Table
of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 2008
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission
File Number 1-15319
SENIOR
HOUSING PROPERTIES TRUST
(Exact Name of
Registrant as Specified in Its Charter)
Maryland
|
|
04-3445278
|
(State or Other
Jurisdiction of Incorporation or
Organization)
|
|
(IRS Employer
Identification No.)
|
400
Centre Street, Newton, Massachusetts 02458
(Address of
Principal Executive Offices) (Zip Code)
617-796-8350
(Registrants
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the
definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated Filer
x
|
|
Accelerated Filer
o
|
|
|
|
Non Accelerated Filer
o
|
|
Smaller reporting company
o
|
(Do not check if a smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
Number of registrants
common shares outstanding as of November 7, 2008: 114,530,684.
Table of Contents
SENIOR HOUSING PROPERTIES TRUST
FORM 10-Q
September 30,
2008
INDEX
In this Quarterly Report on Form 10-Q,
the terms SNH, Senior Housing, 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 data)
(unaudited)
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
Real estate
properties, at cost:
|
|
|
|
|
|
Land
|
|
$
|
286,521
|
|
$
|
217,236
|
|
Buildings and
improvements
|
|
2,358,747
|
|
1,723,111
|
|
|
|
2,645,268
|
|
1,940,347
|
|
Less accumulated
depreciation
|
|
364,366
|
|
323,891
|
|
|
|
2,280,902
|
|
1,616,456
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
7,191
|
|
43,521
|
|
Restricted cash
|
|
4,443
|
|
3,642
|
|
Deferred
financing fees, net
|
|
5,098
|
|
5,974
|
|
Acquired real
estate leases, net
|
|
23,691
|
|
2,387
|
|
Other assets
|
|
27,717
|
|
29,914
|
|
Total assets
|
|
$
|
2,349,042
|
|
$
|
1,701,894
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
Unsecured
revolving credit facility
|
|
$
|
93,000
|
|
$
|
|
|
Senior unsecured
notes due 2012 and 2015, net of discount
|
|
321,981
|
|
321,873
|
|
Secured debt and
capital leases
|
|
152,112
|
|
104,979
|
|
Accrued interest
|
|
8,098
|
|
10,849
|
|
Acquired real
estate lease obligations, net
|
|
7,075
|
|
4,216
|
|
Other
liabilities
|
|
24,156
|
|
10,567
|
|
Total
liabilities
|
|
606,422
|
|
452,484
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity:
|
|
|
|
|
|
Common shares of
beneficial interest, $0.01 par value: 149,700,000 shares authorized, 114,530,684
and 88,691,892 shares issued and outstanding at September 30, 2008 and
December 31, 2007, respectively
|
|
1,145
|
|
887
|
|
Additional
paid-in capital
|
|
2,000,811
|
|
1,476,675
|
|
Cumulative net
income
|
|
497,950
|
|
423,807
|
|
Cumulative
distributions
|
|
(757,553
|
)
|
(653,225
|
)
|
Unrealized gain
on investments
|
|
267
|
|
1,266
|
|
Total
shareholders equity
|
|
1,742,620
|
|
1,249,410
|
|
Total
liabilities and shareholders equity
|
|
$
|
2,349,042
|
|
$
|
1,701,894
|
|
See
accompanying notes.
1
Table of Contents
SENIOR HOUSING PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in
thousands, except per share data)
(unaudited)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
58,897
|
|
$
|
44,653
|
|
$
|
160,560
|
|
$
|
133,361
|
|
Interest and
other income
|
|
776
|
|
571
|
|
2,056
|
|
1,577
|
|
Total revenues
|
|
59,673
|
|
45,224
|
|
162,616
|
|
134,938
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Property
operating expenses
|
|
1,024
|
|
|
|
1,124
|
|
|
|
Interest
|
|
9,606
|
|
9,223
|
|
28,934
|
|
28,276
|
|
Depreciation
|
|
15,859
|
|
11,821
|
|
43,235
|
|
35,120
|
|
General and
administrative
|
|
4,303
|
|
3,567
|
|
12,506
|
|
10,732
|
|
Impairment of
assets
|
|
|
|
|
|
2,940
|
|
|
|
Loss on early
extinguishment of debt
|
|
|
|
|
|
|
|
2,026
|
|
Total expenses
|
|
30,792
|
|
24,611
|
|
88,739
|
|
76,154
|
|
|
|
|
|
|
|
|
|
|
|
Income before
gain on sale of properties
|
|
28,881
|
|
20,613
|
|
73,877
|
|
58,784
|
|
Gain on sale of
properties
|
|
266
|
|
|
|
266
|
|
|
|
Net income
|
|
$
|
29,147
|
|
$
|
20,613
|
|
$
|
74,143
|
|
$
|
58,784
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding
|
|
114,493
|
|
83,659
|
|
102,004
|
|
82,718
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Income before
gain on sale of properties
|
|
$
|
0.25
|
|
$
|
0.25
|
|
$
|
0.72
|
|
$
|
0.71
|
|
Net income
|
|
$
|
0.25
|
|
$
|
0.25
|
|
$
|
0.73
|
|
$
|
0.71
|
|
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,
|
|
|
|
2008
|
|
2007
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
74,143
|
|
$
|
58,784
|
|
Adjustments to
reconcile net income to cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
|
43,235
|
|
35,120
|
|
Amortization of
deferred financing fees and debt discounts
|
|
984
|
|
1,601
|
|
Amortization of
acquired real estate leases
|
|
(31
|
)
|
|
|
Impairment of
assets
|
|
2,940
|
|
|
|
Loss on early
extinguishment of debt
|
|
|
|
2,026
|
|
Gain on sale of
properties
|
|
(266
|
)
|
|
|
Change in assets
and liabilities:
|
|
|
|
|
|
Restricted cash
|
|
(801
|
)
|
(575
|
)
|
Purchase of trading
securities
|
|
|
|
10,153
|
|
Sales of trading
securities
|
|
|
|
(10,153
|
)
|
Other assets
|
|
1,181
|
|
31
|
|
Accrued interest
|
|
(2,751
|
)
|
(3,538
|
)
|
Other
liabilities
|
|
15,091
|
|
4,185
|
|
Cash provided by
operating activities
|
|
133,725
|
|
97,634
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
Acquisitions
|
|
(688,821
|
)
|
(32,834
|
)
|
Net proceeds
from sale of properties
|
|
21,336
|
|
|
|
Cash used for
investing activities
|
|
(667,485
|
)
|
(32,834
|
)
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
Proceeds from
issuance of common shares, net
|
|
522,907
|
|
151,670
|
|
Proceeds from
borrowings on revolving credit facility
|
|
314,000
|
|
22,000
|
|
Repayments of
borrowings on revolving credit facility
|
|
(221,000
|
)
|
(134,000
|
)
|
Redemption of
senior notes
|
|
|
|
(21,750
|
)
|
Repayment of
other debt
|
|
(14,149
|
)
|
(1,269
|
)
|
Distributions to
shareholders
|
|
(104,328
|
)
|
(83,270
|
)
|
Cash provided by
(used for) financing activities
|
|
497,430
|
|
(66,619
|
)
|
|
|
|
|
|
|
Decrease in cash
and cash equivalents
|
|
(36,330
|
)
|
(1,819
|
)
|
Cash and cash
equivalents at beginning of period
|
|
43,521
|
|
5,464
|
|
Cash and cash
equivalents at end of period
|
|
$
|
7,191
|
|
$
|
3,645
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
Interest paid
|
|
$
|
30,737
|
|
$
|
30,213
|
|
|
|
|
|
|
|
Non-cash
investing activities:
|
|
|
|
|
|
Acquisitions funded
by assumed debt
|
|
(61,282
|
)
|
|
|
|
|
|
|
|
|
Non-cash
financing activities:
|
|
|
|
|
|
Assumption of
mortgage notes payable
|
|
61,282
|
|
|
|
Issuance of
common shares pursuant to our incentive share award plan
|
|
1,497
|
|
1,450
|
|
See
accompanying notes.
3
Table
of Contents
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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 the Company, have been prepared
without audit. Certain information and
disclosures required by accounting principles generally accepted in the United
States 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,
2007. In the opinion of our management,
all adjustments, which include only normal recurring adjustments, considered
necessary for a fair presentation have been included. All intercompany transactions and balances
between us and our consolidated subsidiaries have been eliminated. Operating results for interim periods are not
necessarily indicative of the results that may be expected for the full
year. Reclassifications have been made
to the prior years financial statements to conform to the current years
presentation. These reclassifications
had no effect on net income or shareholders equity.
In September 2006,
the Financial Accounting Standards Board, or FASB, issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurement, or SFAS No. 157,
which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurement. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years.
The adoption of this standard did not have a material impact on our
financial position, operations or cash flow.
In December 2007,
the FASB issued Statement of Financial Accounting Standards No. 141
(revised 2007), Business Combinations, or SFAS No. 141(R). SFAS No. 141(R) establishes
principles and requirements for how the acquirer shall recognize and measure in
its financial statements the identifiable assets acquired, liabilities assumed,
any noncontrolling interest in the acquiree and goodwill acquired in a business
combination. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008. We expect the adoption of SFAS 141(R) will
affect our consolidated financial statements if we engage in a transaction that
falls within the scope of this standard.
In May 2008,
the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, or SFAS 162.
SFAS 162 identifies sources of accounting principles and a framework for
selecting principles to be used in preparation of financial statements of
nongovernmental entities that are prepared in conformity with generally
accepted accounting principles in the United States (the GAAP Hierarchy). SFAS 162 is effective 60 days following the Securities
and Exchange Commission, or SECs, approval of the Public Company Accounting
Oversight Board amendments to auditing standard AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. We do not expect this
standard will result in any change to our current accounting practices.
Note 2. Real Estate Properties
At September 30,
2008, we owned 261 properties located in 34 states.
In May 2008, we entered
into a series of agreements to acquire 48 medical office, clinic and biotech
laboratory buildings, or MOBs, from HRPT Properties Trust, or HRPT, for an
aggregate purchase price of approximately $565.0 million. These buildings are approximately 98% leased
to 220 tenants for an average lease term of 6.7 years. As of September 30, 2008, we have
acquired 28 of these buildings and expect the closings of the remaining 20
acquisitions to occur during the next two quarters. In addition, because a third party consent
was not received, one of the agreements was amended so that one of the
remaining buildings with an allocated value of $3.0 million is no longer
subject to our purchase agreement; in the event HRPT obtains the third party
consent, we may nonetheless purchase that building. In June 2008, we acquired five medical
office, clinic and biotech laboratory buildings from HRPT pursuant to these
agreements for approximately $83.8 million, excluding closing costs. In July 2008, we acquired three
additional medical office and clinic properties from HRPT pursuant to these
agreements for approximately $39.1 million, excluding closing costs. In August 2008, we acquired 20
additional clinics from HRPT pursuant to these agreements for approximately
$109.9 million, excluding closing costs.
