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 June 30, 2016

 

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 August 4, 2016: 237,484,059 

 

 

 


 

Table of Contents

 

SENIOR HOUSING PROPERTIES TRUST

FORM 10-Q

 

June 30, 2016

 

INDEX

 

 

 

 

 

 

 

 

Page

PART I 

Financial Information

 

 

 

 

Item 1. 

Financial Statements (unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets — June 30, 2016 and December 31, 2015

1

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three and Six Months Ended June 30, 2016 and 2015

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2016 and 2015

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements

4

 

 

 

Item 2. 

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

21

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

Item 4. 

Controls and Procedures

49

 

 

 

 

Warning Concerning Forward Looking Statements

50

 

 

 

 

Statement Concerning Limited Liability

54

 

 

 

PART II 

Other Information

55

 

 

 

Item 1A. 

Risk Factors

55

 

 

 

Item 6. 

Exhibits

55

 

 

 

 

Signatures

58

 

References in this Quarterly Report on Form 10-Q to the Company, we, us or our include Senior Housing Properties Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

 

 

 

 


 

Table of Contents

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

 

 

Real estate properties:

 

 

 

 

 

 

 

Land

 

$

798,603

 

$

781,426

 

Buildings and improvements

 

 

6,856,429

 

 

6,675,514

 

 

 

 

7,655,032

 

 

7,456,940

 

Accumulated depreciation

 

 

(1,236,109)

 

 

(1,147,540)

 

 

 

 

6,418,923

 

 

6,309,400

 

Cash and cash equivalents

 

 

25,633

 

 

37,656

 

Restricted cash

 

 

7,026

 

 

6,155

 

Acquired real estate leases and other intangible assets, net

 

 

556,845

 

 

604,286

 

Other assets, net

 

 

257,340

 

 

202,593

 

Total assets

 

$

7,265,767

 

$

7,160,090

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Unsecured revolving credit facility

 

$

749,000

 

$

775,000

 

Unsecured term loans, net

 

 

546,681

 

 

546,305

 

Senior unsecured notes, net

 

 

1,721,306

 

 

1,478,536

 

Secured debt and capital leases, net

 

 

647,176

 

 

679,295

 

Accrued interest

 

 

18,433

 

 

16,974

 

Assumed real estate lease obligations, net

 

 

111,712

 

 

115,363

 

Other liabilities

 

 

185,891

 

 

188,857

 

Total liabilities

 

 

3,980,199

 

 

3,800,330

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common shares of beneficial interest, $.01 par value: 300,000,000 shares authorized, 237,484,059 and 237,471,559 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively

 

 

2,375

 

 

2,375

 

Additional paid in capital

 

 

4,532,019

 

 

4,531,703

 

Cumulative net income

 

 

1,548,097

 

 

1,477,590

 

Cumulative other comprehensive income (loss)

 

 

7,676

 

 

(32,537)

 

Cumulative distributions

 

 

(2,804,599)

 

 

(2,619,371)

 

Total shareholders’ equity

 

 

3,285,568

 

 

3,359,760

 

Total liabilities and shareholders’ equity

 

$

7,265,767

 

$

7,160,090

 

 

 

 

See accompanying notes.

1


 

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

163,997

 

$

155,546

 

$

325,419

 

$

301,329

 

Residents fees and services

 

 

97,370

 

 

91,856

 

 

194,323

 

 

174,649

 

Total revenues

 

 

261,367

 

 

247,402

 

 

519,742

 

 

475,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

97,474

 

 

93,592

 

 

195,422

 

 

179,386

 

Depreciation and amortization

 

 

71,372

 

 

62,511

 

 

142,594

 

 

116,218

 

General and administrative

 

 

11,965

 

 

11,674

 

 

22,828

 

 

22,248

 

Acquisition related costs

 

 

180

 

 

4,617

 

 

619

 

 

5,775

 

Impairment of assets

 

 

4,961

 

 

 —

 

 

12,351

 

 

 —

 

Total expenses

 

 

185,952

 

 

172,394

 

 

373,814

 

 

323,627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

75,415

 

 

75,008

 

 

145,928

 

 

152,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend income

 

 

789

 

 

 —

 

