Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and our Annual Report. We are a REIT organized under Maryland law.
PORTFOLIO OVERVIEW
(1)
The following tables present an overview of our portfolio (dollars in thousands, except per living unit / bed or square foot data):
(As of June 30, 2013)
|
|
Number of
Properties
|
|
Number of
Units/Beds or
Square Feet
|
|
Investment
Carrying Value
(2)
|
|
% of Total
Investment
|
|
Investment per
Unit / Bed or
Square Foot
(3)
|
|
Q2 2013
NOI
(4)
|
|
% of Q2 2013
NOI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent living
(5)
|
|
62
|
|
15,176
|
|
$
|
1,864,628
|
|
35.6%
|
|
$
|
122,867
|
|
$
|
33,228
|
|
29.6%
|
|
Assisted living
(5)
|
|
151
|
|
11,158
|
|
1,284,412
|
|
24.5%
|
|
$
|
115,111
|
|
33,040
|
|
29.4%
|
|
Nursing homes
(5)
|
|
48
|
|
5,024
|
|
210,348
|
|
4.0%
|
|
$
|
41,869
|
|
4,359
|
|
3.9%
|
|
Rehabilitation hospitals
|
|
2
|
|
364
|
|
78,382
|
|
1.5%
|
|
$
|
215,335
|
|
2,730
|
|
2.4%
|
|
Subtotal senior living communities
|
|
263
|
|
31,722
|
|
3,437,770
|
|
65.6%
|
|
$
|
108,372
|
|
73,357
|
|
65.3%
|
|
MOBs
|
|
115
|
|
7,714,000
|
sq. ft.
|
1,599,417
|
|
30.8%
|
|
$
|
207
|
|
34,646
|
|
30.8%
|
|
Wellness centers
|
|
10
|
|
812,000
|
sq. ft.
|
180,017
|
|
3.6%
|
|
$
|
222
|
|
4,441
|
|
3.9%
|
|
Total
|
|
388
|
|
|
|
$
|
5,217,204
|
|
100.0%
|
|
|
|
$
|
112,444
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant / Operator / Managed Properties
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Star (Lease No. 1)
|
|
91
|
|
6,731
|
|
699,268
|
|
13.3%
|
|
$
|
103,888
|
|
14,712
|
|
13.1%
|
|
Five Star (Lease No. 2)
|
|
53
|
|
7,564
|
|
755,440
|
|
14.4%
|
|
$
|
99,873
|
|
17,730
|
|
15.7%
|
|
Five Star (Lease No. 3)
|
|
17
|
|
3,281
|
|
350,993
|
|
6.7%
|
|
$
|
106,977
|
|
8,518
|
|
7.5%
|
|
Five Star (Lease No. 4)
|
|
29
|
|
3,335
|
|
387,361
|
|
7.4%
|
|
$
|
116,150
|
|
8,634
|
|
7.7%
|
|
Subtotal Five Star
|
|
190
|
|
20,911
|
|
2,193,062
|
|
41.8%
|
|
$
|
104,876
|
|
49,594
|
|
44.0%
|
|
Sunrise / Marriott
(6)
|
|
4
|
|
1,619
|
|
126,326
|
|
2.4%
|
|
$
|
78,027
|
|
3,133
|
|
2.9%
|
|
Brookdale
|
|
18
|
|
894
|
|
61,122
|
|
1.2%
|
|
$
|
68,369
|
|
1,754
|
|
1.5%
|
|
6 private senior living companies (combined)
|
|
12
|
|
1,620
|
|
94,170
|
|
1.8%
|
|
$
|
58,130
|
|
2,476
|
|
2.2%
|
|
Managed senior living communities
(7)
|
|
39
|
|
6,678
|
|
963,090
|
|
18.4%
|
|
$
|
144,218
|
|
16,400
|
|
14.7%
|
|
Subtotal senior living communities
|
|
263
|
|
31,722
|
|
3,437,770
|
|
65.6%
|
|
$
|
108,372
|
|
73,357
|
|
65.3%
|
|
Multi-tenant MOBs
|
|
115
|
|
7,714,000
|
sq. ft.
|
1,599,417
|
|
30.8%
|
|
$
|
207
|
|
34,646
|
|
30.8%
|
|
Wellness centers
|
|
10
|
|
812,000
|
sq. ft.
|
180,017
|
|
3.6%
|
|
$
|
222
|
|
4,441
|
|
3.9%
|
|
Total
|
|
388
|
|
|
|
$
|
5,217,204
|
|
100.0%
|
|
|
|
$
|
112,444
|
|
100.0%
|
|
Tenant / Managed Property Operating Statistics
(8)
|
|
Rent Coverage
|
|
Occupancy
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
Five Star (Lease No. 1)
|
|
1.21x
|
|
1.18x
|
|
84.7%
|
|
84.1%
|
|
Five Star (Lease No. 2)
|
|
1.17x
|
|
1.27x
|
|
81.2%
|
|
81.9%
|
|
Five Star (Lease No. 3)
|
|
1.67x
|
|
1.71x
|
|
88.8%
|
|
89.6%
|
|
Five Star (Lease No. 4)
|
|
1.18x
|
|
1.17x
|
|
85.7%
|
|
85.4%
|
|
Subtotal Five Star
|
|
1.27x
|
|
1.30x
|
|
84.2%
|
|
84.4%
|
|
Sunrise / Marriott
(6)
|
|
1.89x
|
|
1.97x
|
|
93.2%
|
|
93.0%
|
|
Brookdale
|
|
2.48x
|
|
2.24x
|
|
95.2%
|
|
92.7%
|
|
6 private senior living companies (combined)
|
|
2.12x
|
|
2.78x
|
|
83.6%
|
|
83.8%
|
|
Managed senior living communities
(7)
|
|
NA
|
|
NA
|
|
87.3%
|
|
86.6%
|
|
Subtotal senior living communities
|
|
1.38x
|
|
1.41x
|
|
85.6%
|
|
85.4%
|
|
Multi-tenant MOBs
|
|
NA
|
|
NA
|
|
94.1%
|
|
93.9%
|
|
Wellness centers
|
|
2.21x
|
|
2.16x
|
|
100.0%
|
|
100.0%
|
|
Total
|
|
1.44x
|
|
1.46x
|
|
|
|
|
|
19
(1)
Excludes properties classified in discontinued operations.
(2)
Amounts are before depreciation, but after impairment write downs, if any.
(3)
Represents investment carrying value divided by the number of living units, beds or leased square feet at June 30, 2013.
(4)
Net operating income, or NOI, is defined and calculated by reportable segment and reconciled to net income below in this Item 2.
(5)
Senior living properties are categorized by the type of living units or beds which constitute a majority of the living units or beds at the property.
(6)
Marriott International, Inc. guarantees the lessees obligations under these leases.
(7)
These 39 managed senior living communities are leased to our TRSs and managed by Five Star. The occupancy for the twelve month period ended, or, if shorter, from the date of acquisitions through June 30, 2013 was 87.3%.
(8)
Operating data for multi-tenant MOBs are presented as of June 30, 2013 and 2012; operating data for other properties, tenants and managers are presented based upon the operating results provided by our tenants and managers for the 12 months ended March 31, 2013 and 2012, 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, if any, divided by 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.
20
The following tables set forth information regarding our lease expirations as of June 30, 2013 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
Cumulative
|
|
|
|
Annualized Rental Income
(1) (2)
|
|
Total
|
|
Percentage of
|
|
Year
|
|
Triple Net Senior
Living
Communities
|
|
MOBs
|
|
Wellness
Centers
|
|
Total
|
|
Annualized
Rental Income
Expiring
|
|
Annualized
Rental Income
Expiring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
|
|
$
|
11,905
|
|
$
|
|
|
$
|
11,905
|
|
2.6%
|
|
2.6%
|
|
2014
|
|
|
|
18,167
|
|
|
|
18,167
|
|
4.0%
|
|
6.6%
|
|
2015
|
|
3,039
|
|
20,571
|
|
|
|
23,610
|
|
5.1%
|
|
11.8%
|
|
2016
|
|
|
|
21,314
|
|
|
|
21,314
|
|
4.6%
|
|
16.4%
|
|
2017
|
|
44,392
|
|
25,594
|
|
|
|
69,986
|
|
15.2%
|
|
31.6%
|
|
2018
|
|
14,477
|
|
20,606
|
|
|
|
35,083
|
|
7.6%
|
|
39.2%
|
|
2019
|
|
599
|
|
29,691
|
|
|
|
30,290
|
|
6.6%
|
|
45.8%
|
|
2020
|
|
|
|
11,849
|
|
|
|
11,849
|
|
2.6%
|
|
48.3%
|
|
2021
|
|
1,424
|
|
5,131
|
|
|
|
6,555
|
|
1.4%
|
|
49.7%
|
|
Thereafter
|
|
173,572
|
|
39,289
|
|
17,536
|
|
230,397
|
|
50.3%
|
|
100.0%
|
|
Total
|
|
$
|
237,503
|
|
$
|
204,117
|
|
$
|
17,536
|
|
$
|
459,156
|
|
100.0%
|
|
|
|
Average remaining lease term for all properties (weighted by annualized rental income): 8.5 years
(1)
Annualized rental income is rents pursuant to existing leases as of June 30, 2013, including estimated percentage rents, straight line rent adjustments, estimated recurring expense reimbursements for certain net and modified gross leases and excluding lease value amortization at certain of our MOBs and wellness centers. Excludes properties classified in discontinued operations.
(2)
Excludes rent received from our managed senior living communities leased to our TRSs. If the NOI from our TRSs (three months ended June 30, 2013, annualized) were included in the foregoing table, the percent of total annualized rental income expiring would be: 2013 2.3%; 2014 3.5%; 2015 4.5%, 2016 4.1%; 2017 13.3%; 2018 6.7%; 2019 5.8%; 2020 2.3%; 2021 1.2% and thereafter 56.5%.
21
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
of Number
|
|
|
|
Number of Tenants
(1)
|
|
Number of
|
|
of
|
|
Year
|
|
Senior Living
Communities
(2)
|
|
MOBs
|
|
Wellness
Centers
|
|
Total
|
|
Tenancies
Expiring
|
|
Tenancies
Expiring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
79
|
|
|
|
79
|
|
13.2%
|
|
13.2%
|
|
2014
|
|
|
|
107
|
|
|
|
107
|
|
17.9%
|
|
31.1%
|
|
2015
|
|
3
|
|
92
|
|
|
|
95
|
|
15.9%
|
|
47.0%
|
|
2016
|
|
|
|
71
|
|
|
|
71
|
|
11.9%
|
|
58.9%
|
|
2017
|
|
2
|
|
74
|
|
|
|
76
|
|
12.7%
|
|
71.6%
|
|
2018
|
|
1
|
|
60
|
|
|
|
61
|
|
10.2%
|
|
81.8%
|
|
2019
|
|
1
|
|
33
|
|
|
|
34
|
|
5.7%
|
|
87.5%
|
|
2020
|
|
|
|
22
|
|
|
|
22
|
|
3.7%
|
|
91.2%
|
|
2021
|
|
1
|
|
12
|
|
|
|
13
|
|
2.2%
|
|
93.4%
|
|
Thereafter
|
|
4
|
|
34
|
|
2
|
|
40
|
|
6.6%
|
|
100.0%
|
|
Total
|
|
12
|
|
584
|
|
2
|
|
598
|
|
99.7%
|
|
|
|
(1)
Excludes properties classified in discontinued operations.
(2)
Excludes our managed senior living communities leased to our TRSs as tenants.