On October 31, 2008, we acquired one additional medical office
building from HRPT pursuant to these agreements for approximately $29.8
million, excluding closing costs. We
funded these acquisitions using cash on hand, borrowings under our revolving
credit facility and by assuming three mortgage loans on two properties totaling
4
Table
of Contents
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
(amounts in thousands, except per share data or as otherwise stated)
$10.8 million with a
weighted average interest rate of 7.1% per annum and weighted average maturity
in 2018. Intangible lease assets and
liabilities recorded by us for these acquisitions totaled $20.8 million and
$2.8 million, respectively.
Our obligations to complete the remaining purchases are subject to
various conditions typical of commercial real estate purchases including, with
respect to certain of these properties, third party consents. We also have financing contingencies relating
to certain properties. We can provide no
assurance that we will purchase all of these buildings or that the remaining
purchases will be completed in the next two quarters. In addition, with respect to 45 additional
buildings (containing approximately 4.6 million square feet of rental space)
that are leased to tenants in medical related business which HRPT will continue
to own after these transactions, we also acquired rights of first refusal to
purchase any such buildings in the event HRPT determines to sell such
properties or in the event of an indirect sale as a result of a change of
control of HRPT or a change of control of HRPTs subsidiary which owns such property. HRPT was formerly our parent company and both
we and HRPT are managed by Reit Management and Research LLC, or RMR. Because we and HRPT are both managed by RMR,
the terms of these transactions were negotiated by special committees of our
and HRPTs boards of trustees composed solely of Independent Trustees of each
company.
On June 30, 2008, we
realigned three of our leases with Five Star Quality Care, Inc., or Five
Star. Lease no. 1 now includes 100
properties, including nine properties acquired during the first quarter of
2008. This lease includes independent living communities, assisted living
communities and skilled nursing facilities, and expires in 2022. Lease no. 2
now includes 32 properties, including independent living communities, assisted
living communities, skilled nursing facilities and two rehabilitation
hospitals, and expires in 2026. Lease no. 3 now includes 44 properties,
including 10 properties acquired during the first quarter of 2008 and 10
properties acquired during the third quarter of 2008 and one property acquired
on November 1, 2008 described below.
This lease includes independent living communities, assisted living
communities and skilled nursing facilities and expires in 2024. The total rent
payable by Five Star to us for these properties was unchanged as a result of
this lease realignment. The increased rent payable for these three leases with
Five Star, if and as we purchase improvements to the leased properties, will be
the greater of 8.0% per annum or the 10 year Treasury rate plus 300 basis
points. Five Star was formerly our
subsidiary. In addition to being our
manager, RMR also provides management services to Five Star. Because of these and other relationships
between us and Five Star, all transactions between us and Five Star are
approved by our Independent Trustees and Five Stars Independent Directors.
On July 1, 2008, we
sold three assisted living properties with 259 living units that were formerly
operated by NewSeasons Assisted Living Communities, Inc., or NewSeasons,
to Five Star for $21.4 million and Five Star assumed the NewSeasons and
Independence Blue Cross, or IBC, lease obligations to us for the remaining
seven properties that NewSeasons formerly operated. The rent payable by Five Star for these seven
properties is approximately $7.6 million per annum under lease no. 4 between us
and Five Star.
On August 1, 2008,
we acquired, from an unaffiliated party, two senior living properties with a
total of 112 units for approximately $14.1 million, excluding closing
costs. We leased the properties to Five
Star until 2024 under our Five Star lease no. 3 described above and increased
rent under that lease by $1.1 million.
Percentage rent, based on increases in gross revenues at these
properties, will commence in 2010. We
funded this acquisition using cash on hand.
On August 21, 2008,
we acquired four wellness centers for approximately $100 million, excluding
closing costs, from Life Time Fitness, Inc., or Life Time Fitness. We leased these wellness centers to Life Time
Fitness for initial rent of $9.1 million, plus rent increases of 10% every five
years. This lease has a term expiring in
2028 with renewal options thereafter. We
funded this acquisition using cash on hand and borrowings under our revolving
credit facility.
On September 1,
2008, we acquired, from an unaffiliated party, eight senior living properties
with a total of 451 units for approximately $62.1 million, excluding closing
costs. We leased the properties to Five
Star until 2024 under our Five Star lease no. 3 described above and increased
rent under that lease by $5.0 million.
Percentage rent, based on increases in gross revenues at these
properties, will commence in 2010. We
funded this acquisition using cash on hand, borrowings under our revolving
credit facility and by assuming 15 mortgages on these eight properties totaling
$50.5 million with a weighted average interest rate of 6.54% per annum and
weighted average maturity in 2017.
5
Table
of Contents
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
(amounts in thousands, except per share data
or as otherwise stated)
On September 30,
2008, we acquired, from an unaffiliated party, one medical office building for
approximately $18.6 million, excluding closing costs. This building is currently 100% leased to 12
tenants for an average lease term of 6.5 years.
We funded this acquisition using cash on hand and borrowings under our
revolving credit facility. Intangible
lease assets and liabilities recorded by us for these acquisitions totaled $1.3
million and $401,000, respectively.
On November 1, 2008,
we acquired, from an unaffiliated party, a senior living property with a total
of 249 units for approximately $29.0 million.
We leased this property to Five Star and added it to our Five Star lease
no. 3, which has a term expiring in 2024, and increased the annual rent under this
lease by $2.3 million. Percentage rent,
based on increases in gross revenues at this property, will commence in
2010. We funded this acquisition using
cash on hand and borrowings under our revolving credit facility.
As of September 30,
2008, two of our properties are classified as held for sale. At December 31, 2007 and June 30,
2008, we recorded impairment charges on one of these properties of $1.4 million
and $2.9 million, respectively, to reduce the carrying value of the property to
its estimated fair value. These two
properties are included in real estate properties on our condensed consolidated
balance sheet and have a net carrying value of approximately $6.6 million at September 30,
2008. In September 2008, we entered
into a purchase and sale agreement to sell one of these properties to an
unaffiliated party for approximately $1.3 million. The sale of this property is subject to
various contingencies, and we can provide no assurance that we will sell this
property.
During the nine months ended
September 30, 2008 and 2007, pursuant to the terms of our existing leases
with Five Star, we purchased $42.1 million and $33.1 million, respectively, of
improvements made to our properties leased to Five Star, and, as a result, the
annual rent payable to us by Five Star was increased by approximately $3.6
million and $3.2 million, respectively.
Note 3. Net Unrealized Gain on Investments
On September 30,
2008, we owned 1,000,000 common shares of HRPT and 35,000 common shares of Five
Star, which are carried at fair market value in other assets on our condensed
consolidated balance sheets. The net unrealized gain on investments shown on
our condensed consolidated balance sheets represents the difference between the
quoted market prices (level 1 in the fair value hierarchy as defined in SFAS No. 157)
of such shares on September 30, 2008 ($6.89 and $3.75 per share,
respectively) and their cost on the dates they were acquired ($6.50 and $7.26
per share, respectively).
Note 4. Comprehensive Income
The following is a
reconciliation of net income to comprehensive income for the three and nine
months ended September 30, 2008 and 2007:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net income
|
|
$
|
29,147
|
|
$
|
20,613
|
|
$
|
74,143
|
|
$
|
58,784
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
Change in net
unrealized gain on investments
|
|
86
|
|
(501
|
)
|
(999
|
)
|
(2,562
|
)
|
Comprehensive
income
|
|
$
|
29,233
|
|
$
|
20,112
|
|
$
|
73,144
|
|
$
|
56,222
|
|
Note 5. Indebtedness
We have an unsecured revolving credit facility that
matures in December 2010, with our option to extend the maturity by one
additional year upon payment of a fee.
Our revolving credit facility permits borrowings up to $550.0
million. The annual interest payable for
amounts drawn under the facility is LIBOR plus a premium. The interest rate
payable on borrowings under this revolving credit facility was
4.5% and 5.9% at September 30, 2008 and 2007,
respectively. Our revolving credit
facility is available for acquisitions, working capital and general business
purposes. As of September 30, 2008 and 2007, we had $93.0 million and zero
amounts outstanding under this credit facility, respectively.
As discussed above in Note 2, during the quarter we assumed $61.3
million of mortgage debt with a weighted average interest rate of 6.6% and a
weighted average maturity in 2017 relating to our senior living and MOB
acquisitions. We recorded the assumed
mortgages at their fair value which approximated their outstanding principle
balances. Fair value of the assumed
mortgages was determined using a market approach based upon level 2 inputs
(inputs other than quoted market prices that are observable) in the fair value
hierarchy as defined in SFAS No. 157.
6
Table
of Contents
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
(amounts in thousands, except per share data or as
otherwise stated)
Note 6. Shareholders Equity
On August 14, 2008, we paid a $0.35 per share, or
$40.1 million, distribution to our common shareholders for the quarter ended June 30,
2008. On October 1, 2008, we
declared a distribution of $0.35 per share, or $40.1 million, to be paid to
common shareholders of record on October 17, 2008, with respect to our
results for the quarter ended September 30, 2008. We expect to pay this
distribution on or about November 14, 2008.
On September 22, 2008, pursuant to our incentive
share award plan, we granted 42,125 common
shares of
beneficial interest, par value $0.01 per share, valued at $22.09
per share, the closing price of our common shares on the
New York Stock Exchange, or NYSE, on that day, to our officers and certain
employees of our manager, RMR. We made
these grants pursuant to an exemption from registration contained in Section 4(2) of
the Securities Act of 1933, as amended.
Note
7. Segment Reporting
We have two
reportable operating segments: (i) short term and long term residential
care facilities that offer dining for residents and (ii) properties where
medical related services are offered but where residential overnight stays or
dining services are not provided, or MOBs.
Properties in the short term and long term residential care facilities
segment include independent living facilities, assisted living facilities,
skilled nursing facilities and rehabilitation hospitals. Properties in the MOB segment include medical
office, clinic and biotech laboratory buildings. The All Other category in the following
table includes amounts related to corporate business activities and the
operating results of certain properties that offer fitness, wellness and spa
service to members. Prior to October 2007,
our only operating segment was short term and long term residential care
facilities that offer dining for residents; and prior to June 2008, our
only operating segments were short term and long term residential care
facilities that offer dining for residents and the wellness centers included in
the All Other category.
