conditions; accordingly, we may not purchase some or all of these properties, these purchases may be delayed or the terms of these purchases may change. See Note 10 for further information about this acquisition.

 

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.

 

As of September 30, 2014, we had seven senior living communities with 552 living units and one MOB (four buildings) with 323,541 square feet categorized as properties held for sale. During the nine months ended September 30, 2014, we

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Table of Contents

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

recorded net impairment of assets charges of $117 to adjust the carrying value of four MOBs included in discontinued operations to their aggregate estimated net sale price. The eight properties are included in other assets in our condensed consolidated balance sheets and have a net book value (after impairment) of approximately $12,924 at September 30, 2014. As of December 31, 2013, we had 10 senior living communities with 744 units and four MOBs (seven buildings) with 831,499 square feet categorized as properties held for sale, which were similarly recorded and categorized at September 30, 2014, except that three of the senior living communities and three of the MOBs were sold during the first nine months of 2014, as noted below. These properties are included in other assets in our condensed consolidated balance sheets and had a net book value (after impairment) of approximately $27,888 at December 31, 2013. We decided to sell these properties because of what we believe to be unattractive conditions in the markets in which these properties are located or in which they operate. We classify all properties as held for sale in our condensed consolidated balance sheets that meet the applicable criteria for that treatment as set forth in the Property, Plant and Equipment Topic of the FASB Accounting Standards Codification, or the Codification.

 

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. The senior living properties which we are or were offering for sale as of the applicable periods do not meet the criteria for discontinued operations as they are included within combination leases with other properties that we expect to continue leasing. Summarized income statement information for the four MOBs (seven buildings) that meet the criteria for discontinued operations is included in discontinued operations as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

Rental income

 

$

111 

 

$

2,189 

 

$

3,837 

 

$

7,284 

 

Property operating expenses

 

 

(668)

 

 

(958)

 

 

(2,353)

 

 

(2,723)

 

Depreciation and amortization

 

 

 

 

 

 

 

 

(799)

 

Income from discontinued operations

 

$

(557)

 

$

1,231 

 

$

1,484 

 

$

3,762 

 

 

In January 2014, we sold a senior living community with 36 units that was previously classified as held for sale for $2,400 and recorded a gain on the sale of this property of approximately $156.

 

In April 2014, we sold one MOB (one building) with 210,879 square feet that was included in discontinued operations for $5,000 and recorded no gain or loss on the sale.

 

In June 2014, we sold two senior living communities with 156 units that were previously classified as held for sale for $4,500 and recorded a gain on the sale of these properties of approximately $2,396.

 

In June 2014, we sold one MOB (one building) with 235,079 square feet that was included in discontinued operations for $6,000 and recorded no gain or loss on the sale.

 

In September 2014, we sold one MOB ( one building) with 62,000 square feet that was included in discontinued operations for $675 and recorded no gain or loss on the sale.

 

In October 2014, we sold one senior living community with 70 units that was previously classified as held for sale for $2,850.  Also in October 2014, we sold two senior living communities with 177 units that were previously classified as held for sale for $5,900.  We will record the gain or loss on these sales during the period ending December 31, 2014 when all of the costs of the sales are known.

 

 

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 4.  Unrealized Gain / Loss on Investments

 

As of September 30, 2014, we owned 250,000 common shares of Equity Commonwealth (formerly known as CommonWealth REIT), or EQC, and 4,235,000 common shares of Five Star which are carried at fair market value in other assets on 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 EQC and Five Star shares as of September 30, 2014 ($25.71 and $3.77 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.  Indebtedness

 

Our principal debt obligations at September 30, 2014 were: (1) six public issuances of unsecured senior notes, including: (a) $250,000 principal amount at an annual interest rate of 4.30% due 2016, (b) $400,000 principal amount at an annual interest rate of 3.25% due 2019, (c) $200,000 principal amount at an annual interest rate of 6.75% due 2020, (d) $300,000 principal amount at an annual interest rate of 6.75% due 2021, (e) $250,000 principal amount at an annual interest rate of 4.75% due 2024 and (f) $350,000 principal amount at an annual interest rate of 5.625% due 2042; (2) our $350,000 principal amount term loan; and (3) $652,359 aggregate principal amount of mortgages secured by 47 of our properties (50 buildings) with maturity dates from 2015 to 2043.  The 47 mortgaged properties (50 buildings) had a carrying value of $881,216 at September 30, 2014.  We also had two properties subject to capital leases totaling $12,910 at September 30, 2014; these two properties had a carrying value of $18,375 at September 30, 2014.