22
|
|
Number of Living Units / Beds or Square Feet with Leases Expiring
(1)
|
|
|
|
Living Units / Beds
(2)
|
|
Square Feet
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Triple Net
Senior Living
Communities
(Units / Beds)
|
|
Percent of
Total Living
Units / Beds
Expiring
|
|
Percentage of
Living Units /
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
0.0%
|
|
0.0%
|
|
407,453
|
|
|
|
407,453
|
|
5.0%
|
|
5.0%
|
|
2014
|
|
|
|
0.0%
|
|
0.0%
|
|
548,240
|
|
|
|
548,240
|
|
6.8%
|
|
11.8%
|
|
2015
|
|
423
|
|
1.7%
|
|
1.7%
|
|
832,481
|
|
|
|
832,481
|
|
10.3%
|
|
22.1%
|
|
2016
|
|
|
|
0.0%
|
|
1.7%
|
|
913,409
|
|
|
|
913,409
|
|
11.3%
|
|
33.4%
|
|
2017
|
|
4,229
|
|
16.9%
|
|
18.6%
|
|
1,010,375
|
|
|
|
1,010,375
|
|
12.5%
|
|
45.9%
|
|
2018
|
|
1,619
|
|
6.5%
|
|
25.1%
|
|
599,261
|
|
|
|
599,261
|
|
7.4%
|
|
53.3%
|
|
2019
|
|
175
|
|
0.7%
|
|
25.8%
|
|
942,076
|
|
|
|
942,076
|
|
11.7%
|
|
65.0%
|
|
2020
|
|
|
|
0.0%
|
|
25.8%
|
|
519,671
|
|
|
|
519,671
|
|
6.4%
|
|
71.4%
|
|
2021
|
|
361
|
|
1.4%
|
|
27.2%
|
|
201,360
|
|
|
|
201,360
|
|
2.6%
|
|
74.0%
|
|
Thereafter
|
|
18,237
|
|
72.8%
|
|
100.0%
|
|
1,286,865
|
|
812,000
|
|
2,098,865
|
|
26.0%
|
|
100.0%
|
|
Total
|
|
25,044
|
|
100.0%
|
|
|
|
7,261,191
|
|
812,000
|
|
8,073,191
|
|
100.0%
|
|
|
|
(1)
Excludes properties classified in discontinued operations.
(2)
Excludes 6,682 living units from our managed senior living communities leased to our TRSs. If the number of living units included in our TRS leases were included in the foregoing table, the percent of total living units / beds expiring would be: 2013, 2014 0.0%; 2015 1.3%; 2016 0.0%; 2017 13.3%; 2018 5.1%; 2019 0.6%; 2020 0.0%; 2021 1.1% and thereafter 78.6%.
During the three months ended June 30, 2013, we entered into MOB lease renewals for 83,000 square feet and new leases for 18,000 square feet, at weighted average rental rates that were 2.9% above rents previously charged for the same space. These leases produce average net rent of $35.87 per square foot. Average lease terms for leases entered into during the second quarter of 2013 were 3.6 years. Commitments for tenant improvement, leasing commission costs and concessions for leases we entered into during the second quarter of 2013 totaled $0.7 million, or $7.02 per square foot on average (approximately $1.95 per square foot per year of the lease term).
RESULTS OF OPERATIONS (dollars and square feet in thousands, unless otherwise noted)
We have four operating segments, of which three are reportable operating segments: (i) triple net senior living communities that provide short term and long term residential care and dining services for residents, (ii) managed senior living communities that provide short term and long term residential care and dining services for residents and (iii) MOBs. Our triple net and managed senior living communities include independent living communities, assisted living communities, SNFs and two 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.
23
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Triple net senior living communities
|
|
$
|
56,957
|
|
$
|
59,643
|
|
$
|
113,723
|
|
$
|
118,467
|
|
Managed senior living communities
|
|
74,631
|
|
35,986
|
|
149,687
|
|
71,554
|
|
MOBs
|
|
50,899
|
|
44,306
|
|
101,582
|
|
88,090
|
|
All other operations
|
|
4,441
|
|
4,458
|
|
8,845
|
|
8,878
|
|
Total revenues
|
|
$
|
186,928
|
|
$
|
144,393
|
|
$
|
373,837
|
|
$
|
286,989
|
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
Triple net senior living communities
|
|
$
|
28,971
|
|
$
|
32,289
|
|
$
|
62,356
|
|
$
|
63,797
|
|
Managed senior living communities
|
|
6,299
|
|
3,055
|
|
13,534
|
|
6,365
|
|
MOBs
|
|
(6,425
|
)
|
18,797
|
|
13,853
|
|
36,386
|
|
All other operations
|
|
(23,247
|
)
|
(20,890
|
)
|
(48,910
|
)
|
(40,945
|
)
|
Net income
|
|
$
|
5,598
|
|
$
|
33,251
|
|
$
|
40,833
|
|
$
|
65,603
|
|
The following sections analyze and discuss the results of operations of each of our segments for the periods presented.
Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012 (dollars in thousands):
Unless otherwise indicated, references in this section to changes or comparisons of results, income or expenses refer to comparisons of the second quarter 2013 results against the comparable 2012 period.
Triple net senior living communities
:
|
|
All Properties
|
|
Comparable Properties
(1)
|
|
|
|
As of and for the Three Months
Ended June 30,
|
|
As of and for the Three Months
Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Total properties
(2)
|
|
224
|
|
229
|
|
219
|
|
219
|
|
# of units / beds
|
|
25,044
|
|
26,855
|
|
24,383
|
|
24,383
|
|
Occupancy
|
|
85.6%
|
|
85.4%
|
|
85.2%
|
|
85.2%
|
|
Rent coverage
(3)
|
|
1.38x
|
|
1.41x
|
|
1.38x
|
|
1.41x
|
|
(1)
Consists of triple net senior living communities we have owned continuously since April 1, 2012.
(2)
Reflects the transfer of ten communities previously triple net leased to Sunrise Senior Living, Inc., or Sunrise, in the third and fourth quarter of 2012 to our TRS and managed by Five Star, partially offset by additional triple net leased properties we acquired since April 1, 2012.
24
(3)
All tenant operating data presented are based upon the operating results provided by our tenants for the 12 months ended March 31, 2013 and 2012 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 triple-net lease tenants operations of our properties, before subordinated charges, if any, divided by triple-net lease 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.
Triple net senior living communities, all properties
:
|
|
Three Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
56,957
|
|
$
|
59,643
|
|
$
|
(2,686
|
)
|
(4.5%
|
)
|
Net operating income (NOI)
|
|
56,957
|
|
59,643
|
|
(2,686
|
)
|
(4.5%
|
)
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
(17,019
|
)
|
(17,191
|
)
|
172
|
|
1.0%
|
|
Impairment of assets
|
|
(4,371
|
)
|
|
|
(4,371
|
)
|
(100.0%
|
)
|
Operating income
|
|
35,567
|
|
42,452
|
|
(6,885
|
)
|
(16.2%
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(6,596
|
)
|
(10,163
|
)
|
3,567
|
|
35.1%
|
|
Net income
|
|
$
|
28,971
|
|
$
|
32,289
|
|
$
|
(3,318
|
)
|
(10.3%
|
)
|
Except as noted below under Rental income, we have not included a discussion and analysis of the results of our comparable properties data for the triple net senior living communities segment as we believe that a comparison of the results for our comparable properties for our triple net senior living communities segment is generally consistent from quarter to quarter and a comparison is not meaningful.
Rental income.
Rental income decreased due to the transfer in the third and fourth quarter of 2012 of ten communities previously triple net leased to our managed senior living communities. This decrease was partially offset by our acquisition of four triple net leased communities during the third quarter of 2012 for approximately $36,500 and one community acquired in January 2013 for $22,350 which are leased by a private tenant and our purchase of approximately $40,103 of improvements made to our properties which are leased by Five Star since April 1, 2012. Rental income increased year over year on a comparable property basis primarily as a result of the improvement purchases from Five Star at certain of the 219 communities we have owned continuously since April 1, 2012.
Net operating income.
NOI decreased because of the changes in rental income described above. We do not incur property operating expenses at our triple net senior living communities, as these expenses are paid by our tenants. Accordingly, rental income is the same as NOI. The reconciliation of NOI to net income for our triple net senior living communities segment is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in Non-GAAP Financial Measures.
Depreciation expense.
Depreciation expense decreased as a result of the transfer in the third and fourth quarter of 2012 of ten communities previously triple net leased to our TRSs. This decrease was partially offset as a
25
result of our acquisition of five triple net leased communities since April 1, 2012 and our purchase of improvements made to our properties which are leased by Five Star since April 1, 2012.
Impairment of assets.
During the three months ended June 30, 2013, we recorded impairment of assets charges of $4,371 to reduce the carrying value of four of our senior living communities to their estimated net sale price.
Interest expense.
Interest expense for our triple net senior living communities arises from mortgage debt secured by certain of these properties. The decrease in interest expense is the result of the repayment of 17 mortgage loans in the second quarter of 2012 that had a total principal balance of $33,381 and a weighted average interest rate of 6.89%, the prepayment of $199,197 of our Federal National Mortgage Association secured term loan in August 2012 that had an interest rate of 6.4%, the prepayment of four loans in the second quarter of 2013 that had a total principal balance of $10,377 and a weighted average interest rate of 6.1%, as well as the regularly scheduled amortization of our mortgage debt, partially offset by mortgage debt we assumed in connection with our acquisition of a senior living community in January 2013 triple net leased to a privately owned operator.
26
Managed senior living communities:
|
|
All Properties
|
|
Comparable Properties
(1)
|
|
|
|
As of and for the Three Months
Ended June 30,
|
|
As of and for the Three Months
Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Total properties
|
|
39
|
|
24
|
|
23
|
|
23
|
|
# of units / beds
|
|
6,678
|
|
3,483
|
|
3,416
|
|
3,416
|
|
Occupancy:
|
|
87.4%
|
|
87.7%
|
|
91.5%
|
|
87.6%
|
|
Average monthly rate
|
|
4,215
|
|
3,926
|
|
3,951
|
|
3,927
|
|
(1)
Consists of managed senior living communities we have owned continuously since April 1, 2012.
Managed senior living communities, all properties
:
|
|
Three Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Residents fees and services
|
|
$
|
74,631
|
|
$
|
35,986
|
|
$
|
38,645
|
|
107.4%
|
|
Property operating expenses
|
|
(58,231
|
)
|
(26,244
|
)
|
(31,987
|
)
|
(121.9%
|
)
|
Net operating income (NOI)
|
|
16,400
|
|
9,742
|
|
6,658
|
|
68.3%
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
(7,028
|
)
|
(3,874
|
)
|
(3,154
|
)
|
(81.4%
|
)
|
Operating income
|
|
9,372
|
|
5,868
|
|
3,504
|
|
59.7%
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(3,073
|
)
|
(2,813
|
)
|
(260
|
)
|
(9.2%
|
)
|
Net income
|
|
$
|
6,299
|
|
$
|
3,055
|
|
$
|
3,244
|
|
106.2%
|
|
Residents fees and services.
Residents fees and services are the revenues earned at our managed senior living communities. We recognize these revenues as services are provided. The increase in residents fees and services primarily relate to the acquisition of six managed senior living communities since April 1, 2012 and the revenues earned at the ten senior living communities that were formerly leased to Sunrise where the leaseholds were transferred to our TRS during the third and fourth quarters of 2012.
Property operating expenses.
Property operating expenses include expenses incurred at our managed senior living communities and they consist of management fees, real estate taxes, utility expense, salaries and benefits of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of these operating properties. The increase in property operating expenses primarily relates to the acquisition of six managed senior living communities since April 1, 2012 and the expenses incurred at the ten senior living communities that were formerly leased to Sunrise where the leaseholds were transferred to our TRS during the third and fourth quarters of 2012.
27
Net operating income.
NOI increased because of the changes in residents fees and services and property operating expenses described above. The reconciliation of NOI to net income for our managed senior living communities segment is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in Non-GAAP Financial Measures.
Depreciation expense.
Depreciation expense increased primarily as a result of acquisitions of managed senior living communities since April 1, 2012 and the transfer of ten senior living communities that were formerly triple net leased to Sunrise to one of our TRSs in the third and fourth quarters of 2012.
Interest Expense.
Interest expense for our managed senior living communities arises from mortgage debt secured by certain of these properties. The increase in interest expense is the result of our assumption of $41,814 of mortgage debt with a weighted average interest rate of 5.8% in connection with our acquisition of three communities since April 1, 2012.