|
|
For the Three Months Ended September 30, 2008
|
|
|
|
Short and Long
Term
Residential
Care Facilities
|
|
MOB
|
|
All Other
|
|
Consolidated
|
|
Rental income
|
|
$
|
51,380
|
|
$
|
4,874
|
|
$
|
2,643
|
|
$
|
58,897
|
|
Interest and
other income
|
|
|
|
(107
|
)
|
883
|
|
776
|
|
Total revenues
|
|
51,380
|
|
4,767
|
|
3,526
|
|
59,673
|
|
|
|
|
|
|
|
|
|
|
|
Property
operating expenses
|
|
|
|
1,024
|
|
|
|
1,024
|
|
Interest expense
|
|
1,243
|
|
173
|
|
8,190
|
|
9,606
|
|
Depreciation
expense
|
|
14,025
|
|
1,181
|
|
653
|
|
15,859
|
|
General and
administrative expense
|
|
|
|
310
|
|
3,993
|
|
4,303
|
|
Total expenses
|
|
15,268
|
|
2,688
|
|
12,836
|
|
30,792
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before gain on sale of properties
|
|
36,112
|
|
2,079
|
|
(9,310
|
)
|
28,881
|
|
Gain on sale of
properties
|
|
266
|
|
|
|
|
|
266
|
|
Net income
(loss)
|
|
$
|
36,378
|
|
$
|
2,079
|
|
$
|
(9,310
|
)
|
$
|
29,147
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,856,097
|
|
$
|
262,525
|
|
$
|
230,420
|
|
$
|
2,349,042
|
|
7
Table
of Contents
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
(amounts in thousands, except per share data or as
otherwise stated)
|
|
For the Nine Months Ended September 30, 2008
|
|
|
|
Short and Long
Term
Residential
Care Facilities
|
|
MOB
|
|
All Other
|
|
Consolidated
|
|
Rental income
|
|
$
|
149,523
|
|
$
|
5,133
|
|
$
|
5,904
|
|
$
|
160,560
|
|
Interest and
other income
|
|
|
|
(133
|
)
|
2,189
|
|
2,056
|
|
Total revenues
|
|
149,523
|
|
5,000
|
|
8,093
|
|
162,616
|
|
|
|
|
|
|
|
|
|
|
|
Property
operating expenses
|
|
|
|
1,124
|
|
|
|
1,124
|
|
Interest expense
|
|
3,909
|
|
173
|
|
24,852
|
|
28,934
|
|
Depreciation
expense
|
|
40,541
|
|
1,275
|
|
1,419
|
|
43,235
|
|
General and
administrative expense
|
|
|
|
336
|
|
12,170
|
|
12,506
|
|
Impairment of
assets
|
|
2,940
|
|
|
|
|
|
2,940
|
|
Total expenses
|
|
47,390
|
|
2,908
|
|
38,441
|
|
88,739
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before gain on sale of properties
|
|
102,133
|
|
2,092
|
|
(30,348
|
)
|
73,877
|
|
Gain on sale of
properties
|
|
266
|
|
|
|
|
|
266
|
|
Net income
(loss)
|
|
$
|
102,399
|
|
$
|
2,092
|
|
$
|
(30,348
|
)
|
$
|
74,143
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,856,097
|
|
$
|
262,525
|
|
$
|
230,420
|
|
$
|
2,349,042
|
|
Note
8. Significant Tenant
As discussed above, Five
Star is our former subsidiary and both we and Five Star have management
contracts with RMR. Five Star is the
lessee of 68% of our investments, at cost, as of September 30, 2008. The following tables present summary
financial information for Five Star for the three and nine months ended September 30,
2008 and 2007, as reported in its Quarterly Report on Form 10-Q.
Summary
Financial Information of Five Star Quality Care, Inc.
(in
thousands)
|
|
For the Three Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Total revenues
|
|
$
|
281,942
|
|
$
|
244,598
|
|
Operating income
|
|
2,926
|
|
8,826
|
|
Income (loss)
from continuing operations
|
|
(1,618
|
)
|
8,596
|
|
Net income
(loss)
|
|
(2,250
|
)
|
7,761
|
|
|
|
|
|
|
|
|
|
8
Table
of Contents
SENIOR HOUSING PROPERTIES
TRUST
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands,
except per share data or as otherwise stated)
|
|
As of and for the Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Total revenues
|
|
$
|
811,963
|
|
$
|
721,764
|
|
Operating income
|
|
16,356
|
|
16,068
|
|
Income from
continuing operations
|
|
7,038
|
|
19,223
|
|
Net income
|
|
2,856
|
|
16,604
|
|
|
|
|
|
|
|
Current assets
|
|
131,424
|
|
185,670
|
|
Non-current
assets
|
|
258,096
|
|
176,425
|
|
Total
indebtedness
|
|
139,125
|
|
142,567
|
|
Current
liabilities
|
|
127,492
|
|
109,323
|
|
Non-current
liabilities
|
|
175,824
|
|
170,454
|
|
Total
shareholders equity
|
|
86,204
|
|
82,318
|
|
|
|
|
|
|
|
Net cash
provided by operating activities
|
|
44,787
|
|
26,235
|
|
Net cash used in
discontinued operations
|
|
(1,016
|
)
|
(2,535
|
)
|
Net cash used in
investing activities
|
|
(32,156
|
)
|
(21,294
|
)
|
Net cash used in
financing activities
|
|
(2,642
|
)
|
(28,772
|
)
|
Net increase
(decrease) in cash
|
|
8,973
|
|
(26,366
|
)
|
Cash and cash
equivalents at the beginning of the period
|
|
30,999
|
|
46,241
|
|
Cash and cash
equivalents at the end of the period
|
|
39,972
|
|
19,875
|
|
|
|
|
|
|
|
|
|
The summary financial information of Five Star is presented to comply
with applicable accounting regulations of the SEC.
References in these financial statements to the Quarterly Report on Form 10-Q
for Five Star are included as textual references only, and the information in
such Quarterly Report is not incorporated by reference into these financial
statements.
Note 9. Pro
Forma Information
During the three months ended September 30, 2008, we purchased 10
senior living properties, four wellness centers and 24 MOBs for $343.7 million
and, pursuant to the terms of our existing leases with Five Star, we purchased
$14.8 million of improvements made to our properties leased to Five Star. During the nine months ended September 30,
2008, we purchased 29 senior living properties, four wellness centers and 29
MOBs for $697.1 million and $42.1 million of improvements made to our
properties leased to Five Star. On April 1,
2008, we repaid in full a mortgage loan on one of our properties for $12.6
million. During the nine months ended September 30,
2008, we recorded an impairment charge on one of our properties for $2.9
million. During the three and nine
months ended September 30, 2008, we sold three assisted living facilities
to Five Star for $21.4 million and recorded a gain on sale of $266,000. During the nine months ended September 30,
2008, we issued 25.8 million of our common shares. During 2007, we purchased six wellness
centers for $76.8 million and $47.7 million of improvements made to our
properties leased to Five Star. We
assumed $14.9 million of mortgage debt in conjunction with the wellness centers
acquisition. We purchased and redeemed
$20.0 million of our senior notes in January 2007. We recorded an impairment charge on one of
our properties for $1.4 million. In February and
December 2007, we issued 5.0 million and 6.0 million of our common shares,
respectively. The following table presents our pro forma results of operations as if
all of these acquisitions and related financings were completed on January 1,
2007. This pro forma data is not
necessarily indicative of what actual results of operations would have been for
the periods presented, nor does it represent the results of operations for any
future period. Differences could result
from, but are not limited to, additional property sales or investments, changes
in interest rates and changes in our debt or equity structure.
9
Table
of Contents
SENIOR HOUSING PROPERTIES
TRUST
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands,
except per share data or as otherwise stated)
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Total revenues
|
|
$
|
63,738
|
|
$
|
62,683
|
|
$
|
189,891
|
|
$
|
188,261
|
|
Income before
gain on sale of properties
|
|
$
|
31,260
|
|
$
|
28,891
|
|
$
|
88,989
|
|
$
|
87,119
|
|
Net income
|
|
$
|
31,526
|
|
$
|
29,157
|
|
$
|
89,255
|
|
$
|
87,385
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
data:
|
|
|
|
|
|
|
|
|
|
Income before
gain on sale of properties
|
|
$
|
0.27
|
|
$
|
0.25
|
|
$
|
0.78
|
|
$
|
0.76
|
|
Net income
|
|
$
|
0.28
|
|
$
|
0.25
|
|
$
|
0.78
|
|
$
|
0.76
|
|
10
Table
of Contents
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
The following
discussion should be read in conjunction with our consolidated financial
statements and notes thereto included in this quarterly report and our Annual
Report on Form 10-K for the year ended December 31, 2007.
PORTFOLIO OVERVIEW
The following tables present an overview of our portfolio:
(dollars in
thousands)
|
|
# of
Properties
|
|
# of Units/Beds
|
|
Carrying Value
of Investment
(1)
|
|
% of
Investment
|
|
Annualized
Current Rent
|
|
% of
Annualized
Current Rent
|
|
Facility Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
living communities
(2)
|
|
41
|
|
11,213
|
|
$1,046,346
|
|
39.6
|
%
|
$103,765
|
|
39.7
|
%
|
Assisted living
facilities
|
|
121
|
|
8,531
|
|
903,338
|
|
34.1
|
%
|
83,788
|
|
32.1
|
%
|
Skilled nursing
facilities
|
|
58
|
|
5,869
|
|
227,952
|
|
8.6
|
%
|
19,916
|
|
7.6
|
%
|
Rehabilitation
hospitals
|
|
2
|
|
364
|
|
51,744
|
|
2.0
|
%
|
10,905
|
|
4.1
|
%
|
Wellness centers
(3)
|
|
10
|
|
|
|
180,017
|
|
6.8
|
%
|
16,097
|
|
6.2
|
%
|
MOBs
(4)
|
|
29
|
|
|
|
235,871
|
|
8.9
|
%
|
26,792
|
|
10.3
|
%
|
Total
|
|
261
|
|
25,977
|
|
$2,645,268
|
|
100.0
|
%
|
$261,263
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant/Operator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Star (Lease
No. 1)
(5)
|
|
100
|
|
8,600
|
|
$707,788
|
|
26.8
|
%
|
$62,258
|
|
23.8
|
%
|
Five Star (Lease
No. 2)
(5)
|
|
32
|
|
7,639
|
|
739,422
|
|
28.0
|
%
|
80,776
|
|
30.9
|
%
|
Five Star (Lease
No. 3)
(5)
|
|
43
|
|
2,999
|
|
280,218
|
|
10.6
|
%
|
20,913
|
|
8.0
|
%
|
Five Star (Lease
No. 4)
(6)
|
|
7
|
|
614
|
|
66,571
|
|
2.5
|
%
|
7,593
|
|
2.9
|
%
|
Sunrise/Marriott
(7)
|
|
14
|
|
4,091
|
|
325,165
|
|
12.3
|
%
|
31,979
|
|
12.2
|
%
|
Alterra/Brookdale
(8)
|
|
18
|
|
894
|
|
61,122
|
|
2.3
|
%
|
8,015
|
|
3.1
|
%
|
6 private
companies (combined)
|
|
8
|
|
1,140
|
|
49,094
|
|
1.8
|
%
|
6,840
|
|
2.6
|
%
|
Starmark
(3)
|
|
6
|
|
|
|
80,008
|
|
3.0
|
%
|
6,519
|
|
2.5
|
%
|
Life Time
Fitness
(3)
|
|
4
|
|
|
|
100,009
|
|
3.8
|
%
|
9,578
|
|
3.7
|
%
|
Multi-tenant
MOBs
(4)
|
|
29
|
|
|
|
235,871
|
|
8.9
|
%
|
26,792
|
|
10.3
|
%
|
Total
|
|
261
|
|
25,977
|
|
$2,645,268
|
|
100.0
|
%
|
$261,263
|
|
100.0
|
%
|
Tenant
Operating Statistics (Quarter Ended June 30, 2008)
(9)
|
|
|
|
|
|
|
|
|
|
Percentage of Operating Revenue Sources
|
|
|
|