 

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 January 15, 2018 and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to further extend the stated maturity date by an additional one year to January 15, 2019.  The revolving credit facility agreement provides that we can borrow, repay and reborrow funds available under the revolving credit facility agreement until maturity, and no principal repayment is due until maturity.  The revolving credit facility agreement includes a feature under which maximum borrowings under the facility may be increased to up to $1,500,000 in certain circumstances. The interest rate paid on borrowings under the revolving credit facility agreement is LIBOR plus a premium of 130 basis points, and the facility fee is 30 basis points per annum on the total amount of lending commitments.  Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings.  As of September 30, 2014, the interest rate payable on borrowings under our revolving credit facility was 1.45%, and the weighted average interest rate for borrowings under our revolving credit facility was 1.42% for both the three and nine months ended September 30, 2014. The weighted average interest rate for borrowings under our revolving credit facility was 1.64% and 1.68% for the three and nine months ended September 30, 2013, respectively. As of both September 30, 2014 and November 3, 2014, we had no amounts outstanding and $750,000 available for borrowing by us.

 

Our revolving credit facility agreement provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes Reit Management & Research LLC, or RMR, ceasing to act as our business manager and property manager.

 

In April 2014, we sold $400,000 of 3.25% senior unsecured notes due 2019 and $250,000 of 4.75% senior unsecured notes due 2024, raising net proceeds of approximately $644,889, after underwriting discounts but before expenses. Interest on the notes is payable semi-annually in arrears. We used the net proceeds of this offering for general business purposes, including funding the acquisitions described in Note 3.

 

On May 30, 2014, we entered into a term loan agreement with Wells Fargo Bank, National Association and a syndicate of other lenders, pursuant to which we obtained a $350,000 unsecured term loan. Our term loan matures on January 15, 2020, and is prepayable without penalty at any time.  In addition, our term loan includes a feature under which maximum

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

borrowings may be increased to up to $700,000 in certain circumstances. Our term loan bears interest at a rate of LIBOR plus a premium of 140 basis points that is subject to adjustment based upon changes to our credit ratings.  We used the net proceeds of our term loan to repay amounts outstanding under our revolving credit facility, to repay mortgage notes and for general business purposes. As of September 30, 2014, the interest rate payable for amounts outstanding under our term loan was 1.55%.  The weighted average annual interest rate for amounts outstanding on our term loan was 1.55% for the three and nine months ended September 30, 2014.

 

Our public debt indentures and related supplements and our credit facility agreement contain a number of financial and other covenants, including covenants that restrict our ability to incur indebtedness or to make distributions under certain circumstances and require us to maintain financial ratios and a minimum net worth.

 

In connection with the acquisitions discussed in Note 3 above, in April 2014, we assumed $15,630 of mortgage debt, which we recorded at its fair value of $16,643.  This mortgage has a contractual interest rate of 6.28% and matures in July 2022.  We recorded the assumed mortgage at its fair value.  We determined the fair value of the assumed mortgage using a market approach based upon Level 3 inputs (significant other unobservable inputs) in the fair value hierarchy.

 

In June 2014, we repaid mortgage notes that encumbered two of our properties that had an aggregate principal balance of $35,300 and a weighted average interest rate of 5.8%.

 

In October 2014, we prepaid at par our $14,700 loan incurred in connection with certain revenue bonds scheduled to mature on December 1, 2027. That loan had an interest rate of 5.875%

 

In October 2014, we repaid a mortgage note that encumbered one of our properties that had a principal balance of $11,900 and an interest rate of 6.25%.

 

Note 6.  Shareholders’ Equity

 

On February 21, 2014, we paid a distribution to common shareholders of $0.39 per share, or approximately $73,386, that was declared on January 3, 2014 and was payable to shareholders of record on January 13, 2014.

 

On May 21, 2014, we paid a distribution to common shareholders of $0.39 per share, or approximately $73,397, that was declared on April 2, 2014 and was payable to shareholders of record on April 14, 2014.