 

789

 

 

 —

 

Interest and other income

 

 

177

 

 

142

 

 

242

 

 

217

 

Interest expense

 

 

(41,118)

 

 

(37,907)

 

 

(80,399)

 

 

(73,848)

 

Loss on early extinguishment of debt

 

 

 —

 

 

(39)

 

 

(6)

 

 

(1,448)

 

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

 

 

35,263

 

 

37,204

 

 

66,554

 

 

77,272

 

Income tax expense

 

 

(108)

 

 

(129)

 

 

(202)

 

 

(239)

 

Equity in earnings of an investee

 

 

17

 

 

23

 

 

94

 

 

95

 

Income from continuing operations

 

 

35,172

 

 

37,098

 

 

66,446

 

 

77,128

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

 —

 

 

(109)

 

 

 —

 

 

(350)

 

Impairment of assets from discontinued operations

 

 

 —

 

 

(602)

 

 

 —

 

 

(602)

 

Income before gain on sale of properties

 

 

35,172

 

 

36,387

 

 

66,446

 

 

76,176

 

Gain on sale of properties

 

 

4,061

 

 

 —

 

 

4,061

 

 

 —

 

Net income

 

$

39,233

 

$

36,387

 

$

70,507

 

$

76,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments in available for sale securities

 

 

15,931

 

 

1,387

 

 

40,118

 

 

2,835

 

Equity in unrealized gain (loss) of an investee

 

 

43

 

 

(64)

 

 

95

 

 

(19)

 

   Other comprehensive income

 

 

15,974

 

 

1,323

 

 

40,213

 

 

2,816

 

Comprehensive income

 

$

55,207

 

$

37,710

 

$

110,720

 

$

78,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

 

237,325

 

 

235,549

 

 

237,320

 

 

228,501

 

Weighted average common shares outstanding (diluted)

 

 

237,363

 

 

235,592

 

 

237,349

 

 

228,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per common share amounts (basic and diluted):

 

 

 

 

 

 

 

 

 

 

 

 

 

       Income from continuing operations

 

$

0.17

 

$

0.16

 

 

0.30

 

 

0.34

 

       Loss from discontinued operations

 

 

 —

 

 

(0.01)

 

 

 —

 

 

(0.01)

 

       Net income

 

$

0.17

 

$

0.15

 

$

0.30

 

$

0.33

 

 

See accompanying notes.

 

2


 

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

    

2016

    

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

70,507

 

$

76,176

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

142,594

 

 

116,218

 

Amortization of deferred financing fees and debt discounts and premiums

 

 

2,783

 

 

3,096

 

Straight line rental income

 

 

(9,306)

 

 

(8,699)

 

Amortization of acquired real estate leases and other intangible assets

 

 

(2,558)

 

 

(2,376)

 

Loss on early extinguishment of debt

 

 

6

 

 

1,448

 

Impairment of assets

 

 

12,351

 

 

602

 

Gain on sale of properties

 

 

(4,061)

 

 

 —

 

Gain on sale of investments

 

 

 —

 

 

(71)

 

Other non-cash adjustments

 

 

(1,886)

 

 

(510)

 

Equity in earnings of an investee

 

 

(94)

 

 

(95)

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

 

(871)

 

 

1,423

 

Other assets

 

 

6,202

 

 

(2,803)

 

Accrued interest

 

 

1,459

 

 

1,212

 

Other liabilities

 

 

(955)

 

 

30,914

 

Cash provided by operating activities

 

 

216,171

 

 

216,535

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Real estate acquisitions and deposits

 

 

(187,150)

 

 

(1,103,732)

 

Real estate improvements

 

 

(48,657)

 

 

(35,322)

 

Investment in The RMR Group Inc.