Rent Coverage
|
|
Occupancy
|
|
Private Pay
|
|
Medicare
|
|
Medicaid
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Five Star (Lease
No. 1)
(5)
(10)
|
|
1.31x
|
|
1.27x
|
|
89%
|
|
89%
|
|
65%
|
|
64%
|
|
13%
|
|
14%
|
|
22%
|
|
22%
|
|
Five Star (Lease
No. 2)
(5)
|
|
1.47x
|
|
1.48x
|
|
88%
|
|
90%
|
|
70%
|
|
68%
|
|
27%
|
|
28%
|
|
3%
|
|
4%
|
|
Five Star (Lease
No. 3)
(5)
(10)
|
|
1.53x
|
|
2.71x
|
|
86%
|
|
87%
|
|
46%
|
|
25%
|
|
18%
|
|
24%
|
|
36%
|
|
51%
|
|
Five Star (Lease
No. 4)
(6)
|
|
1.08x
|
|
1.47x
|
|
81%
|
|
83%
|
|
100%
|
|
100%
|
|
|
|
|
|
|
|
|
|
Sunrise/Marriott
(7)
|
|
1.43x
|
|
1.26x
|
|
90%
|
|
89%
|
|
81%
|
|
78%
|
|
16%
|
|
18%
|
|
3%
|
|
4%
|
|
Alterra/Brookdale
(8)
|
|
2.19x
|
|
2.17x
|
|
91%
|
|
87%
|
|
99%
|
|
98%
|
|
|
|
|
|
1%
|
|
2%
|
|
6 private
companies (combined)
|
|
1.92x
|
|
1.98x
|
|
83%
|
|
89%
|
|
26%
|
|
25%
|
|
23%
|
|
24%
|
|
51%
|
|
51%
|
|
Starmark
(3)
|
|
2.07x
|
|
NA
|
|
100%
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
Life Time
Fitness
(3)
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
Multi-tenant
MOBs
(4)
|
|
NA
|
|
NA
|
|
99%
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
Tenant Operating
Statistics (Six Months Ended June 30, 2008)
(9)
|
|
|
|
|
|
|
|
|
|
Percentage of Operating Revenue Sources
|
|
|
|
Rent Coverage
|
|
Occupancy
|
|
Private Pay
|
|
Medicare
|
|
Medicaid
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Five Star (Lease
No. 1)
(5)
(10)
|
|
1.28x
|
|
1.25x
|
|
88%
|
|
89%
|
|
64%
|
|
64%
|
|
14%
|
|
13%
|
|
22%
|
|
23%
|
|
Five Star (Lease
No. 2)
(5)
|
|
1.53x
|
|
1.46x
|
|
89%
|
|
90%
|
|
69%
|
|
68%
|
|
28%
|
|
28%
|
|
3%
|
|
4%
|
|
Five Star (Lease
No. 3)
(5) (10)
|
|
1.75x
|
|
2.65x
|
|
85%
|
|
87%
|
|
37%
|
|
24%
|
|
21%
|
|
25%
|
|
42%
|
|
51%
|
|
Five Star (Lease
No. 4)
(6)
|
|
1.29x
|
|
1.47x
|
|
88%
|
|
88%
|
|
100%
|
|
100%
|
|
|
|
|
|
|
|
|
|
Sunrise/Marriott
(7)
|
|
1.52x
|
|
1.24x
|
|
91%
|
|
89%
|
|
80%
|
|
79%
|
|
17%
|
|
18%
|
|
3%
|
|
3%
|
|
Alterra/Brookdale
(8)
|
|
2.21x
|
|
2.15x
|
|
91%
|
|
87%
|
|
99%
|
|
98%
|
|
|
|
|
|
1%
|
|
2%
|
|
6 private
companies (combined)
|
|
2.08x
|
|
1.83x
|
|
85%
|
|
89%
|
|
27%
|
|
25%
|
|
24%
|
|
24%
|
|
49%
|
|
51%
|
|
Starmark
(3)
|
|
1.99x
|
|
NA
|
|
100%
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
Life Time Fitness
(3)
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
Multi-tenant
MOBs
(4)
|
|
NA
|
|
NA
|
|
99%
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
(1)
|
Amounts are before depreciation, but after
impairment write downs, if any.
|
(2)
|
Properties where the majority of units are
independent living apartments are classified as independent living
communities.
|
(3)
|
In August 2008, we acquired four wellness
centers that are leased to Life Time Fitness. These wellness centers have a
total of 458,000 square feet. In October and November 2007, we
acquired six wellness centers that are leased to affiliates of Starmark
Holdings, LLC. These wellness centers have a total of 354,000 square feet.
|
(4)
|
Since June 2008, we acquired a total of 29
MOBs. The carrying value of these investments is before depreciation and
includes intangible lease assets and liabilities. These MOBs have a total of
approximately 1.2 million square feet.
|
11
Table of Contents
(5)
|
On June 30, 2008, we realigned three of our
leases with Five Star. The rent payable by Five Star to us was unchanged as a
result of this lease realignment. The increased rent payable, if and as we
purchase improvements to the leased properties, will be the greater of 8.0%
per annum or the 10 year Treasury rate plus 300 basis points.
|
(6)
|
On July 1, 2008, we sold three assisted
living properties with 259 living units that were formerly operated by
NewSeasons to Five Star for $21.4 million and Five Star assumed the
NewSeasons and IBC lease obligations to SNH for the remaining seven
properties that NewSeasons formerly operated. The data provided above
represents the seven properties we continue to own.
|
(7)
|
Marriott International, Inc., or Marriott,
guarantees this lease.
|
(8)
|
Brookdale Senior Living, Inc., or Brookdale,
guarantees this lease.
|
(9)
|
All tenant
operating data presented are based upon the operating results provided by our
tenants for the indicated quarterly periods, or the most recent prior period
for which tenant operating results are available to us from our tenants. Rent
coverage is calculated as operating cash flow from our tenants operations of
our properties, before subordinated charges, divided by rent payable to us.
We have not included operating data for our wellness centers that were
acquired in August 2008. We have not independently verified our tenants
operating data.
|
(10)
|
Excludes data
for periods prior to our ownership of certain properties included in this
lease.
|
RESULTS
OF OPERATIONS
Three Months Ended September 30, 2008, Compared
to Three Months Ended September 30, 2007:
|
|
2008
|
|
2007
|
|
Change
|
|
% Change
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
Rental income
|
|
$
|
58,897
|
|
$
|
44,653
|
|
$
|
14,244
|
|
31.9
|
%
|
Interest and
other income
|
|
776
|
|
571
|
|
205
|
|
35.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Property
operating expenses
|
|
1,024
|
|
|
|
1,024
|
|
100.0
|
%
|
Interest expense
|
|
9,606
|
|
9,223
|
|
383
|
|
4.2
|
%
|
Depreciation
expense
|
|
15,859
|
|
11,821
|
|
4,038
|
|
34.2
|
%
|
General and
administrative expense
|
|
4,303
|
|
3,567
|
|
736
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Income before
gain on sale of properties
|
|
28,881
|
|
20,613
|
|
8,268
|
|
40.1
|
%
|
Gain on sale of
properties
|
|
266
|
|
|
|
266
|
|
100.0
|
%
|
Net income
|
|
$
|
29,147
|
|
$
|
20,613
|
|
$
|
8,534
|
|
41.4
|
%
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding
|
|
114,493
|
|
83,659
|
|
$
|
30,834
|
|
36.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Income before
gain on sale of properties per share
|
|
$
|
0.25
|
|
$
|
0.25
|
|
$
|
|
|
|
%
|
Net income per
share
|
|
$
|
0.25
|
|
$
|
0.25
|
|
$
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
increased because of rents earned from our real estate acquisitions since July 1,
2007 including our acquisition of 29 medical office, clinic and biotech
laboratory buildings, or MOBs, since June 2008, offset by rent reductions
resulting from our sale of three properties on July 1, 2008. Interest and other income increased as a
result of higher levels of investable cash in money market funds.
Property operating
expenses for the quarter ended September 30, 2008 is the result of our
acquisition of 29 MOBs since June 2008.
Interest expense
increased because of greater amounts outstanding under our revolving credit
facility offset by lower rates under our revolving credit facility. This
increase was also due to $61.3 million of debt assumed as part of our third quarter
2008 acquisitions and $14.9 million of debt assumed as part of our fourth
quarter 2007 wellness centers acquisition offset by our prepayment of a
mortgage of $12.6 million on April 1, 2008. Our weighted average balance outstanding and
interest rate under our revolving credit facility was $32.2 million and 4.0%
for the three months ended September 30, 2008. There were no amounts outstanding for the
three months ended September 30, 2007.
Depreciation
expense for the third quarter of 2008 increased because of acquisitions since July 1,
2007. General and administrative expenses increased in 2008 principally
due to our acquisitions since July 1, 2007, and higher legal fees, offset
by decreases in accounting fees and state taxes.
On July 1,
2008, we sold three assisted living facilities for net proceeds of $21.4
million. The carrying value of these
properties at the time of sale was $21.1 million, resulting in a gain on sale
of $266,000.
12
Table
of Contents
Net
income increased because of the changes in revenues and expenses described
above. Income before gain on sale of properties per share and net income per
share remained the same because of the changes in revenues and expenses
described above were essentially offset by the effect of an increase in the
weighted average number of shares outstanding resulting from our issuance of
common shares in December 2007 and in February and June 2008.
Nine Months Ended September 30, 2008, Compared to
Nine Months Ended September 30, 2007:
|
|
2008
|
|
2007
|
|
Change
|
|
% Change
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
Rental income
|
|
$
|
160,560
|
|
$
|
133,361
|
|
$
|
27,199
|
|
20.4
|
%
|
Interest and
other income
|
|
2,056
|
|
1,577
|
|
479
|
|
30.4
|
%
|
|
|
|
|
|
|
|
|
|
|
Property
operating expenses
|
|
1,124
|
|
|
|
1,124
|
|
100.0
|
%
|
Interest expense
|
|
28,934
|
|
28,276
|
|
658
|
|
2.3
|
%
|
Depreciation
expense
|
|
43,235
|
|
35,120
|
|
8,115
|
|
23.1
|
%
|
General and
administrative expense
|
|
12,506
|
|
10,732
|
|
1,774
|
|
16.5
|
%
|
Impairment of
assets
|
|
2,940
|
|
|
|
2,940
|
|
100.0
|
%
|
Loss on early
extinguishment of debt
|
|
|
|
2,026
|
|
(2,026
|
)
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
Income before
gain on sale of properties
|
|
73,877
|
|
58,784
|
|
15,093
|
|
25.7
|
%
|
Gain on sale of
properties
|
|
266
|
|
|
|
266
|
|
100.0
|
%
|
Net income
|
|
$
|
74,143
|
|
$
|
58,784
|
|
$
|
15,359
|
|
26.1
|
%
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding
|
|
102,004
|
|
82,718
|
|
19,286
|
|
23.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Income before
gain on sale of properties per share
|
|
$
|
0.72
|
|
$
|
0.71
|
|
$
|
0.01
|
|
1.4
|
%
|
Net income per
share
|
|
$
|
0.73
|
|
$
|
0.71
|
|
$
|
0.02
|
|
2.8
|
%
|
Rental income
increased because of rents earned from our real estate acquisitions since January 1,
2007 including our acquisition of 29 MOBs since June 2008, offset by rent
reductions resulting from our sale of three properties on July 1, 2008.
