PROXY STATEMENT
FOR THE
ANNUAL MEETING OF SHAREHOLDERS
To be held at 9:30 a.m. on Thursday, May 9, 2013
at
Two Newton Place
255 Washington Street, Suite 100
Newton, Massachusetts 02458
INTRODUCTION
A notice of the annual meeting of shareholders of Senior Housing Properties Trust, a Maryland real estate investment trust, or the
Company, is on the preceding page and a form of proxy solicited by our Board of Trustees, or our Board, accompanies this proxy statement. This proxy statement and a form of proxy, together with our
annual report to shareholders for the year ended December 31, 2012, are first being made available, and a Notice Regarding the Availability of Proxy Materials, or the Notice of Internet
Availability, is first being mailed, to shareholders on or about February 21, 2013.
The
annual meeting record date is February 19, 2013. Only shareholders of record at the close of business on February 19, 2013, are entitled to notice of, and to vote at,
the meeting and at any postponement or adjournment thereof. We had 188,053,600 common shares of beneficial interest, $.01 par value per share, or common shares, outstanding on the record date and
entitled to vote at the meeting. Our common shares are listed on the New York Stock Exchange, or NYSE. The holders of our outstanding common shares are entitled to one vote per common share.
A
quorum of shareholders is required for shareholders to take action at the meeting. The presence, in person or by proxy, of holders of common shares entitled to cast a majority of all
the votes entitled to be cast at the meeting shall constitute a quorum. Common shares represented by valid proxies will count for the purpose of determining the presence of a quorum for the meeting.
Abstentions and broker non-votes, if any, will be treated as shares present for purposes of determining whether a quorum is present. Failure of a quorum to be present at the meeting will
necessitate adjournment of the meeting and will subject us to additional expense. Under our bylaws, the chairperson of the meeting may adjourn the meeting if less than a quorum is present at the
meeting.
The
nominees for election as Trustees described in proposals 1 and 2 will be elected if they receive a plurality of all the votes cast. The affirmative vote of a majority of the votes
cast will be necessary to approve the resolution regarding named executive officer compensation described in proposal 3 and to ratify the appointment of Ernst & Young LLP as our
independent registered public accounting firm in
proposal 4. Proposals 3 and 4 are nonbinding shareholder advisory votes and, if approved, would serve only as recommendations to our Board.
1
The
individuals named as proxies on a properly completed proxy will vote in accordance with your directions as indicated thereon. If you properly complete your proxy and give no voting
instructions, your shares will be voted "FOR" the nominees for Trustee in proposals 1 and 2 and "FOR" proposals 3 and 4.
Shareholders
of record may authorize a proxy to vote their shares over the internet or by telephone in the manner provided on the website indicated in the Notice of Internet Availability
mailed to them, or, if they requested and received paper or email copies of proxy materials, by completing and returning the proxy card or by attending the meeting and voting in person. Proxies
submitted by mail, over the internet or by telephone must be received by 11:59 p.m. Eastern Time on Wednesday, May 8, 2013.
Broker
non-votes occur in respect of shares held in street name when the broker indicates that voting instructions for a particular matter have not been received from the
beneficial owners or other persons entitled to vote those shares and the broker does not have discretionary voting authority to vote those shares on that particular matter. Broker
non-votes and abstentions will have no effect on the outcome of any of the proposals. A proxy marked "WITHHOLD" will have the same effect as an abstention.
The
record date for the meeting will apply to any adjournment or postponement of the meeting unless our Board fixes a new record date for the adjourned or postponed meeting. If we
adjourn the annual meeting, we will announce the time and place of the adjourned meeting at the original meeting, but we do not intend to deliver another notice of the meeting unless we fix a new
record date for the adjourned meeting. At any subsequent reconvening of the annual meeting, all proxies will be voted in the same manner as they would have been at the original convening of the
meeting (except for any proxies that have been effectively revoked or withdrawn).
IMPORTANT: If your shares are held in the name of a brokerage firm, bank, nominee or other institution, you should provide instructions to your broker, bank,
nominee or other institution on how to vote your shares. Please contact the person responsible for your account and give instructions for a
proxy to be completed for your shares. If you have any questions or need assistance in voting your shares, please call the firm assisting us in the solicitation of proxies:
Innisfree M&A Incorporated
501 Madison Avenue, 20th Floor
New York, New York 10022
Brokers and Banks Call Collect at (212) 750-5833
Shareholders Call Toll-Free at (877) 717-3922
A
shareholder of record who has given a proxy may revoke it any time prior to its exercise by delivering to our Secretary at Two Newton Place, 255 Washington Street, Suite 300,
Newton, Massachusetts 02458, a written revocation, by delivering a duly executed proxy bearing a later date, by authorizing at a later date a proxy to vote his or her common shares over the internet
or by telephone in the manner provided on the website indicated in the Notice of Internet Availability or by attending the meeting and voting his or her common shares in person. If a shareholder of
record wants to receive a paper or email copy of the proxy card, he or she may request one from our Secretary at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458.
Proxies submitted by mail, over the internet or by telephone must be received by 11:59 p.m. Eastern Time on May 8, 2013. If your shares are held in the name of a brokerage firm, bank,
nominee or other institution and you wish to
2
change
a prior instruction you gave to your brokerage firm, bank, nominee or other institution to vote your shares, you must follow the brokerage firm's, bank's, nominee's or other institution's
instructions for changing your prior voting instructions. In addition, if you hold shares in the name of a brokerage firm, bank, nominee or other institution, you must provide a legal proxy from that
institution in order to vote your shares at the meeting.
Our
principal executive offices are located at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458.
Our
website address is included in this proxy statement as a textual reference only, and the information in the website is not incorporated by reference into this proxy statement.
Notice Regarding the Availability of Proxy Materials
From the date of mailing of the Notice of Internet Availability through the conclusion of the meeting, shareholders will be able to
access all of the proxy materials on the internet at www.proxyvote.com. The proxy materials will be available free of charge. The Notice of Internet Availability will instruct you as to how you may
access and review all of the important information contained in the proxy materials (including our annual report to shareholders) over the internet or through other methods specified at the website
designated in the Notice of Internet Availability. The website designated contains instructions as to how to vote over the internet or by telephone. The Notice of Internet Availability also instructs
you as to how you may request a paper or email copy of the proxy card. If you received a Notice of Internet Availability and would like to receive printed copies of the proxy materials, you should
follow the instructions for requesting such materials included in the Notice of Internet Availability.
PROPOSALS 1 AND 2
ELECTION OF TRUSTEES
The number of our Trustees is fixed at five, and our Board is divided into three groups, with two Trustees in Group I, two Trustees in
Group II and one Trustee in Group III. Trustees in each group are elected for three year terms and serve until their successors are elected and qualified.