 

 

 —

 

 

(16,528)

 

Proceeds from sale of properties

 

 

9,279

 

 

1,750

 

Proceeds from sale of investments

 

 

 —

 

 

6,571

 

Cash used for investing activities

 

 

(226,528)

 

 

(1,147,261)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common shares, net

 

 

 —

 

 

659,502

 

Proceeds from issuance of senior unsecured notes

 

 

250,000

 

 

 —

 

Proceeds from borrowings on revolving credit facility

 

 

340,000

 

 

1,210,000

 

Repayments of borrowings on revolving credit facility

 

 

(366,000)

 

 

(675,000)

 

Repayment of other debt

 

 

(31,788)

 

 

(66,431)

 

Loss on early extinguishment of debt settled in cash

 

 

 —

 

 

(1,523)

 

Payment of debt issuance costs

 

 

(8,650)

 

 

 —

 

Distributions to shareholders

 

 

(185,228)

 

 

(171,185)

 

Cash (used for) provided by financing activities

 

 

(1,666)

 

 

955,363

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

 

(12,023)

 

 

24,637

 

Cash and cash equivalents at beginning of period

 

 

37,656

 

 

27,594

 

Cash and cash equivalents at end of period

 

$

25,633

 

$

52,231

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

76,472

 

$

69,541

 

Income taxes paid

 

 

355

 

 

477

 

 

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

 

 

Investment funded by issuance of common shares

 

 

 —

 

 

(44,461)

 

Acquisitions funded by assumed debt

 

 

 —

 

 

(169,136)

 

 

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

 

 

Assumption of mortgage notes payable

 

 

 —

 

 

169,136

 

Issuance of common shares

 

 

 —

 

 

46,503

 

See accompanying notes.

 

 

3


 

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, 2015, or our Annual Report.  In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation have been included.  All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated.  Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates.  Significant estimates in our condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and impairment of real estate and intangible assets. We have made reclassifications to the prior years’ condensed consolidated financial statements to conform to the current year’s presentation. These reclassifications had no effect on net income or shareholders’ equity. 

 

Note 2.  Recent Accounting Pronouncements

 

On January 1, 2016, we adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, No. 2015-02, Consolidation. Among other things, this update changed how an entity determines the primary beneficiary of a variable interest entity. The implementation of this update did not have an impact on our condensed consolidated financial statements.

 

On January 1, 2016, we adopted FASB ASU, No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability, and ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which addresses the presentation of debt issuance costs related to line of credit arrangements. The implementation of these updates resulted in the reclassification of certain of our capitalized debt issuance costs as an offset to the associated debt liability in our condensed consolidated balance sheets. The classification of capitalized debt issuance costs related to our unsecured revolving credit facility remains unchanged in accordance with ASU No. 2015-15. As of December 31, 2015, debt issuance costs related to our unsecured term loans, senior unsecured notes and secured debt and capital leases of $3,695, $16,530 and $3,664, respectively, were reclassified from assets to an offset to the associated debt liability in our condensed consolidated balance sheets.

 

On January 1, 2016, we adopted FASB ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement for an acquirer in a business combination to account for measurement period adjustments retrospectively. Instead, acquirers must recognize measurement period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The implementation of this update did not have an impact on our condensed consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. This update is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted subject to

4


 

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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)

certain conditions. Currently, changes in fair value of these investments are recorded through other comprehensive income. Under this ASU, these changes will be recorded through earnings. We are continuing to evaluate this guidance, but we expect the implementation of this guidance will affect how changes in the fair value of available for sale equity investments we hold are presented in our condensed consolidated financial statements.

 

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

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, which identifies areas for simplification involving several aspects of accounting for share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU No. 2016-09 is effective for reporting periods beginning after December 15, 2016.  We are currently assessing the potential impact that the adoption of ASU No. 2016-09 will have on our condensed consolidated financial statements.

 

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

 

Note 3.  Real Estate Properties

 

At June 30, 2016, we owned 436 properties (462 buildings) located in 43 states and Washington, D.C. We have accounted for, or expect to account for, the following acquisitions as business combinations unless otherwise noted.

 

Acquisitions:

 

The allocation of the purchase prices of the acquisitions shown below are based upon preliminary estimates of the fair value of assets acquired and liabilities assumed.  The final amounts allocated to assets acquired and liabilities assumed may differ from the preliminary allocations presented in these condensed consolidated financial statements.