Interest and other income increased as a result of higher levels of investable
cash in money market funds.
Property operating
expenses for the nine months ended September 30, 2008 is the result of our
acquisition of 29 MOBs since June 2008.
Interest expense
increased because of greater amounts outstanding under our revolving credit
facility, offset by lower rates under our revolving credit facility. This
increase was also due to $61.3 million of debt assumed as part of our third
quarter 2008 acquisitions and $14.9 million of debt assumed as part of our
fourth quarter 2007 wellness centers acquisition, offset by our prepayment of a
mortgage of $12.6 million on April 1, 2008. Our weighted average balances outstanding and
interest rates under our revolving credit facility was $48.2 million and 3.8%
and $18.3 million and 6.2% for the nine months ended September 30, 2008
and 2007, respectively.
Depreciation
expense for the nine months of 2008 increased as a result of real estate
acquisition since January 1, 2007.
General and administrative expenses increased in 2008 due principally to
our acquisitions since January 1, 2007, and higher accounting fees in the
nine months of 2008 than in the 2007 period, offset by decreases in legal fees
and state taxes.
During the nine
months ended September 30, 2008, we recognized an impairment of assets
charge of $2.9 million related to one property that we intend to sell. In January 2007, we purchased and
retired $20.0 million of our 8 5/8% senior notes due 2012 and recognized a loss
on early retirement of debt of $2.0 million in connection with this
transaction.
On July 1,
2008, we sold three assisted living facilities for net proceeds of $21.4
million. Our carrying value of these
properties at the time of sale was $21.1 million, resulting in a gain on sale
of $266,000.
Net
income increased because of the changes in revenues and expenses described
above. Income before gain on sale of properties per share and net income per
share increased because of the changes in revenues and
13
Table
of Contents
expenses described
above offset by the effect of an increase in the weighted average number of
shares outstanding resulting from our issuance of common shares in February and
December 2007 and in February and June 2008.
LIQUIDITY AND CAPITAL RESOURCES
Our Operating
Liquidity and Resources
Rents
from our properties are our principal source of funds for current expenses,
debt service and distributions to shareholders.
We generally receive minimum rents monthly or quarterly from our tenants
and we receive percentage rents monthly, quarterly or annually. This flow of funds has historically been
sufficient for us to pay our operating expenses, debt service and distributions
to shareholders. We believe that this operating
cash flow will be sufficient to meet our operating expenses, debt service and
distribution payments for the foreseeable future.
Our Investment and
Financing Liquidity and Resources
In order to fund acquisitions and
to accommodate cash needs that may result from timing differences between our
receipts of rents and our need or desire to pay operating expenses and
distributions to our shareholders, we maintain a revolving credit facility with
a group of institutional lenders. Our revolving credit facility matures in December 2010,
and we may extend it to December 2011 upon payment of an extension fee.
The revolving credit facility permits us to borrow up to $550.0 million, and
includes a feature which may permit us to increase the maximum borrowing to
$1.1 billion, in certain circumstances. Borrowings under our revolving credit
facility are unsecured. We may borrow, repay and reborrow funds until maturity.
No principal repayment is due until maturity. We pay interest on borrowings
under the revolving credit facility at LIBOR plus a premium. At September 30,
2008, the annual interest rate payable on our revolving credit facility was
4.5%. As of September 30, 2008, we
had $93.0 million outstanding under this credit facility.
In February 2008,
we issued 6.2 million common shares in a public offering, raising net proceeds
of $129.4 million. We used the net proceeds from this offering to repay
borrowings outstanding on our revolving credit facility and for general
business purposes, including funding, in part, the acquisitions described
below.
During
the three months ended March 31, 2008, we purchased 19 senior living
properties with a total of 1,692 units for approximately $272.3 million from
five unaffiliated parties. We leased these properties to Five Star for initial
rent of $21.8 million and added them to what we now refer to as Five Star lease
no. 1 and lease no. 3, which have current terms expiring in 2022 and 2024,
respectively. Percentage rent, based on
increases in gross revenues at these properties, will commence in 2010. We
funded these acquisitions using cash on hand, proceeds from equity issuances
and borrowings under our revolving credit facility.
On April 1,
2008, we paid in full a mortgage loan on one of our properties for $12.6
million. We used cash on hand and
borrowings under our revolving credit facility to fund this payment.
In June 2008,
we issued 19.6 million common shares in a public offering, raising net proceeds
of $393.7 million. We used the net proceeds from this offering to repay
borrowings outstanding on our revolving credit facility and for general business
purposes, including funding, in part, the acquisitions described below.
In May 2008, we entered into a series of agreements to acquire 48
medical office, clinic and biotech laboratory buildings for an aggregate
purchase price of approximately $565.0 million from HRPT. These buildings are approximately 98% leased
to 220 tenants for an average lease term of 6.7 years. As of September 30, 2008, we have
acquired 28 of these buildings and expect the closings of the remaining 20
acquisitions to occur during the next two quarters. In addition, because a third party consent
was not received, one of the agreements was amended so that one of the
remaining buildings with an allocated value of $3.0 million is no longer
subject to our purchase agreement; in the event HRPT obtains the third party
consent we may nonetheless purchase that building. In June 2008, we acquired five medical
office, clinic and biotech laboratory buildings pursuant to these agreements
for approximately $83.8 million, excluding closing costs. In July 2008, we acquired three
additional medical office and clinic properties for approximately $39.1
million, excluding closing costs. In August 2008,
we acquired 20 additional clinics for approximately $109.9 million, excluding
closing costs. On October 31, 2008,
we acquired one additional medical office building for approximately $29.8
million, excluding closing costs. We
funded these acquisitions using cash on hand, borrowings under our revolving
credit facility and by assuming three mortgage loans on two properties totaling
$10.8 million with a weighted average interest rate of 7.1% per annum and
weighted average maturity in 2018.
14
Table of Contents
Our obligations to complete the remaining
purchases are subject to various conditions typical of commercial real estate
purchases including, with respect to certain of these properties, third party
consents. We also have financing
contingencies relating to certain properties.
We can provide no assurance that we will purchase all of these buildings
or that the remaining purchases will be completed in the next two quarters. In addition, we also acquired rights of first
refusal to purchase any of 45 additional buildings (containing approximately
4.6 million square feet of rental space) that are leased to tenants in medical
related business which HRPT will continue to own after these transactions. HRPT was formerly our parent company, and
both we and HRPT are managed by RMR.
Because we and HRPT are both managed by RMR, the terms of these
transactions were negotiated by special committees of our and HRPTs boards of
trustees composed solely of Independent Trustees of each company.
On June 30, 2008, we realigned three of our
leases with Five Star. Lease no. 1 now
includes 100 properties, including nine properties acquired during the first
quarter of 2008. This lease includes independent living communities, assisted
living communities and skilled nursing facilities, and expires in 2022. Lease
no. 2 now includes 32 properties, including independent living communities,
assisted living communities, skilled nursing facilities and two rehabilitation
hospitals, and expires in 2026. Lease no. 3 now includes 44 properties,
including 10 properties acquired during the first quarter of 2008 and 10
properties acquired during the third quarter of 2008 and one property acquired
on November 1, 2008 described below.
This lease includes independent living communities, assisted living
communities and skilled nursing facilities and expires in 2024. The total rent
payable by Five Star to us for these properties was unchanged as a result of
this lease realignment. The increased rent payable for these three leases with
Five Star, if and as we purchase improvements to the leased properties, will be
the greater of 8.0% per annum or the 10 year Treasury rate plus 300 basis
points. Five Star was formerly our subsidiary. In addition to being our manager, RMR also
provides management services to Five Star.
Because of these and other relationships between us and Five Star, all
transactions between us and Five Star are approved by our Independent Trustees
and Five Stars Independent Directors.
On July 1, 2008, we
sold three assisted living properties with 259 living units that were formerly
operated by NewSeasons to Five Star for $21.4 million and Five Star assumed the
NewSeasons and IBC lease obligations to us for the remaining seven properties
that NewSeasons formerly operated. The
rent payable by Five Star for these seven properties is approximately $7.6
million per annum under lease no. 4 between us and Five Star.
On August 1, 2008,
we acquired, from an unaffiliated party, two senior living properties with a
total of 112 units for approximately $14.1 million, excluding closing
costs. We leased the properties to Five
Star until 2024 under our Five Star lease no. 3 described above and increased
rent under that lease by $1.1 million.
Percentage rent, based on increases in gross revenues at these
properties, will commence in 2010. We
funded this acquisition using cash on hand.
On August 21, 2008,
we acquired four wellness centers for approximately $100 million, excluding
closing costs, from Life Time Fitness. We leased these wellness centers to Life
Time Fitness for initial rent of $9.1 million, plus rent increases of 10% every
five years. This lease has a term
expiring in 2028 with renewal options thereafter. We funded this acquisition using cash on hand
and borrowings under our revolving credit facility.
On September 1,
2008, we acquired, from an unaffiliated party, eight senior living properties
with a total of 451 units for approximately $62.1 million, excluding closing
costs. We leased the properties to Five
Star until 2024 under our Five Star lease no. 3 described above and increased
rent under that lease by $5.0 million.
Percentage rent, based on increases in gross revenues at these
properties, will commence in 2010. We
funded this acquisition using cash on hand, borrowings under our revolving
credit facility and by assuming 15 mortgages on these eight properties totaling
$50.5 million with a weighted average interest rate of 6.54% per annum and
weighted average maturity in 2017.
On September 30,
2008, we acquired, from an unaffiliated party, one medical office building for
approximately $18.6 million, excluding closing costs. This building is currently 100% leased to 12
tenants for an average lease term of 6.5 years.
We funded this acquisition using cash on hand and borrowings under our
revolving credit facility.
On November 1, 2008, we acquired, from an
unaffiliated party, a senior living property with a total of 249 units for
approximately $29.0 million. We leased
this property to Five Star and added it to our Five Star lease no. 3, which has
a term expiring in 2024, and increased the annual rent under this lease by $2.3
million. Percentage rent,
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based on increases in gross revenues at this property, will commence in
2010. We funded this acquisition using
cash on hand and borrowings under our revolving credit facility.
At September 30, 2008, we had $7.2 million of
cash and cash equivalents and $457.0 million available under our revolving
credit facility. We expect to use cash
balances, borrowings under our revolving credit facility and net proceeds of offerings
of equity or debt securities to fund future working capital requirements,
property acquisitions and expenditures related to the repair, maintenance or
renovation of our properties.
When significant amounts are outstanding under our
revolving credit facility or as the maturity dates of our revolving credit
facility and term debts approach, we explore alternatives for the repayment of
amounts due. Such alternatives may
include incurring additional debt and issuing new equity securities. We have an effective shelf registration
statement that allows us to issue public securities on an expedited basis, but
it does not assure that there will be buyers for such securities.
Recent capital
markets conditions have been challenging.
The availability and cost of credit have been and may continue to be
adversely affected by illiquid capital markets and wide credit spreads, and
equity markets have been extremely volatile.
While we believe we will have access to various types of financings,
including debt or equity offerings, to fund our future acquisitions and to pay
our debts and other obligations, there can be no assurance that we will be able
to complete any debt or equity offerings or that our cost of any future public
or private financings will be reasonable.