Managed senior living communities, comparable properties (managed senior living communities we have owned continuously since April 1, 2012):
|
|
Three Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Residents fees and services
|
|
$
|
37,459
|
|
$
|
35,730
|
|
$
|
1,729
|
|
4.8%
|
|
Property operating expenses
|
|
(26,985
|
)
|
(26,026
|
)
|
(959
|
)
|
(3.7%
|
)
|
Net operating income (NOI)
|
|
10,474
|
|
9,704
|
|
770
|
|
7.9%
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
(3,849
|
)
|
(3,822
|
)
|
(27
|
)
|
(0.7%
|
)
|
Operating income
|
|
6,625
|
|
5,882
|
|
743
|
|
12.6%
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(2,734
|
)
|
(2,795
|
)
|
61
|
|
2.2%
|
|
Net income
|
|
$
|
3,891
|
|
$
|
3,087
|
|
$
|
804
|
|
26.0%
|
|
Residents fees and services.
We recognize residents fees and services as services are provided. Our residents fees and services increased year over year on a comparable property basis because of changes in occupancy mix and an increase in average monthly rates charged to residents at the 23 communities we have owned continuously since April 1, 2012.
Property operating expenses.
Property operating expenses consist of property management fees, real estate taxes, utility expense, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating properties. Property operating expenses increased principally because of an increase in utility expenses, real estate taxes, insurance, and other direct costs of operating properties.
Net operating income.
NOI increased because of the changes in residents fees and services and property operating expenses described above. The reconciliation of NOI to net income for our managed senior living communities segment, comparable properties, is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in Non-GAAP Financial Measures.
28
Depreciation expense.
Depreciation expense increased as a result of our purchase of improvements made to our properties.
Interest expense.
Interest expense for our managed senior living communities arises from mortgage debt secured by certain of these properties. Interest expense decreased as a result of regularly scheduled amortization of our mortgage debt.
29
MOBs:
|
|
All Properties
(1)
|
|
Comparable Properties
(1) (2)
|
|
|
|
As of and for the Three Months
Ended June 30,
|
|
As of and for the Three Months
Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Total properties
|
|
115
|
|
105
|
|
99
|
|
99
|
|
Total square feet
(3)
|
|
7,714
|
|
7,235
|
|
6,658
|
|
6,658
|
|
Occupancy
(4)
|
|
94.1%
|
|
93.9%
|
|
93.6%
|
|
95.3%
|
|
(1)
Excludes properties classified in discontinued operations.
(2)
Consists of MOBs we have owned continuously since April 1, 2012. One MOB which was sold in July 2012 and one MOB which was vacated in February 2012 that is scheduled for demolition are excluded.
(3)
Prior periods exclude space remeasurements made during the periods presented.
(4)
MOB occupancy includes (i) space being fitted out for occupancy pursuant to existing leases and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants.
MOBs, all properties:
|
|
Three Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
50,899
|
|
$
|
44,306
|
|
$
|
6,593
|
|
14.9%
|
|
Property operating expenses
|
|
(16,253
|
)
|
(13,574
|
)
|
(2,679
|
)
|
(19.7%
|
)
|
Net operating income (NOI)
|
|
34,646
|
|
30,732
|
|
3,914
|
|
12.7%
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation / amortization expense
|
|
(13,301
|
)
|
(12,611
|
)
|
(690
|
)
|
(5.5%
|
)
|
Operating income
|
|
21,345
|
|
18,121
|
|
3,224
|
|
17.8%
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(1,387
|
)
|
(381
|
)
|
(1,006
|
)
|
(264.0%
|
)
|
Income from continuing operations
|
|
19,958
|
|
17,740
|
|
2,218
|
|
12.5%
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
1,513
|
|
1,057
|
|
456
|
|
(43.1%
|
)
|
Impairment of assets from discontinued operations
|
|
(27,896
|
)
|
|
|
(27,896
|
)
|
(100.0%
|
)
|
Net (loss) income
|
|
$
|
(6,425
|
)
|
$
|
18,797
|
|
$
|
(25,222
|
)
|
134.2%
|
|
Rental income.
Rental income increased because of rents from 16 MOBs we acquired for approximately $278,295 since April 1, 2012, partially offset by the sale of one MOB for approximately $1,100 in July 2012. Rental income includes non-cash straight line rent adjustments totaling $1,645 and $1,659 and amortization of approximately $(971) and $753 of acquired in place real estate leases and obligations for the three months ended June 30, 2013 and 2012, respectively.
30
Property operating expenses.
Property operating expenses consist of property management fees, real estate taxes, utility expense, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating properties. Property operating expenses increased primarily because of our MOB acquisitions since April 1, 2012, partially offset by the sale of one MOB in July 2012.
Net operating income.
NOI increased because of the changes in rental income and property operating expenses described above. The reconciliation of NOI to net income for our MOB segment is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in Non-GAAP Financial Measures.
Depreciation / amortization expense.
Depreciation / amortization expense increased primarily because of our MOB acquisitions since April 1, 2012, partially offset by the sale of one MOB in July 2012.
Interest expense.
Interest expense for our MOBs arises from mortgage debt secured by certain of these properties. The change in interest expense is the result of our assumption of $73,103 of mortgage debt in connection with our acquisition of three MOBs since April 1, 2012 with a weighted average interest rate of 5.9%, partially offset by the repayment of one mortgage loan in April 2012 that had a principal balance of approximately $2,330 and an interest rate of 6.73% and the regularly scheduled amortization of our mortgage debt.
Income from discontinued operations.
Income from discontinued operations relates to the seven MOBs classified as held for sale as of June 30, 2013. The increase in income is due to no longer depreciating the assets as of the date they met the held for sale criteria established under GAAP.
Impairment of assets from discontinued operations.
During the three months ended June 30, 2013, we recorded impairment of assets charges of $27,896 to reduce the carrying value of seven of our MOBs to their estimated net sale price.
MOBs, comparable properties
(MOBs we have owned continuously since April 1, 2012)
(1)
:
|
|
Three Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
42,679
|
|
$
|
43,601
|
|
$
|
(921
|
)
|
(2.1%
|
)
|
Property operating expenses
|
|
(13,446
|
)
|
(13,340
|
)
|
(106
|
)
|
(0.8%
|
)
|
Net operating income (NOI)
|
|
29,233
|
|
30,261
|
|
(1,028
|
)
|
(3.4%
|
)
|
|
|
|
|
|
|
|
|
|
|
Depreciation / amortization expense
|
|
(10,572
|
)
|
(12,181
|
)
|
1,610
|
|
13.2%
|
|
Operating income
|
|
18,661
|
|
18,080
|
|
582
|
|
3.2%
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(282
|
)
|
(375
|
)
|
93
|
|
24.9%
|
|
Net income
|
|
$
|
18,379
|
|
$
|
17,705
|
|
$
|
675
|
|
3.8%
|
|
(1)
Excludes properties classified in discontinued operations.
31
Rental income.
Rental income decreased as a result of a reduction in same store occupancy from 95.3% at June 30, 2012 to 93.6% at June 30, 2013, mainly caused by the termination of certain tenant leases.
Property operating expenses.
Property operating expenses consist of property management fees, real estate taxes, utility expense, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating properties. Property operating expenses increased principally because of an increase in utility expenses, real estate taxes, insurance, and other direct costs of operating properties.
Net operating income.
NOI decreased because of the changes in rental income and property operating expenses described above. The reconciliation of NOI to net income for our MOB segment for comparable properties is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in Non-GAAP Financial Measures.
Depreciation /amortization expense.
Depreciation / amortization expense decreased primarily because of a reduction in amortization of above and below market lease adjustments that we amortize over the respective lease terms, partially offset by an increase in the amortization of leasing costs.
Interest expense.
Interest expense for our MOBs arises from mortgage debt secured by certain of these properties. The change in interest expense is the result of the repayment of one mortgage loan in April 2012 that had a principal balance of approximately $2,330 and an interest rate of 6.73% and the regularly scheduled amortization of our mortgage debt.
All other operations
:
(1)
|
|
Three Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
4,441
|
|
$
|
4,458
|
|
$
|
(17
|
)
|
-0.4%
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
948
|
|
948
|
|
|
|
|
|
General and administrative
|
|
8,168
|
|
8,068
|
|
100
|
|
1.2%
|
|
Acquisition related costs
|
|
292
|
|
1,829
|
|
(1,537
|
)
|
(84.0%
|
)
|
Total expenses
|
|
9,408
|
|
10,845
|
|
(1,437
|
)
|
-13.3%
|
|
Operating loss
|
|
(4,967
|
)
|
(6,387
|
)
|
1,420
|
|
22.2%
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
397
|
|
227
|
|
170
|
|
74.9%
|
|
Interest expense
|
|
(18,511
|
)
|
(14,763
|
)
|
(3,748
|
)
|
(25.4%
|
)
|
Loss on early extinguishment of debt
|
|
(105
|
)
|
|
|
(105
|
)
|
(100.0%
|
)
|
Equity in earnings of an investee
|
|
79
|
|
76
|
|
3
|
|
3.9%
|
|
Loss before income tax expense
|
|
(23,107
|
)
|
(20,847
|
)
|
(2,260
|
)
|
(10.8%
|
)
|
Income tax expense
|
|
(140
|
)
|
(43
|
)
|
(97
|
)
|
(225.6%
|
)
|
Net loss
|
|
$
|
(23,247
|
)
|
$
|
(20,890
|
)
|
$
|
(2,357
|
)
|
(11.3%
|
)
|
(1)
All other operations includes our wellness center operations that we do not consider a significant, separately reportable segment of our business and corporate business activities, and our operating expenses that are not attributable to a specific reportable segment.
32
Rental income.
Rental income includes non-cash straight line rent adjustments totaling approximately $365 and amortization of approximately $55 of acquired real estate leases and obligations in both the three months ended June 30, 2013 and 2012.
Depreciation expense.
Depreciation expense remained consistent as we did not make any wellness center acquisitions nor capital improvements for the three months ended June 30, 2013 and 2012 and we generally depreciate our long lived wellness center assets on a straight line basis.
General and administrative expense.
General and administrative expenses consist of fees and expenses of our trustees, fees pursuant to our business management agreement with RMR, equity compensation expense, legal and accounting fees and other costs relating to our status as a publicly traded company.
General and administrative expenses increased principally as a result of our acquisitions of senior living communities and MOBs since April 1, 2012, partially offset by the sale of one MOB in July 2012.
Acquisition related costs.
Acquisition related costs represent legal and due diligence costs incurred in connection with our acquisition activity during the three months ended June 30, 2013 and 2012. Acquisition related costs decreased as a result of less senior living and MOB acquisition activity during the three months ended June 30, 2013 than the prior year period.
Interest and other income.
The decrease in interest and other income is primarily due to the elimination of interest received from our Bridge Loan with Five Star that was repaid in April 2012. Interest and other income also includes interest on our investable cash and dividend income related to the 250,000 common shares of CWH that we own.
Interest expense.
Interest expense increased because of our issuance of $350,000 of unsecured senior notes with an interest rate of 5.625% in July 2012, partially offset by lower amounts outstanding under our revolving credit facility. Our weighted average balance outstanding and interest rate under our revolving credit facility was $11,538 and 2.6%, and $273,835 and 1.8%, for the three months ended
June 30, 2013 and 2012, respectively.
Loss on early extinguishment of debt.
In June 2013, we prepaid four mortgage loans encumbering four of our properties for $10,377 that had maturity dates in 2013. The loss is a result of the premium paid to prepay these mortgages prior to their maturity dates.
Equity in earnings of an investee.
Equity in earnings of an investee represents our proportionate share of earnings from AIC.
33
Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012 (dollars in thousands):
Triple net senior living communities:
|
|
All Properties
|
|
Comparable Properties
(1)
|
|
|
|
As of and for the Six Months
Ended June 30,
|
|
As of and for the Six Months
Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Total properties
(2)
|
|
224
|
|
229
|
|
219
|
|
219
|
|
# of units / beds
|
|
25,044
|
|
26,855
|
|
24,383
|
|
24,383
|
|
Occupancy
|
|
85.6%
|
|
85.4%
|
|
85.2%
|
|
85.2%
|
|
Rent coverage
(3)
|
|
1.38x
|
|
1.41x
|
|
1.38x
|
|
1.41x
|
|
(1)
Consists of triple net senior living communities we have owned continuously since January 1, 2012.
(2)
Reflects the transfer of ten communities previously triple net leased to Sunrise in the third and fourth quarter of 2012 to our TRS and managed by Five Star, partially offset by additional triple net leased properties we acquired since July 1, 2012.
(3)
All tenant operating data presented are based upon the operating results provided by our tenants for the 12 months ended March 31, 2013 and 2012 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 triple-net lease tenants operations of our properties, before subordinated charges, if any, divided by triple-net lease 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.
