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
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For the quarterly period ended September 30, 2009
OR
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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Commission File Number 1-15319
SENIOR
HOUSING PROPERTIES TRUST
(Exact Name of Registrant as Specified in Its Charter)
Maryland
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|
04-3445278
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(State or Other Jurisdiction of Incorporation or
Organization)
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(IRS Employer Identification No.)
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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 (or for such
shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
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
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Accelerated Filer
o
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|
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Non Accelerated Filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
|
|
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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 4, 2009:
127,377,665.
SENIOR HOUSING PROPERTIES TRUST
FORM 10-Q
September 30, 2009
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.
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,
|
|
|
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2009
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|
2008
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ASSETS
|
|
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|
|
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Real estate properties:
|
|
|
|
|
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Land
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$
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357,508
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$
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319,591
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Buildings and improvements
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2,844,036
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2,487,665
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|
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3,201,544
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2,807,256
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Less accumulated depreciation
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435,310
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381,339
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2,766,234
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2,425,917
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|
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Cash and cash equivalents
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72,487
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5,990
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Restricted cash
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4,728
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4,344
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Deferred financing fees, net
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14,703
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|
5,068
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Acquired real estate leases, net
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44,554
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30,546
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Other assets
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52,330
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25,009
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Total assets
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$
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2,955,036
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$
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2,496,874
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|
|
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LIABILITIES AND SHAREHOLDERS EQUITY
|
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Unsecured revolving credit facility
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$
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$
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257,000
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Senior unsecured notes due 2012 and 2015, net of
discount
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322,124
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322,017
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Secured debt and capital leases
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662,116
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151,416
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Accrued interest
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10,894
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11,121
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Acquired real estate lease obligations, net
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|
10,071
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7,974
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Other liabilities
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33,766
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15,988
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Total liabilities
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1,038,971
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765,516
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Commitments and contingencies
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Shareholders equity:
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Common shares of beneficial interest, $0.01 par
value: 149,700,000 shares authorized, 127,377,665 and 114,542,584 shares
issued and outstanding at September 30, 2009 and December 31, 2008,
respectively
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1,274
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1,145
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Additional paid in capital
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2,226,473
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2,000,865
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Cumulative net income
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607,927
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530,318
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Cumulative distributions
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(923,255
|
)
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(797,639
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)
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Unrealized gain on investments
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3,646
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(3,331
|
)
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Total shareholders equity
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1,916,065
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1,731,358
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Total liabilities and shareholders equity
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$
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2,955,036
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$
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2,496,874
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|
See accompanying notes.
1
SENIOR HOUSING PROPERTIES
TRUST
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
(unaudited)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2009
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2008
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2009
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2008
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Revenues:
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Rental income
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$
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72,010
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$
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58,844
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$
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209,785
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$
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160,591
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Interest and other income
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|
355
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|
829
|
|
750
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|
2,025
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Total revenues
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72,365
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59,673
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210,535
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162,616
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|
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|
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|
|
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Expenses:
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Property operating expenses
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4,112
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1,024
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10,286
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1,124
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Interest
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15,949
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9,606
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37,432
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28,934
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Depreciation
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19,689
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15,859
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56,713
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43,235
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Acquisition costs
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517
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1,911
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General and administrative
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5,284
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4,303
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15,335
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12,506
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Impairment of assets
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11,249
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11,249
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2,940
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Total expenses
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56,800
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30,792
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132,926
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88,739
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Income before gain on sale of properties
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15,565
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28,881
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77,609
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73,877
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Gain on sale of properties
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266
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266
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Net income
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$
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15,565
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$
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29,147
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$
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77,609
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$
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74,143
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Weighted average shares outstanding
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121,665
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114,493
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120,005
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102,004
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Earnings per share:
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Income before gain on sale of properties
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$
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0.13
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$
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0.25
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$
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0.65
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$
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0.72
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Net income
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$
|
0.13
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$
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0.25
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$
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0.65
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$
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0.73
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|
See
accompanying notes
.
2
SENIOR HOUSING PROPERTIES
TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
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Nine Months Ended
September 30,
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|
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2009
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2008
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Cash flows from operating activities:
|
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|
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Net income
|
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$
|
77,609
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|
$
|
74,143
|
|
Adjustments to reconcile net income to cash
provided by
operating
activities:
|
|
|
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Depreciation
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56,713
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43,235
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Amortization
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2,521
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|
953
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Impairment of assets
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11,249
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2,940
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Gain on sale of properties
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(266
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)
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Equity in losses of Affiliates Insurance Company
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133
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Change in assets and liabilities:
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|
|
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Restricted cash
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(384
|
)
|
(801
|
)
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Other assets
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(6,580
|
)
|
1,181
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|
Accrued interest
|
|
(227
|
)
|
(2,751
|
)
|
Other liabilities
|
|
19,505
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|
15,091
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|
Cash provided by operating activities
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160,539
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|
133,725
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|
|
|
|
|
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Cash flows from investing activities:
|
|
|
|
|
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Acquisitions
|
|
(423,866
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)
|
(688,821
|
)
|
Investment in Five Star Quality Care, Inc.
|
|
(8,960
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)
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|
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Investment in Affiliates Insurance Company
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(5,110
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)
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|
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Proceeds from sale of real estate
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|
3,171
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|
21,336
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Cash used for investing activities
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(434,765
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)
|
(667,485
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)
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|
|
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|
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Cash flows from financing activities:
|
|
|
|
|
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Proceeds from issuance of common shares, net
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223,974
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|
522,907
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|
Proceeds from issuance of mortgage debt
|
|
512,934
|
|
|
|
Proceeds from borrowings on revolving credit
facility
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134,000
|
|
314,000
|
|
Repayments of borrowings on revolving credit
facility
|
|
(391,000
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)
|
(221,000
|
)
|
Repayment of other debt
|
|
(2,234
|
)
|
(14,149
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)
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Deferred financing fees
|
|
(11,335
|
)
|
|
|
Distributions to shareholders
|
|
(125,616
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)
|
(104,328
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)
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Cash provided by financing activities
|
|
340,723
|
|
497,430
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
66,497
|
|
(36,330
|
)
|
Cash and cash equivalents at beginning of period
|
|
5,990
|
|
43,521
|
|
Cash and cash equivalents at end of period
|
|
$
|
72,487
|
|
$
|
7,191
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
Interest paid
|
|
$
|
35,850
|
|
$
|
30,737
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
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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
|
|
1,763
|
|
1,497
|
|
See accompanying notes.
3
SENIOR HOUSING PROPERTIES
TRUST
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in
thousands, except per share data or as otherwise stated)
Note 1. Basis of Presentation
The
accompanying condensed consolidated financial statements of Senior Housing
Properties Trust and its subsidiaries, or the Company, have been prepared
without audit. Certain information and
disclosures required by generally accepted accounting principles, or GAAP, 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, 2008.
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
preparing these condensed consolidated financial statements, we evaluated
events that occurred through November 4, 2009 for potential recognition or
disclosure, the date these financial statements are issued.
In
June 2009, the Financial Accounting Standards Board, or FASB, issued
The FASB Accounting Standards Codification
TM
, or the Codification. The Codification is the single source of
authoritative non-governmental U.S. GAAP and is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption of the Codification
did not cause any change to our current accounting practices.
Effective
June 30, 2009, we adopted the Subsequent Events Topic of the
Codification. This topic establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before the financial statements are issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and whether that date
represents the date the financial statements are issued or are available to be
issued.
The Business Combinations Topic of the Codification
establishes principles and requirements for how an acquirer will recognize and
measure in its financial statements the identifiable assets acquired, liabilities
assumed and any noncontrolling interest in the acquiree and goodwill acquired
in a business combination principally by expanding the definition of what
constitutes a business combination, making it more likely that our acquisitions
will be accounted for as business combinations, and by requiring the immediate
expensing of acquisition costs incurred in connection with such
transactions. This topic is effective
for fiscal years beginning after December 15, 2008 and the adoption
affects our consolidated financial statements, principally by requiring us to
expense acquisition costs.
Effective June 30, 2009, we adopted the Interim
Disclosures about Fair Value of Financial Instruments subtopic of the Financial
Instruments Topic of the Codification.
Please see Note 7, Fair Value of Assets and Liabilities for relevant
disclosures.
In
April 2009, the FASB issued the following topics: Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly;
Recognition and Presentation of Other-Than-Temporary Impairments; and Interim
Disclosures about Fair Value of Financial Instruments. The first topic
provides additional guidance for estimating fair value when the volume and
level of activity for the assets or liabilities have significantly
decreased. This topic also includes guidance on identifying circumstances
that indicate a transaction is not orderly. The Other-Than-Temporary
Impairments Topic amends existing other than temporary impairment guidance
related to debt securities to make the guidance more operational and to improve
the presentation and disclosure of other than temporary impairments of debt and
equity securities. The
4
SENIOR HOUSING PROPERTIES
TRUST
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in
thousands, except per share data or as otherwise stated)
Interim
Disclosures about Fair Value of Financial Instruments Topic requires disclosure
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. Each
of these topics was effective for interim and annual reporting periods ending
after June 15, 2009. The adoption of these topics did not cause any
significant changes to our disclosures in our consolidated financial
statements.
Note 2. Real Estate Properties
At
September 30, 2009, we owned 289 properties located in 35 states and
Washington, D.C.
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 HRP, for an aggregate purchase price of approximately $565,000. As of September 1, 2009, we completed
these transactions with HRP. During
2009, we acquired 10 of these MOBs containing 617,000 square feet for an
aggregate purchase price of approximately $214,585, plus closing costs. We recorded intangible lease assets of $19,281
and intangible lease liabilities of $3,553 for these MOBs acquired during the
nine months ended September 30, 2009.
The allocation of the purchase price of our third quarter 2009
acquisitions is based upon preliminary estimates of the fair value of assets
acquired and liabilities assumed.
Consequently, amounts preliminarily allocated to assets acquired and
liabilities assumed could change significantly from those used in these
condensed consolidated financial statements.
One of the remaining buildings with an allocated value of $3,000 is no
longer subject to our purchase agreement.
At the request of a tenant for two properties subject to a
multi-property lease, in May and September 2009 we sold two of our
MOB properties for approximately $3,190, which was their approximate net book
value, to two unaffiliated parties. We
now own 45 of these properties containing 2.1 million square feet for an
aggregate cost of approximately $558,150, plus closing costs. We funded these acquisitions using cash on
hand, proceeds from our mortgage financing, proceeds from equity issuances,
borrowings under our revolving credit facility and by assuming three mortgage
loans, on two properties, totaling $10,800 with a weighted average interest
rate of 7.1% per annum and a weighted average maturity in 2018.
As of September 30,
2009, the MOBs that we acquired from HRP and continue to own were 98%
leased to approximately 200 tenants for an average lease
term of 9.2 years. HRP was formerly our
parent company, and both we and HRP are managed by Reit Management &
Research LLC, or RMR. Because we and HRP
have three trustees in common and we are both managed by RMR, the terms of
these transactions were negotiated by special committees of our and HRPs
boards of trustees composed of trustees who were not also trustees of both
companies. For more information about our dealings with HRP and RMR and their
affiliates and about the risks which may arise as a result of these and other
related person transactions, please see our Annual Report on Form 10-K for
the year ended December 31, 2008, or the Annual Report, our Quarterly
Report on Form 10-Q for the quarters ended March 31, 2009 and June 30,
2009, or the Quarterly Reports, the Other Items in this Quarterly Report on Form 10-Q,
and our other filings made with the SEC, and in particular, the section
captioned Risk Factors in the Annual Report, the sections captioned Managements
Discussion and Analysis of Financial Condition and Results of Operations
Related Person Transactions in the Annual Report, Quarterly Reports and this
Quarterly Report on Form 10-Q and the section captioned Related Person
Transactions and Company Review of Such Transactions in our Proxy Statement
dated March 30, 2009 relating to our 2009 Annual Shareholders Meeting.
On
September 30, 2009, we acquired 10 MOBs with a total of 643,000 square
feet for approximately $169,000, plus closing costs, from an unaffiliated
party. These buildings are currently
100% leased to one tenant for a lease term of 15 years plus renewal
options. We funded this acquisition
using cash on
5
SENIOR HOUSING
PROPERTIES TRUST
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in
thousands, except per share data or as otherwise stated)
hand,
proceeds from our mortgage financing in August 2009 described in Note 5
below and proceeds from our equity offering in September 2009 described in
Note 6 below.