If current market conditions continue or worsen, one or more lenders
under our revolving credit facility may be unable or unwilling to fund advances
which we request or we may not be able to access additional capital. Impacts such as these would impair our
ability to make future acquisitions and make our current growth plans
unachievable. Also, the current market
conditions have led to materially increased credit spreads which, if they
continue, may result in material increase in indexes, such as LIBOR, which
determine the interest rate under our floating rate debts and our costs when we
refinance our fixed rate debts may materially increase. These interest cost increases could have
material and adverse impact on our results of operations and financial
condition.
On February 15,
2008, we paid a $0.35 per common share, or $31.0 million, distribution to our
common shareholders for the quarter ended December 31, 2007. On May 15, 2008, we paid a $0.35 per
common share, or $33.2 million, distribution to our common shareholders for the
quarter ended March 31, 2008. On August 14,
2008, we paid a $0.35 per common share, or $40.1 million, distribution to our
common shareholders for the quarter ended June 30, 2008. On October 1, 2008, we declared a
distribution of $0.35 per common share, or $40.1 million, to be paid to our
common shareholders of record on October 17, 2008 with respect to our
results for the quarter ended September 30, 2008. We expect to pay this
distribution on or about November 14, 2008, using cash on hand and
borrowings under our revolving credit facility.
As of November 5, 2008,
we have no off balance sheet arrangements, commercial paper, derivatives,
swaps, hedges, joint ventures or partnerships.
Debt Covenants
Our
principal debt obligations at September 30, 2008, were our unsecured
revolving credit facility, two public issues totaling $322.5 million of
unsecured senior notes and $136.8 million of mortgage debts and bonds secured
by 33 of our properties. Our senior notes are governed by an indenture. This
indenture and related supplements and our revolving credit facility contain a
number of financial ratio covenants which generally restrict our ability to
incur debts, including debts secured by mortgages on our properties in excess
of calculated amounts, require us to maintain a minimum net worth, restrict our
ability to make distributions under certain circumstances and require us to
maintain various financial ratios. As of
September 30, 2008 we believe we were in compliance with all of the
covenants under our indenture and related supplements and our revolving credit
facility.
None of our indenture and related supplements, our
revolving credit facility or our other debt obligations contains provisions for
acceleration which could be triggered by our debt ratings. However, in certain
circumstances our revolving credit facility uses our senior debt rating to
determine the fees and the interest rate payable.
Our public debt indenture and related supplements
contain cross default provisions to any other debts of $10.0 million or more.
Similarly, a default on our public debt indenture would be a default under our
revolving credit facility.
Related Person Transactions
HRPT is our former parent company and both we and HRPT are managed by
RMR. Because of these and other relationships
we and HRPT may be considered related persons.
As discussed above, in May 2008, we entered into a series of
agreements to acquire 48 medical office, clinic and biotech laboratory
buildings from HRPT for an aggregate purchase price of approximately $565.0
million. As of September 30, 2008,
we have acquired 28 of these buildings and expect the closings of the remaining
20 acquisitions to occur during the next two quarters. Because a third party consent was not
recieved, one of the agreements was amended so that one of the properties is no
longer subject to such agreement.
Nonetheless, we may recieve such third party consent and may ultimately
sell that property. In June 2008,
we acquired five medical office, clinic and biotech laboratory buildings from
HRPT pursuant to these agreements for approximately $83.8 million, excluding
closing costs. In July 2008, we
acquired three additional
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medical
office and clinic properties from HRPT pursuant to these agreements for
approximately $39.1 million, excluding closing costs. In August 2008, we acquired 20
additional clinics from HRPT pursuant to these agreements for approximately
$109.9 million, excluding closing costs.
On October 31, 2008 we acquired one additional medical office
building from HRPT pursuant to these agreements for approximately $29.8
million, excluding closing costs. We
funded these acquisitions using cash on hand, borrowings under our revolving
credit facility and by assuming three mortgage loans on two properties totaling
$10.8 million with a weighted average interest rate of 7.1% per annum and
weighted average maturity in 2018.
Our obligations to complete the remaining purchases from HRPT are
subject to various conditions typical of commercial real estate purchases
including, with respect to certain of these properties, third party consents
and financing contingencies to certain properties. Accordingly, the purchase price may change,
these purchases may be accelerated or delayed or these purchases may not occur.
We can provide no assurance that we will
purchase all of these buildings or that the remaining purchases will be
completed in the next two quarters. In
addition, with respect to
45 additional buildings (containing
approximately 4.6 million square feet of rental space) that are leased to
tenants in medical related business which HRPT will continue to own after these
transactions,
we also acquired
rights of first refusal to purchase any such buildings in the event HRPT
determines to sell such properties or in the event of an indirect sale as a
result of a change of control of HRPT or a change of control of HRPTs
subsidiary which owns such property. For more information about the terms of
the transaction between us and HRPT, please read the documents evidencing this
transaction, copies of which were filed as exhibits to our Current Report on
Form 8-K, dated May 9, 2008. Because we
and HRPT are both managed by RMR, the terms of these transactions were
negotiated by special committees of our and HRPTs board of trustees composed
solely of Independent Trustees of each company.
For more information about the terms of our relationship with RMR,
please refer to our Annual Report on Form 10-K for the year ended December 31,
2007 filed on February 29, 2008 and to our Current Report on Form 8-K dated May
9, 2008 and to our definitive proxy statement filed on April 21, 2008.
Five Star is our largest
tenant. Five Star is our former
subsidiary. In addition to being our
manager, RMR also provides management services to Five Star. Because of these and other relationships we
and Five Star may be considered related persons. Also, because of these relationships all of
our transactions with Five Star are approved by our Independent Trustees and
Five Stars Independent Directors. Since
June 30, 2008, we have had several transactions with Five Star.
On June 30, 2008, we
realigned three of our leases with Five Star.
Lease no. 1 now includes 100 properties, including nine properties
acquired during the first quarter of 2008. This lease includes independent
living communities, assisted living communities and skilled nursing facilities,
and expires in 2022. Lease no. 2 now includes 32 properties, including
independent living communities, assisted living communities, skilled nursing
facilities and two rehabilitation hospitals, and expires in 2026. Lease no. 3
now includes 44 properties, including 10 properties acquired during the first
quarter of 2008 and 10 properties acquired during the third quarter of 2008 and
one property acquired on November 1, 2008 described below. This lease includes independent living
communities, assisted living communities and skilled nursing facilities and
expires in 2024. The total rent payable by Five Star to us for these properties
was unchanged as a result of this lease realignment. The increased rent payable
for these three leases with Five Star, if and as we purchase improvements to
the leased properties, will be the greater of 8.0% per annum or the 10 year
Treasury rate plus 300 basis points.
On July 1, 2008, we
sold three assisted living properties with 259 living units that were formerly
operated by NewSeasons to Five Star for $21.4 million and Five Star assumed the
NewSeasons and Independence Blue Cross, or IBC, lease obligations to us for the
remaining seven properties that NewSeasons formerly operated. The rent payable by Five Star for these seven
properties is approximately $7.6 million per annum under lease no. 4 between us
and Five Star.
On August 1, 2008,
we acquired, from an unaffiliated party, two senior living properties with a
total of 112 units for approximately $14.1 million, excluding closing
costs. We leased the properties to Five
Star until 2024 under our Five Star lease no. 3 described above and increased
rent under that lease by $1.1 million.
Percentage rent, based on increases in gross revenues at these
properties, will commence in 2010. We
funded this acquisition using cash on hand.
On September 1,
2008, we acquired, from an unaffiliated party, eight senior living properties
with a total of 451 units for approximately $62.1 million, excluding closing
costs. We leased the properties to Five
Star until 2024 under our Five Star lease no. 3 described above and increased
rent under that lease by $5.0 million.
Percentage rent, based on increases in gross revenues at these
properties, will commence in 2010. We
funded this acquisition using cash on hand, borrowings under our revolving
credit facility and by assuming 15 mortgages on these eight properties totaling
$50.5 million with a weighted average interest rate of 6.54% per annum and
weighted average maturity in 2017.
On November 1, 2008,
we acquired, from an unaffiliated party, a senior living property with a total
of 249 units for approximately $29.0 million.
We leased this property to Five Star and added it to our Five Star lease
no. 3, which has a term expiring in 2024, and increased the annual rent under
this lease by $2.3 million. Percentage
rent,
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based on increases in gross revenues at this property,
will commence in 2010. We funded this
acquisition using cash on hand and borrowings under our revolving credit
facility.
During the three months
ended September 30, 2008, pursuant to the terms of our existing leases
with Five Star, we purchased $14.8 million of improvements made to our
properties leased to Five Star, and, as a result, the annual rent payable to us
by Five Star was increased by approximately $1.2 million.
Item 4. Controls and
Procedures
As of the end of the
period covered by this report, our management carried out an evaluation, under
the supervision and with the participation of our managing trustees, President
and Chief Operating Officer and Treasurer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures pursuant to Exchange
Act Rules 13a-15 and 15d-15. Based
upon that evaluation, our managing trustees, President and Chief Operating
Officer and Treasurer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective.
There have been no
changes in our internal control over financial reporting during the quarter
ended September 30, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
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WARNING CONCERNING FORWARD LOOKING STATEMENTS
THIS QUARTERLY REPORT
CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER FEDERAL SECURITIES
LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS BELIEVE, EXPECT, ANTICIPATE,
INTEND, PLAN, ESTIMATE OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD
LOOKING STATEMENTS. THESE FORWARD
LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS,
BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT
OCCUR. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR
IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FOR EXAMPLE:
·
THIS QUARTERLY REPORT STATES
THAT WE HAVE AGREED TO PURCHASE MEDICAL OFFICE, CLINIC AND BIOTECH LABORATORY
BUILDINGS. OUR OBLIGATIONS TO COMPLETE
THE CURRENTLY PENDING PURCHASES IS SUBJECT TO VARIOUS CONDITIONS TYPICAL OF
LARGE COMMERCIAL REAL ESTATE PURCHASES, INCLUDING, WITH RESPECT TO CERTAIN
PROPERTIES, OBTAINING THIRD PARTY CONSENTS.
ALSO, WE HAVE FINANCING CONTINGENCIES RELATING TO CERTAIN
PROPERTIES. AS A RESULT OF ANY FAILURE
OF THESE CONDITIONS, SOME OF THE PROPERTIES MAY NOT BE PURCHASED, THE
PURCHASE PRICES PAYABLE BY US MAY BE CHANGED OR SOME OF THESE PURCHASES MAY BE
ACCELERATED OR DELAYED.
·
THIS QUARTERLY REPORT STATES
THAT WE INTEND TO SELL TWO PROPERTIES THAT ARE CLASSIFIED AS HELD FOR SALE ON
OUR CONSOLIDATED BALANCE SHEET AND THAT WE HAVE ENTERED INTO A PURCHASE AND
SALE AGREEMENT FOR ONE OF THESE PROPERTIES.
WE MAY BE UNABLE TO FIND QUALIFIED BUYERS TO PURCHASE THESE
PROPERTIES ON FAVORABLE, OR ANY, TERMS, AND MAY NOT PROCEED WITH THESE
SALES DUE TO MARKET CONDITIONS, FAILURE TO SATISFY CONTINGENCIES OR OTHER
REASONS. AS A RESULT, THESE PROPOSED
SALES MAY NOT OCCUR.