34
Triple net senior living communities, all properties
:
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
113,723
|
|
$
|
118,467
|
|
$
|
(4,744
|
)
|
(4.0%
|
)
|
Net operating income (NOI)
|
|
113,723
|
|
118,467
|
|
(4,744
|
)
|
(4.0%
|
)
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
(33,936
|
)
|
(34,383
|
)
|
447
|
|
1.3%
|
|
Impairment of assets
|
|
(4,371
|
)
|
|
|
(4,371
|
)
|
(100.0%
|
)
|
Operating income
|
|
75,416
|
|
84,084
|
|
(8,668
|
)
|
(10.3%
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(13,060
|
)
|
(20,287
|
)
|
7,227
|
|
35.6%
|
|
Net income
|
|
$
|
62,356
|
|
$
|
63,797
|
|
$
|
(1,441
|
)
|
(2.3%
|
)
|
Except as noted below under Rental income, we have not included a discussion and analysis of the results of our comparable properties data for the triple net senior living communities segment as we believe that a comparison of the results for our comparable properties for our triple net senior living communities segment is generally consistent from period to period and a comparison is not meaningful.
Rental income.
Rental income decreased due to the transfer in the third and fourth quarter of 2012 of ten communities previously triple net leased to our managed senior living communities. This decrease was partially offset by our acquisition of four triple net leased communities during the third quarter of 2012 for approximately $36,500 and one community acquired in January 2013 for $22,350 which are leased by a private tenant and our purchase of approximately $46,421 of improvements made to our properties which are leased by Five Star since January 1, 2012. Rental income increased year over year on a comparable property basis primarily as a result of the improvement purchases from Five Star at certain of the communities we lease to Five Star that we have owned continuously since January 1, 2012.
Net operating income.
NOI decreased because of the changes in rental income described above. We do not incur property operating expenses at our triple net senior living communities, as these expenses are paid by our tenants. Accordingly, rental income is the same as NOI. The reconciliation of NOI to net income for our triple net senior living communities segment is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in Non-GAAP Financial Measures.
Depreciation expense.
Depreciation expense decreased as a result of the transfer in the third and fourth quarter of 2012 of ten communities previously triple net leased to our TRSs. This decrease was partially offset as a result of our acquisition of five triple net leased communities since January 1, 2012 and our purchase of improvements made to our properties which are leased by Five Star since January 1, 2012.
Impairment of assets.
During the six months ended June 30, 2013, we recorded impairment of assets charges of $4,371 to reduce the carrying value of four of our senior living communities classified as held for sale as of June 30, 2013 to their estimated net sale price.
35
Interest expense.
Interest expense for our triple net senior living communities arises from mortgage debt secured by certain of these properties. The decrease in interest expense is the result of the repayment of 17 mortgage loans in the second quarter of 2012 that had a total principal balance of $33,381 and a weighted average interest rate of 6.89%, the prepayment of $199,197 of our Federal National Mortgage Association secured term loan in August 2012 that had an interest rate of 6.4%, the prepayment of four loans in the second quarter of 2013 that had a total principal balance of $10,377 and a weighted average interest rate of 6.1%, as well as the regularly scheduled amortization of our mortgage debt, partially offset by mortgage debt of $13,306 with an interest rate of 6.25% we assumed in connection with our acquisition of a senior living community in January 2013 triple net leased to a privately owned operator.
36
Managed senior living communities:
|
|
All Properties
|
|
Comparable Properties
(1)
|
|
|
|
As of and for the Six Months
Ended June 30,
|
|
As of and for the Six Months
Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Total properties
|
|
39
|
|
24
|
|
22
|
|
22
|
|
# of units / beds
|
|
6,678
|
|
3,483
|
|
3,324
|
|
3,324
|
|
Occupancy
|
|
87.2%
|
|
87.4%
|
|
91.5%
|
|
87.5%
|
|
Average monthly rate
|
|
4,255
|
|
3,945
|
|
3,967
|
|
3,953
|
|
(1)
Consists of managed senior living communities we have owned continuously since January 1, 2012.
Managed senior living communities, all properties
:
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Residents fees and services
|
|
$
|
149,687
|
|
$
|
71,554
|
|
$
|
78,133
|
|
109.2%
|
|
Property operating expenses
|
|
(116,135
|
)
|
(51,743
|
)
|
(64,392
|
)
|
(124.4%
|
)
|
Net operating income (NOI)
|
|
33,552
|
|
19,811
|
|
13,741
|
|
69.4%
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
(13,877
|
)
|
(7,580
|
)
|
(6,297
|
)
|
(83.1%
|
)
|
Operating income
|
|
19,675
|
|
12,231
|
|
7,444
|
|
60.9%
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(6,141
|
)
|
(5,866
|
)
|
(275
|
)
|
(4.7%
|
)
|
Net income
|
|
$
|
13,534
|
|
$
|
6,365
|
|
$
|
7,169
|
|
112.6%
|
|
Residents fees and services.
Residents fees and services are the revenues earned at our managed senior living communities. We recognize these revenues as services are provided. The increase in residents fees and services primarily relate to the acquisition of seven managed senior living communities since January 1, 2012 and the revenues earned at the ten senior living communities that were formerly leased to Sunrise where the leaseholds were transferred to our TRS during the third and fourth quarters of 2012.
Property operating expenses.
Property operating expenses include expenses incurred at our managed senior living communities and they consist of management fees, real estate taxes, utility expense, salaries and benefits of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of these operating properties. The increase in property operating expenses primarily relates to the acquisition of seven managed senior living communities since January 1, 2012 and the expenses incurred at the ten senior living communities that were formerly leased to Sunrise where the leaseholds were transferred to our TRS during the third and fourth quarters of 2012.
37
Net operating income.
NOI increased because of the changes in residents fees and services and property operating expenses described above. The reconciliation of NOI to net income for our managed senior living communities segment is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in Non-GAAP Financial Measures.
Depreciation expense.
Depreciation expense increased primarily as a result of acquisitions of managed senior living communities since January 1, 2012 and the transfer of ten senior living communities that were formerly triple net leased to Sunrise to one of our TRSs in the third and fourth quarters of 2012.
Interest Expense.
Interest expense for our managed senior living communities arises from mortgage debt secured by certain of these properties. The increase in interest expense is the result of our assumption of $41,814 of mortgage debt with a weighted average interest rate of 5.8% in connection with our acquisition of three communities in 2012, partially offset by the repayment of one mortgage loan in February 2012 that had a principal balance of approximately $12,400.
Managed senior living communities, comparable properties (managed senior living communities we have owned continuously since January 1, 2012):
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Residents fees and services
|
|
$
|
72,793
|
|
$
|
69,893
|
|
$
|
2,900
|
|
4.1%
|
|
Property operating expenses
|
|
(52,255
|
)
|
(50,381
|
)
|
(1,874
|
)
|
(3.7%
|
)
|
Net operating income (NOI)
|
|
20,538
|
|
19,512
|
|
1,026
|
|
5.3%
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
(7,413
|
)
|
(7,202
|
)
|
(211
|
)
|
(2.9%
|
)
|
Operating income
|
|
13,125
|
|
12,310
|
|
815
|
|
6.6%
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(5,456
|
)
|
(5,729
|
)
|
273
|
|
4.8%
|
|
Net income
|
|
$
|
7,669
|
|
$
|
6,581
|
|
$
|
1,088
|
|
16.5%
|
|
Residents fees and services.
We recognize residents fees and services as services are provided. Our residents fees and services increased year over year on a comparable property basis because of changes in occupancy mix and an increase in the average monthly rates charged to residents at the 22 communities we have owned continuously since January 1, 2012.
Property operating expenses.
Property operating expenses consist of property management fees, real estate taxes, utility expense, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating properties. Property operating expenses increased principally because of an increase in utility expenses, real estate taxes, insurance, and other direct costs of operating properties.
Net operating income.
NOI increased because of the changes in residents fees and services and property operating expenses described above. The reconciliation of NOI to net income for our managed senior living communities segment, comparable properties, is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in Non-GAAP Financial Measures.
38
Depreciation expense.
Depreciation expense increased as a result of our purchase of improvements made to our properties.
Interest expense.
Interest expense for our managed senior living communities arises from mortgage debt secured by certain of these properties. Interest expense decreased as a result of the repayment of one mortgage loan in February 2012 that had a principal balance of approximately $12,400 and an interest rate of 6.03% and regularly scheduled amortization of our mortgage debt.
MOBs:
|
|
All Properties
(1)
|
|
Comparable Properties
(1) (2)
|
|
|
|
As of and for the Six Months
Ended June 30,
|
|
As of and for the Six Months
Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Total properties
|
|
115
|
|
105
|
|
99
|
|
99
|
|
Total square feet
(3)
|
|
7,714
|
|
7,235
|
|
6,658
|
|
6,658
|
|
Occupancy
(4)
|
|
94.1%
|
|
93.9%
|
|
93.6%
|
|
95.3%
|
|
(1)
Excludes properties classified in discontinued operations.
(2)
Consists of MOBs we have owned continuously since January 1, 2012. One MOB which was sold in July 2012 and one MOB which was vacated in February 2012 that is scheduled for demolition are excluded.
(3)
Prior periods exclude space remeasurements made during the periods presented.
(4)
MOB occupancy includes (i) space being fitted out for occupancy pursuant to existing leases and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants.
39
MOBs, all properties:
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
101,582
|
|
$
|
88,090
|
|
$
|
13,492
|
|
15.3%
|
|
Property operating expenses
|
|
(32,028
|
)
|
(26,561
|
)
|
(5,467
|
)
|
(20.6%
|
)
|
Net operating income (NOI)
|
|
69,554
|
|
61,529
|
|
8,025
|
|
13.0%
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation / amortization expense
|
|
(26,290
|
)
|
(23,538
|
)
|
(2,752
|
)
|
(11.7%
|
)
|
Impairment of assets
|
|
(1,304
|
)
|
(3,071
|
)
|
1,767
|
|
57.5%
|
|
Operating income
|
|
41,960
|
|
34,920
|
|
7,040
|
|
20.2%
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(2,734
|
)
|
(793
|
)
|
(1,941
|
)
|
(244.8%
|
)
|
Income from continuing operations
|
|
39,226
|
|
34,127
|
|
5,099
|
|
14.9%
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
2,523
|
|
2,259
|
|
264
|
|
(11.7%
|
)
|
Impairment of assets from discontinued operations
|
|
(27,896
|
)
|
|
|
(27,896
|
)
|
(100.0%
|
)
|
Net income
|
|
$
|
13,853
|
|
$
|
36,386
|
|
$
|
(22,533
|
)
|
61.9%
|
|
Rental income.
Rental income increased because of rents from 16 MOBs we acquired for approximately $278,295 since January 1, 2012, partially offset by the sale of one MOB for approximately $1,100 in July 2012 and the loss of rental income at another MOB where the lease expired in February 2012 and has remained vacant. Rental income includes non-cash straight line rent adjustments totaling $3,184 and $3,644 and amortization of approximately $(1,945) and $244 of acquired real estate leases and obligations for the six months ended June 30, 2013 and 2012, respectively.
Property operating expenses.
Property operating expenses consist of property management fees, real estate taxes, utility expense, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating properties. Property operating expenses increased primarily because of our MOB acquisitions since January 1, 2012, partially offset by the sale of one MOB in July 2012.
Net operating income.
NOI increased because of the changes in rental income and property operating expenses described above. The reconciliation of NOI to net income for our MOB segment is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in Non-GAAP Financial Measures.
Depreciation / amortization expense.
Depreciation / amortization expense increased primarily because of our MOB acquisitions since January 1, 2012, partially offset by the sale of one MOB in July 2012.
Impairment of assets.
During the six months ended June 30, 2013, we recorded an impairment of assets charge of $1,304 related to one property to reduce the carrying value of this property to its estimated net sale price. During the six months ended June 30, 2012, we recorded an impairment of assets charge of $3,071 related to one property
to reduce the carrying value of this property to its estimated net sale price.
40
Interest expense.