In
October 2009, we acquired one senior living property for approximately
$21,000, plus closing costs, from an unaffiliated party. We leased this property to Five Star Quality
Care, Inc., or Five Star, and added this property to Five Star Lease No. 4,
which has a current term expiring in 2017.
Percentage rent, based on increases in gross revenues at this property,
will commence in 2011. We funded this
acquisition using cash on hand, proceeds from our mortgage financing in August 2009
described in Note 5 below and proceeds from our equity offering in September 2009
described in Note 6 below.
In
October 2009, we agreed to acquire 10 senior living properties for
approximately $97,250 from two unaffiliated parties. We intend to lease these properties to Five
Star. We expect percentage rent, based
on increases in gross revenues at these properties, will commence in 2011. We expect to fund these acquisitions using
cash on hand, proceeds from our equity offering in September 2009
described in Note 6 below and borrowings under our revolving credit
facility. The purchase of these
properties is contingent upon completion of our diligence and other customary
closing conditions. We can provide no assurance that we will purchase these
properties.
For
the three and nine months ended September 30, 2009, we recognized an impairment
of assets charge of $11,249 related to eight of our properties, including six
skilled nursing facilities and one assisted living property leased to Five Star
and one MOB leased entirely to a single tenant.
Two of these properties are classified as held for sale as described
below. For the nine months ended September 30,
2008, we recognized an impairment of assets charge of $2,940 related to one of
our assisted living properties classified as held for sale.
As
of September 30, 2009, four of our properties are classified as held for
sale. These four
properties
are included in real estate properties on our condensed consolidated balance
sheets and have a net carrying value of approximately
$3,927
at September 30, 2009. These
properties are currently leased to Five Star.
On October 1, 2009, we sold one of these properties to an
unaffiliated party for $500 and on November 1, 2009, we sold another one
of these properties to an unaffiliated party for $1,350. The two sold properties had been included in
Five Star Lease No. 1 and Five Star Lease No. 2, respectively.
During
the nine months ended September 30, 2009, pursuant to the terms of our
existing leases with Five Star, we purchased $30,350 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 $2,430.
Note 3. Net Unrealized Gain on
Investments
On
September 30, 2009, we owned 1,000,000 common shares of HRP and 3,235,000
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 of our HRP and Five Star shares on September 30,
2009 ($7.52 and $3.66 per share, respectively) and our weighted costs on the
dates we acquired these shares ($6.50 and $2.85 per share, respectively).
6
SENIOR HOUSING PROPERTIES
TRUST
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in
thousands, except per share data or as otherwise stated)
Note
4. Comprehensive Income
The
following is a reconciliation of net income to comprehensive income for the
three and nine months ended September 30, 2009 and 2008:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net income
|
|
$
|
15,565
|
|
$
|
29,147
|
|
$
|
77,609
|
|
$
|
74,143
|
|
Other comprehensive
income:
|
|
|
|
|
|
|
|
|
|
Change in net unrealized
gain / (loss) on investments
|
|
6,273
|
|
86
|
|
6,977
|
|
(999
|
)
|
Comprehensive income
|
|
$
|
21,838
|
|
$
|
29,233
|
|
$
|
84,586
|
|
$
|
73,144
|
|
Note 5. Indebtedness
We
have an unsecured revolving credit facility that matures on December 31,
2010. Our revolving credit facility
permits borrowings up to $550,000. The
annual interest payable for amounts drawn under the facility is LIBOR plus a
premium. The weighted average interest rate payable on borrowings under this
revolving credit facility was 1.1% and 4.5% at September 30, 2009 and
2008, respectively. In addition to
interest, we pay certain fees to maintain this credit facility and we amortize
certain set up costs. Our revolving
credit facility is available for acquisitions, working capital and general
business purposes. As of September 30, 2009 and 2008, we had zero and
$93,000 amounts outstanding under this credit facility, respectively, and
$550,000 and $457,000 available under this credit facility, respectively. Subject to certain conditions, this credit
facilitys maturity date can be extended at our option to December 31,
2011 upon payment of a fee.
On
August 4, 2009, a special purpose subsidiary of ours closed a $512,900
mortgage financing with the Federal National Mortgage Association, or FNMA.
This mortgage loan is secured by first liens on 28 senior living properties
that we own and lease to Five Star with 5,618 living units / beds located in 16
states. We used the proceeds from this mortgage financing to repay amounts
outstanding under our revolving credit facility, to purchase the remaining
seven MOBs from HRP and to acquire 10 MOBs and one senior living property from
unaffiliated parties as described in Note 2 above.
In connection with the FNMA
transaction, we realigned our four leases with Five Star. Lease No. 1 (which is comprised of four
separate leases) now includes 79 properties (excluding one property sold
subsequent to September 30, 2009 as described in Note 2 above), including
independent living communities, assisted living communities and skilled nursing
facilities, and expires in 2024. Lease No. 2
now includes 49 properties (excluding one property sold subsequent to September 30,
2009 as described in Note 2 above), including independent living communities,
assisted living communities, skilled nursing facilities and two rehabilitation
hospitals, and expires in 2026. Lease No. 3
now includes the 28 FNMA financed properties, including independent living
communities and assisted living communities, and expires in 2028. Lease No. 4 now includes 26 properties
(including one property acquired subsequent to September 30, 2009 as
described in Note 2 above), including independent living communities, assisted
living communities and skilled nursing facilities, and expires in 2017. In connection with the lease realignment and
the FNMA financing, we entered into a lease realignment agreement with Five
Star, or the Lease Realignment Agreement.
Pursuant to the terms of the Lease Realignment Agreement, (1) the
four leases, or the Leases, were reconfigured as described above, (2) we
acquired certain personal property located at
28
properties in 16 states
, or the Properties, from subsidiaries of Five Star
and pledged that personal property to FNMA, (3) we purchased 3,200,000
shares, or the Shares, of Five Star common stock, $.01 par value per share,
which represent approximately 9% of its total common stock outstanding, (4) Five
Star assumed certain reporting and other operating obligations required by FNMA
and (5) subsidiaries of Five Star pledged certain tangible and intangible
personal property, such as accounts receivable and contract rights, located at,
or arising from the operations of, the Properties to secure certain obligations
to us and arising under the FNMA loan.
To compensate Five Star for its sale of personal property to us, its
sale of the Shares to us, the pledge of Five Stars intangible assets and for
the services and obligations that Five Star has assumed, (1) we reduced
the annual rent payable to us under Lease No. 2 by $2,000 per year for the
term of that Lease; (2) we paid Five Star $18,600; and (3) we
reimbursed Five Star for its out of
7
SENIOR HOUSING PROPERTIES
TRUST
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in
thousands, except per share data or as otherwise stated)
pocket
expenses incurred in connection with the negotiation and closing of this
transaction. Five Star has granted
certain registration rights to us with regard to the Shares and our future
transfer of the Shares are subject to certain restrictions. For more
information about this FNMA financing and the agreement we entered with Five
Star to facilitate this financing, please see Part II, Item 5 of our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.
Note 6. Shareholders Equity
In
September 2009, we issued 6.9 million common shares in a public offering,
raising net proceeds of approximately $127,160.
We used a portion of the net proceeds from this offering to acquire the
10 MOBs and one senior living property from unaffiliated parties as described
in Note 2 above. We intend to use the
balance of these proceeds for general business purposes, including funding
pending acquisitions and for possible future acquisitions.
On
August 14, 2009, we paid a $0.36 per share, or $43,400, distribution to
our common shareholders for the quarter ended June 30, 2009. On October 5, 2009, we declared a
distribution of $0.36 per share, or $45,856, to be paid to common shareholders
of record on October 15, 2009, with respect to our results for the quarter
ended September 30, 2009. We expect to pay this distribution on or about November 17,
2009.
On
September 17, 2009, pursuant to our incentive share award plan, we granted
63,450 common shares of beneficial interest, par value $0.01 per share, valued
at $19.36 per share, the closing price of our common shares on the New York
Stock Exchange 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.
Note 7. Fair Value of Assets and
Liabilities
The
table below presents certain of our assets and liabilities measured at fair
value at September 30, 2009 categorized by the level of inputs used in the
valuation of each asset or liability.
Description
|
|
Total
|
|
Quoted Prices in Active
Markets for Identical
Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
(1)
|
|
$
|
3,927
|
|
$
|
|
|
$
|
3,927
|
|
$
|
|
|
Long-lived assets held and used
(2)
|
|
|
16,857
|
|
|
|
|
|
16,857
|
|
|
|
|
Investments in available for sale securities
(3)
|
|
19,360
|
|
19,360
|
|
|
|
|
|
Senior notes
(4)
|
|
322,543
|
|
|
|
322,543
|
|
|
|
(1) Assets
held for sale consist of four of our properties that we expect to sell that are
reported at fair value. We used offers
to purchase the properties made by third parties or comparable sales
transactions (level 2 inputs) to determine fair value of these properties. As of September 30, 2009, the net
carrying value of these properties was approximately $3,927 and we recorded an
impairment charge of $1,621 for the three and nine months ended September 30,
2009 related to two of these properties.
We have recorded cumulative impairments of approximately $9,953 to these
properties in order to reduce their carrying value to fair value.
(2) Long-lived assets
held and used consist of six of our properties with a carrying amount of
$26,485 that were written down to their fair value of $16,857, resulting in an
impairment charge of $9,628, which was
included in earnings for the period. We
used broker information and comparable sales transactions (level 2 inputs) to
determine fair value of these properties.
(3) Our
investments in available for sale securities include our 1,000,000 common
shares of HRP and 3,235,000 common shares of Five Star. The fair values of
these shares are based on quoted prices in active markets (level 1 inputs).
8
SENIOR HOUSING
PROPERTIES TRUST
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in
thousands, except per share data or as otherwise stated)
(4) We
estimate the fair values of our senior notes using as average of the bid and
ask price of our two issues of senior notes at the balance sheet date (level 2
inputs). As of September 30, 2009, the historic book value of our senior
notes was $322,124.
In
addition to the assets and liabilities described in the above table, our
additional financial instruments include rents receivable, cash and cash
equivalents, restricted cash, secured and unsecured debt and other liabilities.
The fair values of these additional financial instruments approximate their
carrying values at September 30, 2009 based upon their liquidity, short
term maturity, variable rate pricing or our estimate of fair value using
discounted cash flows analyses and prevailing interest rates.
Note 8. 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 activities occur but where residential overnight stays or
dining services are not provided, or MOBs.