Our
current Trustees are John L. Harrington and Adam D. Portnoy in Group II with a term of office expiring at the meeting to which this proxy statement relates, Frederick N. Zeytoonjian
in Group III with a term of office expiring at our 2014 annual meeting of shareholders and Barry M. Portnoy and Jeffrey P. Somers in Group I with a term of office expiring at our 2015 annual meeting
of shareholders. The term of the Group II Trustees elected at the meeting to which this proxy statement relates will expire at our 2016 annual meeting of shareholders.
Our
Trustees are also categorized as Independent Trustees or Managing Trustees. Our Board is composed of three Independent Trustees and two Managing Trustees. Our Independent Trustees
are not employees of Reit Management & Research LLC, or RMR, our manager, are not involved in our day to day activities and are persons who qualify as independent under our declaration
of trust, our
bylaws and the applicable rules of the NYSE and the Securities and Exchange Commission, or SEC. Our Managing Trustees are not Independent Trustees and have been employees of RMR or involved in our day
to day activities for at least one year. Messrs. Harrington, Somers and Zeytoonjian are our Independent Trustees, and Messrs. Barry Portnoy and Adam Portnoy are our Managing Trustees.
3
Biographical
information relating to our Trustees and other information relating to our Board appears elsewhere in this proxy statement.
PROPOSAL 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
On February 14, 2013, our Audit Committee voted to appoint Ernst & Young LLP as our independent registered public
accounting firm for the fiscal year ending December 31, 2013 (our fiscal year being a calendar year). Ernst & Young LLP acted as our independent registered public accounting firm
for 2012 and 2011. A representative of Ernst & Young LLP is expected to be present at the meeting, with the opportunity to make a statement if he or she desires to do so. This
representative will be available to respond to appropriate questions from shareholders who are present at the meeting. Proposal 4 is nonbinding. If the appointment is not ratified, our Audit Committee
will consider whether to appoint another independent registered public accounting firm in its discretion. If the appointment is ratified, our Audit Committee, in its discretion, may appoint a
different independent registered public accounting firm at any time if it determines that such a change would be advisable.
The
fees and expenses to date for services provided by Ernst & Young LLP to us for the last two fiscal years were as follows:
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Audit fees
|
|
$
|
665,840
|
|
$
|
661,300
|
|
Audit related fees
|
|
|
|
|
|
|
|
Tax fees
|
|
|
18,405
|
|
|
16,700
|
|
|
|
|
|
|
|
Subtotal
|
|
|
684,245
|
|
|
678,000
|
|
All other fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees
|
|
$
|
684,245
|
|
$
|
678,000
|
|
|
|
|
|
|
|
Our
Audit Committee has established policies and procedures that are intended to control the services provided by our independent registered public accounting firm and to monitor their
continuing independence. Under these policies, no services may be undertaken by our independent registered
public accounting firm unless the engagement is specifically approved by our Audit Committee or the services are included within a category that has been approved by our Audit Committee. The maximum
charge for services is established by our Audit Committee when the specific engagement or the category of services is approved. In certain circumstances, our management is required to notify our Audit
Committee when approved services are undertaken and the Audit Committee or its Chair may approve amendments or modifications to the engagement or the maximum fees. Our Director of Internal Audit is
responsible to report to our Audit Committee regarding compliance with these policies and procedures.
Our
Audit Committee will not approve engagements of our independent registered public accounting firm to perform non-audit services for us if doing so will cause our
independent registered public accounting firm to cease to be independent within the meaning of applicable SEC or NYSE rules. In other circumstances, our Audit Committee considers, among other things,
whether our independent registered public accounting firm is able to provide the required services in a more or less effective and efficient manner than other available service providers and whether
the services are consistent with the Public Company Accounting Oversight Board Rules.
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All
services for which we engaged our independent registered public accounting firm in 2012 and 2011 were approved by our Audit Committee. The total fees for audit and
non-audit services provided by Ernst & Young LLP in 2012 and 2011 are set forth above. The tax fees charged by Ernst & Young LLP during 2012 and 2011 were for
tax compliance services related to our income tax returns for the fiscal years ended December 31, 2011 and 2010, respectively. Our Audit Committee approved the engagement of Ernst &
Young LLP to provide these non-audit services because it determined that Ernst & Young LLP providing these services would not compromise its independence and that its
familiarity with our record keeping and accounting systems would permit it to provide these services with equal or higher quality, more quickly and at a lower cost than we could obtain these services
from other providers.
The
affirmative vote of a majority of the votes cast will be necessary for the ratification of the appointment of Ernst & Young LLP as our independent registered public
accounting firm for the fiscal year ending December 31, 2013. The shareholder vote on proposal 4 is advisory and nonbinding and serves only as a recommendation to our Board.
Our Board recommends you vote "FOR" the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm
for the fiscal year ending December 31, 2013.
SOLICITATION OF PROXIES
Proxies may be solicited, without additional compensation, by our Trustees and officers, and by RMR and its directors, officers and
employees, by mail, telephone or other electronic means or in person. We are paying the costs of this solicitation, including the preparation, printing, mailing and website hosting of proxy materials.
We will request banks, brokers and other custodians, nominees and fiduciaries to forward proxy materials to the beneficial owners of our common shares and to obtain their voting instructions. We will
reimburse those firms for their expenses. In addition, we have retained Innisfree to assist in the solicitation of proxies for a fee of $15,000 plus reimbursement of expenses. We have agreed to
indemnify Innisfree against certain liabilities arising out of our agreement with Innisfree.
TRUSTEES AND EXECUTIVE OFFICERS
The following are the ages and recent principal occupations, as of February 20, 2013, of our nominees, Trustees and executive
officers. Unless otherwise specified, the business address of our nominees, Trustees and executive officers is c/o Senior Housing Properties Trust, Two Newton Place, 255 Washington Street,
Suite 300, Newton, Massachusetts 02458.
Independent Trustee Nominee for a Term Expiring in 2016
JOHN L. HARRINGTON, Age: 76
Mr. Harrington has been one of our Independent Trustees since 1999. Mr. Harrington was Chairman of the Board of the
Yawkey Foundation (a charitable foundation) from 2002 to 2003 and since 2007, serving as one of its trustees since 1982 and as Executive Director from 1982 to 2006. He was also a Trustee of the JRY
Trust from 1982 through 2009. Mr. Harrington was Chief Executive Officer and General Partner of the Boston Red Sox Baseball Club from 1986 to 2002 and served as that organization's Vice
President and Chief Financial Officer prior to that time. He was President of
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Boston
Trust Management Corp. from 1981 to 2006 and a principal of Bingham McCutchen Sports Consulting LLC from 2007 to 2008. Mr. Harrington represented the Boston Red Sox majority
interest in co-founding The New England Sports Network, or NESN, managing NESN from 1981 to 2002. Mr. Harrington served as a Director of Fleet Bank from 1995 to 1999 and of Shawmut
Bank of Boston from 1986 to 1995, a Member of the Major League Baseball Executive Council from 1998 to 2001, Assistant Secretary of Administration and Finance for the Commonwealth of Massachusetts in
1980, Treasurer of the American League of Professional Baseball Clubs from 1970 to 1972, Assistant Professor and Director of Admissions, Carroll Graduate School of Management at Boston College from
1967 through 1970 and as Supervisory Auditor for the U.S. General Accounting Office from 1961 through 1966. Mr. Harrington has held many civic leadership positions and received numerous
leadership awards and honorary doctorate degrees. Mr. Harrington holds a Massachusetts license as a certified public accountant. Mr. Harrington has been an Independent Trustee of
Hospitality Properties Trust, or HPT, and Government Properties Income Trust, or GOV, since 1995 and 2009, respectively. Mr. Harrington has been an Independent Trustee of RMR Real Estate Income
Fund, or RIF, and its predecessor funds since shortly after their formation (the earliest of which was in 2002) and was an Independent Trustee of RMR Funds Series Trust from shortly after its
formation in 2007 until its dissolution in 2009.