Interest expense for our MOBs arises from mortgage debt secured by certain of these properties. The change in interest expense is the result of our assumption of $73,103 of mortgage debt in connection with our acquisition of three MOBs in 2012 with a weighted average interest rate of 5.9%, partially offset by the repayment of one mortgage loan in April 2012 that had a principal balance of approximately $2,330 and an interest rate of 6.73% and the regularly scheduled amortization of our mortgage debt.
Income from discontinued operations.
Income from discontinued operations relates to the seven MOBs classified as held for sale as of June 30, 2013. The increase in income is due to no longer depreciating the assets as of the date they met the held for sale criteria established under GAAP.
Impairment of assets from discontinued operations.
During the three months ended June 30, 2013, we recorded impairment of assets charges of $27,896 to reduce the carrying value of seven of our MOBs to their estimated net sale price.
MOBs, comparable properties
(MOBs we have owned continuously since January 1, 2012)
(1)
:
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
85,446
|
|
$
|
87,130
|
|
$
|
(1,684
|
)
|
(1.9%
|
)
|
Property operating expenses
|
|
(26,809
|
)
|
(26,256
|
)
|
(553
|
)
|
(2.1%
|
)
|
Net operating income (NOI)
|
|
58,637
|
|
60,874
|
|
(2,237
|
)
|
(3.7%
|
)
|
|
|
|
|
|
|
|
|
|
|
Depreciation / amortization expense
|
|
(21,319
|
)
|
(22,719
|
)
|
1,400
|
|
6.2%
|
|
Operating income
|
|
37,318
|
|
38,155
|
|
(837
|
)
|
(2.2%
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(569
|
)
|
(786
|
)
|
217
|
|
27.6%
|
|
Net income
|
|
$
|
36,749
|
|
$
|
37,369
|
|
$
|
(620
|
)
|
(1.7%
|
)
|
(1)
Excludes properties classified in discontinued operations.
Rental income.
Rental income decreased as a result of a reduction in same store occupancy from 95.3% at June 30, 2012 to 93.6% at June 30, 2013, mainly caused by the termination of certain tenant leases.
Property operating expenses.
Property operating expenses consist of property management fees, real estate taxes, utility expense, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating properties. Property operating expenses increased principally because of an increase in utility expenses, real estate taxes, insurance, and other direct costs of operating properties.
Net operating income.
NOI decreased because of the changes in rental income and property operating expenses described above. The reconciliation of NOI to net income for our MOB segment for comparable properties is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below in Non-GAAP Financial Measures.
41
Depreciation / amortization expense.
Depreciation / amortization expense decreased primarily because of a reduction in amortization of above and below market lease adjustments that we amortize over the respective lease terms, partially offset by an increase in the amortization of leasing costs.
Interest expense.
Interest expense for our MOBs arises from mortgage debt secured by certain of these properties. The change in interest expense is the result of the repayment of one mortgage loan in April 2012 that had a principal balance of approximately $2,330 and an interest rate of 6.73% and the regularly scheduled amortization of our mortgage debt.
All other operations
:
(1)
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
8,845
|
|
$
|
8,878
|
|
$
|
(33
|
)
|
(0.4%
|
)
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
1,896
|
|
1,896
|
|
|
|
|
|
General and administrative
|
|
16,816
|
|
15,753
|
|
1,063
|
|
6.7%
|
|
Acquisition related costs
|
|
2,187
|
|
2,694
|
|
(507
|
)
|
(18.8%
|
)
|
Total expenses
|
|
20,899
|
|
20,343
|
|
556
|
|
2.7%
|
|
Operating loss
|
|
(12,054
|
)
|
(11,465
|
)
|
(589
|
)
|
(5.1%
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
570
|
|
709
|
|
(139
|
)
|
(19.6%
|
)
|
Interest expense
|
|
(37,196
|
)
|
(30,063
|
)
|
(7,133
|
)
|
(23.7%
|
)
|
Loss on early extinguishment of debt
|
|
(105
|
)
|
|
|
(105
|
)
|
(100.0%
|
)
|
Equity in earnings of an investee
|
|
155
|
|
121
|
|
34
|
|
28.1%
|
|
Loss before income tax expense
|
|
(48,630
|
)
|
(40,698
|
)
|
(7,932
|
)
|
(19.5%
|
)
|
Income tax expense
|
|
(280
|
)
|
(247
|
)
|
(33
|
)
|
(13.4%
|
)
|
Net loss
|
|
$
|
(48,910
|
)
|
$
|
(40,945
|
)
|
$
|
(7,965
|
)
|
(19.5%
|
)
|
(1)
All other operations includes our wellness center operations that we do not consider a significant, separately reportable segment of our business and corporate business activities, and our operating expenses that are not attributable to a specific reportable segment.
Rental income.
Rental income includes non-cash straight line rent adjustments totaling approximately $729 and amortization of approximately $110 of acquired real estate leases and obligations in both the six months ended June 30, 2013 and 2012.
Depreciation expense.
Depreciation expense remained consistent as there were no wellness center acquisitions nor capital improvement funding for the six months ended June 30, 2013 and 2012 and we generally depreciate our long lived wellness center assets on a straight line basis.
42
General and administrative expense.
General and administrative expenses consist of fees and expenses of our trustees, fees pursuant to our business management agreement with RMR, equity compensation expense, legal and accounting fees and other costs relating to our status as a publicly traded company.
General and administrative expenses increased principally as a result of our acquisitions of senior living communities and MOBs since January 1, 2012, partially offset by the sale of one MOB in July 2012.
Acquisition related costs.
Acquisition related costs represent legal and due diligence costs incurred in connection with our acquisition activity during the six months ended June 30, 2013 and 2012. Acquisition related costs decreased as a result of less senior living and MOB acquisition activity during the six months ended June 30, 2013 than the prior year period.
Interest and other income.
The decrease in interest and other income is primarily due to the elimination of interest received from our Bridge Loan with Five Star that was repaid in April 2012. Interest and other income also includes interest on our investable cash and dividend income related to the 250,000 common shares of CWH that we own.
Interest expense.
Interest expense increased because of our issuance of $350,000 of unsecured senior notes with an interest rate of 5.625% in July 2012, partially offset by lower amounts outstanding under our revolving credit facility and reduced interest expense because of our redemption in January 2012 of all $225,000 of our 8.625% unsecured senior notes. Our weighted average balance outstanding and interest rate under our revolving credit facility was $32,793 and 1.9%, and $247,951 and 1.8%, for the six months ended
June 30, 2013 and 2012, respectively.
Loss on early extinguishment of debt.
In June 2013, we prepaid four mortgage loans encumbering four of our properties for $10,377 that had maturity dates in 2013. The loss is a result of the premium paid to prepay these mortgages prior to their maturity dates.
Equity in earnings of an investee.
Equity in earnings of an investee represents our proportionate share of earnings from AIC.
43
Non-GAAP Financial Measures (dollars in thousands, except per share amounts)
We provide below calculations of our funds from operations, or FFO, Normalized FFO and NOI for the three and six months ended June 30, 2013 and 2012. We believe that this data may facilitate an understanding of our consolidated historical operating results. These measures should be considered in conjunction with net income, operating income and cash flow from operating activities as presented in our condensed consolidated statements of income and comprehensive income and condensed consolidated statements of cash flows. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income, operating income or cash flow from operating activities, determined in accordance with GAAP, or as indicators of our financial performance or liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of our needs. Other REITs and real estate companies may calculate FFO, Normalized FFO or NOI differently than we do.
Funds From Operations and Normalized Funds From Operations
We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined by the National Association of Real Estate Investment Trusts, or NAREIT, which is net income, calculated in accordance with GAAP, excluding any gain or loss on sale of properties and impairment of real estate assets, plus real estate depreciation and amortization, as well as other adjustments currently not applicable to us. Our calculation of Normalized FFO differs from NAREITs definition of FFO because we include estimated percentage rent in the period to which we estimate that it relates rather than when it is recognized as income in accordance with GAAP and exclude acquisition related costs, gain or loss on early extinguishment of debt, gain or loss on lease terminations and loss on impairment of intangible assets, if any. We consider FFO and Normalized FFO to be appropriate measures of operating performance for a REIT, along with net income, operating income and cash flow from operating activities. We believe that FFO and Normalized FFO provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO and Normalized FFO may facilitate a comparison of our operating performance between periods and between us and other REITs. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our status as a REIT, limitations in our revolving credit facility agreement and public debt covenants, the availability of debt and equity capital to us, our expectation of our future capital requirements and operating performance, and our expected needs and availability of cash to pay our obligations.
Our calculations of FFO and Normalized FFO for the three and six months ended June 30, 2013 and 2012 and reconciliations of net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, to FFO and Normalized FFO appear in the following table.
44
|
|
Three Months Ended
June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,598
|
|
$
|
33,251
|
|
$
|
40,833
|
|
$
|
65,603
|
|
Depreciation expense from continuing operations
|
|
38,296
|
|
34,624
|
|
75,999
|
|
67,397
|
|
Depreciation expense from discontinued operations
|
|
199
|
|
606
|
|
799
|
|
1,210
|
|
Impairment of assets
|
|
4,371
|
|
|
|
5,675
|
|
3,071
|
|
Impairment of assets from discontinued operations
|
|
27,896
|
|
|
|
27,896
|
|
|
|
FFO
|
|
76,360
|
|
68,481
|
|
151,202
|
|
137,281
|
|
Acquisition related costs from continuing operations
|
|
292
|
|
1,829
|
|
2,187
|
|
2,694
|
|
Loss on early extinguishment of debt
|
|
105
|
|
|
|
105
|
|
|
|
Percentage rent adjustment
(1)
|
|
2,300
|
|
2,900
|
|
4,500
|
|
5,800
|
|
Normalized FFO
|
|
$
|
79,057
|
|
$
|
73,210
|
|
$
|
157,994
|
|
$
|
145,775
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
188,081
|
|
162,670
|
|
186,350
|
|
162,659
|
|
|
|
|
|
|
|
|
|
|
|
FFO per share
|
|
$
|
0.41
|
|
$
|
0.42
|
|
$
|
0.81
|
|
$
|
0.84
|
|
Normalized FFO per share
|
|
$
|
0.42
|
|
$
|
0.45
|
|
$
|
0.85
|
|
$
|
0.90
|
|
Net income per share
|
|
$
|
0.03
|
|
$
|
0.20
|
|
$
|
0.22
|
|
$
|
0.40
|
|
Distributions declared per share
|
|
$
|
0.39
|
|
$
|
0.38
|
|
$
|
0.78
|
|
$
|
0.76
|
|
(1)
In calculating net income in accordance with GAAP, we recognize percentage rental income received for the first, second and third quarters in the fourth quarter, which is when all contingencies are met and the income is earned. Although we defer recognition of this revenue until the fourth quarter for purposes of calculating net income, we include these estimated amounts in our calculation of Normalized FFO for each quarter of the year. The fourth quarter Normalized FFO calculation excludes the amounts included during the first three quarters.
Property Net Operating Income (NOI)
We calculate NOI as shown below. We define NOI as income from our real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions. We consider NOI to be an appropriate supplemental measure to net income because it may help both investors and management to understand the operations of our properties. We use NOI internally to evaluate individual and company wide property level performance, and we believe that NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are incurred at the property level and may facilitate comparisons of our operating performance between periods. The calculation of NOI excludes certain components of net income in order to provide results that are more closely related to our properties results of operations.
The calculation of NOI by reportable segment is included above in this Item 2. The following table includes the reconciliation of our consolidated NOI to net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, for the three and six months ended June 30, 2013 and 2012.