Properties in the short term and long term residential care 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
services to members. Prior to June 2008,
our only operating segments were short term and long term residential care
facilities that offer dining for residents and properties that offer fitness,
wellness and spa services to members included in the All Other category.
|
|
For the Three Months Ended September 30, 2009
|
|
|
|
Short and
Long Term
Residential
Care Facilities
|
|
MOB
|
|
All Other
|
|
Consolidated
|
|
Rental income
|
|
$
|
54,401
|
|
$
|
13,706
|
|
$
|
3,903
|
|
$
|
72,010
|
|
Interest and other income
|
|
|
|
|
|
355
|
|
355
|
|
Total revenues
|
|
54,401
|
|
13,706
|
|
4,258
|
|
72,365
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses
|
|
|
|
4,112
|
|
|
|
4,112
|
|
Interest expense
|
|
7,475
|
|
185
|
|
8,289
|
|
15,949
|
|
Depreciation expense
|
|
15,348
|
|
3,419
|
|
922
|
|
19,689
|
|
Acquisition costs
|
|
|
|
517
|
|
|
|
517
|
|
General and administrative
|
|
|
|
|
|
5,284
|
|
5,284
|
|
Impairment of assets
|
|
3,784
|
|
7,465
|
|
|
|
11,249
|
|
Total expenses
|
|
26,607
|
|
15,698
|
|
14,495
|
|
56,800
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
27,794
|
|
$
|
(1,992
|
)
|
$
|
(10,237
|
)
|
$
|
15,565
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,866,832
|
|
$
|
746,218
|
|
$
|
341,986
|
|
$
|
2,955,036
|
|
9
SENIOR HOUSING
PROPERTIES TRUST
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in
thousands, except per share data or as otherwise stated)
|
|
For the Three Months Ended September 30, 2008
|
|
|
|
Short and
Long Term
Residential
Care Facilities
|
|
MOB
|
|
All Other
|
|
Consolidated
|
|
Rental income
|
|
$
|
51,434
|
|
$
|
4,767
|
|
$
|
2,643
|
|
$
|
58,844
|
|
Interest and other income
|
|
|
|
|
|
829
|
|
829
|
|
Total revenues
|
|
51,434
|
|
4,767
|
|
3,472
|
|
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
|
|
|
|
|
|
4,303
|
|
4,303
|
|
Total expenses
|
|
15,268
|
|
2,378
|
|
13,146
|
|
30,792
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before gain on sale of properties
|
|
36,166
|
|
2,389
|
|
(9,674
|
)
|
28,881
|
|
Gain on sale of properties
|
|
266
|
|
|
|
|
|
266
|
|
Net income (loss)
|
|
$
|
36,432
|
|
$
|
2,389
|
|
$
|
(9,674
|
)
|
$
|
29,147
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,856,097
|
|
$
|
262,525
|
|
$
|
230,420
|
|
$
|
2,349,042
|
|
|
|
For the Nine Months Ended September 30, 2009
|
|
|
|
Short and
Long Term
Residential
Care Facilities
|
|
MOB
|
|
All Other
|
|
Consolidated
|
|
Rental income
|
|
$
|
162,920
|
|
$
|
35,157
|
|
$
|
11,708
|
|
$
|
209,785
|
|
Interest and other income
|
|
|
|
|
|
750
|
|
750
|
|
Total revenues
|
|
162,920
|
|
35,157
|
|
12,458
|
|
210,535
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses
|
|
|
|
10,286
|
|
|
|
10,286
|
|
Interest expense
|
|
11,544
|
|
560
|
|
25,328
|
|
37,432
|
|
Depreciation expense
|
|
45,203
|
|
8,743
|
|
2,767
|
|
56,713
|
|
Acquisition costs
|
|
|
|
1,911
|
|
|
|
1,911
|
|
General and administrative
|
|
|
|
|
|
15,335
|
|
15,335
|
|
Impairment of assets
|
|
3,784
|
|
7,465
|
|
|
|
11,249
|
|
Total expenses
|
|
60,531
|
|
28,965
|
|
43,430
|
|
132,926
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
102,389
|
|
$
|
6,192
|
|
$
|
(30,972
|
)
|
$
|
77,609
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,866,832
|
|
$
|
746,218
|
|
$
|
341,986
|
|
$
|
2,955,036
|
|
10
SENIOR HOUSING PROPERTIES
TRUST
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in
thousands, except per share data or as otherwise stated)
|
|
For the Nine Months Ended September 30, 2008
|
|
|
|
Short and
Long Term
Residential
Care Facilities
|
|
MOB
|
|
All Other
|
|
Consolidated
|
|
Rental income
|
|
$
|
149,687
|
|
$
|
5,000
|
|
$
|
5,904
|
|
$
|
160,591
|
|
Interest and other income
|
|
|
|
|
|
2,025
|
|
2,025
|
|
Total revenues
|
|
149,687
|
|
5,000
|
|
7,929
|
|
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
|
|
|
|
|
|
12,506
|
|
12,506
|
|
Impairment of assets
|
|
2,940
|
|
|
|
|
|
2,940
|
|
Total expenses
|
|
47,390
|
|
2,572
|
|
38,777
|
|
88,739
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before gain on sale of properties
|
|
102,297
|
|
2,428
|
|
(30,848
|
)
|
73,877
|
|
Gain on sale of properties
|
|
266
|
|
|
|
|
|
266
|
|
Net income (loss)
|
|
$
|
102,563
|
|
$
|
2,428
|
|
$
|
(30,848
|
)
|
$
|
74,143
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,856,097
|
|
$
|
262,525
|
|
$
|
230,420
|
|
$
|
2,349,042
|
|
Note 9. Significant Tenant
Five
Star is the lessee of 59% of our investments, at cost, as of September 30,
2009. The following tables present
summary financial information for Five Star for the three and nine months ended
September 30, 2009 and 2008, as reported in its Quarterly Report on Form 10-Q.
Summary Financial Information of Five Star Quality
Care, Inc.
(unaudited)
|
|
For the Three Months Ended September 30,
|
|
Operations
|
|
2009
|
|
2008
|
|
Total revenues
|
|
$
|
297,208
|
|
$
|
280,619
|
|
Operating income
|
|
1,392
|
|
2,957
|
|
Income (loss) from continuing operations
|
|
4,362
|
|
(1,587
|
)
|
Net income (loss)
|
|
4,108
|
|
(2,250
|
)
|
|
|
|
|
|
|
|
|
11
SENIOR HOUSING PROPERTIES
TRUST
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in
thousands, except per share data or as otherwise stated)
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
Total revenues
|
|
$
|
887,731
|
|
$
|
808,006
|
|
Operating income
|
|
9,020
|
|
16,495
|
|
Income from continuing operations
|
|
38,569
|
|
7,177
|
|
Net income
|
|
38,058
|
|
2,856
|
|
|
|
|
|
|
|
Cash Flows
|
|
|
|
|
|
Cash provided by operating activities
|
|
32,509
|
|
44,593
|
|
Net cash provided by (used in) discontinued operations
|
|
611
|
|
(1,136
|
)
|
Cash used in investing activities
|
|
(11,036
|
)
|
(31,842
|
)
|
Cash used in financing activities
|
|
(11,790
|
)
|
(2,642
|
)
|
Change in cash and cash equivalents
|
|
10,294
|
|
8,973
|
|
Cash and cash equivalents at beginning of period
|
|
16,138
|
|
30,999
|
|
Cash and cash equivalents at end of period
|
|
26,432
|
|
39,972
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
Financial Position
|
|
2009
|
|
2008
|
|
Current
assets
|
|
$
|
195,763
|
|
$
|
131,424
|
|
Non-current
assets
|
|
223,825
|
|
258,096
|
|
Total
indebtedness
|
|
103,725
|
|
139,125
|
|
Current
liabilities
|
|
180,054
|
|
127,492
|
|
Non-current
liabilities
|
|
101,199
|
|
175,824
|
|
Total
shareholders equity
|
|
138,335
|
|
86,204
|
|
|
|
|
|
|
|
|
|
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 Five Stars
Quarterly Report is not incorporated by reference into these financial
statements.
Five
Star is our former subsidiary and both we and Five Star have management
contracts with RMR. For information
about our dealings with Five Star and RMR and about the risks which may arise
as a result of these related person transactions, please see our Annual Report
on Form 10-K for the year ended December 31, 2008, especially the
section titled Risk Factors.
Note
10. Pro Forma Information
During
the three months ended September 30, 2009, we purchased 17 MOBs for
approximately $313,565, sold one MOB for $100 and, pursuant to the terms of our
existing leases with Five Star, we purchased $6,114 of improvements made to our
properties leased to Five Star. During
the nine months ended September 30, 2009, we purchased 20 MOBs for
approximately $383,585, sold two MOBs for $3,190 and, pursuant to the terms of
our existing leases with Five Star, we purchased $30,350 of improvements made
to our properties leased to Five Star.
During the three and nine months ended September 30, 2009, we
recognized an impairment of assets charge of $11,249 related to eight
properties. In August 2009, we
closed on a $512,900 mortgage financing with FNMA, acquired $8,497 of personal
property at the FNMA leased properties, acquired 3.2 million shares of Five
Star common stock, reduced the annual rent payable to us under Five Star Lease No. 2
by $2,000 per year for the term of that Lease and incurred $11,815 of deferred
financing fees related to this mortgage financing. During 2008, we purchased 30
12
SENIOR HOUSING PROPERTIES
TRUST
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in
thousands, except per share data or as otherwise stated)
senior
living properties, four wellness centers and 38 MOBs for an aggregate of $842,900;
we purchased $69,400 of improvements made to our properties leased to Five
Star; we repaid in full a mortgage loan on one of our properties for $12,600 in
April 2008; we assumed $61,300 of mortgage debt in conjunction with our
2008 acquisitions; we recorded an impairment charge on four of our properties
for $8,380; and we sold three assisted living facilities to Five Star for
$21,350 and realized a gain on sale of approximately $266 in July 2008. During 2009 and 2008, we also issued 12,704
and 25,759 of our common shares, respectively.
The following table presents our
pro forma results of operations as if all of these acquisitions, dispositions
and financing transactions were completed on January 1, 2008. 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 capital structure.
|
|
Pro Forma Results
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Total revenues
|
|
$
|
77,985
|
|
$
|
77,891
|
|
$
|
233,224
|
|
$
|
233,408
|
|
Income before gain on sale of properties
|
|
$
|
15,798
|
|
$
|
10,577
|
|
$
|
69,769
|
|
$
|
65,533
|
|
Net income
|
|
$
|
15,798
|
|
$
|
10,843
|
|
$
|
69,769
|
|
$
|
65,799
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data:
|
|
|
|
|
|
|
|
|
|
Income before gain on sale of properties
|
|
$
|
0.12
|
|
$
|
0.08
|
|
$
|
0.56
|
|
$
|
0.51
|
|
Net income
|
|
$
|
0.12
|
|
$
|
0.09
|
|
$
|
0.56
|
|
$
|
0.52
|
|
Note
11. Affiliates Insurance Company
As
of September 30, 2009, we have invested $5,110 in Affiliates
Insurance Company, or AIC, an insurance company, that is owned by RMR
and other companies to which RMR provides management services.
We own 16.67% of the common shares of AIC which has a current
carrying value of $4,977. This
investment is included in other assets on our condensed consolidated balance
sheets. Although we own less than 20% of AIC, we use the equity method to
account for our investment in AIC because we believe that we have significant
influence over AIC since each of our trustees is a director of AIC and since we
expect to procure some of our insurance from AIC. Under the equity
method, we record our percentage share of net earnings from AIC in our
consolidated statements of income. For
the three and nine month periods, our share of AICs net losses totaled $23 and
$133, respectively, and are included in general and administrative expenses on
our condensed consolidated statements of income. If we determine there is
an other than temporary decline in the fair value of this investment, we
would record a charge to earnings. In evaluating the fair value of this
investment, we consider, among other things, the assets and
liabilities held by AIC, AICs overall financial condition and earning
trends, and the financial condition and prospects for the insurance
industry generally. Subsequent to September 30,
2009, we invested an additional $24 in order to fund our share
of formation and licensing costs for AIC.
13
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, 2008.