(1)
Mr. Harrington served as an Independent Director of Five Star Quality Care, Inc., or Five Star, from 2001 to 2003.
Our
Board concluded that Mr. Harrington is qualified to serve as one of our Independent Trustees based upon, among other things, his demonstrated leadership capability, his work
on public company boards and board committees and in key management roles in various enterprises, his professional skills and expertise in accounting, finance and risk management and experience as a
chief financial officer, his expertise in compensation and benefits matters, his service with government and experience in public policy matters, his institutional knowledge earned through service on
our Board for 14 years
and his qualifying as an Independent Trustee in accordance with the requirements of the NYSE, the SEC and our bylaws. Mr. Harrington is an Independent Trustee in Group II and, if elected at the
meeting, his term will expire at our 2016 annual meeting of shareholders.
Managing Trustee Nominee for a Term Expiring in 2016
ADAM D. PORTNOY, Age: 42
Mr. Adam D. Portnoy has been one of our Managing Trustees since 2007. Mr. Portnoy has been a Managing Trustee of
CommonWealth REIT, or CWH, HPT, GOV and Select Income REIT, or SIR, since 2006, 2007, 2009 and 2011, respectively. Mr. Portnoy has been an Interested Trustee of RIF and its predecessor funds
since 2009. He has been President of CWH since 2011 and was an Executive Vice President of CWH from 2003 through 2006. He was President of GOV from 2009 until 2011. Mr. Portnoy has been an
executive officer of RMR since 2003 and currently is the President, Chief Executive Officer and a Director of RMR. Additionally, Mr. Portnoy is an owner of RMR and of RMR Advisors, Inc.,
or RMR Advisors, an SEC registered investment advisor. Mr. Portnoy has been President and Director of RMR Advisors since 2007 and was a Vice President prior to that time since 2003. He has also
been President of the RMR Funds since 2007. Prior to becoming President in 2007, Mr. Portnoy served as Vice President of the RMR Funds beginning in 2004. Prior to 2004, Mr. Portnoy held
various positions in the finance industry and public sector, including working as an investment
-
(1)
-
RIF,
its predecessor funds and RMR Funds Series Trust are collectively referred to herein as the "RMR Funds."
8
banker
at Donaldson, Lufkin & Jenrette and ABN AMRO, working in private equity at the International Finance Corporation (a member of The World Bank Group) and DLJ Merchant Banking Partners, and
serving as Chief Executive Officer of a telecommunications company. Mr. Portnoy is also currently a member of the Board of Governors of the National Association of Real Estate Trusts, a member
of the Board of Trustees of Occidental College and serving as the Honorary Consul General of the Republic of Bulgaria to Massachusetts. Mr. Adam Portnoy is the son of Mr. Barry Portnoy,
our other Managing Trustee.
Our
Board concluded that Mr. Portnoy is qualified to serve as one of our Managing Trustees based upon, among other things, his extensive experience in and knowledge of the
commercial real estate industry and real estate investment trusts, or REITs, his leadership position with RMR, his public company director service, his demonstrated management ability, his experience
in investment banking and private equity, his government organization service, his institutional knowledge earned through service on our Board for six years and in key leadership positions with our
manager for nine years and his qualifying as a Managing Trustee in accordance with the requirements of our bylaws. Mr. Adam Portnoy is a Managing Trustee in Group II and, if elected at the
meeting, his term will expire at our 2016 annual meeting of shareholders.
Independent Trustees Continuing in Office
FREDERICK N. ZEYTOONJIAN, Age: 77
Mr. Zeytoonjian has been one of our Independent Trustees since 2003. Mr. Zeytoonjian is the founder and has been Chairman
and Chief Executive Officer of Turf Products, LLC, one of the largest distributors of lawn care equipment in the United States, for over 40 years. Mr. Zeytoonjian also has been an
Independent Trustee of CWH since 1999.
Our
Board concluded that Mr. Zeytoonjian is qualified to serve as one of our Independent Trustees based upon, among other things, his demonstrated business leadership as a
successful entrepreneur for decades, his work on public company boards and board committees, his experience in and knowledge of commercial real estate, his financial background and his institutional
knowledge earned through service on our Board for 10 years and his qualifying as an Independent Trustee in accordance with the requirements of the NYSE, the SEC and our bylaws.
Mr. Zeytoonjian is an Independent Trustee in Group III, and his term expires at our 2014 annual meeting of shareholders.
JEFFREY P. SOMERS, Age: 69
Mr. Somers has been one of our Independent Trustees since 2009. Mr. Somers has been, since 2010, Of Counsel to, and from
1995 to 2009, was a member, and for six of those years the managing member, of the law firm of Morse, Barnes-Brown & Pendleton, PC. Prior to that time, he was a partner for more than
20 years at the law firm of Gadsby Hannah LLP (now McCarter & English, LLP) and for eight of those years was managing partner of the firm. Since 2002, Mr. Somers has
served as a Director for Cantella Management Corp., a holding company for Cantella & Co., Inc., an SEC registered broker dealer. From 1995 to 2001, he served as a Trustee for the
Pictet Funds. Before entering private law practice, Mr. Somers was a staff attorney at the SEC in Washington, D.C. He has previously served as a trustee for Glover Hospital, which is now part
of Beth Israel Deaconess Hospital, among various other civic leadership roles. Mr. Somers has been an Independent Trustee of
9
the
RMR Funds since 2009. Mr. Somers has been an Independent Trustee of GOV and SIR since 2009 and 2012, respectively.