 

On August 21, 2014, we paid a distribution to common shareholders of $0.39 per share, or approximately $79,469, that was declared on July 7, 2014 and was payable to shareholders of record on July 18, 2014.

 

On October 2, 2014, we declared a distribution payable to common shareholders of record on October 17, 2014, of $0.39 per share, or approximately $79,515. We expect to pay this distribution on or about November 21, 2014 using cash on hand and borrowings under our revolving credit facility.

 

During the nine months ended September 30, 2014 and the period from October 1, 2014 to November 3, 2014, we issued 85,986 and 12,463, respectively, of our common shares to RMR as part of the business management fee payable by us under our business management agreement. See Note 10 for further information regarding this agreement.

 

In April 2014, we issued 15,525,000 common shares in a public offering, raising net proceeds of approximately $323,318, 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 purposes, including funding the acquisitions described in Note 3.

 

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

On June 5, 2014, we granted 2,500 common shares valued at $24.50 per share, the closing price of our common shares on the New York Stock Exchange, or NYSE, on that day, to each of our five Trustees.

 

On September 12, 2014, pursuant to our 2012 Equity Compensation Plan, we granted an aggregate of 81,700 of our common shares to our officers and certain employees of our manager, RMR, valued at $21.42 per share, the closing price of our common shares on the NYSE on that day.

 

Note 7.  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 September 30, 2014 categorized by the level of inputs used in the valuation of each asset or liability.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

Quoted Prices in

    

Significant

    

Significant

 

 

 

 

 

 

Active Markets for

 

Other

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

Observable Inputs

 

Inputs

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets held for sale(1)

 

$

12,924 

 

$

 

$

12,924 

 

$

 

Investments in available for sale securities(2)

 

$

22,393 

 

$

22,393 

 

$

 

$

 

Unsecured senior notes(3)

 

$

1,816,660 

 

$

1,816,660 

 

$

 

$

 

Secured debt(4)

 

$

726,242 

 

$

 

$

 

$

726,242 

 

 


(1)

Assets held for sale consist of eight properties (11 buildings) 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 $13,500 to these properties in order to reduce their book value to fair value.

(2)

Our investments in available for sale securities include our 250,000 common shares of EQC and 4,235,000 common shares of Five Star. The fair values of these shares are based on quoted prices at September 30, 2014 in active markets (Level 1 inputs).

(3)

We estimate the fair values of our unsecured senior notes using an average of the bid and ask price of our outstanding six issuances of senior notes (Level 1 inputs) on or about September 30, 2014.  The fair values of these senior note obligations exceed their aggregate book values of $1,743,272 by $73,387 because these notes were trading at premiums to their face amounts.

(4)

We estimate the fair values of our secured debt by using discounted cash flow analyses and currently prevailing market terms at September 30, 2014 (Level 3 inputs).  Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

 

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 and other unsecured debt. The fair values of these additional financial instruments approximate their carrying values at September 30, 2014 based upon their liquidity, short term maturity, variable rate pricing or our estimate of fair value using discounted cash flow analyses and prevailing interest rates.

 

Note 8.  Segment Reporting

 

We have four operating segments, of which three are separately reportable operating segments:  (1) triple net leased senior living communities that provide short term and long term residential care and dining services for residents that are leased to third parties, (2) managed senior living communities that provide short term and long term residential care and dining services for residents that are managed for our account and (3) MOBs.  Our triple net leased and managed senior living communities both include independent living communities, assisted living communities, skilled nursing facilities,

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

or SNFs, and some communities that offer a combination of the independent and assisted living and skilled nursing services.  Properties in the MOB segment include buildings leased to medical providers, medical related businesses, clinics and biotech laboratory tenants.  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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2014

 

 

    

Triple Net

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Leased

 

Managed

 

 

 

 

 

 

 

 

 

 

 

 

Senior Living

 

Senior Living

 

 

 

 

All Other

 

 

 

 

 

 

Communities

 

Communities

 

MOBs

 

Operations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

55,266 

 

$

 —

 

$

77,798 

 

$

4,550 

 

$

137,614 

 

Residents fees and services

 

 

 —

 

 

79,259 

 

 

 —

 

 

 —

 

 

79,259 

 

Total revenues

 

 

55,266 

 

 