PORTFOLIO
OVERVIEW
The
following tables present an overview of our portfolio (dollars in thousands
except per unit/square foot):
(As
of September 30, 2009)
|
|
Number of
Properties
|
|
Number of
Units/Beds or
Square Feet
|
|
Investment
Carrying Value
(1)
|
|
% of
Investment
|
|
Annualized
Current Rent
|
|
% of
Annualized
Current
Rent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent living
communities
(2)
|
|
43
|
|
11,524
|
|
$
|
1,119,530
|
|
35.1%
|
|
$
|
109,878
|
|
34.2%
|
|
Assisted living
facilities
(2)
|
|
120
|
|
8,472
|
|
910,129
|
|
28.4%
|
|
84,822
|
|
26.4%
|
|
Skilled nursing
facilities
(2)
|
|
58
|
|
5,844
|
|
228,536
|
|
7.1%
|
|
20,413
|
|
6.4%
|
|
Rehabilitation
hospitals
|
|
2
|
|
364
|
|
61,025
|
|
1.9%
|
|
9,648
|
|
3.0%
|
|
Wellness centers
|
|
10
|
|
812,000
|
sq. ft.
|
180,017
|
|
5.6%
|
|
17,069
|
|
5.3%
|
|
MOBs
|
|
56
|
|
2,867,862
|
sq. ft.
|
702,307
|
|
21.9%
|
|
79,124
|
|
24.7%
|
|
Total
|
|
289
|
|
|
|
$
|
3,201,544
|
|
100.0%
|
|
$
|
320,954
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant / Operator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Star (Lease
No. 1)
(3)
|
|
80
|
|
5,919
|
|
$
|
533,304
|
|
16.7%
|
|
$
|
45,273
|
|
14.1%
|
|
Five Star (Lease
No. 2)
(3)
|
|
50
|
|
6,106
|
|
502,738
|
|
15.7%
|
|
49,294
|
|
15.4%
|
|
Five Star (Lease
No. 3)
(3)
|
|
28
|
|
5,618
|
|
617,161
|
|
19.3%
|
|
61,564
|
|
19.2%
|
|
Five Star (Lease
No. 4)
(3)
|
|
25
|
|
2,461
|
|
230,636
|
|
7.2%
|
|
21,144
|
|
6.6%
|
|
Sunrise / Marriott
(4)
|
|
14
|
|
4,091
|
|
325,165
|
|
10.2%
|
|
32,416
|
|
10.1%
|
|
Brookdale
|
|
18
|
|
894
|
|
61,122
|
|
1.9%
|
|
8,173
|
|
2.5%
|
|
6 private companies
(combined)
|
|
8
|
|
1,115
|
|
49,094
|
|
1.5%
|
|
6,897
|
|
2.1%
|
|
Wellness centers
|
|
10
|
|
812,000
|
sq. ft
|
180,017
|
|
5.6%
|
|
17,069
|
|
5.3%
|
|
Multi-tenant MOBs
|
|
56
|
|
2,867,862
|
sq. ft
|
702,307
|
|
21.9%
|
|
79,124
|
|
24.7%
|
|
Total
|
|
289
|
|
|
|
$
|
3,201,544
|
|
100.0%
|
|
$
|
320,954
|
|
100.0%
|
|
Tenant Operating
Statistics (Quarter Ended June 30)
(5)
|
|
Rent
Coverage
|
|
Occupancy
|
|
Annualized Rental Income per Living
Unit,
Bed or Square Foot
(6)
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Five Star (Lease
No. 1)
(3)
|
|
1.37x
|
|
1.23x
|
|
87%
|
|
88%
|
|
$
|
7,649
|
|
$
|
7,520
|
|
Five Star (Lease No. 2)
(3) (7)
|
|
1.37x
|
|
1.44x
|
|
82%
|
|
84%
|
|
$
|
6,905
|
|
$
|
6,520
|
|
Five Star (Lease
No. 3)
(3)
|
|
1.52x
|
|
1.56x
|
|
89%
|
|
91%
|
|
$
|
10,958
|
|
$
|
10,670
|
|
Five Star (Lease
No. 4)
(3)
|
|
1.06x
|
|
1.38x
|
|
85%
|
|
90%
|
|
$
|
8,592
|
|
$
|
8,280
|
|
Sunrise / Marriott
(4)
|
|
1.44x
|
|
1.43x
|
|
89%
|
|
90%
|
|
$
|
7,924
|
|
$
|
7,817
|
|
Brookdale
|
|
2.14x
|
|
2.19x
|
|
90%
|
|
91%
|
|
$
|
9,142
|
|
$
|
8,965
|
|
6 private companies
(combined)
|
|
1.96x
|
|
1.92x
|
|
81%
|
|
83%
|
|
$
|
6,186
|
|
$
|
6,134
|
|
Wellness centers
(8)
|
|
2.36x
|
|
2.37x
|
|
100%
|
|
100%
|
|
NA
|
|
NA
|
|
Multi-tenant MOBs
(9)
|
|
NA
|
|
NA
|
|
98%
|
|
99%
|
|
$
|
28
|
|
$
|
22
|
|
|
|
Short
and Long Term Residential Care Facilities
Percentage of Operating Revenue Sources
|
|
|
|
Private
Pay
(10)
|
|
Medicare
|
|
Medicaid
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Star (Lease
No. 1)
(3)
|
|
60%
|
|
60%
|
|
14%
|
|
14%
|
|
26%
|
|
26%
|
|
Five Star (Lease
No. 2)
(3)
|
|
52%
|
|
51%
|
|
32%
|
|
32%
|
|
16%
|
|
17%
|
|
Five Star (Lease
No. 3)
(3)
|
|
87%
|
|
88%
|
|
12%
|
|
11%
|
|
1%
|
|
1%
|
|
Five Star (Lease
No. 4)
(3)
|
|
67%
|
|
69%
|
|
14%
|
|
14%
|
|
19%
|
|
17%
|
|
Sunrise / Marriott
(4)
|
|
69%
|
|
81%
|
|
27%
|
|
16%
|
|
4%
|
|
3%
|
|
Brookdale
|
|
100%
|
|
99%
|
|
|
|
|
|
|
|
1%
|
|
6 private companies
(combined)
|
|
24%
|
|
26%
|
|
24%
|
|
23%
|
|
52%
|
|
51%
|
|
14
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Tenant
Operating Statistics (Six Months Ended June 30)
(5)
|
|
Rent
Coverage
|
|
Occupancy
|
|
Annualized Rental Income per Living
Unit,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Star (Lease
No. 1)
(3)
|
|
1.35x
|
|
1.34x
|
|
87%
|
|
88%
|
|
$
|
7,649
|
|
$
|
7,520
|
|
Five Star (Lease
No. 2)
(3)
(7)
|
|
1.33x
|
|
1.47x
|
|
81%
|
|
85%
|
|
$
|
6,905
|
|
$
|
6,520
|
|
Five Star (Lease
No. 3)
(3)
|
|
1.58x
|
|
1.59x
|
|
89%
|
|
92%
|
|
$
|
10,958
|
|
$
|
10,670
|
|
Five Star (Lease
No. 4)
(3)
|
|
1.03x
|
|
1.43x
|
|
85%
|
|
90%
|
|
$
|
8,592
|
|
$
|
8,280
|
|
Sunrise / Marriott
(4)
|
|
1.45x
|
|
1.52x
|
|
90%
|
|
91%
|
|
$
|
7,924
|
|
$
|
7,817
|
|
Brookdale
|
|
2.18x
|
|
2.21x
|
|
91%
|
|
91%
|
|
$
|
9,142
|
|
$
|
8,965
|
|
6 private companies
(combined)
|
|
1.89x
|
|
2.08x
|
|
81%
|
|
85%
|
|
$
|
6,186
|
|
$
|
6,134
|
|
Wellness centers
(8)
|
|
1.86x
|
|
1.99x
|
|
100%
|
|
100%
|
|
NA
|
|
NA
|
|
Multi-tenant MOBs
(9)
|
|
NA
|
|
NA
|
|
98%
|
|
99%
|
|
$
|
28
|
|
$
|
22
|
|
|
|
Short
and Long Term Residential Care Facilities
|
|
|
|
Percentage
of Operating Revenue Sources
|
|
|
|
Private
Pay
(10)
|
|
Medicare
|
|
Medicaid
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Star (Lease No. 1)
(3)
|
|
49%
|
|
50%
|
|
18%
|
|
18%
|
|
33%
|
|
32%
|
|
Five Star (Lease No. 2)
(3)
|
|
50%
|
|
51%
|
|
33%
|
|
34%
|
|
17%
|
|
16%
|
|
Five Star (Lease No. 3)
(3)
|
|
86%
|
|
88%
|
|
13%
|
|
11%
|
|
1%
|
|
1%
|
|
Five Star (Lease No. 4)
(3)
|
|
68%
|
|
69%
|
|
13%
|
|
4%
|
|
19%
|
|
17%
|
|
Sunrise / Marriott
(4)
|
|
67%
|
|
67%
|
|
29%
|
|
29%
|
|
4%
|
|
4%
|
|
Brookdale
|
|
100%
|
|
99%
|
|
|
|
|
|
|
|
1%
|
|
6 private companies (combined)
|
|
23%
|
|
27%
|
|
25%
|
|
24%
|
|
52%
|
|
49%
|
|
(1)
Amounts are before depreciation, but after impairment write downs, if
any.
(2)
Properties are categorized by the type of living units / beds which
constitute a majority of the living units / beds at the property.
(3)
On August 4, 2009, in connection with the Federal National Mortgage
Association, or FNMA, transaction, we realigned our four leases with Five Star
Quality Care, Inc., or Five Star.
The data presented reflects this realignment.
(4)
Marriott International, Inc. guarantees this lease.
(5)
All tenant operating data presented are based upon the
operating results provided by our tenants for the indicated quarterly or six
month periods, or the most recent prior period for which tenant operating
results are available to us. Rent coverage is calculated as operating cash flow
from our tenants operations of our properties, before subordinated charges,
divided by minimum rents payable to us.
We have not independently verified our tenants operating data. The table excludes data for periods prior to
our ownership of some of these properties.
(6)
Represents annualized rent by lease divided by the
number of living units, beds or square feet leased at September 30, 2009
and 2008.
(7)
Annualized rental income per living unit, bed or
square foot excludes the two rehabilitation hospitals because these properties
have extensive clinic space for services to both overnight patients and
patients who receive treatment and do not stay overnight, and these properties
are not comparable to residential senior living properties.
(8)
Annualized rental income per living unit, bed or
square foot excludes the wellness centers because these properties have
extensive indoor and outdoor recreation space which is not comparable to
properties where rent is based on interior space only.
(9)
Our medical office, clinic and biotech laboratory
building, or MOB, leases include both triple net leases where, in addition to
paying fixed rents, the tenants assume the obligation to operate and maintain
the properties at their expense and net and modified leases where we are
responsible to operate and maintain the properties and we charge tenants for
some or all of the property operating costs.
A minority of our MOB leases are so-called full-service leases where
we receive fixed rent from our tenants and no reimbursement for our property
operating costs.
(10)
Private pay excludes revenues from the Medicare and
Medicaid programs.