Our
Board concluded that Mr. Somers is qualified to serve as one of our Independent Trustees based upon, among other things, his expertise in legal, corporate governance and
regulatory matters, his leadership role as a law firm managing member, his experience as a hospital trustee, including guiding the hospital's sale process, his service as a trustee of public
investment companies, his experience in complex business transactions, his various civic roles, his familiarity with finance and accounting matters, his institutional knowledge gained through service
on our Board for four years and his qualifying as an Independent Trustee in accordance with the requirements of the NYSE, the SEC and our bylaws. Mr. Somers is an Independent Trustee in Group
I, and his term expires at our 2015 annual meeting of shareholders.
Managing Trustee Continuing in Office
BARRY M. PORTNOY, Age: 67
Mr. Barry M. Portnoy has been one of our Managing Trustees since 1999. Mr. Portnoy has been a Managing Trustee of CWH,
HPT, GOV and SIR since 1986, 1995, 2009 and 2011, respectively. He has been a Managing Director of Five Star and of TravelCenters of America LLC, or TA, since 2001 and 2006, respectively.
Mr. Portnoy is an owner of RMR and of RMR Advisors. Mr. Portnoy has been an owner and a Director of RMR (and its predecessor) since its founding in 1986, a full time employee of RMR
since 1997, the Chairman of RMR since 1998 and a Director and Vice President of RMR Advisors since 2002. Mr. Portnoy has been an Interested Trustee of the RMR Funds from shortly after their
formation (the earliest of which was in 2002). Mr. Portnoy
practiced law for many years as a partner in, and chairman of, a law firm until 1997. Mr. Barry Portnoy is the father of Mr. Adam Portnoy, our other Managing Trustee.
Our
Board concluded that Mr. Portnoy is qualified to serve as one of our Managing Trustees based upon, among other things, his demonstrated leadership capability, his extensive
experience in and knowledge of the commercial real estate industry, senior living industry and REITs, his leadership position with RMR, his extensive public company director service, his professional
skills and expertise in, among other things, legal and regulatory matters, his institutional knowledge earned through prior service on our Board and in key leadership positions with our manager and
his qualifying as a Managing Trustee in accordance with the requirements of our bylaws. Mr. Portnoy is a Managing Trustee in Group I, and his term expires at our 2015 annual meeting of
shareholders.
Executive Officers
DAVID J. HEGARTY, Age: 56
Mr. Hegarty has been our President and Chief Operating Officer since 1999. Mr. Hegarty has been an executive officer and
a Director of RMR for over six years and has been an Executive Vice President of RMR since 2006. Mr. Hegarty is a certified public accountant.
RICHARD A. DOYLE, JR., Age: 44
Mr. Doyle has been our Treasurer and Chief Financial Officer since 2007. Mr. Doyle has been a Senior Vice President of
RMR since 2007 and has been an employee of RMR since 2006. From 2005
10
to
2006, Mr. Doyle was the Director of Financial Reporting of Five Star. Mr. Doyle was a finance officer of Sun Life Financial Inc. from 1999 until 2005. Mr. Doyle
is a certified public accountant.
Except
as noted with regard to Mr. Barry Portnoy and Mr. Adam Portnoy, there are no family relationships among any of our Trustees or executive officers. Our executive
officers serve at the discretion of our Board.
RMR,
RMR Advisors, CWH, GOV, HPT, SIR, Five Star, TA and the RMR Funds may be considered to be affiliates of us. RMR is a privately owned company that provides management services to
public and private companies, including us, CWH, GOV, HPT, SIR, Five Star and TA. CWH is a publicly traded REIT that primarily owns office buildings and industrial properties. GOV is a publicly traded
REIT that primarily invests in properties that are majority leased to government tenants. HPT is a publicly traded REIT that primarily owns hotels and travel centers. SIR is a publicly traded REIT
that primarily owns single tenant, net leased properties. Five Star is a publicly traded real estate based operating company in the healthcare and senior living services business; Five Star is our
largest tenant and manager of several of our properties. TA is a publicly traded real estate based operating company in the travel center business. The RMR Funds are or were investment companies
registered under the Investment Company Act of 1940, as amended. RMR Advisors is an SEC registered investment adviser to the RMR Funds.
BOARD OF TRUSTEES
Our business is conducted under the general direction of our Board as provided by our declaration of trust, our bylaws and the laws of
the State of Maryland, the state in which we were organized on December 16, 1998.
Three
of our Trustees, John L. Harrington, Jeffrey P. Somers and Frederick N. Zeytoonjian, are our Independent Trustees within the meaning of our bylaws. Two of our Trustees, Adam D.
Portnoy and Barry M. Portnoy, are our Managing Trustees within the meaning of our bylaws.
Our
bylaws require that a majority of our Board be Independent Trustees. In determining the status of those Trustees who qualify as Independent Trustees, each year our Board
affirmatively determines whether Trustees have a direct or indirect material relationship with us, including our subsidiaries, other than serving as our Trustees. When assessing a Trustee's
relationship with us, our Board considers all relevant facts and circumstances, not merely from the Trustee's standpoint, but also from that of the persons or organizations with which the Trustee has
an affiliation.
Our
Board has determined that Messrs. Harrington, Somers and Zeytoonjian currently qualify as independent trustees under applicable NYSE rules and are Independent Trustees under
our bylaws. In making that determination with respect to Mr. Harrington, our Board considered Mr. Harrington's service on the board of Five Star, a major tenant and manager of ours, from
2001 until January 2004. Additionally, with respect to Mr. Zeytoonjian, our Board considered Mr. Zeytoonjian's service on the board of CWH since 1999. Our Board also considered each of
these three Trustees' service in other enterprises and on the boards of other companies to which RMR and its affiliates provide management services. Our Board has concluded that none of these three
Trustees possessed or currently possesses any relationship that could impair his judgment in connection with his duties and responsibilities as a Trustee or that could otherwise be a direct or
indirect material relationship under applicable NYSE standards.
11
During
2012, our Board held six meetings, our Audit Committee held eight meetings, our Compensation Committee held four meetings and our Nominating and Governance Committee held two
meetings. During 2012, each Trustee attended 75% or more of the total number of meetings of our Board and any committee of which he was a member during the time in which he served on our Board or such
committee. All of our Trustees attended last year's annual meeting of shareholders.
Pursuant
to our Governance Guidelines, our Independent Trustees meet at least once each year without management. The presiding Trustee at these meetings is the Chair of our Audit
Committee, unless the Independent Trustees in attendance select another Independent Trustee to preside.
We
do not maintain directors' and officers' liability insurance for our Trustees and officers. Subject to certain limitations, our declaration of trust and separate indemnification
agreements that we have entered into require that we indemnify our Trustees and officers.
Board Leadership Structure
Our Board is comprised of both Independent Trustees and Managing Trustees, with a majority being Independent Trustees. Our Independent
Trustees are not employees of RMR, are not involved in our day to day activities and are persons who qualify as independent under our declaration of trust, our bylaws and the applicable rules of the
NYSE and SEC. Our Managing Trustees are not Independent Trustees and have been employees of RMR or involved in our day to day activities for at least one year. Our Board is composed of three
Independent Trustees and two Managing Trustees. Our President and our Treasurer are not members of our Board, but they regularly attend Board meetings, as does our Director of Internal Audit. Other
officers of RMR also sometimes attend Board meetings at the invitation of our Board.