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Triple Net Leased Senior Living Communities:

 

In June 2016, we acquired seven senior living communities located in four states with 545 private pay units from Five Star Quality Care, Inc., or, together with its subsidiaries, Five Star, for approximately $112,350, excluding closing costs, and simultaneously entered into a new long term lease with Five Star for those communities. We funded this acquisition using cash on hand and borrowings under our revolving credit facility. See Note 10 for further information regarding this sale and leaseback transaction with Five Star.  We accounted for this acquisition as an asset acquisition, and the preliminary allocation of the purchase price was as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

    

    

Cash Paid

    

    

 

    

    

 

    

    

 

    

    

 

    

 

 

 

 

 

Number

 

 

 

plus

 

 

 

 

 

 

 

 

 

 

 

 

Premium

 

 

 

 

of

 

Units /

 

Assumed

 

 

 

 

Buildings and

 

 

 

Assumed

 

on Assumed

Date

 

Location

 

Properties

 

Beds

 

Debt (1)

 

Land

 

Improvements

 

FF&E

 

Debt

 

Debt

Jun-16

 

4 states

 

7

 

545

 

$

112,350

 

$

10,630

 

$

99,590

 

$

2,130

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

545

 

$

112,350

 

$

10,630

 

$

99,590

 

$

2,130

 

$

 —

 

$

 —


(1)

This amount includes the cash we paid as well as various closing settlement adjustments, but excludes closing costs. 

 

Managed Senior Living Communities:

 

In May 2016, we acquired one managed senior living community located in Georgia with 38 private pay units for a purchase price of approximately $8,400, excluding closing costs. We acquired this community using a taxable REIT subsidiary, or TRS, structure and we have entered a management agreement with Five Star to manage this community. We funded this acquisition using cash on hand and borrowings under our revolving credit facility. See Note 10 for further information regarding our management arrangements with Five Star. The preliminary allocation of the purchase price for this acquisition was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

    

    

    

Cash Paid

    

    

 

    

    

 

    

    

 

    

 

    

    

 

    

    

 

 

 

 

 

Number

 

 

 

plus

 

 

 

 

 

 

 

 

 

Acquired

 

 

 

 

Premium

 

 

 

 

of

 

Units /

 

Assumed

 

 

 

 

Buildings and

 

 

 

Real Estate

 

Assumed

 

on Assumed

Date

 

Location

 

Properties

 

Beds

 

Debt (1)

 

Land

 

Improvements

 

FF&E

 

Leases

 

Debt

 

Debt

May-16

 

Georgia

 

 1

 

38

 

$

8,400

 

$

327

 

$

6,195

 

$

478

 

$

1,400

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 1

 

38

 

$

8,400

 

$

327

 

$

6,195

 

$

478

 

$

1,400

 

$

 —

 

$

 —


(1)

This amount includes the cash we paid as well as various closing settlement adjustments, but excludes closing costs. 

 

MOBs:

 

In February 2016, we acquired one property (three buildings) leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or MOBs, located in Minnesota with approximately 128,000 square feet for a purchase price of approximately $22,700, excluding closing costs. In May 2016, we acquired one MOB (one building) located in Florida with approximately 166,000 square feet for a purchase price of approximately $45,000, excluding closing costs. We accounted for the acquisition of this MOB as an asset acquisition. We funded these acquisitions using cash on hand and borrowings under our revolving credit facility. The preliminary allocation of the purchase prices for these acquisitions was as follows:

6


 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

 

 

    

    

    

Cash Paid

    

    

 

    

    

 

    

    

 

    

Acquired

    

    

 

    

    

 

 

 

 

 

 

Number

 

Number

 

 

 

plus

 

 

 

 

 

 

 

Acquired

 

Real Estate

 

 

 

 

Premium

 

 

 

 

 

of

 

of

 

Square

 

Assumed

 

 

 

 

Buildings and

 

Real Estate

 

Lease

 

Assumed

 

on Assumed

 

Date

 

Location

 

Properties

 

Buildings

 

Feet (000’s)

 

Debt (1)

 

Land

 

Improvements

 

Leases (2)

 

Obligations (2)

 

Debt

 

Debt

 

Feb-16

 

Minnesota

 

 1

 

 3

 

128

 

$

22,700

 

$

4,074

 

$

15,223

 

$

5,163

 

$

(1,760)

 

$

 —

 

$

 —

 

May-16

 

Florida

 

 1

 

 1

 

166

 

 

45,000

 

 

3,047

 

 

41,953

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 2

 

 4

 

294

 

$

67,700

 

$

7,121

 

$

57,176

 

$

5,163

 

$

(1,760)

 

$

 —

 

$

 —

 


(1)

This amount includes the cash we paid as well as various closing settlement adjustments, but excludes closing costs. 