45
|
|
Three Months Ended
June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Reconciliation of NOI to Net Income:
|
|
|
|
|
|
|
|
|
|
Triple net communities NOI
|
|
$
|
56,957
|
|
$
|
59,643
|
|
$
|
113,723
|
|
$
|
118,467
|
|
Managed communities NOI
|
|
16,400
|
|
9,742
|
|
33,552
|
|
19,811
|
|
MOB NOI
|
|
34,646
|
|
30,732
|
|
69,554
|
|
61,529
|
|
All other operations NOI
|
|
4,441
|
|
4,458
|
|
8,845
|
|
8,878
|
|
Total NOI
|
|
112,444
|
|
104,575
|
|
225,674
|
|
208,685
|
|
Depreciation expense
|
|
(38,296
|
)
|
(34,624
|
)
|
(75,999
|
)
|
(67,397
|
)
|
General and administrative expense
|
|
(8,168
|
)
|
(8,068
|
)
|
(16,816
|
)
|
(15,753
|
)
|
Acquisition related costs
|
|
(292
|
)
|
(1,829
|
)
|
(2,187
|
)
|
(2,694
|
)
|
Impairment of assets
|
|
(4,371
|
)
|
|
|
(5,675
|
)
|
(3,071
|
)
|
Operating income
|
|
61,317
|
|
60,054
|
|
124,997
|
|
119,770
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
397
|
|
227
|
|
570
|
|
709
|
|
Interest expense
|
|
(29,567
|
)
|
(28,120
|
)
|
(59,131
|
)
|
(57,009
|
)
|
Loss on early extinguishment of debt
|
|
(105
|
)
|
|
|
(105
|
)
|
|
|
Equity in earnings of an investee
|
|
79
|
|
76
|
|
155
|
|
121
|
|
Income before income tax expense
|
|
32,121
|
|
32,237
|
|
66,486
|
|
63,591
|
|
Income tax expense
|
|
(140
|
)
|
(43
|
)
|
(280
|
)
|
(247
|
)
|
Income from continuing operations
|
|
31,981
|
|
32,194
|
|
66,206
|
|
63,344
|
|
Income from discontinued operations
|
|
1,513
|
|
1,057
|
|
2,523
|
|
2,259
|
|
Loss on impairment from discontinued operations
|
|
(27,896
|
)
|
|
|
(27,896
|
)
|
|
|
Net income
|
|
$
|
5,598
|
|
$
|
33,251
|
|
$
|
40,833
|
|
$
|
65,603
|
|
LIQUIDITY AND CAPITAL RESOURCES
Rental income and residents fees and services revenues from our leased and managed properties and borrowings under our revolving credit facility are our principal sources of funds to pay operating expenses, debt service and distributions to shareholders. 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 next 12 months and for the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon our ability to:
·
maintain or improve the occupancy of, and the current rental rates at, our properties;
·
control operating cost increases at our properties; and
·
purchase additional properties which produce cash flows in excess of our cost of acquisition capital and property operating expenses.
46
Our Operating Liquidity and Resources
We generally receive minimum rents monthly or quarterly from our tenants, we receive percentage rents from our triple net senior living community tenants monthly, quarterly or annually and we receive residents fees and services revenues, net of expenses, from our managed senior living communities monthly. During the six months ended June 30, 2013 and 2012, we generated $150.9 million and $146.5 million, respectively, of cash from operations. The increase in our cash from operations over the prior year primarily resulted from our property acquisitions, as further described below.
Our Investment and Financing Liquidity and Resources
At June 30, 2013, we had $37.3 million of cash and cash equivalents and $720.0 million available to borrow under our revolving credit facility. We expect to use cash balances, borrowings under our revolving credit facility, net proceeds from offerings of equity or debt securities and the cash flow from our operations to fund our operations, debt repayments, distributions, future property acquisitions, expenditures related to the repair, maintenance or renovation of our properties and for other general business purposes. We believe such amounts will be sufficient to fund these activities for the next 12 months and the foreseeable future thereafter.
In order to fund acquisitions and to meet cash needs that may result from timing differences between our receipts of rents and our desire or need to make distributions or pay operating or capital expenses, we maintain a $750.0 million unsecured revolving credit facility with a group of institutional lenders. The maturity date of our revolving credit facility is June 24, 2015 and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to extend the stated maturity date of our revolving credit facility by one year to June 24, 2016. In addition, our revolving credit facility includes a feature under which maximum borrowings may be increased to up to $1.5 billion in certain circumstances. Borrowings under our revolving credit facility bear interest at LIBOR plus a premium, which was 160 basis points as of June 30, 2013. We also pay a facility fee of 35 basis points per annum on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of June 30, 2013, the interest rate payable on borrowings under our revolving credit facility was 1.77%. The weighted average interest rate for borrowings under our revolving credit facility was 2.56% and 1.85% for the three and six months ended June 30, 2013, respectively. As of June 30, 2013 and July 31, 2013, we had $30.0 million and $10.0 million outstanding and $720.0 million and $740.0 million available under our revolving credit facility, respectively.
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 intend to explore alternatives for the repayment of amounts due. Such alternatives may include incurring additional debt, issuing new equity securities, extending the maturity date of our revolving credit facility and entering into a new credit facility. We currently 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.
We are currently in discussions with our lenders about possibly amending our revolving credit facility to, among other things, extend the maturity date and lower the borrowing costs. At this time, these discussions are preliminary and may not result in any change to our revolving credit facility.
In June 2013, we repaid mortgage notes with a weighted average interest rate of 6.1% encumbering four of our properties for approximately $10.5 million that had maturity dates in 2013.
47
During the six months ended June 30, 2013, we acquired four properties located in two states for an aggregate purchase price of approximately $75.0 million, excluding closing costs. At the time of acquisition, these properties generated property NOI which yielded approximately 8.6% of the aggregate gross purchase price, based on estimated GAAP revenue, excluding adjustments for above and below market lease value amortization, less property operating expenses, on the date of closing.
In April 2013, we entered into an agreement to acquire one senior living community for approximately $22 million, excluding closing costs. The senior living community is located in Cumming, GA and includes 93 private pay assisted living units. In July 2013, we entered into an agreement to acquire one senior living community for approximately $10 million, excluding closing costs. The senior living community is located in Jefferson City, TN and includes 60 private pay assisted living units. In July 2013, we entered into an agreement to acquire two senior living communities for approximately $19.1 million, excluding closing costs. The senior living communities are located in Canton and Ellijay, GA and include 153 private pay assisted living units. In July 2013, we entered into an agreement to acquire a MOB for approximately $49.5 million, excluding closing costs. This MOB is located in Boston, MA and includes 105,462 square feet. This MOB is a state of the art biotech laboratory building which will be long term leased to an investment grade rated tenant. These acquisitions are contingent upon customary closing conditions; accordingly, we can provide no assurance that we will purchase these properties, that our purchases will not be delayed or that the terms will not change.
As of June 30, 2013, we had 18 properties held for sale, including 11 senior living communities with 856 units and seven MOBs with 831,499 square feet. We decided to sell these properties because of underlying conditions in the markets where these properties are located. In aggregate, the 11 senior living communities that are held for sale receive a majority of their revenues from Medicare/Medicaid reimbursements. All 11 of these communities are leased to Five Star and our rents from Five Star will be reduced if and as these sales occur, as determined pursuant to our leases with Five Star. The seven MOBs were 99.3% occupied for a weighted (by rents) average lease term of 1.0 years as of June 30, 2013, and they generated annualized NOI of $6.8 million based on the three months ended June 30, 2013. During the three months ended June 30, 2013, we recorded impairment of assets charges of $32.3 million to reduce the carrying value of 11 of these 18 properties to their aggregate estimated net sale price. These properties have a net book value (after impairment) of $42.6 million as of June 30, 2013.
We are in the process of offering these 18 properties for sale, but we can provide no assurance that sales of these properties will occur. One of the 11 senior living communities, a skilled nursing facility with 112 units, is held for sale under an agreement to be sold for $2.6 million. We expect the sale of this community to occur before the end of 2013, but completion of this sale is subject to customary closing conditions and we can provide no assurance that a sale of this community will occur before the end of 2013 or will be completed at all or that the terms for the sale will not change. For more information about these completed and pending acquisitions and potential sales, see Note 3 to our condensed consolidated financial statements appearing in Item 1 above.
During the three and six months ended June 30, 2013, pursuant to the terms of our existing leases with Five Star, we purchased $7.7 million and $15.9 million, respectively, of improvements made to our properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $654,000 and $1.3 million, respectively. We used cash on hand to fund these purchases.
48
During the three and six months ended June 30, 2013 and 2012, amounts capitalized for leasing costs and building improvements at our MOBs and our capital expenditures at our managed senior living communities were as follows (dollars in thousands):
|
|
Three Months Ended
June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
MOB tenant improvements
(1)
|
|
$
|
739
|
|
$
|
975
|
|
$
|
971
|
|
$
|
1,771
|
|
MOB leasing costs
(1)
|
|
534
|
|
851
|
|
846
|
|
1,553
|
|
MOB building improvements
(1) (2)
|
|
1,729
|
|
662
|
|
2,361
|
|
1,649
|
|
Managed senior living communities capital improvements
|
|
2,979
|
|
1,540
|
|
5,719
|
|
2,379
|
|
Development, redevelopment and other activities
(3)
|
|
3,996
|
|
1,126
|
|
6,632
|
|
1,152
|
|
Total capital expenditures
|
|
$
|
9,977
|
|
$
|
5,154
|
|
$
|
16,529
|
|
$
|
8,504
|
|
(1)
Excludes expenditures at properties classified in discontinued operations.
(2)
MOB building improvements generally include: (i) construction costs and expenditures to replace obsolete building components that extend the useful life of existing assets, and (ii) non-recurring expenditures or expenditures that we believe increase the value of our existing properties.
(3)
Development, redevelopment and other activities generally include (i) major capital expenditures that are identified at the time of a property acquisition and incurred within a short period after acquiring the property; and (ii) major capital expenditure projects that reposition a property or result in new sources of revenue.
During the three months ended June 30, 2013, commitments made for expenditures, such as tenant improvements and leasing costs in connection with leasing space, were as follows (dollars and square feet in thousands, except per square foot amounts):
|
|
New
Leases
|
|
Renewals
|
|
Total
|
|
Square feet leased during the quarter
|
|
18
|
|
83
|
|
101
|
|
Total leasing costs and concession commitments
(1)
|
|
$
|
412
|
|
$
|
297
|
|
$
|
709
|
|
Total leasing costs and concession commitments per square foot
(1)
|
|
$
|
22.89
|
|
$
|
3.58
|
|
$
|
7.02
|
|
Weighted average lease term (years)
(2)
|
|
5.1
|
|
3.4
|
|
3.6
|
|
Total leasing costs and concession commitments per square foot per year
(1)
|
|
$
|
4.49
|
|
$
|
1.05
|
|
$
|
1.95
|
|
(1)
Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. Excludes expenditures at properties classified in discontinued operations.
(2)
Weighted based on annualized rental income pursuant to existing leases as of June 30, 2013, including straight line rent adjustments, estimated recurring expense reimbursements and excluding lease value amortization.
In January 2013, we issued 11,500,000 common shares in a public offering, raising net proceeds of approximately $262.1 million after underwriting discounts but before expenses. We used the net proceeds of this offering to repay borrowings outstanding under our revolving credit facility and for general business purposes, which included funding in part acquisitions of properties described in this Item 2, with the remainder to be used for general business purposes, including possible future acquisitions.
49
On May 21, 2013, we paid a $0.39 per share, or $73,349, distribution to our common shareholders of record on April 17, 2013 with respect to our operating results for the quarter ended March 31, 2013. On July 3, 2013, we declared a quarterly distribution of $0.39 per share, or $73,353, to our common shareholders of record on July 17, 2013, with respect to our operating results for the quarter ended June 30, 2013; we expect to pay this distribution on or about August 21, 2013 using cash on hand and borrowings under our revolving credit facility.
We believe we will have access to various types of financings, including equity or debt offerings, to fund our future acquisitions and to pay our debts and other obligations as they become due. Our ability to complete and the costs of our future debt transactions will depend primarily upon market conditions and our credit ratings. We have no control over market conditions. Our credit ratings depend upon evaluations by credit rating agencies of our business practices and plans and, in particular, whether we appear to have the ability to maintain our earnings and service our debt funding obligations, to space our debt maturities and to balance our use of equity and debt capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipatable adverse changes. We intend to conduct our business activities in a manner which will continue to afford us reasonable access to capital for investment and financing activities. However, there can be no assurance that we will be able to complete any equity or debt offerings or that our cost of any future public or private financings will not increase.