Our
Audit, Compensation and Nominating and Governance Committees are comprised solely of our Independent Trustees, and an Independent Trustee serves as Chair of each such committee.
These standing committees have responsibilities related to our leadership and governance, including among other things: (1) our Audit Committee reviews our financial reports, oversees our
accounting and financial reporting processes, selects our independent accountants, determines the fees paid to our independent accountants and assists our Board with its oversight of our internal
audit function, our risk management and our compliance with legal and regulatory requirements; (2) our Compensation Committee annually evaluates the performance of our Director of Internal
Audit and approves the compensation we pay to him, determines any compensation that we directly pay to our President, reviews and approves any compensation that we directly pay to our Treasurer and
any other senior executive of ours who is also a senior executive of RMR, reviews our business and property management agreements with RMR, evaluates RMR's performance under those agreements, approves
the fees and certain other costs that we pay under those agreements, determines whether those agreements will be renewed, amended, terminated or allowed to expire and administers all of our equity
compensation awards; and (3) our Nominating and Governance Committee considers nominees to serve on our Board, recommends to our Board nominees for election to our Board, assesses our Board's
performance and reviews and assesses our Board leadership structure and Governance Guidelines and recommends to the Board any changes it determines appropriate. The Chairs of our Audit, Compensation
and Nominating and Governance Committees set the agenda for their respective committee meetings, but committee members, our Managing Trustees or members of our management may suggest agenda items to
be considered by these committees.
12
We
do not have a Chairman of our Board or a lead Independent Trustee. Our President, any Managing Trustee or any two Independent Trustees may call a special meeting. Our Managing
Trustees, in consultation with our President and Treasurer, set the agenda for our Board meetings, and any Independent Trustee may place an item on an agenda by providing notice to a Managing Trustee,
our President or our Treasurer. Discussions at Board meetings are led by the Managing Trustee or Independent Trustee who is most knowledgeable on a subject. Our Board is small, which facilitates
informal discussions and communication from management to the Board and among Trustees. Our Independent Trustees meet to consider Company business without the attendance of our Managing Trustees or
our officers, and they meet separately with our officers, with our Director of Internal Audit and with our outside accountants. In such meetings of our Independent Trustees, the Chair of the Audit
Committee presides unless the Independent Trustees determine otherwise.
In
light of the size of our Board and the oversight provided by and involvement of our Independent Trustees and Board committees in the leadership of our Company, our Board considers
that our current leadership structure and conduct combines appropriate leadership with the ability to conduct our business efficiently and with appropriate care and attention.
Risk Oversight
Our Board oversees risk as part of its general oversight of our Company, and oversight of risk is addressed as part of various Board
and Board committee activities and through regular and special Board and Board committee meetings. The actual day to day business of our Company is conducted by RMR, and RMR implements risk management
in its activities. In discharging their oversight responsibilities, our Board and Board committees regularly review a wide range of reports provided to them by RMR and other service providers,
including reports on market and industry conditions, operating and compliance reports, financial reports, reports on risk management activities, regulatory and legislative updates that may impact us,
legal proceedings updates and reports
on other business related matters, and discusses such matters among themselves and with representatives of RMR, counsel and our independent accountants. Our Audit Committee, which meets at least
quarterly and reports its findings to our Board, performs a lead role in helping our Board fulfill its responsibilities for oversight of our financial reporting, internal audit function, risk
management and our compliance with legal and regulatory requirements. Our Board and Audit Committee review periodic reports from our independent registered public accounting firm regarding potential
risks, including risks related to our internal controls. Our Audit Committee also annually reviews, approves and oversees an internal audit plan developed by our Director of Internal Audit with the
goal of helping our Company systematically evaluate the effectiveness of our risk management, control and governance processes, and periodically meets with our Director of Internal Audit to review the
results of our internal audits, and directs or recommends to the Board actions or changes it determines appropriate to enhance or improve the effectiveness of our risk management. Our Compensation
Committee also evaluates the performance of our Director of Internal Audit and RMR's performance under our business and property management agreements. Also, our Compensation Committee and our Board
consider the fact that we have a share grant program that requires share grants to vest over a period of years, rather than a stock option program such as is employed by many other publicly owned
companies. We believe that the use of share grants vesting over time rather than stock options mitigates the incentives for our management to undertake undue risks and encourages our management to
make longer term, less risk prone decisions.
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While
a number of risk management functions are performed, it is not possible to identify all of the risks that may affect us or to develop processes and controls to eliminate all risks
and their possible effects, and processes and controls employed to address risks may be limited in their effectiveness. Moreover, it is necessary for our Company to bear certain risks to achieve our
objectives. As a result of the foregoing and other factors, our Company's ability to manage risk is subject to substantial limitations.
BOARD COMMITTEES
We have a standing Audit Committee, Compensation Committee and Nominating and Governance Committee, each of which has a written
charter. Each of the above committees is currently comprised of Messrs. Harrington, Somers and Zeytoonjian, who are independent under applicable NYSE listing standards, each committee's
respective charter and, in the case of our Audit Committee, the applicable independence requirements of the SEC. Our Audit Committee,
Compensation Committee and Nominating and Governance Committee are delegated the powers of our Board necessary to carry out their responsibilities.
Our
Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act. The primary function of our Audit Committee is to assist our Board in fulfilling
its responsibilities for oversight of: (1) the integrity of our financial statements; (2) our compliance with legal and regulatory requirements; (3) our independent registered
public accounting firm's qualifications and independence; and (4) the performance of our internal audit function and independent registered public accounting firm. Our Board has determined that
Mr. Harrington is our Audit Committee financial expert and is "independent" as defined by the rules of the SEC and the NYSE. Our Board's determination that Mr. Harrington is our Audit
Committee financial expert was based upon his experience as: (i) Executive Director of a large charitable organization; (ii) Chief Executive Officer of a major professional sports
business; (iii) a member of our Audit Committee and of the audit committees of other publicly owned companies; (iv) a certified public accountant; (v) a Director of a large
national bank; and (vi) a college professor of accounting. Additionally, our Board has determined that Mr. Harrington's simultaneous service on the audit committees of HPT, GOV and RIF
will not impair his ability to effectively serve on our Audit Committee. Under its charter, our Audit Committee has the final authority and responsibility to select our independent registered public
accounting firm.