15
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
The following tables set
forth information regarding lease expirations as of September 30, 2009
(dollars in thousands):
|
|
Annualized Rent
|
|
Percent of
Total
|
|
Cumulative
Percentage
of
Annualized
|
|
Year
|
|
Short and Long
Term Residential
Care Facilities
|
|
MOBs
|
|
Wellness
Centers
|
|
Total
|
|
Annualized
Current Rent
Expiring
|
|
Current
Rent
Expiring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
|
|
$
|
997
|
|
$
|
|
|
$
|
997
|
|
0.3%
|
|
0.3%
|
|
2010
|
|
1,333
|
|
2,392
|
|
|
|
3,725
|
|
1.2%
|
|
1.5%
|
|
2011
|
|
|
|
2,047
|
|
|
|
2,047
|
|
0.6%
|
|
2.1%
|
|
2012
|
|
|
|
5,951
|
|
|
|
5,951
|
|
1.9%
|
|
4.0%
|
|
2013
|
|
32,416
|
|
3,658
|
|
|
|
36,074
|
|
11.2%
|
|
15.2%
|
|
2014
|
|
|
|
6,167
|
|
|
|
6,167
|
|
1.9%
|
|
17.1%
|
|
2015
|
|
2,072
|
|
5,324
|
|
|
|
7,396
|
|
2.3%
|
|
19.4%
|
|
2016
|
|
2,888
|
|
6,760
|
|
|
|
9,648
|
|
3.0%
|
|
22.4%
|
|
2017
|
|
29,317
|
|
1,308
|
|
|
|
30,625
|
|
9.5%
|
|
31.9%
|
|
2018
|
|
|
|
1,896
|
|
|
|
1,896
|
|
0.6%
|
|
32.5%
|
|
2019 and after
|
|
156,735
|
|
42,624
|
|
17,069
|
|
216,428
|
|
67.5%
|
|
100.0%
|
|
Total
|
|
$
|
224,761
|
|
$
|
79,124
|
|
$
|
17,069
|
|
$
|
320,954
|
|
100.0%
|
|
|
|
Average remaining lease term for all properties
(weighted by rent) 12.8 years
|
|
Number of Tenants
|
|
|
|
Cumulative
|
|
Year
|
|
Short and
Long Term
Residential
Care Facilities
|
|
MOBs
|
|
Wellness
Centers
|
|
Total
|
|
Percent of
Total Number
of Tenants
Expiring
|
|
Percentage
of Number
of Tenants
Expiring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
15
|
|
|
|
15
|
|
6.8%
|
|
6.8%
|
|
2010
|
|
1
|
|
23
|
|
|
|
24
|
|
10.9%
|
|
17.7%
|
|
2011
|
|
|
|
22
|
|
|
|
22
|
|
10.0%
|
|
27.7%
|
|
2012
|
|
|
|
38
|
|
|
|
38
|
|
17.2%
|
|
44.9%
|
|
2013
|
|
1
|
|
21
|
|
|
|
22
|
|
10.0%
|
|
54.9%
|
|
2014
|
|
|
|
22
|
|
|
|
22
|
|
10.0%
|
|
64.9%
|
|
2015
|
|
2
|
|
18
|
|
|
|
20
|
|
9.0%
|
|
73.9%
|
|
2016
|
|
2
|
|
18
|
|
|
|
20
|
|
9.0%
|
|
82.9%
|
|
2017
|
|
2
|
|
12
|
|
|
|
14
|
|
6.3%
|
|
89.2%
|
|
2018
|
|
|
|
6
|
|
|
|
6
|
|
2.7%
|
|
91.9%
|
|
2019 and after
|
|
4
|
|
12
|
|
2
|
|
18
|
|
8.1%
|
|
100.0%
|
|
Total
|
|
12
|
|
207
|
|
2
|
|
221
|
|
100.0%
|
|
|
|
16
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Number of Living Units or Beds or Square Feet with Leases Expiring
Year
|
|
Short and
Long Term
Residential
Care
Facilities
(Units/Beds)
|
|
Percent
of Total
Living
Units or
Beds
Expiring
|
|
Cumulative
Percentage
of Total
Living
Units or
Beds
Expiring
|
|
MOBs
(Square
Feet)
|
|
Wellness
Centers
(Square
Feet)
|
|
Total
Square
Feet
|
|
Percent
of Total
Square
Feet
Expiring
|
|
Cumulative
Percent of
Total
Square
Feet
Expiring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
0.0%
|
|
0.0%
|
|
26,716
|
|
|
|
26,716
|
|
0.7%
|
|
0.7%
|
|
2010
|
|
140
|
|
0.5%
|
|
0.5%
|
|
73,408
|
|
|
|
73,408
|
|
2.0%
|
|
2.7%
|
|
2011
|
|
|
|
0.0%
|
|
0.5%
|
|
63,458
|
|
|
|
63,458
|
|
1.7%
|
|
4.4%
|
|
2012
|
|
|
|
0.0%
|
|
0.5%
|
|
296,708
|
|
|
|
296,708
|
|
8.2%
|
|
12.6%
|
|
2013
|
|
4,091
|
|
15.6%
|
|
16.1%
|
|
143,974
|
|
|
|
143,974
|
|
4.0%
|
|
16.6%
|
|
2014
|
|
|
|
0.0%
|
|
16.1%
|
|
157,987
|
|
|
|
157,987
|
|
4.4%
|
|
21.0%
|
|
2015
|
|
283
|
|
1.1%
|
|
17.2%
|
|
232,520
|
|
|
|
232,520
|
|
6.4%
|
|
27.4%
|
|
2016
|
|
517
|
|
2.0%
|
|
19.2%
|
|
328,525
|
|
|
|
328,525
|
|
9.1%
|
|
36.5%
|
|
2017
|
|
3,355
|
|
12.8%
|
|
32.0%
|
|
32,895
|
|
|
|
32,895
|
|
0.9%
|
|
37.4%
|
|
2018
|
|
|
|
0.0%
|
|
32.0%
|
|
48,174
|
|
|
|
48,174
|
|
1.3%
|
|
38.7%
|
|
2019 and after
|
|
17,818
|
|
68.0%
|
|
100.0%
|
|
1,413,562
|
|
812,000
|
|
2,225,562
|
|
61.3%
|
|
100.0%
|
|
Total
|
|
26,204
|
|
100.0%
|
|
|
|
2,817,927
|
|
812,000
|
|
3,629,927
|
|
100.0%
|
|
|
|
RESULTS
OF OPERATIONS
Three Months Ended September 30,
2009 Compared to Three Months Ended September 30, 2008:
|
|
2009
|
|
2008
|
|
Change
|
|
% Change
|
|
|
|
(dollars in thousands, except per share amounts)
|
|
|
|
Rental income
|
|
$
|
72,010
|
|
$
|
58,844
|
|
$
|
13,166
|
|
22.4%
|
|
Interest and other income
|
|
355
|
|
829
|
|
(474
|
)
|
(57.2)%
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses
|
|
4,112
|
|
1,024
|
|
3,088
|
|
301.6%
|
|
Interest expense
|
|
15,949
|
|
9,606
|
|
6,343
|
|
66.0%
|
|
Depreciation expense
|
|
19,689
|
|
15,859
|
|
3,830
|
|
24.2%
|
|
Acquisition costs
|
|
517
|
|
|
|
517
|
|
|
|
General and administrative
|
|
5,284
|
|
4,303
|
|
981
|
|
22.8%
|
|
Impairment of assets
|
|
11,249
|
|
|
|
11,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before gain on sale of properties
|
|
15,565
|
|
28,881
|
|
(13,316
|
)
|
(46.1)%
|
|
Gain on sale of properties
|
|
|
|
266
|
|
(266
|
)
|
|
|
Net income
|
|
$
|
15,565
|
|
$
|
29,147
|
|
$
|
13,582
|
|
(46.6)%
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
121,665
|
|
114,493
|
|
7,172
|
|
6.3%
|
|
|
|
|
|
|
|
|
|
|
|
Income before gain on sale of properties per share
|
|
$
|
0.13
|
|
$
|
0.25
|
|
$
|
(0.12
|
)
|
(48.0)%
|
|
Net income per share
|
|
$
|
0.13
|
|
$
|
0.25
|
|
$
|
(0.12
|
)
|
(48.0)%
|
|
Rental
income increased because of rents earned from our real estate acquisitions
since October 1, 2008, including $13.7 million of rental income in the
third quarter of 2009 due to our acquisition of MOBs since June 2008. Interest and other income decreased as a
result of lower levels of investable cash and lower interest rates.
17
Item 2.
Managements Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The
increase in property operating expenses for the quarter ended September 30,
2009 is theresult of our acquisition of MOBs since June 2008 and principally includes expenses related to
real estate taxes, utilities, cleaning costs and property management fees paid
to Reit Management & Research LLC, or RMR.
Interest
expense increased because of interest payments on our $512.9 million mortgage
financing entered in August 2009 with a weighted average interest rate of
6.59%, the amortization of $11.8 million of deferred financing fees incurred in
connection with this mortgage financing and greater amounts outstanding under
our revolving credit facility offset by lower interest rates. Our weighted average balance outstanding and
interest rate under our revolving credit facility was $90.4 million and 1.1%,
and $32.2 million and 4.0%, for the three months ended September 30, 2009
and 2008, respectively. Interest
expense also increased due to $61.3 million of debt assumed in connection with
our third quarter 2008 acquisitions.
Depreciation
expense for the third quarter of 2009 increased because of acquisitions since October 1,
2008. Commencing January 1, 2009, acquisition costs are expensed
under the Business Combinations Topic of
The FASB Accounting
Standards Codification
TM
, or the Codification. General and administrative expenses increased
in 2009 principally due to our acquisitions since October 1, 2008.
During
the three months ended September 30, 2009, we recognized an impairment of
assets charge of $11.2 million related to eight properties, including six
skilled nursing facilities, one assisted living property and one MOB.
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.
Net income per share decreased because of the changes
in revenues and expenses described above and the effect of an increase in the
weighted average number of shares outstanding resulting from our issuance of
common shares in February and September 2009.
Nine Months Ended September 30,
2009 Compared to Nine Months Ended September 30, 2008:
|
|
2009
|
|
2008
|
|
Change
|
|
% Change
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
Rental income
|
|
$
|
209,785
|
|
$
|
160,591
|
|
$
|
49,194
|
|
30.6%
|
|
Interest and other income
|
|
750
|
|
2,025
|
|
(1,275
|
)
|
(63.0)%
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses
|
|
10,286
|
|
1,124
|
|
9,162
|
|
815.1%
|
|
Interest expense
|
|
37,432
|
|
28,934
|
|
8,498
|
|
29.4%
|
|
Depreciation expense
|
|
56,713
|
|
43,235
|
|
13,478
|
|
31.2%
|
|
Acquisition costs
|
|
1,911
|
|
|
|
1,911
|
|
|
|
General and administrative
|
|
15,335
|
|
12,506
|
|
2,829
|
|
22.6%
|
|
Impairment of assets
|
|
11,249
|
|
2,940
|
|
8,309
|
|
282.6%
|
|
|
|
|
|
|
|
|
|
|
|
Income before gain on sale of properties
|
|
77,609
|
|
73,877
|
|
3,732
|
|
5.1%
|
|
Gain on sale of properties
|
|
|
|
266
|
|
(266
|
)
|
|
|
Net income
|
|
$
|
77,609
|
|
$
|
74,143
|
|
$
|
3,466
|
|
4.7%
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
120,005
|
|
102,004
|
|
18,001
|
|
17.6%
|
|
|
|
|
|
|
|
|
|
|
|
Income before gain on sale of properties per share
|
|
$
|
0.65
|
|
$
|
0.72
|
|
$
|
(0.07
|
)
|
(9.7)%
|
|
Net income per share
|
|
$
|
0.65
|
|
$
|
0.73
|
|
$
|
(0.08
|
)
|
(11.0)%
|
|
18
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Rental
income increased because of rents earned from our real estate acquisitions
since October 1, 2008, including $35.2 million of rental income in the
nine months ended September 30, 2009 due to our acquisition of MOBs since June 2008,
partially offset by a reduction in rental income resulting from the sale of
three properties during the third quarter of 2008. Interest and other income decreased as a
result of lower levels of investable cash and lower interest rates.
The
increase in property operating expenses for the nine months ended September 30,
2009 is the result of our acquisition of MOBs since June 2008 and principally includes expenses related to
real estate taxes, utilities, cleaning costs and property management fees paid
to RMR.
Interest
expense increased because of interest payments on our $512.9 million mortgage
financing entered in August 2009 with a weighted average interest rate of
6.59%, the amortization of $11.8 million of deferred financing fees incurred in
connection with this mortgage financing and greater amounts outstanding under
our revolving credit facility offset by lower interest rates. Our weighted average balance outstanding and
interest rate under our revolving credit facility was $169.2 million and 1.3%,
and $48.2 million and 3.8%, for the nine months ended September 30, 2009
and 2008, respectively. Interest
expense also increased due to $61.3 million of debt assumed in connection with
our third quarter 2008 acquisitions.
Depreciation
expense for the nine months ended September 30, 2009 increased because of
acquisitions since October 1, 2008. Commencing January 1, 2009,
acquisition costs are expensed under the Business Combinations Topic of the
Codification. General and administrative
expenses increased in 2009 principally due to our acquisitions since October 1,
2008.
During
the nine months ended September 30, 2009, we recognized an impairment of
assets charge of $11.2 million related to eight properties, including six
skilled nursing facilities, one assisted living property and one MOB. During the nine months ended September 30,
2008, we recognized an impairment of assets charge of $2.9 million related to
one assisted living property.
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.
Net income per share decreased because of the changes
in revenues and expenses described above and the effect of an increase in the
weighted average number of shares outstanding resulting from our issuance of
common shares in February and June 2008 and February and September 2009.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of
funds to pay operating expenses, debt service and distributions to shareholders
is rental income from our properties. We believe that our operating cash flow
will be sufficient to meet our operating expenses and debt service and pay
distributions on our shares for the foreseeable future. Our future cash flows
from operating activities will depend primarily upon our ability to:
·
maintain or
improve the occupancy of, and the current rent rates at, our properties;
·
control
operating cost increases at our properties; and
·
purchase
additional properties which produce positive cash flows from operations.
19
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
Our
Operating Liquidity and Resources
We generally receive minimum rents monthly or
quarterly from our tenants and we receive percentage rents monthly, quarterly
or annually. During the nine months ended September 30, 2009, we generated
$160.5 million of cash from operations and at September 30, 2009, we had
$72.5 million of cash and cash equivalents.
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. This revolving credit facility permits us to borrow up
to $550.0 million. 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. This facility matures in December 2010.
Subject to certain conditions, this credit facilitys maturity date can be
extended at our option to December 31, 2011 upon payment of a fee.
In May 2008, we entered into a series of agreements to acquire 48
MOBs from HRPT Properties Trust, or HRP, for a total purchase price of $565.0
million. As of September 1, 2009,
we completed these transactions with HRP.