Off Balance Sheet Arrangements
As of June 30, 2013, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Debt Covenants
Our principal debt obligations at June 30, 2013 were: (1) outstanding borrowings under our $750.0 million unsecured revolving credit facility; (2) four public issuances of unsecured senior notes, including: (a) $250.0 million principal amount due 2016 at an annual interest rate of 4.30%, (b) $200.0 million principal amount due 2020 at an annual interest rate of 6.75%, (c) $300.0 million principal amount due 2021 at an annual interest rate of 6.75% and (d) $350.0 million principal amount due 2042 at an annual interest rate of 5.625%; and (3) $701.1 million aggregate principal amount of mortgages secured by 53 of our properties with maturity dates from 2013 to 2043. We had $30.0 million outstanding under our unsecured revolving credit facility as of June 30, 2013. We also have two properties encumbered by capital leases totaling $13.6 million at June 30, 2013. Our unsecured 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 June 30, 2013, 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 indenture and related supplements, our revolving credit facility or our other debt obligations contain 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 by us.
Our public debt indenture and related supplements contain cross default provisions, which are generally triggered upon default of any of our other debts of at least $10.0 million or, with respect to certain notes under such indenture and supplements, higher amounts. Similarly, our revolving credit facility contains a cross default
50
provision that is triggered upon default of 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. Termination of our business management and property management agreements with RMR would cause a default under our revolving credit facility, if not approved by a majority of our lenders.
Related Person Transactions
We have relationships and historical and continuing transactions with our Trustees, our executive officers, RMR, Five Star, AIC and other companies to which RMR provides management services and others affiliated with them. For example, we have no employees and personnel and various services we require to operate our business are provided to us by RMR pursuant to management agreements; and RMR is owned by our Managing Trustees. Also, as a further example, we have relationships with other companies to which RMR provides management services and which have trustees, directors and officers who are also trustees, directors or officers of ours or RMR, including: Five Star is our former subsidiary, our largest tenant and a manager of certain of our senior living communities, and we are Five Stars largest stockholder; D&R Yonkers LLC is owned by our executive officers and one of our TRSs subleases a portion of a senior living community we own to it in order to accommodate certain requirements of New York healthcare licensing laws; and we, RMR, Five Star and five other companies to which RMR provides management services each currently own 12.5% of AIC, and we and the other shareholders of AIC have property insurance in place providing $500.0 million of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts. For further information about these and other such relationships and related person transactions, please see Note 11 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. In addition, for more information about these transactions and relationships, please see elsewhere in this Quarterly Report on Form 10-Q, including Warning Concerning Forward Looking Statements in Part I, and our Annual Report, definitive Proxy Statement for the Annual Meeting of Shareholders held on May 9, 2013, or our Proxy Statement, and our other filings with the SEC, including Note 5 to our consolidated financial statements included in our Annual Report, the sections captioned Business, Managements Discussion and Analysis of Financial Condition and Results of OperationsRelated Person Transactions and Warning Concerning Forward Looking Statements of our Annual Report and the section captioned Related Person Transactions and Company Review of Such Transactions and the information regarding our Trustees and executive officers in our Proxy Statement. In addition, please see the section captioned Risk Factors of our Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC, including our Annual Report and our Proxy Statement, are available at the SECs website at www.sec.gov. Copies of certain of our agreements with these related parties, including our business management agreement and property management agreement with RMR, our leases, forms of management agreements and related pooling agreements and former Bridge Loan with Five Star, our agreements with D&R Yonkers LLC and its owners and our shareholders agreement with AIC and its shareholders, are publicly available as exhibits to our public filings with the SEC and accessible at the SECs website.
We believe that our agreements with RMR, Five Star, D&R Yonkers LLC and its owners and AIC are on commercially reasonable terms. We also believe that our relationships with RMR, Five Star, D&R Yonkers LLC and its owners and AIC and their affiliated and related persons and entities benefit us and, in fact, provide us with competitive advantages in operating and growing our business.
Impact of Government Reimbursement
As of
June 30, 2013
, approximately 94% of our NOI was generated from properties where a majority of the NOI is derived from private resources, and the remaining 6% of our NOI was generated from properties
51
where a majority of the NOI was derived from Medicare and Medicaid reimbursements.
We and our tenants and manager operate facilities in many states and participate in federal and state healthcare payment programs, including the federal Medicare and state Medicaid programs for services in SNFs, hospitals and other similar facilities, state Medicaid programs for services in assisted living communities and other federal and state healthcare payment programs. Because of the current federal budget deficit and other federal spending priorities and continued challenging state fiscal conditions, there have been numerous recent legislative and regulatory actions or proposed actions with respect to federal Medicare rates and state Medicaid rates and federal payments to states for Medicaid programs. Examples of these, and other information regarding such programs, are provided under the caption BusinessGovernment Regulation and Reimbursement in our Annual Report. Each year, The Centers for Medicare & Medicaid Services, or CMS, issues updated Medicare prospective payment system, or PPS, rates based on facility type. PPS is a method of reimbursement by which CMS makes Medicare payments for services based on a predetermined, fixed payment amount based on the classification system of that service, in contrast to a traditional fee-for-service model. CMS estimates that its updated PPS rates for federal fiscal year 2013 will result in a net increase of approximately 1.8% in aggregate Medicare payments for SNFs and a 2.1% aggregate increase in PPS rates for inpatient rehabilitation facilities, such as our two rehabilitation hospitals. Due to a prior reduction of 11.1% in Medicare payment rates for federal fiscal year 2012, however, Medicare PPS rates for SNFs are lower for federal fiscal year 2013 than they were in federal fiscal year 2011.
In addition, the Budget Control Act of 2011 allows for automatic reductions in federal spending by means of a process called sequestration, which has reduced Medicare payments by 2% since April 1, 2013. Sequestration could result in reductions to our and our tenants revenues from Medicare and certain other federal health programs over the next decade. These changes may have a material adverse effect on the ability of our tenants to pay us rent, the profitability of our managed senior living communities and the values of our properties.
Although Medicaid is exempt from the sequestration process, some of the states in which we and our tenants operate either have not raised Medicaid rates by amounts sufficient to offset increasing costs or have frozen or reduced, or are expected to freeze or reduce, Medicaid rates. In addition, certain temporary increases in federal payments to states for Medicaid programs that had been in effect since October 1, 2008 ended as of June 30, 2011. According to the 2012 Actuarial Report on the Financial Outlook for Medicaid, Medicaid enrollment is projected to increase at an average annual rate of 3.4% through 2021, due in part to the expansion in Medicaid eligibility under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, beginning in 2014. Under the ACA, the federal government would pay for 100% of a states expansion in the Medicaid program to groups not currently covered by Medicaid for the first three years and gradually reduce its subsidy to 90% by 2020. As of June 30, 2013, however, more than 20 states have elected not to broaden Medicaid eligibility and, instead, to forgo the federal funds that would otherwise be available for Medicaid expansion. We are unable to predict the impact of recent legislative and regulatory actions or proposed actions including those with respect to state Medicaid rates and the payments to states for Medicaid programs on us.
The ACA includes various provisions affecting Medicare and Medicaid providers, including expanded public disclosure requirements for SNFs and other providers, enforcement reforms and increased funding for Medicare and Medicaid program integrity control initiatives. The ACA has resulted in several changes to existing healthcare fraud and abuse laws, established additional enforcement tools and funding for enforcement, and provided for increased cooperation between agencies by establishing mechanisms for sharing information relating to legal compliance by healthcare providers. Furthermore, the ACA provides for enhanced criminal and administrative penalties for noncompliance. We are unable to predict the impact on our tenants and our manager of the insurance reforms, payment reforms, and healthcare delivery systems reforms contained in and to be
52
developed pursuant to the ACA. Expanded insurance availability could provide more paying customers to our tenants and manager. On the other hand, if the changes to be implemented under the ACA result in reduced payments for the services that our tenants or our manager provide or the failure of Medicare, Medicaid or insurance payment rates to cover our tenants and managed senior living communities costs, including the rents our tenants pay and the minimum returns and possible additional returns payable to us with respect to our managed senior living communities, our future financial results could be adversely and materially affected.
We cannot estimate the type and magnitude of the regulatory changes that may affect our business, but they may have a material adverse effect on the ability of our tenants to pay us rent, the profitability of our managed senior living communities and the values of our properties. The changes implemented or to be implemented could result in the failure of Medicare, Medicaid or private payment rates to cover our tenants and managed senior living communities costs of providing required services to residents, in reductions in payments or other circumstances that could have a material adverse effect on the ability of our tenants to pay rent to us, the profitability of our managed senior living communities and the values of our properties.
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 has not materially changed since December 31, 2012. Other than as described below, we do not currently foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.
53
At June 30, 2013, our outstanding fixed rate debt included the following (dollars in thousands):
Debt
|
|
Principal
Balance
(1)
|
|
Annual
Interest
Rate
(1)
|
|
Annual
Interest
Expense
|
|
Maturity
|
|
Interest
Payments Due
|
|
Unsecured senior notes
|
|
$
|
350,000
|
|
5.625%
|
|
$
|
19,688
|
|
2042
|
|
Quarterly
|
|
Unsecured senior notes
|
|
300,000
|
|
6.75%
|
|
20,250
|
|
2021
|
|
Semi-Annually
|
|
Unsecured senior notes
|
|
250,000
|
|
4.30%
|
|
10,750
|
|
2016
|
|
Semi-Annually
|
|
Unsecured senior notes
|
|
200,000
|
|
6.75%
|
|
13,500
|
|
2020
|
|
Semi-Annually
|
|
Mortgages
|
|
294,530
|
|
6.71%
|
|
19,763
|
|
2019
|
|
Monthly
|
|
Mortgages
|
|
89,287
|
|
5.924%
|
|
5,289
|
|
2016
|
|
Monthly
|
|
Mortgages
|
|
52,000
|
|
5.64%
|
|
2,933
|
|
2016
|
|
Monthly
|
|
Mortgages
|
|
46,261
|
|
6.54%
|
|
3,025
|
|
2017
|
|
Monthly
|
|
Mortgages
|
|
36,528
|
|
5.83%
|
|
2,130
|
|
2014
|
|
Monthly
|
|
Mortgages
|
|
30,564
|
|
6.015%
|
|
1,838
|
|
2015
|
|
Monthly
|
|
Mortgages
|
|
13,624
|
|
6.91%
|
|
941
|
|
2013
|
|
Monthly
|
|
Mortgages
|
|
12,913
|
|
5.66%
|
|
731
|
|
2015
|
|
Monthly
|
|
Mortgages
|
|
12,452
|
|
6.25%
|
|
778
|
|
2016
|
|
Monthly
|
|
Mortgages
|
|
12,186
|
|
6.25%
|
|
762
|
|
2015
|
|
Monthly
|
|
Mortgages
|
|
11,538
|
|
6.37%
|
|
734
|
|
2015
|
|
Monthly
|
|
Mortgages
|
|
11,333
|
|
6.15%
|
|
697
|
|
2017
|
|
Monthly
|
|
Mortgages
|
|
9,534
|
|
6.73%
|
|
642
|
|
2018
|
|
Monthly
|
|
Mortgages
|
|
9,423
|
|
5.95%
|
|
561
|
|
2038
|
|
Monthly
|
|
Mortgages
|
|
6,687
|
|
5.81%
|
|
389
|
|
2015
|
|
Monthly
|
|
Mortgages
|
|
6,420
|
|
5.97%
|
|
383
|
|
2016
|
|
Monthly
|
|
Mortgages
|
|
5,765
|
|
5.86%
|
|
338
|
|
2017
|
|
Monthly
|
|
Mortgages
|
|
5,071
|
|
5.65%
|
|
287
|
|
2015
|
|
Monthly
|
|
Mortgages
|
|
4,710
|
|
4.38%
|
|
206
|
|
2043
|
|
Monthly
|
|
Mortgages
|
|
4,550
|
|
5.81%
|
|
264
|
|
2015
|
|
Monthly
|
|
Mortgages
|
|
3,490
|
|
6.25%
|
|
218
|
|
2033
|
|
Monthly
|
|
Mortgages
|
|
3,141
|
|
7.31%
|
|
230
|
|
2022
|
|
Monthly
|
|
Mortgages
|
|
2,841
|
|
5.88%
|
|
167
|
|
2015
|
|
Monthly
|
|
Mortgages
|
|
1,546
|
|
7.85%
|
|
121
|
|
2022
|
|
Monthly
|
|
Bonds
|
|
14,700
|
|
5.88%
|
|
864
|
|
2027
|
|
Semi-Annually
|
|
|
|
$
|
1,801,094
|
|
|
|
$
|
108,479
|
|
|
|
|
|
(1)
The principal balances and interest rates are the amounts stated in the applicable contracts. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we assumed these debts. This table does not include obligations under capital leases.