79,259 

 

 

77,798 

 

 

4,550 

 

 

216,873 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

 

 

61,330 

 

 

21,376 

 

 

 

 

82,706 

 

Depreciation

 

 

15,372 

 

 

8,006 

 

 

25,748 

 

 

948 

 

 

50,074 

 

General and administrative

 

 

 —

 

 

 —

 

 

 —

 

 

10,384 

 

 

10,384 

 

Acquisition related costs

 

 

 

 

 

 

 —

 

 

15 

 

 

15 

 

Total expenses

 

 

15,372 

 

 

69,336 

 

 

47,124 

 

 

11,347 

 

 

143,179 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

39,894 

 

 

9,923 

 

 

30,674 

 

 

(6,797)

 

 

73,694 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 —

 

 

 —

 

 

 —

 

 

78 

 

 

78 

 

Interest expense

 

 

(6,446)

 

 

(2,416)

 

 

(1,484)

 

 

(25,855)

 

 

(36,201)

 

Income (loss) before income tax expense and equity in earnings of an investee

 

 

33,448 

 

 

7,507 

 

 

29,190 

 

 

(32,574)

 

 

37,571 

 

Income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

(156)

 

 

(156)

 

Equity in earnings of an investee

 

 

 —

 

 

 —

 

 

 —

 

 

38 

 

 

38 

 

Income (loss) from continuing operations

 

 

33,448 

 

 

7,507 

 

 

29,190 

 

 

(32,692)

 

 

37,453 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

 —

 

 

 —

 

 

(557)

 

 

 —

 

 

(557)

 

Impairment of assets from discontinued operations

 

 

 —

 

 

 —

 

 

216 

 

 

 —

 

 

216 

 

Net income (loss)

 

$

33,448 

 

$

7,507 

 

$

28,849 

 

$

(32,692)

 

$

37,112 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,823,234 

 

$

899,545 

 

$

2,953,668 

 

$

312,675 

 

$

5,989,122 

 

 

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2013

 

 

    

Triple Net

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Leased

 

Managed

 

 

 

 

 

 

 

 

 

 

 

 

Senior Living

 

Senior Living

 

 

 

 

All Other

 

 

 

 

 

 

Communities

 

Communities

 

MOBs

 

Operations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

57,073 

 

$

 

$

50,910 

 

$

4,336 

 

$

112,319 

 

Residents fees and services

 

 

 

 

74,946 

 

 

 

 

 

 

74,946 

 

Total revenues

 

 

57,073 

 

 

74,946 

 

 

50,910 

 

 

4,336 

 

 

187,265 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

 

 

57,708 

 

 

17,021 

 

 

 

 

74,729 

 

Depreciation

 

 

16,760 

 

 

7,251 

 

 

13,514 

 

 

948 

 

 

38,473 

 

General and administrative

 

 

 

 

 

 

 

 

7,798 

 

 

7,798 

 

Acquisition related costs

 

 

 

 

 

 

 

 

396 

 

 

396 

 

Total expenses

 

 

16,760 

 

 

64,959 

 

 

30,535 

 

 

9,142 

 

 

121,396 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

40,313 

 

 

9,987 

 

 

20,375 

 

 

(4,806)

 

 

65,869 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

 

 

 

 

 

 

42 

 

 

42 

 

Interest expense

 

 

(6,546)

 

 

(3,054)

 

 

(1,369)

 

 

(18,436)

 

 

(29,405)

 

Loss on early extinguishment of debt

 

 

 

 

 

 

 

 

(692)

 

 

(692)

 

Income (loss) before income tax expense and equity in earnings of an investee

 

 

33,767 

 

 

6,933 

 

 

19,006 

 

 

(23,892)

 

 

35,814 

 

Income tax expense

 

 

 

 

 

 

 

 

(125)

 

 

(125)

 

Equity in earnings of an investee

 

 

 

 

 

 

 

 

64 

 

 

64 

 

Income (loss) from continuing operations

 

 

33,767 

 

 

6,933 

 

 

19,006 

 

 

(23,953)

 

 

35,753 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

 

 

 

1,231 

 

 

 

 

1,231 

 

Income (loss) before gain on sale of properties

 

 

33,767 

 

 

6,933 

 

 

20,237 

 

 

(23,953)