We currently continue to own 45 of these properties, acquired for a
total purchase price of approximately $558.2 million. One property with a value of approximately
$3.0 million is no longer subject to a purchase agreement and we sold two
properties during 2009. For more
information concerning these purchases please see Notes 2 and 5 to our
condensed consolidated financial statements above and the subsection titled Related
Persons Transactions below.
In February and September 2009, we issued 5.9 and 6.9 million
common shares in public offerings, raising net proceeds of approximately $96.8
million and $127.2 million, respectively.
We used the net proceeds from these offerings to repay borrowings
outstanding on our revolving credit facility, to fund the real estate
acquisitions described above and below and for general business purposes. We intend to use the balance of the net
proceeds from the September offering for general business purposes,
including funding pending acquisitions and for possible future acquisitions.
On August 4, 2009, we closed a $512.9 million mortgage financing
with FNMA. This mortgage loan is secured by first liens on 28 senior living
properties leased to Five Star.
We used the proceeds from
this mortgage financing to repay amounts outstanding under our revolving credit
facility, to purchase the remaining seven MOBs from HRP and to acquire the 10
MOBs and one senior living property from unaffiliated parties as described
below. In connection with the FNMA
transaction, we realigned our leases with Five Star, we purchased property and
securities from Five Star and we reduced the rent payable by Five Star to us
and Five Star assumed certain obligations to FNMA. For more information about the changes in our
relationship with Five Star resulting from the FNMA transaction, please see
Notes 2 and 5 to our condensed consolidated financial statements above and the
subsection titled Related Persons Transactions below.
During the nine months ended September 30, 2009, we purchased
$30.4 million of improvements made to our properties that are leased to Five
Star. We used cash on hand and
borrowings under our revolving credit facility to fund these purchases. As a result of this purchase, the annual rent
payable to us by Five Star increased by approximately $2.4 million.
At September 30, 2009, we had $72.5 million of cash and cash
equivalents and $550.0 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
20
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
(continued)
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
will 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 debt markets and wide
credit rate spreads, and equity markets have been extremely volatile. While we believe we will have access to
various types of financings, including debt or equity, 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 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, our lenders may be unable or unwilling to renew our credit facilities
and we may not be able to access additional capital. Our
ability to continue to access capital could be impacted by various factors,
including general market conditions and the continuing recession in the U.S.
economy, interest rates, credit ratings on our securities, the market price of
our capital stock and the financial performance of our tenants. Also, the current market conditions have led
to materially increased credit spreads which, if they continue, may result in
material increases in the interest costs under our floating rate debts and our
fixed rate debts when we refinance or when we incur new debt. These interest cost increases could have a
material and adverse impact on our results of operations and financial
conditions.
On February 13, 2009, we paid a $0.35 per common
share, or $40.1 million, quarterly distribution to our common shareholders for
the quarter ended December 31, 2008.
On May 15, 2009, we paid a $0.35 per common share, or $42.2
million, quarterly distribution to our common shareholders for the quarter
ended March 31, 2009. On August 14,
2009, we paid a $0.36 per common share, or $43.4 million, quarterly
distribution to our common shareholders for the quarter ended June 30,
2009. On October 5, 2009, we
declared a quarterly distribution of $0.36 per common share, or $45.9 million,
to be paid to our common shareholders of record on October 15, 2009 with
respect to our results for the quarter ended September 30, 2009. We expect
to pay this quarterly distribution on or about November 17, 2009, using
cash on hand and, if necessary, borrowings under our revolving credit facility.
On
September 30, 2009, we acquired 10 MOBs with a total of 643,000 square
feet for approximately $169.0 million, plus closing costs, from an unaffiliated
party for initial cash rent of $15.0 million per year. These buildings are currently 100% leased to
one tenant for a lease term of 15 years plus renewal options. We funded this acquisition using cash on
hand, proceeds from our mortgage financing in August 2009 described above
and proceeds from our equity offering in September 2009 described above.
On
October 1, 2009, we acquired one senior living property for approximately
$21.0 million, plus closing costs, from an unaffiliated party. We leased this property to Five Star and
added this property to Five Star Lease No. 4, which has a current term
expiring in 2017, for initial rent of approximately $1.8 million per year. Percentage rent, based on increases in gross
revenues at this property, will commence in 2011. We funded this acquisition using cash on
hand, proceeds from our mortgage financing in August 2009 described above
and proceeds from our equity offering in September 2009 described above.
In
October 2009, we agreed to acquire 10 senior living properties for
approximately $97.3 million from two unaffiliated parties. We intend to lease these properties to Five
Star and expect initial rent to be approximately $8.5 million per year. We expect percentage rent, based on increases
in gross revenues at these properties, will commence in 2011. We expect to fund these acquisitions using
cash on hand,
21
Item
2. Managements Discussion and Analysis
of Financial Condition and Results of Operations (continued)
proceeds
from our equity offering in September 2009 described above and borrowings
under our revolving credit facility. The
purchase of these properties is contingent upon completion of our diligence and
other customary closing conditions. We can provide no assurance that we will purchase
these properties.
As of November 4, 2009, 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,
2009, were our unsecured revolving credit facility, two public issues of
unsecured senior notes totaling $322.5 million and $647.1 million of mortgages
secured by 61 of our properties. Our
senior notes are governed by an indenture.
The indenture for our unsecured senior notes and related supplements and
our revolving credit facility contain a number of covenants which 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
generally require us to maintain certain other financial ratios. As of September 30,
2009, we believe we were in compliance with all of the covenants under our
indenture and related supplements, our revolving credit facility and our other
debt obligations.
None of our indentures
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, our revolving credit facility contains a cross default
provision to any other debts of $25.0 million or more that are recourse debts
and to any other debts of $75.0 million or more that are non-recourse debts.
Related Persons Transactions
In
May 2008, we entered into a series of agreements to acquire 48 MOBs from
HRP for an aggregate purchase price of approximately $565.0 million. As of September 1, 2009, we completed
these transactions with HRP. During
2009, we acquired 10 of these MOBs containing 617,000 square feet for an
aggregate purchase price of approximately $214.6 million, plus closing
costs. We recorded intangible lease
assets of $19.3 million and intangible lease liabilities of $3.6 million for
these MOBs acquired during the nine months ended September 30, 2009. One of the remaining buildings with an
allocated value of $3.0 million is no longer subject to our purchase
agreement. At the request of a tenant
for two properties subject to a multi-property lease, in May and September 2009
we sold two of our MOB properties for approximately $3.2 million, which was
their approximate net book value, to two unaffiliated parties. We now own 45 of these properties containing
2.1 million square feet for an aggregate cost of approximately $558.2 million,
plus closing costs. We funded these
acquisitions using cash on hand, proceeds from a mortgage financing, proceeds
from equity issuances, 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 a weighted average
maturity in 2018.
As of September 30,
2009, the MOBs that we acquired from HRP and continue to own were 98%
leased to approximately 200 tenants for an average lease
term of 9.2 years.
HRP was formerly our parent. We were spun off to HRPs shareholders in
1999 and, at the time of this spin off, we and HRP entered into a transaction
agreement which, among other things, prohibited
22
Item
2. Managements Discussion and Analysis
of Financial Condition and Results of Operations (continued)
us from purchasing MOBs.
Concurrently with the execution and delivery of the purchase agreements
described above, we and HRP entered into an amendment to that transaction
agreement, or the first amendment agreement, to permit us, rather than HRP, to
invest in medical office, clinic and biomedical, pharmaceutical and laboratory
buildings. The first amendment agreement
is subject, in the case of mixed use buildings, to HRPs retaining the right to
invest in any mixed use building for which the rentable square footage is less
than 50% medical office, clinic and biomedical, pharmaceutical and laboratory
use. Also, concurrently with the
execution and delivery of the purchase agreements, we entered into a right of
first refusal agreement under which we were granted a right of first refusal to
purchase up to 45 additional identified properties (containing approximately
4.6 million square feet of rental space) HRP owns which are leased to tenants
in medical related businesses in the event HRP determines to sell such
properties or in the event of an indirect sale as a result of HRPs change of
control or a change of control of HRPs subsidiary which owns such properties.
Both we and HRP are managed by RMR; Barry Portnoy and Adam Portnoy own
RMR and are Managing Trustees of both us and HRP; and Frederick Zeytoonjian is
an Independent Trustee of both us and HRP.
Because of these relationships, the terms of our agreements entered in
2008 with HRP were negotiated and approved by special committees of our and HRPs
boards composed of trustees of each company who are not trustees of both
companies. For more information about the terms of the purchase agreements, the
first amendment agreement and the right of first refusal agreement between us
and HRP, please read these agreements, copies of which are filed as exhibits to
our Current Report on Form 8-K dated May 9, 2008, copies of which are
available at the SEC website: www.sec.gov.
Five Star is our largest tenant and is our former subsidiary. In addition to being our manager, RMR also
provides management services to Five Star.
One of our trustees, Barry Portnoy, is currently a Managing Director of
Five Star. Because of these and other
relationships we and Five Star may be considered related persons. As of September 30, 2009, we leased 181
senior living communities and two rehabilitation hospitals
to Five Star for total annual minimum rent of $173.7 million. Because of the relationships between us and
Five Star, all of our transactions with Five Star are separately approved by
our Independent Trustees and Five Stars Independent Directors.
During the nine months ended September 30, 2009, pursuant to the
terms of our existing leases with Five Star, we purchased $30.4 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 $2.4
million.
On
August 4, 2009, we closed a $512.9 million mortgage financing with FNMA.
This mortgage loan is secured by first liens on 28 senior living properties
that we own and lease to Five Star with 5,618 living units / beds located in 16
states. We used the proceeds from this mortgage financing to repay amounts
outstanding under our revolving credit facility, to purchase the remaining
seven MOBs from HRP and to acquire 10 MOBs and one senior living property from
unaffiliated parties. In connection
with the FNMA transaction, we realigned our four leases with Five Star. Lease No. 1 (which is comprised of four
separate leases) now includes 79 properties (excluding one property sold
subsequent to September 30, 2009 as described above), including
independent living communities, assisted living communities and skilled nursing
facilities, and expires in 2024. Lease No. 2
now includes 49 properties (excluding one property sold subsequent to September 30,
2009 as described above), including independent living communities, assisted
living communities, skilled nursing facilities and two rehabilitation
hospitals, and expires in 2026. Lease No. 3
now includes the 28 FNMA financed properties, including independent living
communities and assisted living communities, and expires in 2028. Lease No. 4 now includes 26 properties
(including one property acquired subsequent to September 30, 2009 as
described above and below), including independent living communities, assisted
living communities and skilled nursing facilities, and expires in 2017. In connection with the lease realignment and
the FNMA financing, we entered into a lease realignment agreement with Five
Star, or the Lease Realignment Agreement.
Pursuant to the terms of the Lease Realignment Agreement, (1) the
four leases,
23
Item
2. Managements Discussion and Analysis
of Financial Condition and Results of Operations (continued)
or
the Leases, were reconfigured as described above, (2) we acquired certain
personal property located at
28 properties in 16
states
, or the Properties, from subsidiaries of Five Star and pledged that
personal property to FNMA, (3) we purchased 3,200,000 shares, or the
Shares, of Five Star common stock, $.01 par value per share, which represent
approximately 9% of its total common stock outstanding, (4) Five Star
assumed certain reporting and other operating obligations required by FNMA and (5) subsidiaries
of Five Star pledged certain tangible and intangible personal property, such as
accounts receivable and contract rights, located at, or arising from the
operations of, the Properties to secure certain obligations to us and arising
under the FNMA loan. To compensate Five
Star for its sale of personal property to us, its sale of the Shares to us, the
pledge of Five Stars intangible assets and for the services and obligations
that Five Star has assumed, (1) we reduced the annual rent payable to us
under Lease No. 2 by $2.0 million per year for the term of that Lease; (2) we
paid Five Star $18.6 million; and (3) we reimbursed Five Star for its out
of pocket expenses incurred in connection with the negotiation and closing of
this transaction. Five Star has granted
certain registration rights to us with regard to the Shares and our future
transfer of the Shares are subject to certain restrictions. The terms of the Lease Realignment Agreement
described above were negotiated and approved by special committees of our
Independent Trustees and Five Stars Independent Directors, none of whom are
trustees or directors of the other company.