OTHER IMPORTANT FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN OUR FORWARD
LOOKING STATEMENTS ARE DESCRIBED MORE
FULLY UNDER ITEM 1A. RISK FACTORS IN OUR ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 2007.
YOU SHOULD NOT PLACE UNDUE
RELIANCE UPON FORWARD LOOKING STATEMENTS.
EXCEPT AS REQUIRED BY
LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD LOOKING
STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
STATEMENT
CONCERNING LIMITED LIABILITY
THE ARTICLES OF AMENDMENT
AND RESTATEMENT OF THE DECLARATION OF TRUST ESTABLISHING SENIOR HOUSING
PROPERTIES TRUST, DATED SEPTEMBER 20, 1999, A COPY OF WHICH, TOGETHER WITH ALL
AMENDMENTS AND SUPPLEMENTS THERETO, IS DULY FILED IN THE OFFICE OF THE STATE
DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT THE NAME SENIOR
HOUSING PROPERTIES TRUST REFERS TO THE TRUSTEES UNDER THE DECLARATION OF
TRUST, AS AMENDED AND SUPPLEMENTED, AS TRUSTEES, BUT NOT INDIVIDUALLY OR
PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF
SENIOR HOUSING PROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY,
JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SENIOR HOUSING
PROPERTIES TRUST. ALL PERSONS DEALING
WITH SENIOR HOUSING PROPERTIES TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS
OF SENIOR HOUSING PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE
PERFORMANCE OF ANY OBLIGATION.
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PART II.
Other Information
Item
2.
Unregistered Sales of Equity Securities and Use of
Proceeds
On September 22,
2008, pursuant to our incentive share award plan, we granted 42,125 common
shares of beneficial interest, par value $0.01 per share,
valued at $22.09
per share, the closing price of
our common shares on the NYSE on that day, to our officers and certain
employees of our manager, Reit Management & Research LLC. We made these grants pursuant to an exemption
from registration contained in Section 4(2) of the Securities Act of
1933, as amended.
Item
5.
Other Information
On November 5, 2008,
our Board of Trustees approved Amended and Restated Bylaws for SNH, which
reflect various revisions to our previous bylaws. The Amended and Restated Bylaws are effective
as of November 5, 2008.
The changes reflected in
the Amended and Restated Bylaws from our previous bylaws include, among other
things:
·
A number of revisions to the
provisions regarding meetings of our shareholders contained in Article II,
including among other things:
o
Expressly
providing that notice of shareholders meetings may be made by electronic
transmission;
o
Eliminating
the prescribed time that a notice for a shareholders meeting must be given in
advance of the meeting (previously between 15 and 60 days prior to the annual
meeting and effectively between not less than 10 days or more than 60 days for
a special meeting);
o
Eliminating
any express bylaw requirement to provide notice of an adjourned shareholders
meeting or for setting a new record date for an adjourned meeting;
o
Expressly
authorizing the chairperson of a shareholders meeting to adjourn the meeting
for any reason deemed necessary by the chairperson, including if (i) no
quorum is present for the transaction of the business, (ii) the Board of
Trustees or the chairperson of the meeting determines that adjournment is
necessary or appropriate to enable the shareholders to consider fully
information that the Board of Trustees or the chairperson of the meeting
determines has not been made sufficiently or timely available to shareholders
or (iii) the Board of Trustees or the chairperson of the meeting
determines that adjournment is otherwise in our best interests;
o
Enumerating
additional specific actions the chairperson of a shareholders meeting is
entitled to take at the meeting for the proper conduct of the meeting,
including concluding the meeting and complying with any state and local laws
concerning safety and security;
o
Providing
that shareholders present, either in person or by proxy, at a meeting which has
been duly called and convened and at which a quorum was established may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough votes to leave less than a quorum then being present at the meeting;
o
Removing
the bylaw expressly providing that the Board of Trustees may adopt by
resolution a procedure by which a shareholder may certify in writing to SNH
that any shares registered in the name of the shareholder are held for the
account of a specified person other than the shareholder, resulting in the
person specified in the certification being regarded as, for the purposes set
forth in the certification, the shareholder of record of the specified shares;
o
Removing
the bylaw requirement that SNH deliver an annual report to shareholders at or
before the annual meeting of shareholders, as SNH is separately subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, as
well as reporting requirements under Maryland law and the rules of the New
York Stock Exchange (the stock exchange on which our shares are listed), which
requirements obligate SNH to provide annual reports to its shareholders;
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o
Revising
the procedures for submission of nominations for Trustee elections and other
proposals by shareholders for consideration at an annual meeting of
shareholders, including, among other things:
<
Requiring a shareholder wishing to make a
nomination or proposal of other business to be a shareholder of record at the
time of submitting its notice of a nomination or other proposal through and
including the time of the meeting and that the shareholder submit the
nomination or proposal of other business to the Board of Trustees in accordance
with SNHs Declaration of Trust;
<
Providing that the advance notice provisions in Section 2.14.1(a)(ii) are
the exclusive means for a shareholder to submit such business for consideration
at an annual meeting of shareholders, except to the extent of matters which are
required to be presented to shareholders by applicable law which have been
properly presented in accordance with the requirements of such law;
<
Revising the deadline for submitting a notice of a
nomination or proposal of other business for consideration at an annual meeting
of our shareholders to not later than 5:00 p.m. (Eastern Time) on the 120
th
day nor earlier than the 150
th
day prior to the first anniversary of
the date of our preceding years proxy statement; and if the date of the proxy
statement for the annual meeting is more than 30 days earlier than the first
anniversary of the date of the proxy statement for the preceding years annual
meeting, the notice shall be delivered by not later than 5:00 p.m.
(Eastern Time) on the 10th day following the earlier of the day on which (i) notice
of the annual meeting is mailed or otherwise made available or (ii) public
announcement (as defined in the Amended and Restated Bylaws) of the date of
such meeting is first made by SNH; and corresponding changes were made to the
deadline for nominations for Trustee elections where we increase the number of
Trustees to be elected at the meeting but only with respect to nominees for any
new positions created by such increase and for special meetings of shareholders
if the Board of Trustees has determined that Trustees shall be elected at that
special meeting;
·
For purposes of our 2009
annual meeting of shareholders, the amendments provide that, to be timely, a
notice shall be delivered to the secretary of SNH at our principal executive
offices not later than 5:00 p.m. (Eastern Time) on December 31, 2008
nor earlier than December 1, 2008;
<
Expanding the information required to be provided
regarding any proposed nominee or certain associates of the proposed nominee by
the proposing shareholder, including, among other things:
·
Requiring information as to
the proposed nominees qualifications to be a Trustee pursuant to the criteria
set forth in Section 3.1 of the Amended and Restated Bylaws;
·
Expanding to 24 months the
period of time prior to the submission of the notice by the shareholder for
which disclosure regarding transactions relating to securities of SNH by the
proposed nominee or certain associates of the proposed nominee need be provided
by the proposing shareholder;
·
Requiring disclosure of
certain performance related fees that the proposed nominee or certain of the
proposed nominees associates are entitled to based on any increase or decrease
in the value of our shares or instrument or arrangement of the type
contemplated within the definition of a Derivative Transaction (as defined in
the Amended and Restated Bylaws), if any, as of the date of such notice;
·
Requiring disclosure of any
proportionate interest in our shares or instrument or arrangement of the type
contemplated within the definition of a Derivative Transaction held, directly
or indirectly, by a general or limited partnership in
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which such proposed
nominee or certain associates of the proposed nominee is a general partner or,
directly or indirectly, beneficially owns an interest in a general partner;
·
Requiring disclosure of all
direct and indirect compensation and other material monetary agreements,
arrangements and understandings during the past three years, and any other
material relationships, between or among the proposing shareholder, certain associates
of the proposed nominee, or their respective affiliates and associates, or
others acting in concert therewith, on the one hand, and the proposed nominee,
or his or her respective affiliates and associates, or others acting in concert
therewith, on the other hand, including, without limitation, all information
that would be required to be disclosed pursuant to Item 404 of Regulation S-K
promulgated by the SEC, if the shareholder making the nomination and certain
associates of the proposed nominee on whose behalf the nomination is made, or
any affiliate or associate thereof or person acting in concert therewith, were
the registrant for purposes of such rule and the proposed nominee were a
director or executive officer of such registrant; and
·
Requiring disclosure of any
rights to dividends on the shares of SNH owned beneficially by the proposed
nominee or certain associates of the proposed nominee that are separated or
separable from the underlying shares of SNH;
<
Expanding the information required to be provided
by the shareholder regarding itself and certain of its associates to include,
among other things:
·
A description of all
agreements, arrangements and understandings between the shareholder and certain
associates of the shareholder amongst themselves or with any other person or
persons (including their names) in connection with the proposal of such business
by the shareholder;
·
Additional information
regarding transactions by the proposed shareholder and certain associates of
the shareholder involving our securities, including extending to 24 months the
period of time prior to the submission of the notice by the shareholder for
which such information must be provided;
·
Disclosure of the
shareholders investment intent with respect to the shareholders acquisition
of our securities;
·
All information relating to
the shareholder and certain associates of the shareholder required to be
disclosed in connection with the solicitation of proxies for election of
Trustees in an election contest (even if an election contest is not involved),
or is otherwise required, in each case, pursuant to Section 14 (or any
successor provision) of the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder;
·
Disclosure of certain
performance related fees that the shareholder or certain associates of the
shareholder is entitled to based on any increase or decrease in the value of
our shares or instrument or arrangement of the type contemplated within the
definition of Derivative Transaction, if any, as of the date of such notice;
·
Disclosure of any
proportionate interest in our shares or instrument or arrangement of the type
contemplated within the definition of Derivative Transaction held, directly or
indirectly, by a general or limited partnership in which the shareholder or
certain associates of the shareholder is a general partner or, directly or
indirectly, beneficially owns an interest in a general partner; and
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·
Disclosure of any rights to
dividends on our shares owned beneficially by the proposed nominee or certain
associates of the proposed nominee that are separated or separable from the
underlying shares of SNH; and
<
Requiring the shareholder to indicate the class and
series of beneficial interest of SNH entitled to vote for the proposed nominee
and/or other proposal of business, as applicable, if more than one class or
series of beneficial interest in SNH is outstanding;
o
Clarifying
and revising the notice obligations for a shareholder nomination or other
proposal that, if approved and implemented by us, would cause us to be in
breach of any covenant of SNH in any existing debt instrument or agreement to
extend the provision to cover other material agreements and to apply generally
to our subsidiaries (as defined in the Amended and Restated Bylaws) as well as
SNH and to require the proposing shareholder to provide at the same time as the
submission of its nomination or other proposal evidence of the availability to
SNH of substitute credit or contractual arrangements similar to the credit or
contractual arrangements which are implicated by the shareholder nomination or
other proposal that are at least as favorable to us, as determined by our Board
of Trustees in its discretion, unless the proposing shareholder instead submits
at such time evidence satisfactory to our Board of Trustees of the lenders or
contracting partys willingness to waive the breach of covenant or default;
o
Clarifying
and expanding the notice requirements regarding shareholder nominations or
other proposals requiring regulatory notice, consent or approval to require
that the shareholder provide at the same time as the submission of the