Our
Compensation Committee's primary responsibilities include: (1) reviewing the terms of RMR's business management and property management agreements with us, evaluating the
performance of RMR under those agreements, approving the fees and certain other costs that we are required to pay under those agreements and making determinations regarding continuance of or changes
to those agreements; (2) evaluating the performance of our President and determining and approving any compensation, including any equity compensation, paid directly by us to our President;
(3) evaluating the performance of our Director of Internal Audit and determining the compensation payable to him and the costs of our internal audit function generally; (4) evaluating,
approving and administering all of our equity compensation plans; (5) evaluating whether our executive compensation programs encourage appropriate levels of risk taking by our executives; and
(6) reviewing and considering the incentives and risks associated with our compensation policies and practices.
The
responsibilities of our Nominating and Governance Committee include: (1) identification of individuals qualified to become members of our Board and recommending to our Board
the nominees for Trustee for each annual meeting of shareholders or when Board vacancies occur; (2) development
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and
recommendation to our Board of governance guidelines; and (3) evaluation of the performance of our Board.
The
charter of each of our standing committees provides that the committee may form and delegate authority to subcommittees of one or more members when appropriate. Subcommittees are
subject to the provisions of the applicable committee's charter.
Our
policy with respect to Board members' attendance at our annual meetings of shareholders can be found in our Governance Guidelines, the full text of which appears at our website at
www.snhreit.com. In addition to our Governance Guidelines, copies of the charters of our Audit, Compensation and Nominating and Governance Committees, as well as our Code of Business Conduct and
Ethics, may be obtained free of charge at our website, www.snhreit.com, or by writing to our Secretary, Senior Housing Properties Trust, Two Newton Place, 255 Washington Street, Suite 300,
Newton, Massachusetts 02458.
COMMUNICATIONS WITH TRUSTEES
Any shareholder or other interested person who desires to communicate with our Independent Trustees or any Trustees, individually or as
a group, may do so by filling out a report at our website, www.snhreit.com, by calling our toll-free confidential message system at (866) 511-5038 or by writing to the
party for whom the communication is intended, c/o Director of Internal Audit, Senior Housing Properties Trust, Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458.
Our Director of Internal Audit will then deliver any communication to the appropriate party or parties.
SELECTION OF CANDIDATES FOR TRUSTEES;
SHAREHOLDER RECOMMENDATIONS, NOMINATIONS AND OTHER PROPOSALS
Our Board has established Governance Guidelines which, together with our declaration of trust and our bylaws, set forth the
qualifications for service on our Board. Our Governance Guidelines may be changed from time to time by our Board upon the recommendation of our Nominating and Governance Committee. Our Board makes
nominations of persons to be elected by shareholders as Trustees. Our Board also elects Trustees to fill Board vacancies that may occur from time to time. In both of these circumstances, our Board
will act upon recommendations made by our Nominating and Governance Committee.
In
considering candidates to serve as Trustees, our Nominating and Governance Committee seeks individuals who have qualities that the Committee believes will be effective in serving our
long term best interests. Among the characteristics that the Committee considers are the following: integrity, experience, achievements, judgment, intelligence, competence, personal character, ability
to make independent analytical inquiries, willingness to devote adequate time to Board duties, likelihood that a candidate will be able to serve on our Board for an extended period and other matters
that our Nominating and Governance Committee deems appropriate. While our Board does not have a specific diversity policy in connection with the selection of nominees for Trustee, due consideration is
given to our Board's desire for an overall balance of diversity of perspectives, backgrounds and experiences. Our Board does not consider gender, sexual orientation, race, religion, ethnicity,
national origin or citizenship to be relevant considerations and does not discriminate on the basis of such criteria. When considering candidates, our Nominating and Governance Committee will also
assist our Board in determining the desired mix of experience, skills, attributes and other criteria that will strengthen our
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Board
in a way that best serves the long term interests of our Company and complement the experience, skills, attributes and qualifications of existing Trustees. Depending on whether the position to
be filled is that of an Independent Trustee or a Managing Trustee, the qualifications of the candidate to meet the criteria for each such category of Trustee is considered. In seeking candidates for
Trustee who have not previously served as one of our Trustees, the Nominating and Governance Committee may use the business, professional and personal contacts of its members, it may accept
recommendations from other Board members and, if it considers it appropriate, the Nominating and Governance Committee may engage a professional search firm. In addition to other criteria, our bylaws
require that nominees submit any additional information required in connection with our license or regulation by state insurance or healthcare regulatory authorities.
In
2012, we did not pay any third party to identify or to assist in the evaluation of any candidate for election to our Board. We did not receive any shareholder recommendations or
nominations for our Board for the 2013 annual meeting of shareholders, except the nominations made by our Board and recommendations by our Nominating and Governance Committee, each of which includes
Board members who are shareholders of record.
Shareholder Recommendations for Nominees.
A responsibility of our Nominating and Governance Committee is to consider candidates for
election as
Trustee who are properly recommended by shareholders. To be considered by our Nominating and Governance Committee, a shareholder recommendation for a nominee must be made by such shareholder's written
notice to the Chair of our Nominating and Governance Committee and our Secretary, which notice should contain or be accompanied by the information and documents with respect to the recommended nominee
and recommending shareholder that the recommending shareholder believes to be relevant or helpful to our Nominating and Governance Committee's deliberations. Our Nominating and Governance Committee
may request additional information about the shareholder recommended nominee or about the shareholder recommending the nominee. Any recommended nominee will be considered by our Nominating and
Governance Committee in its discretion using the same criteria as other candidates considered by it.
The
preceding paragraph applies only to shareholder recommendations for nominees to our Nominating and Governance Committee. A shareholder nomination must be made in accordance with the
provisions of our bylaws, including the procedures discussed below, and applicable state and federal laws.
2014 Annual Meeting Deadlines for Shareholder Proposals Pursuant to Rule 14a-8 under the Exchange Act.
Shareholder proposals
intended to be presented pursuant to Rule 14a-8 under the Exchange Act at our 2014 annual meeting of shareholders must be received at our principal executive offices on or before
October 24, 2013, in order to be considered for inclusion in our proxy statement for our 2014 annual meeting of shareholders, provided that if we hold our 2014 annual meeting on a date that is
more than 30 days before or after May 9, 2014, shareholders must submit proposals for inclusion in our 2014 proxy statement within a reasonable time before we begin to print our proxy
materials. Under Rule 14a-8, we are not required to include shareholder proposals in our proxy materials unless conditions specified in the rule are met.
2014 Annual Meeting Deadlines for Shareholder Nominations and Shareholder Proposals Not Made Pursuant to Rule 14a-8 under the Exchange
Act.