Each special committee was represented by separate counsel. For more information about this FNMA
financing and the agreement we entered with Five Star to facilitate this
financing, please see Part II, Item 5 of our Quarterly Report on Form 10Q
for the quarter ended June 30, 2009.
On
October 1, 2009, we acquired one senior living property for approximately
$21.0 million, plus closing costs, from an unaffiliated party. We leased this property to Five Star and
added this property to Five Star Lease No. 4, which has a current term
expiring in 2017, for initial rent of approximately $1.8 million per year. Percentage rent, based on increases in gross
revenues at this property, will commence in 2011. We funded this acquisition using cash on
hand, proceeds from our mortgage financing in August 2009 described above
and proceeds from our equity offering in September 2009 described above.
In
October 2009, we agreed to acquire 10 senior living properties for
approximately $97.3 million from two unaffiliated parties. We intend to lease these properties to Five
Star and expect initial rent to be approximately $8.5 million per year. We expect percentage rent, based on increases
in gross revenues at these properties, will commence in 2011. We expect to fund these acquisitions using
cash on hand, proceeds from our equity offering in September 2009
described above and borrowings under our revolving credit facility. The purchase of these properties is
contingent upon completion of our diligence and other customary closing
conditions. We can provide no assurance that we will purchase these properties.
As
of September 30, 2009, we have invested $5.1 million in Affiliates
Insurance Company, or AIC, an insurance company, that is owned by RMR
and other companies to which RMR provides management services.
We own 16.67% of the common shares of AIC which has a current
carrying value of $5.0 million.
RMR continues to provide both business and property
management services to us with fees calculated based upon our gross investments
and gross MOB rents, respectively. RMR
is owned by our Managing Trustees, Barry and Adam Portnoy. For more information about our dealings with
our two Managing Trustees, RMR, Five Star, HRP and their affiliates and our
investments in AIC and about the risks which may arise as a result of these and
other related person transactions, please see our Annual Report on Form 10-K
for the year ended December 31, 2008, or the Annual Report, our Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30,
2009, or the Quarterly Reports, the Other Items in this Quarterly Report on Form 10-Q,
and our other filings made with the SEC, and in particular, the section
captioned Risk Factors in the Annual Report, the sections captioned Managements
Discussion and Analysis of Financial Condition and Results of Operations
Related Person Transactions in the Annual Report, Quarterly Reports and this
Quarterly Report on Form 10-Q and the section captioned Related Person
Transactions and Company Review of Such Transactions in our Proxy Statement
dated March 30, 2009, or our Proxy Statement, relating to our 2009 Annual
Shareholders Meeting.
24
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
We are exposed to risks
associated with market changes in interest rates. We manage our exposure to this market risk by
monitoring available financing alternatives.
Our strategy to manage exposure to changes in interest rates is
unchanged since December 31, 2008. Other than as described below, we do
not foresee any significant changes in our exposure to fluctuations in interest
rates or in how we manage this exposure in the future.
At
September 30, 2009, our outstanding fixed rate debt included the following
(dollars in thousands):
Debt
|
|
Principal
Balance
|
|
Annual
Interest Rate
|
|
Annual
Interest
Expense
|
|
Maturity
|
|
Interest
Payments Due
|
|
Unsecured
senior notes
|
|
$
|
225,000
|
|
8.625%
|
|
$
|
19,406
|
|
2012
|
|
Semi-Annually
|
|
Unsecured
senior notes
|
|
97,500
|
|
7.875%
|
|
7,678
|
|
2015
|
|
Semi-Annually
|
|
Mortgages
(1)
|
|
307,760
|
|
6.710%
|
|
20,651
|
|
2019
|
|
Monthly
|
|
Mortgages
|
|
49,584
|
|
6.54%
|
|
3,243
|
|
2017
|
|
Monthly
|
|
Mortgages
|
|
32,678
|
|
6.97%
|
|
2,278
|
|
2012
|
|
Monthly
|
|
Mortgage
|
|
14,518
|
|
6.91%
|
|
1,003
|
|
2013
|
|
Monthly
|
|
Mortgages
|
|
11,647
|
|
6.11%
|
|
712
|
|
2013
|
|
Monthly
|
|
Mortgage
|
|
4,403
|
|
6.50%
|
|
286
|
|
2013
|
|
Monthly
|
|
Mortgage
|
|
4,005
|
|
7.31%
|
|
293
|
|
2022
|
|
Monthly
|
|
Mortgage
|
|
1,957
|
|
7.85%
|
|
154
|
|
2022
|
|
Monthly
|
|
Bonds
|
|
14,700
|
|
5.875%
|
|
864
|
|
2027
|
|
Semi-Annually
|
|
|
|
$
|
763,752
|
|
|
|
$
|
56,568
|
|
|
|
|
|
(1) Consists of fixed rate portion of our FNMA
loan.
No principal payments are
due under our unsecured notes or bonds until maturity. Our mortgages require
principal and interest payments through maturity pursuant to amortization schedules.
Because these debts bear interest at a fixed rate, changes in market interest
rates during the term of these debts will not affect our operating
results. However, if these debts are
refinanced at interest rates which are 10% higher or lower than shown above,
our per annum interest cost would increase or decrease by approximately $2.7
million.
Changes in market interest rates also affect the fair value of our fixed
rate debt obligations;
i
ncreases in market interest rates decrease the fair value of our fixed
rate debt, while decreases in market interest rates increase the fair value of
our fixed rate debt. Based on the
balances outstanding at September 30, 2009, and discounted cash flow
analysis through the maturity date of our fixed rate debt obligations, a
hypothetical immediate 10% change in interest rates would change the fair value
of those obligations by approximately $26.0 million.
We
are allowed to make prepayments of our unsecured senior notes, in whole or in
part, at par plus a premium, as defined.
Our mortgages contain provisions that allow us to make repayment at par
plus premiums which are generally designed to preserve a stated yield to the
mortgage holder. Also, we occasionally
have the opportunity to purchase our outstanding debt by open market
purchases. These prepayment rights may
afford us the opportunity to mitigate the risk of refinancing at maturity.
25
Item 3. Quantitative
and Qualitative Disclosures About Market Risk (continued)
Our unsecured revolving credit facility accrues
interest at floating rates and matures on December 31, 2010. Subject to certain conditions, this credit
facilitys maturity date can be extended at our option to December 31,
2011 upon payment of a fee. At September 30 and November 4, 2009, we
had zero amounts outstanding and $550.0 million available for borrowing under
our revolving credit facility. We may
make repayments and drawings under our revolving credit facility at any time
without penalty. We borrow in U.S.
dollars and borrowings under our revolving credit facility accrue interest at
LIBOR plus a premium. Accordingly, we are vulnerable to changes in U.S. dollar
based short term interest rates, specifically LIBOR. A change in interest rates would not affect
the value of this floating rate debt but would affect our operating
results.
If interest rates were to
change gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating
interest rates will increase or decrease in the future with increases or
decreases in the outstanding amount under our revolving credit facility or
other floating rate debt, including the floating rate portion of the FNMA
mortgage financing described below
. The following
table presents the impact a 10% change in interest rates would have on our
floating rate interest expense at September 30, 2009 if we were fully
drawn on our revolving credit facility (dollars in thousands):
|
|
Impact of Changes in Interest Rates
|
|
|
|
Interest Rate
Per Year
|
|
Outstanding
Debt
|
|
Total Interest
Expense Per
Year
|
|
At September 30, 2009
|
|
1.12%
|
|
$
|
550,000
|
|
$
|
6,160
|
|
10% reduction
|
|
1.01%
|
|
$
|
550,000
|
|
$
|
5,555
|
|
10% increase
|
|
1.23%
|
|
$
|
550,000
|
|
$
|
6,765
|
|
On
August 4, 2009, we closed a FNMA mortgage financing for approximately
$512.9 million. A part of this borrowing
is at a fixed interest rate and a part is at a floating rate calculated as a
spread above LIBOR. A change in market interest
rates will change the value of the fixed rate part of this loan and the
interest expense on the floating rate part of this loan. For example, at the time we closed this FNMA
mortgage loan, our effective weighted average annual interest rate payable on
the full amount of this loan was 6.59%.
If interest rates increase by 10% of current rates, the impact upon us
would be to change the value of this obligation and change our interest expense
as shown in the following table:
|
|
Impact of Changes in Interest Rates
|
|
|
|
Weighted
Average
Interest Rate
(1)
|
|
Fair Value of
Outstanding Debt
|
|
Total Interest
Expense Per
Year
|
|
At September 30, 2009
|
|
6.59%
|
|
$
|
512,934
|
|
$
|
33,802
|
|
10% reduction
|
|
5.93%
|
|
$
|
536,180
|
|
$
|
31,795
|
|
10% increase
|
|
7.25%
|
|
$
|
489,469
|
|
$
|
35,487
|
|
(1)
A portion of the loan requires interest at a fixed rate of 6.71% and a portion
of the loan requires interest at a variable rate which was 6.415% at September 30,
2009. This table assumes a 10% interest
rate change on the variable portion of the loan. The fixed rate portion of the loan is also
included in the table above relating to our outstanding fixed rate debt.
Also, we have arranged with FNMA to cap, or limit,
the interest rate increases which will impact the interest expense we will pay
on the floating rate part of this loan.
The net effect of this cap arrangement is that the annual effective
interest rate on the full amount of this loan we may be required to pay is
7.79%.
We
also have the option to prepay our FNMA obligations in order to mitigate the
risks of refinancing or for other reasons.
The fixed rate portion of this loan may be prepaid during the first 114
months of the loan term subject to our paying a standard make whole premium and
thereafter for a fixed percent premium of the amount prepaid which is reduced
to zero in the last six months of this ten year loan. The floating rate portion may be prepaid
after one year for a fixed premium percent of the amount prepaid which is also
reduced to zero in the last six months of this ten year loan.
26
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 the
Securities Exchange Act of 1934, as amended, 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,
2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
27
WARNING CONCERNING FORWARD LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q
CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER
FEDERAL SECURITIES LAWS. 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. FORWARD LOOKING STATEMENTS IN
THIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:
·
OUR
RESPONSIBILITIES UNDER THE FNMA LOAN;
·
OUR ABILITY TO
PURCHASE OR SELL PROPERTIES;
·
OUR ABILITY TO
RAISE DEBT OR EQUITY CAPITAL;
·
OUR ABILITY TO
PAY INTEREST AND DEBT PRINCIPAL AND MAKE DISTRIBUTIONS;
·
OUR ABILITY TO RETAIN OUR
EXISTING TENANTS AND MAINTAIN OR INCREASE CURRENT RENTAL RATES;
·
OUR AGREEMENTS
TO PURCHASE CERTAIN SENIOR LIVING PROPERTIES;
·
OUR
PARTICIPATING IN THE INSURANCE COMPANY BEING FORMED WITH RMR AND COMPANIES TO
WHICH RMR PROVIDES MANAGEMENT SERVICES; AND
·
OTHER MATTERS.
OUR
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY
OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR
BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FUNDS FROM OPERATIONS,
CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:
·
THE IMPACT OF CHANGES IN THE
ECONOMY AND THE CAPITAL MARKETS, INCLUDING THE RECENT CHANGES IN THE CAPITAL
MARKETS, ON US AND OUR TENANTS;
·
ACTUAL AND POTENTIAL
CONFLICTS OF INTEREST WITH OUR MANAGING TRUSTEES, FIVE STAR, HRP, RMR AND THEIR
AFFILIATES;
·
CHANGES IN FEDERAL, STATE
AND LOCAL LEGISLATION, GOVERNMENTAL REGULATIONS, ACCOUNTING RULES, TAX LAWS AND
SIMILAR MATTERS; AND
·
COMPETITION WITHIN THE REAL
ESTATE INDUSTRY OR THOSE INDUSTRIES IN WHICH OUR TENANTS OPERATE.
FOR
EXAMPLE:
·
THIS QUARTERLY REPORT ON FORM 10-Q
STATES THAT FIVE STAR HAS AGREED TO UNDERTAKE CERTAIN REPORTING AND OTHER
REQUIREMENTS UNDER THE
28
FNMA MORTGAGE LOAN TO US. AN IMPLICATION OF THIS
STATEMENT MAY BE THAT WE HAVE BEEN RELEASED OF THESE OBLIGATIONS TO FNMA.