(2)

The weighted average amortization periods for acquired lease intangible assets and assumed real estate lease obligations at the time of these acquisitions was 6.4 years and 7.3 years, respectively.

 

Impairment:

 

We periodically evaluate our assets for impairments. Impairment indicators may include declining tenant or resident occupancy, weak or declining profitability of our properties, decreasing 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 an asset. If indicators of impairment are present, we evaluate the carrying value of the affected asset by comparing it to the expected future undiscounted net cash flows to be generated from that asset. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the asset to its estimated fair value. During the six months ended June 30, 2016, we recorded the following impairment charges:

 

·

$4,391 in the first quarter of 2016 to write off acquired lease intangible assets associated with lease defaults at two of our triple net leased senior living communities leased to two third party private operators.  In April 2016, we reached an agreement with one of these tenants and its guarantor to settle past due amounts, terminate the lease and transfer operations. As part of this agreement, we received an amount of $2,365, and entered into a management agreement with Five Star to operate this community on our behalf under a TRS structure. In July 2016, we reached an agreement with the other tenant to terminate the lease and transfer operations, and we entered into a management agreement with Five Star to operate this community on our behalf under a TRS structure. See Note 10 for further information regarding our management arrangements with Five Star.

 

·

$2,999 in the first quarter of 2016 to reduce the carrying values of one MOB (one building) and one land parcel to their estimated sales prices less costs to sell. In March 2016, we sold this land parcel as described further below under “Dispositions”.

 

·

$4,961 in the second quarter of 2016 to reduce the carrying values of five MOBs (five buildings) to their estimated sales price less costs to sell. These five MOBs are classified as held for sale as of June 30, 2016. In July 2016, we sold four of these MOBs as described further below under “Dispositions”.

 

Dispositions:

 

In March 2016, we sold a land parcel, which was previously classified as held for sale, for approximately $700, excluding closing costs.

 

In June 2016, we sold one skilled nursing facility, or SNF, that was previously included in our triple net leased senior living community segment and classified as held for sale for approximately $9,100, excluding closing costs. We recognized a gain on sale of approximately $4,061 related to this sale.

 

In July 2016, we sold four MOBs (four buildings), which were classified as held for sale at June 30, 2016 for approximately $20,150, excluding closing costs.

 

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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)

Results of operations for properties sold or held for sale are only included in discontinued operations in our condensed consolidated statements of comprehensive income when the criteria for discontinued operations in the Presentation of Financial Statements Topic of the FASB Accounting Standards Codification are met. The senior living communities and MOBs which we are or were offering for sale during the periods presented did not meet the criteria for discontinued operations and are included in continuing operations.

 

 

Note 4.  Investments in Available for Sale Securities

 

As of June 30, 2016, we owned 4,235,000 common shares of Five Star. We classify these shares as available for sale securities and carry them at fair market value in other assets in our condensed consolidated balance sheets, with unrealized gains and losses reported as a component of shareholders’ equity. Our historical cost basis for these shares is $14,230. At June 30, 2016, our investment in Five Star had a fair value of $9,910, resulting in a cumulative unrealized loss of $4,320 based on Five Star’s quoted share price at June 30, 2016 ($2.34 per share).

 

In addition, at June 30, 2016, we owned 2,637,408 shares of class A common stock of The RMR Group Inc., or RMR Inc. We also classify these shares of RMR Inc. as available for sale securities and carry them at fair value in other assets in our condensed consolidated balance sheets, with unrealized gains and losses reported as a component of shareholders’ equity. Our historical cost basis for these shares is $69,826. At June 30, 2016, our investment in RMR Inc. had a fair value of $81,681, resulting in a cumulative unrealized gain of $11,855 based on RMR Inc.’s quoted share price at June 30, 2016 ($30.97 per share).