nomination or proposal of other business evidence satisfactory to the Board of
Trustees that the applicable governmental or regulatory actions have been made
or obtained or if that evidence was not obtainable by the time of such
submission despite the shareholders diligent and best efforts, a detailed plan
for making or obtaining the applicable filings, consents or approvals prior to
the election of any shareholder nominee or the implementation of the
shareholders proposal, which plan must be satisfactory to our Board of
Trustees in its discretion;
o
Clarifying
the procedures for the verification of information provided by the shareholder
making the nomination or other proposal of business and expressly providing
that the proposing shareholder is responsible for ensuring compliance with the
advance notice provisions, that any responses of the shareholder to any request
for information will not cure any defect in the shareholders notice and that
neither SNH, our Board of Trustees or any committee of our Board of Trustee nor
any officer of SNH has any duty to request clarification or updating
information or inform the proposing shareholder of any defect in the
shareholders notice; and
o
Providing
that, subject to applicable law, any shareholder proposal for business the
subject matter or effect of which would be within the exclusive purview of the
Board of Trustees or would reasonably likely, if considered by the shareholders
or approved or implemented by us, result in an impairment of the limited
liability status for our shareholders, shall be deemed not to be a matter upon
which the shareholders are entitled to vote;
·
A number of revisions to the
provisions regarding qualifications and meetings of Trustees and processes of
the Board of Trustees contained in Article III, including among other
things:
o
Expressly
providing for nonexclusive qualifications that a Trustee must possess to
qualify for nomination or election as a Trustee, including that the individual (i) has
substantial expertise or experience relevant to the business of SNH or its
subsidiaries, (ii) has not been convicted of a felony and (iii) meets
the qualifications of an Independent Trustee or a Managing Trustee (each as
defined in the Amended and Restated Bylaws), as appropriate;
o
Expressly
providing that, in the case of failure to elect Trustees at an annual meeting
of the shareholders, the incumbent Trustees shall hold over and continue to
direct the management of the business and affairs of SNH until they may resign
or until their successors are elected and qualify;
o
Providing
that, if enough Trustees have withdrawn from a meeting of the Board of Trustees
so as to leave fewer than are required to establish a quorum, but the meeting
is not adjourned, the action of the majority of that number of Trustees
necessary to constitute a quorum at the meeting shall be the action of the
Board of Trustees, unless the concurrence of a greater proportion is required
for
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such
action by applicable law, the Declaration of Trust or the Amended and Restated
Bylaws;
o
Expressly
providing that any Trustee elected to fill a vacancy, whether occurring due to
an increase in size of the Board of Trustees or by the death, resignation or
removal of any Trustee, shall hold office for the remainder of the full term of
the class of Trustees in which the vacancy occurred or was created and until a
successor is elected and qualifies;
o
Removing
the provision that provided that we may lend money to, guarantee an obligation
of or otherwise assist a Trustee;
o
Providing
that a Trustee may be removed at any time, with or without cause, by the
affirmative vote either of all the remaining Trustees or, at a meeting of the
shareholders properly called for that purpose, by the affirmative vote of the
holders of not less than two-thirds of the shares of SNH then outstanding and
entitled to vote generally in the election of Trustees;
o
Removing
the provision that provided that no Trustee shall be liable for any loss which
may occur by reason of the failure of the bank, trust company, savings and loan
association or other institution with whom moneys or share have been deposited;
and
o
Including
emergency provisions in order to provide for procedural flexibility in the
event of an emergency;
·
Revisions were made to
Articles IV and V to update the roles and processes of the committees of the
Board of Trustees and the officers of SNH, including permitting committees to
take action by written consent executed by a majority of the members rather
than requiring unanimous written consent for the committees to take written
action;
·
Revisions were made to Article VII
to provide for certain clarifications and administrative changes, including
expressly providing that shareholders may request that their shares of SNH be
in book entry form;
·
A new Article VIII was
adopted which provides for various regulatory and disclosure requirements
effecting SNH or any of our subsidiaries that shareholders of SNH shall comply
with, including, among other things:
o
Requiring
that shareholders whose ownership interest in SNH or actions affecting SNH,
triggers the application of any requirement or regulation of any federal,
state, municipal or other governmental or regulatory body on SNH or any
subsidiary of SNH or any of their respective businesses, assets or operations,
promptly take all actions necessary and fully cooperate with SNH to ensure that
such requirements or regulations are satisfied without restricting, imposing
additional obligations on or in any way limiting the business, assets,
operations or prospects of SNH or any subsidiary of SNH;
o
Requiring
that, if the shareholder fails or is otherwise unable to promptly take such
actions so as to satisfy such requirements or regulations, then the shareholder
shall promptly divest a sufficient number of our shares necessary to cause the
application of such requirement or regulation to not apply to us or any
subsidiary of ours; and, if the shareholder fails to cause such satisfaction or
divest itself of such sufficient number of our shares by not later than the
10th day after triggering such requirement or regulation, then any shares of
SNH beneficially owned by such shareholder at and in excess of the level
triggering the application of such requirement or regulation shall, to the
fullest extent permitted by law, be deemed to constitute shares held in
violation of the ownership limitations set forth in Article VII of our
Declaration of Trust and be subject to the provisions of Article VII of
our Declaration of Trust and any actions triggering the application of such
requirements or regulations may be deemed by us to be of no force or effect;
o
Requiring
that if the shareholder fails to satisfy the requirements or regulations or to
take curative actions within such 10 day period, we may take all other actions
which our Board of Trustees deems appropriate to require compliance or to
preserve the value of our assets; and we may charge the offending shareholder
for our costs and expenses as well as any damages which may result to us;
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o
Requiring
that shareholders comply with all applicable requirements of federal and state
laws, including all rules and regulations promulgated thereunder, in
connection with such shareholders ownership interest in us and all other laws
which apply to us or any subsidiary of ours or their respective businesses,
assets or operations and which require action or inaction on the part of the
shareholder;
o
Providing
that, if a shareholder, by virtue of the shareholders ownership interest in us
or its receipt or exercise of proxies to vote shares owned by other
shareholders would not be permitted to vote the shareholders shares of SNH or
proxies for shares of SNH in excess of a certain amount pursuant to applicable
law but the Board of Trustees determines that the excess shares or shares
represented by the excess proxies are necessary to obtain a quorum, then the
shareholder shall not be entitled to vote any such excess shares or proxies,
and instead such excess shares or proxies may, to the fullest extent permitted
by law, be voted by our advisor (or by another person designated by us) in
proportion to the total shares otherwise voted on such matter; and
o
Providing
that, to the fullest extent permitted by law, any representation, warranty or
covenant made by a shareholder with any governmental or regulatory body in
connection with such shareholders interest in us or any subsidiary of ours
shall be deemed to be simultaneously made to, for the benefit of and
enforceable by, us and any applicable subsidiary of ours;
·
As Section 9.4 of the
our Declaration of Trust provides for indemnification of, among others, present
or former shareholders, Trustees or officers of SNH against any claim or
liability to which those persons may become subject or which those persons may incur
by reason of their status as a present or former shareholder, Trustee or
officer of SNH and as SNH is party to indemnification agreements with Trustees
and officers of SNH, what was formerly Article XI of our bylaws
(indemnification and advance of expenses) was removed;
·
Former Article IX of
our bylaws (now Article X of the Amended and Restated Bylaws) was amended
by removing the provision expressly authorizing the Board of Trustees, before
payment of any dividends or other distributions, to set aside out of any funds
of SNH available for dividends or other distributions such sum or sums as the
Board of Trustees may from time to time, in its absolute discretion, think
proper as a reserve fund for contingencies or for any other purpose as the
Trustees shall determine to be in the best interest of SNH;
·
As we are a party to an
advisory agreement with our advisor, Reit Management & Research LLC,
what was formerly Article XIII of the bylaws was removed as the advisory
agreement directly governs our relationship with Reit Management &
Research LLC;
·
Former Article XV of
our bylaws (now Article XIV of the Amended and Restated Bylaws) was
amended to add additional provisions, including, among other things:
o
Providing
that, in addition to the obligations of shareholders to indemnify us and hold
us harmless as set forth in Section 8.7 of our Declaration of Trust, to
the fullest extent permitted by law, each shareholder will be liable to us for,
and indemnify and hold harmless us (and any subsidiaries or affiliates thereof)
from and against, all costs, expenses, penalties, fines or other amounts
arising from such shareholders breach of any provision of our Amended and
Restated Bylaws or our Declaration of Trust or any action against us in which
such shareholder is not the prevailing party;
o
Providing
procedures for ratification of past action or inaction on the part of SNH or
its officers; and
o
Empowering
the Board of Trustees to make determinations regarding ambiguities in the
application of our Amended and Restated Bylaws; and
·
Various other amendments and
modifications to address various administrative matters, clarify certain
provisions, eliminate certain matters already addressed in our Declaration of
Trust and update some outdated provisions.
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To the extent that the
amendments to our bylaws, as well as the preexisting provisions of our bylaws,
contain provisions which limit the ability of a shareholder to remove
management or Trustees or restrict the ability to own or transfer our shares,
those provisions may have anti-takeover effects.
The foregoing summary of
the amendments to the existing bylaws is qualified in its entirety by reference
to the text of the amendments and the Amended and Restated Bylaws. The Amended and Restated Bylaws, and a copy
marked to show changes from the prior bylaws, are attached hereto as Exhibits
3.1 and 3.2, respectively, and are incorporated by reference herein.
Item
6.
Exhibits
3.1
Amended and Restated Bylaws of the Company, as amended
and restated November 5, 2008.
(Filed herewith)
3.2
Amended and Restated Bylaws of the Company, as amended
and restated November 5, 2008 (marked).
(Filed
herewith)
10.1
Second Amendment to Amended and Restated Master Lease
Agreement (Lease No. 3), dated as of September 1, 2008, by and among
certain subsidiaries of the Company, as Landlord, and Five Star Quality Care
Trust, as Tenant.
(Filed herewith)
10.2
Third Amendment to Amended and Restated Master Lease
Agreement (Lease No. 3), dated as of November 1, 2008, by and among
certain subsidiaries of the Company, as Landlord, and Five Star Quality Care
Trust, as Tenant.
(Filed herewith)
12.1
Computation of Ratio of Earnings to Fixed Charges.
(Filed herewith)
31.1
Rule 13a-14(a) Certification.
(Filed herewith)
31.2
Rule 13a-14(a) Certification.
(Filed herewith)
31.3
Rule 13a-14(a) Certification.
(Filed herewith)
31.4
Rule 13a-14(a) Certification.
(Filed herewith)
32.1
Section 1350
Certification.
(Furnished herewith)
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SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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SENIOR HOUSING
PROPERTIES TRUST
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By:
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/s/ David J. Hegarty
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David J. Hegarty
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President and Chief Operating
Officer
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Dated: November 10,
2008
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By:
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/s/ Richard A. Doyle
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Richard A. Doyle
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Treasurer and Chief
Financial Officer
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(principal financial
and accounting officer)
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Dated: November 10,
2008
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27
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