In order for one or more shareholders properly to propose a nominee for election to our Board or propose business outside of Rule 14a-8
under the
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Exchange
Act, the shareholder(s) must comply in all respects with the advance notice and other provisions set forth in our bylaws, which currently include, among other things, requirements as to the
shareholder's timely delivery of advance notice, share ownership and submission of specified information. For example, our bylaws provide that to nominate a Trustee for election to our Board at our
annual meeting, the shareholder(s) must, among other things: (1) at the date such shareholder gives its advance notice, hold individually or in the aggregate at least 3% of our shares entitled
to vote at the meeting on such election, must have held such shares continuously for at least three years and must continuously hold such shares through and including the time of the annual meeting
(including any adjournment or postponement thereof); (2) be a shareholder of record at the time of giving notice through and including the time of the annual meeting (including any adjournment
or postponement thereof); (3) be entitled to make nominations and to vote at the meeting on such election; (4) hold a certificate or certificates for all shares of beneficial interest of
the Company owned by such shareholder during all times described in clause (1); and (5) comply with the advance notice procedures and requirements as to such nomination. The advance
notice must set forth detailed specified information about the nominee and the nominee's affiliates and associates, the shareholder making the nomination and affiliates and associates of that
shareholder and provide to the extent known by the shareholder giving the notice, the name and address of any other shareholder supporting the shareholder's nomination.
As
a further example, to propose other business to be considered by the shareholders at our annual meeting (other than the nomination of individuals for election to our Board), our
bylaws provide that the shareholder must: (1) have continuously held at least $2,000 in market value, or 1% of our shares entitled to vote at the meeting on the proposal for such business for
at least one year from the date the shareholder gives its advance notice and continuously hold such shares through and including the time of the annual meeting (including any adjournment or
postponement thereof); (2) be a shareholder of record at the time of giving notice through and including the time of the annual meeting (including any adjournment or postponement thereof);
(3) be entitled to propose such business and to vote at the meeting on the proposal for such business; (4) hold a certificate or certificates for all shares of beneficial interest of the
Company owned by such shareholder during all times described in clause (1); and (5) comply with the advance notice procedures and requirements as to such business. The advance notice
must set forth a description of such business, the reasons for proposing such business at the
meeting and any material interest in such business of the shareholder, a description of all agreements, arrangements and understandings involving the shareholder in connection with the proposal of
such business and a representation that the shareholder intends to appear in person or by proxy at the meeting to bring the business before the meeting.
In
addition, at the same time as the submission of a shareholder nomination or proposal for consideration at a meeting of our shareholders that, if elected or approved and implemented by
us, would cause us to be in breach of any covenant in or in default under any debt instrument or agreement or other material agreement of ours or any subsidiary of ours, our bylaws provide that the
shareholder must submit to our Secretary (i) evidence satisfactory to our Board of the lender's or contracting party's willingness to waive the breach of covenant or default, or (ii) a
detailed plan for repayment of the applicable indebtedness or curing the contractual breach or default and satisfying any resulting damage, specifically identifying the actions to be taken or the
source of funds, which plan must be satisfactory to our Board in its discretion, and evidence of the availability to us of substitute credit or contractual arrangements similar to the credit or
contractual arrangements which are implicated by the shareholder nomination or other proposal that are at least as favorable to us, as
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determined
by our Board in its discretion. Additionally, if (i) the submission of a shareholder nomination or proposal of other business to be considered at a shareholders meeting could not be
considered or, if elected or approved, implemented by us without our or any subsidiary of ours, or the proponent shareholder, the nominee, the holder of proxies or their respective affiliates or
associates filing with or otherwise notifying or obtaining the consent, approval or other action of any governmental or regulatory body, or a governmental action, or (ii) such shareholder's
ownership of our shares or any solicitation of proxies or votes or holding or exercising proxies by such shareholder, the nominee or their respective affiliates or associates would require
governmental action, then, at the same time as the submission of the shareholder nomination or proposal of other business, our bylaws provide that the proponent shareholder shall submit to our
Secretary (x) evidence satisfactory to our Board that any and all governmental action has been given or obtained, including, without limitation, such evidence as our Board may require so that
any nominee may be determined to satisfy any suitability or other requirements or (y) if such evidence was not obtainable from a governmental or regulatory body by such time despite the
shareholder's diligent and best efforts, a detailed plan for making or obtaining the governmental action prior to the election of the nominee or the implementation of the proposal for other business,
which plan must be satisfactory to our Board in its discretion.
Our
bylaws require that shareholder nominations and proposals intended to be made outside of Rule 14a-8 under the Exchange Act at our 2014 annual meeting of
shareholders must be
submitted, in accordance with the requirements of our bylaws, not later than 5:00 p.m. Eastern Time on October 24, 2013 (which is also the date, after which, shareholder nominations and
proposals made outside of Rule 14a-8 under the Exchange Act would be considered "untimely" within the meaning of Rule 14a-4(c) under the Exchange Act) and not
earlier than September 24, 2013; provided, that, if our 2014 annual meeting is called for a date that is more than 30 days earlier or later than May 9, 2014, then a shareholder's
notice must be so delivered not later than 5:00 p.m. Eastern Time on the tenth day following the earlier of the day on which (1) notice of the date of our 2014 annual meeting is mailed
or otherwise made available or (2) public announcement of the date of our 2014 annual meeting is first made by us.
The
foregoing description of the procedures for a shareholder to propose a nomination for election to our Board or other business for consideration at an annual meeting is only a summary
and is not a complete listing of all requirements. Copies of our bylaws, including the provisions that concern shareholder recommendations and the requirements for shareholder nominations and other
proposals, may be obtained by writing to our Secretary at Senior Housing Properties Trust, Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458, or from the SEC's
website at www.sec.gov. Any shareholder considering making a nomination or other proposal should carefully review and comply with those provisions. Under our declaration of trust and our bylaws, a
shareholder is obligated to indemnify us for costs and expenses we incur arising from the shareholder's breach or failure to fully comply with any covenant, condition or provision of our declaration
of trust or our bylaws, including costs and expenses we may incur as a result of the shareholder's failure to comply with the requirements to make nominations and proposals.
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COMPENSATION DISCUSSION AND ANALYSIS
Compensation Overview
We do not have any employees. None of our executive officers has an employment agreement with us or any agreement that becomes
effective upon his termination or a change in control of us. Our manager, RMR, provides services that otherwise would be provided by employees. RMR conducts our day to day operations on our behalf and
compensates our named executive officers, Messrs. Hegarty and Doyle, directly and in its sole discretion in connection with their services rendered to RMR and to us. We do not pay our executive
officers salaries or bonuses or provide other compensatory benefits except for the grants of shares under our share award plans discussed below. Although our Compensation Committee reviews and
approves our business management and property management agreements with RMR, it is not involved in compensation decisions made by RMR for its employees other than the employee serving as our Director
of Internal Audit. Our payments to RMR are described in
Related Person Transactions and Company Review of Such Transactions
in this proxy statement.