 

See Notes 7 and 10 below for further information regarding our investments in available for sale securities.

 

Note 5.  Indebtedness

 

Our principal debt obligations at June 30, 2016 were: (1) outstanding borrowings under our $1,000,000 unsecured revolving credit facility; (2) six public issuances of senior unsecured notes, including: (a) $400,000 principal amount at an annual interest rate of 3.25% due 2019, (b) $200,000 principal amount at an annual interest rate of 6.75% due 2020, (c) $300,000 principal amount at an annual interest rate of 6.75% due 2021, (d) $250,000 principal amount at an annual interest rate of 4.75% due 2024, (e) $350,000 principal amount at an annual interest rate of 5.625% due 2042 and (f) $250,000 principal amount at an annual interest rate of 6.25% due 2046; (3) our $350,000 principal amount term loan due 2020; (4) our $200,000 principal amount term loan due 2022; and (5) $636,087 aggregate principal amount of mortgages (excluding premiums, discounts and net debt issuance costs) secured by 54 of our properties (55 buildings) with maturity dates between 2016 and 2043.  The 54 mortgaged properties (55 buildings) had a carrying value (before accumulated depreciation) of $1,040,792 at June 30, 2016.  We also had two properties subject to capital leases with lease obligations totaling $11,817 at June 30, 2016; these two properties had a carrying value (before accumulated depreciation) of $36,039 at June 30, 2016, and the capital leases expire in 2026.

 

In February 2016, we issued $250,000 of 6.25% senior unsecured notes due 2046, and raised net proceeds of approximately $241,350 after underwriting discounts and expenses. We used the net proceeds of this offering to repay in part the outstanding amount under our revolving credit facility and for general business purposes.

 

In July 2016, we entered into loan agreements and obtained an aggregate $620,000 secured debt financing that matures in August 2026. These loans are secured by one MOB (two buildings) located in Massachusetts and require interest at a weighted average fixed annual interest rate of 3.53%. We used the net proceeds from these loans to repay in part the outstanding amount under our revolving credit facility and for general business purposes. The loan agreements contain customary covenants and provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default.

 

8


 

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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)

We have a $1,000,000 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 our payment of an extension fee and meeting other conditions, we have an option to extend the stated maturity date by an additional year to January 15, 2019. Our revolving credit facility provides that we can borrow, repay and re-borrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity.  Our revolving credit facility requires annual interest to be paid on borrowings at LIBOR plus a premium, which was 130 basis points as of June 30, 2016, plus a facility fee of 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 June 30, 2016, the annual interest rate payable on borrowings under our revolving credit facility was 1.7%. The weighted average annual interest rates for borrowings under our revolving credit facility were 1.7% and 1.5% for the three months ended June 30, 2016 and 2015, respectively, and 1.7% and 1.5% for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, we had $749,000 outstanding and $251,000 available for borrowing, and as of August 4, 2016, we had $100,000 outstanding and $900,000 available for borrowing under our revolving credit facility. We incurred interest expense and other associated costs related to our revolving credit facility of $3,454 and $2,063 for the three months ended June 30, 2016 and 2015, respectively. We incurred interest expense and other associated costs related to our revolving credit facility of $7,136 and $3,003 for the six months ended June 30, 2016 and 2015, respectively. Our revolving credit facility includes an accordion feature pursuant to which maximum borrowings under the facility may be increased to up to $1,500,000 in certain circumstances.

 

We have a $200,000 term loan, which we borrowed in 2015. This term loan matures in September 2022 and is prepayable without penalty beginning September 29, 2017. This term loan requires annual interest to be paid at LIBOR plus a premium of 180 basis points that is subject to adjustment based upon changes to our credit ratings. As of June 30, 2016, the annual interest rate payable for amounts outstanding under this term loan was 2.3%. The weighted average annual interest rate for amounts outstanding under this term loan was 2.3% for both the three and six months ended June 30, 2016. We incurred interest expense and other associated costs related to this term loan of $1,133 and $2,260 for the three and six months ended June 30, 2016, respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $400,000 in certain circumstances.