IN FACT, WE REMAIN RESPONSIBLE TO FNMA FOR ALL REQUIREMENTS ARISING UNDER THE
MORTGAGE AND LOAN DOCUMENTS AND WE WILL BE RESPONSIBLE TO PERFORM THE
OBLIGATIONS WHICH FIVE STAR HAS ASSUMED IN THE EVENT FIVE STAR FAILS TO SATISFY
THESE OBLIGATIONS. ALSO, CERTAIN OF THE OBLIGATIONS ARISING UNDER THE MORTGAGE
DOCUMENTS RELATE TO FIVE STARS OPERATIONS OF THE MORTGAGED PROPERTIES WHICH MAY BE
BEYOND OUR CAPACITY TO PERFORM;
·
THIS
QUARTERLY REPORT ON FORM 10-Q STATES THAT WE INTEND TO USE THE PROCEEDS OF
OUR SEPTEMBER 2009 EQUITY ISSUANCE, AMONG OTHER PURPOSES, TO FUND ACQUISITIONS.
WE ARE CURRENTLY CONSIDERING SEVERAL ACQUISITION OPPORTUNITIES; HOWEVER, THERE
CAN BE NO ASSURANCE THAT WE WILL CONCLUDE ANY OF THESE ACQUISITIONS OR THAT
ALTERNATIVE ACQUISITIONS WILL BE IDENTIFIED AND CLOSED;
·
THIS
QUARTERLY REPORT ON FORM 10-Q STATES THAT THE TERMS OF THE LEASE
REALIGNMENT AGREEMENT BETWEEN US AND FIVE STAR WERE NEGOTIATED BY SPECIAL
COMMITTEES OF THE BOARDS OF US AND FIVE STAR COMPOSED ONLY OF OUR TRUSTEES AND
FIVE STAR DIRECTORS WHO ARE NOT ALSO TRUSTEES AND DIRECTORS OF THE OTHER
COMPANY. THE IMPLICATION OF THIS STATEMENT MAY BE THAT THIS AGREEMENT WAS
NEGOTIATED ON AN ARMS LENGTH BASIS AND MAY NOT BE LEGALLY CHALLENGED
BECAUSE THIS AGREEMENT PROVIDES A FAIR EXCHANGE OF CONSIDERATION BETWEEN US AND
FIVE STAR. IN FACT: (I) FIVE STAR WAS FORMERLY OUR 100% OWNED SUBSIDIARY
AND FIVE STAR BECAME A SEPARATELY OWNED PUBLIC COMPANY AS A RESULT OF A SPIN
OFF TO OUR SHAREHOLDERS IN 2001; (II) RMR PROVIDES MANAGEMENT SERVICES TO
BOTH US AND FIVE STAR; (III) THE OFFICERS OF BOTH US AND FIVE STAR ARE
ALSO OFFICERS OF RMR; (IV) RMR AND ITS OFFICERS PROVIDED INFORMATION AND
ASSISTANCE TO THE SPECIAL COMMITTEES OF BOTH US AND FIVE STAR; (V) THE
MEMBERS OF THE SPECIAL COMMITTEES OF BOTH US AND FIVE STAR ALSO SERVE AS
TRUSTEES OR DIRECTORS OF OTHER COMPANIES MANAGED BY RMR; AND (VI) WE AND
FIVE STAR HAVE EXTENSIVE AND CONTINUING BUSINESS WITH EACH OTHER. ALTHOUGH WE
BELIEVE THAT THIS AGREEMENT IS FAIR TO US, IN THE CIRCUMSTANCES OF THE MULTIPLE
RELATIONSHIPS AMONG FIVE STAR AND US, IT IS POSSIBLE THAT LITIGATION MAY BE
BROUGHT ALLEGING THAT THIS AGREEMENT IS UNFAIR TO US OR TO FIVE STAR.
LITIGATION MAY BE EXPENSIVE AND DISTRACTING TO MANAGEMENT. WE CAN PROVIDE
NO ASSURANCE THAT OUR ENTRY INTO THE LEASE REALIGNMENT AGREEMENT WITH FIVE STAR
WILL NOT CAUSE US TO BECOME INVOLVED IN LITIGATION THAT CHALLENGES THE FAIRNESS
OF THE CONSIDERATION WE HAVE EXCHANGED WITH FIVE STAR. SUCH ALLEGATIONS OR
LITIGATION COULD CAUSE OUR SHARE TRADING PRICE TO DECLINE AND THE OUTCOME OF
SUCH LITIGATION IS IMPOSSIBLE TO PREDICT;
·
THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT
WE HAVE ENTERED INTO PURCHASE AND SALE AGREEMENTS TO ACQUIRE 10 PROPERTIES FROM
UNAFFILIATED PARTIES. OUR OBLIGATION TO
COMPLETE THESE PURCHASES IS SUBJECT TO VARIOUS CONDITIONS TYPICAL OF LARGE
COMMERCIAL REAL ESTATE PURCHASES. AS A
RESULT OF ANY FAILURE OF THESE CONDITIONS, THESE PROPERTIES MAY NOT BE
PURCHASED. ALSO, THIS QUARTERLY REPORT
ON FORM 10-Q STATES THAT IF THESE PROPERTIES ARE PURCHASED THEY WILL BE
LEASED TO FIVE STAR. THE FINAL TERMS OF
OUR LEASE FOR THESE
29
PROPERTIES HAVE NOT YET BEEN AGREED AND, BECAUSE OF THE MULTIPLE
RELATIONSHIPS AMOUNG US, FIVE STAR AND RMR, THESE TERMS WILL BE SUBJECT TO
APPROVAL BY OUR TRUSTEES AND FIVE STARS DIRECTORS WHO ARE NOT ALSO TRUSTEES OR
DIRECTORS OF THE OTHER COMPANIES.
ACCORDINGLY, THIS LEASE MAY NOT BE ENTERED;
·
OUR PARTICIPATION IN THE
INSURANCE BUSINESS WITH RMR AND ITS AFFILIATES INVOLVES POTENTIAL FINANCIAL
RISKS AND REWARDS TYPICAL OF ANY START UP BUSINESS VENTURE AS WELL AS OTHER
FINANCIAL RISKS AND REWARDS SPECIFIC TO INSURANCE COMPANIES. AMONG THE RISKS
THAT ARE SPECIFIC TO INSURANCE COMPANIES IS THE RISK THAT AIC MAY NOT BE
ABLE TO ADEQUATELY PAY CLAIMS WHICH COULD LEAVE US UNDERINSURED AND INCREASE
OUR FUNDING EXPOSURE FOR CLAIMS THAT MIGHT OTHERWISE HAVE BEEN FUNDED IF
INSURANCE WAS PURCHASED FROM FINANCIALLY MORE SECURE INSURERS. ACCORDINGLY, OUR EXPECTED FINANCIAL BENEFITS
FROM OUR INITIAL OR FUTURE INVESTMENTS IN AIC MAY BE DELAYED OR MAY NOT
OCCUR AND AIC MAY REQUIRE A LARGER INVESTMENT THAN WE EXPECT;
·
IF THE
AVAILABILITY OF DEBT CAPITAL REMAINS RESTRICTED OR BECOMES MORE RESTRICTED, WE MAY BE
UNABLE TO REFINANCE OR REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE OR ON
TERMS WHICH ARE AS FAVORABLE AS WE NOW HAVE;
·
OUR ABILITY TO MAKE FUTURE
DISTRIBUTIONS DEPENDS UPON OUR FUTURE EARNINGS.
WE MAY BE UNABLE TO MAINTAIN OUR CURRENT RATE OF DISTRIBUTIONS AND
FUTURE DISTRIBUTIONS MAY BE SUSPENDED OR PAID AT A LESSER RATE THAN THE
DISTRIBUTIONS WE NOW PAY;
·
OUR ABILITY TO GROW OUR
BUSINESS AND PAY OUR DISTRIBUTIONS DEPENDS IN LARGE PART UPON OUR ABILITY
TO BUY PROPERTIES AND LEASE THEM FOR RENTS WHICH EXCEED OUR CAPITAL COSTS. WE MAY BE UNABLE TO IDENTIFY PROPERTIES
THAT WE WANT TO ACQUIRE OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES, ACQUISITION
FINANCING OR LEASE TERMS FOR NEW PROPERTIES;
·
SOME OF OUR TENANTS MAY NOT RENEW EXPIRING
LEASES, AND WE MAY BE UNABLE TO LOCATE NEW TENANTS TO MAINTAIN THE
HISTORICAL OCCUPANCY RATES OF OUR PROPERTIES;
·
RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE;
AND
·
OUR TENANTS MAY EXPERIENCE
LOSSES AND BECOME UNABLE TO PAY OUR RENTS.
THESE
RESULTS COULD OCCUR DUE TO MANY DIFFERENT REASONS, SOME OF WHICH, SUCH AS
NATURAL DISASTERS OR CHANGES IN OUR TENANTS REVENUES OR COSTS, OR CHANGES IN
CAPITAL MARKETS OR THE ECONOMY GENERALLY, ARE BEYOND OUR CONTROL.
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, 2008.
YOU
SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.
EXCEPT AS REQUIRED BY LAW, WE DO NOT INTEND TO UPDATE OR
CHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
30
STATEMENT
CONCERNING LIMITED LIABILITY
THE
AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING SENIOR HOUSING
PROPERTIES TRUST, DATED SEPTEMBER 20, 1999, AS AMENDED AND SUPPLEMENTED, AS
FILED WITH THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND,
PROVIDES 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.
31
PART II.
Other Information
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
On September 17, 2009, pursuant to our
incentive share award plan, we granted 63,450 common shares of beneficial
interest, par value $0.01 per share, valued at $19.36 per share, the closing
price of our common shares on the New York Stock Exchange 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.
Item 5.
Other
Items
On November 2, 2009,
our board approved amended and restated bylaws of the Company. Those amended and restated bylaws clarify the
existing bylaw provisions imposing liability on shareholders for, and
obligating a shareholder to indemnify us and hold us harmless from and against,
all costs, expenses , penalties, fines or other amounts arising from the
shareholders breach of any provision of our declaration of trust or bylaws and
other conforming and clarifying changes, and include arbitration provisions for
the resolution of certain disputes, claims and controversies.
Section 14.2 of our
amended and restated bylaws now expressly provides that matters for which a
shareholder is liable to and obligated to indemnify and hold us harmless
include any breach or failure to fully comply with any covenant, condition or
provision of our declaration of trust or bylaws, including the advance notice
provisions pertaining to shareholder nominations and other proposals, and
applies to derivative actions brought against us in which the shareholder is
not the prevailing party. Our amended
and restated bylaws also include a new Article XV, which provides that
actions brought against us or any trustee, officer, manager (including RMR or
its successor), agent or employee of us, by a shareholder, including derivative
and class actions, shall, on the demand of any party to such dispute, be
resolved through binding arbitration in accordance with the procedures set
forth in our amended and restated bylaws.
The foregoing description of
our amended and restated bylaws is not complete and is subject to and qualified
in its entirety by reference to the amended and restated bylaws, a copy of
which is attached as Exhibit 3.1, and which amended and restated bylaws
are incorporated herein by reference. In
addition, a marked copy of our amended and restated bylaws indicating changes
made to our bylaws as they existed immediately prior to the adoption of those
amended and restated bylaws is attached as Exhibit 3.2.
Item 6.
Exhibits
3.1
Amended and Restated Bylaws, as amended and restated
as of November 2, 2009.
3.2
Amended and Restated Bylaws, as amended and restated
as of November 2, 2009 (marked).
10.1
Second Amendment to Purchase Agreement, dated as of September 1,
2009, by and between Senior Housing Properties Trust and HUB Properties Trust
(with respect to Oklahoma Clinics) (
Incorporated by reference
to the Companys Current Report on Form 8-K dated September 9, 2009
).
10.2
Partial Termination of and First Amendment to
Amended and Restated Master Lease Agreement (Lease No. 1), dated as of October 1,
2009, by and among certain subsidiaries of Senior Housing Properties Trust, 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)
32
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)
33
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 4, 2009
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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 4, 2009
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34
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