In
September 2012, the Chair of our Compensation Committee met with our Managing Trustees and the chairs of the compensation committees of the other public REITs, RIF and the operating
companies for which RMR and its affiliates provide management services. RMR provides management services to: (1) CWH, a publicly traded REIT that primarily owns office buildings and industrial
properties; (2) GOV, a publicly traded REIT that primarily invests in properties that are majority leased to government tenants; (3) HPT, a publicly traded REIT that primarily owns
hotels and travel centers; (4) SIR, a publicly traded REIT that primarily owns single tenant, net leased properties; (5) Five Star, a publicly traded real estate based operating company
in the healthcare and senior living services business; and (6) TA, a publicly traded real estate based operating company in the travel center business. The purpose of this meeting was, among
other things, to discuss compensation philosophy and factors that may affect compensation decisions, to consider the compensation payable to our Director of Internal Audit who provides services to us
and to other companies managed by RMR and its affiliates, to consider the allocation of internal audit and related services costs among us and other companies to which RMR or its affiliates provide
internal audit and related services, to provide a comparative understanding of potential share grants by us and the other affected companies and to hear and consider recommendations from our Managing
Trustees concerning potential share grants. The share grants made by the companies and other REITs managed by RMR and its affiliates are considered to be appropriately comparable because of the
similarities between certain services we require from our share grantees and the services provided to these other companies. Subsequent to this meeting, the members of our Compensation Committee held
a meeting at which the Chair provided a report of the information discussed with the Managing Trustees and others, and made recommendations for share grants to our executive officers. Our Compensation
Committee then discussed these recommendations and other factors, including the following factors for the 2012 share grants: (1) the value of the proposed share grants; (2) the
historical awards previously granted to each executive officer and the corresponding values at the time of the grants; (3) the recommendations by RMR as presented by our Managing Trustees;
(4) the value of share grants to executive officers providing comparable services at other REITs and companies managed by RMR; (5) changes, if any, in the responsibilities assigned to,
or assumed by, each executive officer during the past year and on a
going forward basis; (6) the length of historical services to us by each executive officer; (7) the responsibilities of each executive officer and the Compensation Committee's perception
regarding the
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quality
of the services provided by each executive officer in carrying out those responsibilities; and (8) our financial and operating performance in the past year and our perceived future
prospects. Our Compensation Committee's starting premise each year is to award our named executive officers the same number of shares as they were awarded in the prior year in an effort to meet
recipients' expectations. Our Compensation Committee then considered these multiple factors in determining whether to increase or decrease the amounts of the prior year's grants. There was no
formulaic approach to the use of these various factors in determining the number of shares to award to each executive officer. The share amounts were determined on a subjective basis using the various
factors at our Compensation Committee's sole discretion. Our executive officers did not participate in these meetings and were not involved in determining or recommending the amount or form of
executive compensation they receive from us. Our Compensation Committee did not engage a compensation consultant to participate in the determination or recommendation of the amount or form of
executive compensation.
In
evaluating our compensation process for 2012, our Compensation Committee generally considered the results of the advisory vote of our shareholders on the compensation of the executive
officers named in our 2012 proxy statement. Our Compensation Committee noted that more than 97% of votes cast approved of the compensation of those executive officers as described in our 2012 proxy
statement. Our Compensation Committee considered these voting results as supportive of the Committee's general executive compensation practices.
Analysis of Grants under Our Share Award Plans
Although we do not pay any cash compensation directly to our officers and have no employees, we have adopted share award plans to
reward our executive officers and other RMR employees who provide services to us and to foster a continuing identity of interest between them and our shareholders. We award shares under our share
award plans to recognize our executive officers' scope of responsibilities, reward demonstrated performance and leadership, motivate future performance, align the interests of our executives with
those of our other shareholders and motivate
the executives to remain employees of our manager and to continue to provide services to us through the term of the awards.
Under
its charter, our Compensation Committee evaluates, approves and administers our equity compensation plans, which currently consist solely of our share award plans providing for the
grants of our common shares. The Compensation Committee has historically determined to use grants of restricted common shares rather than stock options as equity compensation. Because the value of our
common shares may be determined in part by reference to its dividend yield relative to market interest rates rather than by its potential for capital appreciation, we believe a conventional stock
option plan might not provide appropriate incentives for management for a business like ours, but a share grant plan may create a better identity of interests between management and other
shareholders. Also, because we believe a stock option plan may encourage excessive short term risk taking, we have historically granted restricted shares rather than stock options.
Our
Compensation Committee uses comparative information about other REITs managed by RMR as additional data to help it determine whether it is awarding share amounts that it deems
reasonable based on the characteristics of those REITs and their respective officers. The Compensation Committee also considers the size and structure of the other REITs and other RMR managed
businesses, and the experience, length of service and scope of duties and responsibilities of the officers
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at
these other companies to assess the value of the share awards proposed for our officers in light of the proposed awards for officers with comparable roles at the other companies. Our Compensation
Committee reviewed the data regarding the other REITs and their officers, together with the other factors discussed above, but the Compensation Committee did not undertake a detailed comparison of the
named executive officers across the REITs or other companies managed by RMR or assign weight to any particular characteristic of these other companies or their officers because our Compensation
Committee determines the share amounts in its sole discretion on a non-formulaic basis. In 2012, the Compensation Committee considered the foregoing factors and decided to award the same
number of shares to our named executive officers as those awarded in 2011 in accordance with the recommendation of our Managing Trustees. Consistent with the prior year determination, the Compensation
Committee determined to grant a larger number of shares to Mr. Hegarty than Mr. Doyle due to Mr. Hegarty's more senior position and his greater length of service to us. The
Compensation Committee considered the overall contributions of each officer to us during 2012 to be at a high level.
We
determine the fair market value of the shares granted based on the closing price of our common shares on the date of grant. The Compensation Committee has imposed, and may impose,
vesting and other conditions on the granted common shares because it believes that time based vesting encourages the recipients of the share awards to remain employed by RMR and to continue to provide
services to us. The Compensation Committee currently uses a vesting schedule under which one fifth of the shares vest immediately and the remaining shares vest in four equal, consecutive annual
installments commencing on the first anniversary of the date of grant. The Compensation Committee utilizes a four year time based vesting schedule to provide an incentive to provide services for a
long term and in consideration of the tax treatment of the share grants to us and to the recipients. In the event a recipient granted a share award ceases to perform duties for us or ceases to be an
officer or an employee of RMR or any company that RMR manages during the vesting period, we may cause the forfeiture of, or we may repurchase for nominal consideration, the common shares that have not
yet vested. As with other issued common shares, vested and unvested shares awarded under our share award plans are entitled to receive distributions that we make on our common shares.
Because
the schedule for consideration of share awards by our Compensation Committee and our Board is determined on a regular schedule (i.e., in September for our officers and
employees of RMR and at the first meeting of our Board after the annual meeting of shareholders for our Trustees), the proximity of any grants to earnings announcements or other market events, if any,
is coincidental.
We
believe that our compensation philosophy and programs are designed to foster a business culture that aligns the interests of our executive officers with those of our shareholders. We
believe that the equity compensation of our executive officers is appropriate to the goal of providing shareholders dependable, long term returns.
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