 

We also have a $350,000 term loan, which we borrowed in 2014. This term loan matures in January 2020 and is prepayable without penalty at any time.  This term loan requires annual interest to be paid at LIBOR plus a premium of 140 basis points that is subject to adjustment based upon changes to our credit ratings. As of June 30, 2016, the annual interest rate payable on amounts outstanding under this term loan was 1.9%.  The weighted average annual interest rate for amounts outstanding under this term loan was 1.9% and 1.6% for the three months ended June 30, 2016 and 2015, respectively, and 1.9% and 1.6% for the six months ended June 30, 2016 and 2015, respectively. We incurred interest expense and other associated costs related to this term loan of $1,635 and $1,449 for three months ended June 30, 2016 and 2015, respectively. We incurred interest expense and other associated costs related to this term loan of $3,249 and $2,823 for six months ended June 30, 2016 and 2015, respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances.

 

Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our revolving credit facility and term loan agreements, a change of control of us, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business manager and property manager. Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements also contain a number of covenants, including covenants that restrict our ability to incur debts, and generally require us to maintain certain financial ratios, and our revolving credit facility and term loan agreements restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements at June 30, 2016.

 

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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)

In January 2016, we prepaid, at par plus accrued interest, a $6,115 mortgage note secured by one of our properties with a maturity date in April 2016 and an annual interest rate of 5.97%. In April 2016, we prepaid, at par plus accrued interest, an $18,000 mortgage note secured by one of our properties with a maturity date in July 2016 and an annual interest rate of 4.65%. In July 2016, we prepaid, at par plus accrued interest, an $11,871 mortgage note secured by one of our properties with a maturity date in November 2016 and an annual interest rate of 6.25%. Also in July 2016, we gave notice of our intention to prepay, at par plus accrued interest, two mortgage notes secured by two of our properties with an aggregate principal balance of approximately $79,957, maturity dates in November 2016 and a weighted average annual interest rate of 5.92%; we expect to make these prepayments in September 2016.  

 

Note 6.  Shareholders’ Equity

 

On February 23, 2016, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,614, that was declared on January 11, 2016 and was payable to shareholders of record on January 22, 2016. On May 19, 2016, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,614, that was declared on April 13, 2016 and was payable to shareholders of record on April 25, 2016. On July 12, 2016, we declared a regular quarterly distribution payable to common shareholders of record on July 22, 2016 of $0.39 per share, or approximately $92,619. We expect to pay this distribution on or about August 18, 2016.

 

Note 7.  Fair Value of Assets and Liabilities

 

The table below presents certain of our assets measured at fair value at June 30, 2016, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Significant

 

 

 

Total as of

 

Quoted Prices in Active

 

Significant Other

 

Unobservable

 

 

 

June 30,

 

Markets for Identical

 

Observable Inputs

 

Inputs

 

Description

 

2016

 

Assets (Level 1)

 

(Level 2)

 

(Level 3)

 

Recurring Fair Value Measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

    Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

        Investments in available for sale securities(1)

 

$

91,591

 

$

91,591

 

$

 

$

 

Non-Recurring Fair Value Measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

    Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

        Assets held for sale(2)

 

$

21,307

 

$

 

$

 —

 

$

21,307

 


(1)

Our investments in available for sale securities include our 4,235,000 common shares of Five Star and our 2,637,408 shares of RMR Inc. class A common stock. The fair values of these shares are based upon quoted prices at June 30, 2016 in active markets (Level 1 inputs). Our historical cost basis for our Five Star and RMR Inc. shares is $14,230 and $69,826, respectively, as of June 30, 2016. The unrealized loss of $4,320 for our Five Star shares and the unrealized gain of $11,855 for our RMR Inc. shares as of June 30, 2016 are included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets. We evaluated the decline in the fair value of the Five Star shares and determined that based on the severity and duration of the decline, and our ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, we do not consider these investments to be other-than-temporarily impaired at June 30, 2016.

(2)

Assets held for sale consist of five MOBs held for sale as of June 30, 2016. These MOBs are recorded at their estimated fair values less costs to sell. We used offers from third parties to purchase these properties and knowledge of local real estate markets to determine their fair values as of June 30, 2016.

 

In addition to the assets described in the table above, our financial instruments at June 30, 2016 and December 31, 2015 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, term loans, senior unsecured notes, secured debt and capital leases and other unsecured obligations and liabilities. The fair values of these

10


 

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)

financial instruments approximated their carrying values in our condensed consolidated financial statements as of such dates, except as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2016

 

As of December 31, 2015

Description

 

Carrying Amount (1)

 

Estimated Fair Value

 

Carrying Amount (1)

 

Estimated Fair Value

Senior unsecured notes

 

$

1,721,306

 

$

1,827,523

 

$

1,478,536

 

$

1,548,613

Secured debt and capital leases (2)

 

 

647,176

 

 

694,701

 

 

679,295

 

 

724,615

 

 

$

2,368,482

 

$

2,522,224

 

$

2,157,831

 

$

2,273,228

(1)

Includes unamortized debt issuance costs, premiums and discounts.

(2)

We assumed certain of these secured debts in connection with our acquisitions of certain properties. We recorded the assumed mortgage debts at estimated fair value on the date of acquisition and we are amortizing the fair value adjustments, if any, to interest expense over the respective terms of the mortgage debts to reduce interest expense to the estimated market interest rates as of the date of acquisition.

 

We estimate the fair values of our senior unsecured notes using an average of the bid and ask price of our outstanding six issuances of senior unsecured notes (Level 2 inputs as defined in the fair value hierarchy under GAAP) on or about June 30, 2016.  We estimate the fair values of our secured debts by using discounted cash flow analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined as defined in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

 

Note 8.  Segment Reporting

 

As of June 30, 2016, we have four operating segments, of which three are separate reporting segments. The first reporting segment includes triple net senior living communities that provide short term and long term residential care and other services for residents. The second reporting segment includes managed senior living communities that provide short term and long term residential care and other services for residents. The third reporting segment includes MOBs. Our fourth segment includes the remainder of our operations, including certain properties that offer wellness, fitness and

11


 

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)

spa services to members, which we do not consider to be sufficiently material to constitute a separate reporting segment, and all of our other operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 2016

 

    

Triple Net

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Leased

 

Managed

 

 

 

 

 

 

 

 

 

 

 

Senior Living

 

Senior Living

 

 

 

 

All Other

 

 

 

 

 

Communities

 

Communities

 

MOBs

 

Operations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

66,441

 

$

 —

 

$

92,978

 

$

4,578

 

$

163,997

Residents fees and services

 

 

 —

 

 

97,370

 

 

 —

 

 

 —

 

 

97,370

Total revenues

 

 

66,441

 

 

97,370

 

 

92,978

 

 

4,578

 

 

261,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

423

 

 

71,642

 

 

25,409

 

 

 —

 

 

97,474

Depreciation and amortization

 

 

19,273

 

 

20,140

 

 

31,011

 

 

948

 

 

71,372

General and administrative

 

 

 —

 

 

 —

 

 

 —

 

 

11,965

 

 

11,965

Acquisition related costs

 

 

 —

 

 

 —

 

 

 —

 

 

180

 

 

180

  Impairment of assets

 

 

 —

 

 

 —

 

 

4,961

 

 

 —

 

 

4,961

Total expenses

 

 

19,696

 

 

91,782

 

 

61,381

 

 

13,093

 

 

185,952

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

46,745

 

 

5,588

 

 

31,597

 

 

(8,515)

 

 

75,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend income

 

 

 —

 

 

 —

 

 

 —

 

 

789

 

 

789

Interest and other income

 

 

 —

 

 

 —

 

 

 —

 

 

177

 

 

177

Interest expense

 

 

(6,282)

 

 

(2,663)

 

 

(844)

 

 

(31,329)

 

 

(41,118)

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

 

 

40,463

 

 

2,925

 

 

30,753

 

 

(38,878)

 

 

35,263

Income tax expense

 

 

 —

 

 

 —

 

 

 —

 

 

(108)

 

 

(108)

Equity in earnings of an investee

 

 

 —

 

 

 —

 

 

 —

 

 

17

 

 

17

Income (loss) before gain on sale of properties

 

$

40,463

 

$

2,925

 

$

30,753

 

$

(38,969)

 

$

35,172

Gain on sale of properties