No principal repayments 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
54
our interest obligations. If these debts were refinanced at interest rates which are 100 basis points higher or lower than shown above, our annual interest cost would increase or decrease by approximately $18.0 million.
Changes in market interest rates would affect the fair value of our fixed rate debt obligations; increases 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 June 30, 2013, and discounted cash flow analyses through the respective maturity dates and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligations, a hypothetical immediate 100 basis point change in interest rates would change the fair value of those obligations by approximately $30.5 million.
Our unsecured senior notes and mortgages each contain provisions that allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and we are generally allowed to make prepayments only at a premium equal to a make whole amount, as defined, which is generally designed to preserve a stated yield to the noteholder. Also, we have in the past repurchased and retired some of our outstanding debts and we may do so again in the future. These prepayment rights and our ability to repurchase and retire outstanding debt may afford us opportunities to mitigate the risk of refinancing our debts at maturity at higher rates by refinancing prior to maturity.
Our only current floating rate obligations are under our $750.0 million unsecured revolving credit facility and we had $30.0 million of borrowings outstanding as of June 30, 2013 under that credit facility. Our revolving credit facility matures in June 2015, and, subject to our meeting certain conditions, including our payment of an extension fee, we have the option to extend the stated maturity date by one year to June 2016.
We are currently in discussions with our lenders about possibly amending our revolving credit facility to, among other things, extend the maturity date and lower the borrowing costs. At this time, these discussions are preliminary and may not result in any change to our revolving credit facility.
No principal repayments are required under our revolving credit facility prior to maturity, and prepayments may be made, and redrawn subject to conditions, at any time without penalty. Borrowings under our revolving credit facility are in U.S. dollars and bear interest at LIBOR plus a premium that is subject to adjustment based upon changes to our credit ratings. Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR. There have been recent governmental inquiries regarding the setting of LIBOR, which may result in changes to the process that could have the effect of increasing LIBOR. In addition, upon renewal or refinancing of our revolving credit facility, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit risk. Generally, a change in interest rates would not affect the value of our floating rate debt but would affect our operating results. The following table presents the impact a 100 basis point increase in interest rates would have on our annual floating rate interest expense at June 30, 2013:
|
|
Impact of Changes in Interest Rates
|
|
Annual
|
|
|
|
Interest Rate
(1)
|
|
Outstanding
Debt
|
|
Total Interest
Expense Per Year
|
|
Earnings per
Share Impact
(2)
|
|
At June 30, 2013
|
|
1.85%
|
|
$
|
30,000
|
|
$
|
555
|
|
$
|
|
|
100 basis point increase
|
|
2.85%
|
|
$
|
30,000
|
|
$
|
855
|
|
$
|
|
|
(1)
Weighted based on the outstanding borrowings as of June 30, 2013.
(2)
Based on weighted average number of shares outstanding for the three months ended June 30, 2013.
55
The following table presents the impact a 100 basis point increase in interest rates would have on our annual floating rate interest expense at June 30, 2013 if we had fully drawn our credit facility (dollars in thousands):
|
|
Impact of Changes in Interest Rates
|
|
|
|
Interest Rate
(1)
|
|
Outstanding
Debt
|
|
Total Interest
Expense Per Year
|
|
Annual
Earnings
per Share Impact
(2)
|
|
At June 30, 2013
|
|
1.85%
|
|
$
|
750,000
|
|
$
|
13,875
|
|
$
|
0.07
|
|
100 basis point increase
|
|
2.85%
|
|
$
|
750,000
|
|
$
|
21,375
|
|
$
|
0.12
|
|
(1)
Weighted based on the outstanding borrowings as of June 30, 2013 assuming we were fully drawn on our revolving credit facility.
(2)
Based on weighted average number of shares outstanding for the three months ended June 30, 2013.
The foregoing two tables show the impact of an immediate change in floating interest rates. 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 of our revolving credit facility and term loan or other floating rate debt.
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 June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
56
WARNING CONCERNING FORWARD LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS BELIEVE, EXPECT, ANTICIPATE, INTEND, PLAN, ESTIMATE OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:
·
OUR ACQUISITIONS AND SALES OF PROPERTIES,
·
OUR ABILITY TO COMPETE FOR ACQUISITIONS AND TENANCIES EFFECTIVELY,
·
OUR ABILITY TO RAISE EQUITY OR DEBT CAPITAL,
·
OUR ABILITY TO PAY INTEREST ON AND PRINCIPAL OF OUR DEBT,
·
OUR ABILITY TO PAY DISTRIBUTIONS TO OUR SHAREHOLDERS AND THE AMOUNT OF SUCH DISTRIBUTIONS,
·
OUR ABILITY TO RETAIN OUR EXISTING TENANTS, ATTRACT NEW TENANTS AND MAINTAIN OR INCREASE CURRENT RENTAL RATES,
·
THE CREDIT QUALITY OF OUR TENANTS,
·
OUR POLICIES AND PLANS REGARDING INVESTMENTS AND FINANCINGS,
·
THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY,
·
OUR TAX STATUS AS A REIT,
·
OUR BELIEF THAT FIVE STAR, OUR FORMER SUBSIDIARY, WHICH IS OUR LARGEST TENANT AND WHICH MANAGES SEVERAL OF OUR SENIOR LIVING COMMUNITIES FOR OUR ACCOUNT, HAS ADEQUATE FINANCIAL RESOURCES AND LIQUIDITY TO MEET ITS OBLIGATIONS TO US AND TO MANAGE OUR MANAGED COMMUNITIES SUCCESSFULLY,
·
OUR EXPECTATION THAT WE WILL BENEFIT FINANCIALLY BY PARTICIPATING IN AIC WITH RMR AND COMPANIES TO WHICH RMR PROVIDES MANAGEMENT SERVICES, AND
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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
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THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FFO, NORMALIZED FFO, NOI, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:
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THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR TENANTS,
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THE IMPACT OF THE ACA AND OTHER RECENTLY ENACTED, ADOPTED OR PROPOSED LEGISLATION OR REGULATIONS ON US AND ON OUR TENANTS AND MANAGER AND THEIR ABILITY TO PAY OUR RENTS AND RETURNS,
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ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR MANAGING TRUSTEES, FIVE STAR, RMR, AIC, D&R YONKERS LLC AND THEIR RELATED PERSONS AND ENTITIES,
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COMPLIANCE WITH, AND CHANGES TO, FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, ACCOUNTING RULES, TAX LAWS AND SIMILAR MATTERS,
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LIMITATIONS IMPOSED ON OUR BUSINESS AND OUR ABILITY TO SATISFY COMPLEX RULES IN ORDER FOR US TO QUALIFY AS A REIT FOR U.S. FEDERAL INCOME TAX PURPOSES,
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COMPETITION WITHIN THE HEALTHCARE AND REAL ESTATE INDUSTRIES, AND
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ACTS OF TERRORISM, OUTBREAKS OF SO CALLED PANDEMICS OR OTHER MANMADE OR NATURAL DISASTERS BEYOND OUR CONTROL.
FOR EXAMPLE:
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FIVE STAR IS OUR LARGEST TENANT AND MANAGES SEVERAL OF OUR SENIOR LIVING COMMUNITIES FOR OUR ACCOUNT AND FIVE STAR MAY EXPERIENCE FINANCIAL DIFFICULTIES AS A RESULT OF A NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO:
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CHANGES IN MEDICARE AND MEDICAID PAYMENTS, INCLUDING THOSE THAT MAY RESULT FROM THE ACA AND OTHER RECENTLY ENACTED OR PROPOSED LEGISLATION OR REGULATIONS, WHICH COULD RESULT IN REDUCED RATES OR A FAILURE OF SUCH RATES TO COVER FIVE STARS COSTS,
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CHANGES IN REGULATIONS AFFECTING FIVE STARS OPERATIONS,
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CHANGES IN THE ECONOMY GENERALLY OR GOVERNMENTAL POLICIES WHICH REDUCE THE DEMAND FOR THE SERVICES FIVE STAR OFFERS,
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INCREASES IN INSURANCE AND TORT LIABILITY AND OTHER COSTS, AND
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INEFFECTIVE INTEGRATION OF NEW ACQUISITIONS,
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IF FIVE STARS OPERATIONS BECOME UNPROFITABLE, FIVE STAR MAY BECOME UNABLE TO PAY OUR RENTS AND WE MAY NOT RECEIVE OUR EXPECTED RETURN ON OUR INVESTED CAPITAL OR ADDITIONAL AMOUNTS FROM OUR SENIOR LIVING COMMUNITIES THAT ARE MANAGED BY FIVE STAR,
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OUR OTHER TENANTS MAY EXPERIENCE LOSSES AND BECOME UNABLE TO PAY OUR RENTS,
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CONTINUED AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND MEETING OTHER CUSTOMARY CREDIT FACILITY CONDITIONS,
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ACTUAL COSTS UNDER OUR REVOLVING CREDIT FACILITY WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF OTHER FEES AND EXPENSES ASSOCIATED WITH OUR REVOLVING CREDIT FACILITY,
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INCREASING THE MAXIMUM BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY IS SUBJECT TO OBTAINING ADDITIONAL COMMITMENTS FROM LENDERS, WHICH MAY NOT OCCUR,
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CONTINGENCIES IN OUR ACQUISITION AND SALES AGREEMENTS MAY CAUSE OUR FUTURE ACQUISITIONS AND SALES NOT TO OCCUR OR TO BE DELAYED OR THE TERMS TO BE CHANGED,
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THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE HAVE EIGHTEEN PROPERTIES CLASSIFIED AS HELD FOR SALE. WE MAY NOT BE ABLE TO SELL THESE PROPERTIES ON TERMS ACCEPTABLE TO US OR OTHERWISE,
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WE MAY BE UNABLE TO REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE,
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OUR ABILITY TO MAKE FUTURE DISTRIBUTIONS DEPENDS UPON A NUMBER OF FACTORS, INCLUDING OUR FUTURE EARNINGS. WE MAY BE UNABLE TO MAINTAIN OUR CURRENT RATE OF DISTRIBUTIONS AND FUTURE DISTRIBUTIONS MAY BE SUSPENDED,
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OUR ABILITY TO GROW OUR BUSINESS AND INCREASE OUR DISTRIBUTIONS DEPENDS IN LARGE PART UPON OUR ABILITY TO BUY PROPERTIES AND ARRANGE FOR THEIR PROFITABLE OPERATION OR LEASE THEM FOR RENTS THAT EXCEED OUR CAPITAL COSTS. WE MAY BE UNABLE TO IDENTIFY PROPERTIES THAT WE WANT TO ACQUIRE OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES, ACQUISITION FINANCING, MANAGEMENT CONTRACTS OR LEASE TERMS FOR NEW PROPERTIES,
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SOME OF OUR TENANTS MAY NOT RENEW EXPIRING LEASES, AND WE MAY BE UNABLE TO LOCATE NEW TENANTS TO MAINTAIN OR INCREASE THE HISTORICAL OCCUPANCY RATES OF, OR RENTS FROM, OUR PROPERTIES,
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RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE BECAUSE OF CHANGING MARKET CONDITIONS OR OTHERWISE,
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THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE ARE CURRENTLY IN DISCUSSIONS WITH OUR LENDERS TO AMEND OUR REVOLVING CREDIT FACILITY TO, AMONG OTHER THINGS, EXTEND THE MATURITY DATE AND LOWER BORROWING COSTS. HOWEVER, THERE CAN BE NO ASSURANCE THAT WE WILL BE ABLE TO NEGOTIATE TERMS THAT ARE ACCEPTABLE TO US OR THAT WILL RESULT IN AN EXTENDED MATURITY DATE OR LOWER BORROWING COSTS,
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THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE EXPECT THAT WE MAY ENTER INTO ADDITIONAL MANAGEMENT AGREEMENTS WITH FIVE STAR SIMILAR TO THOSE CURRENTLY IN EFFECT FOR FIVE STAR TO MANAGE ADDITIONAL SENIOR LIVING COMMUNITIES WE MAY ACQUIRE IN THE FUTURE. HOWEVER, THERE CAN BE NO ASSURANCE THAT WE WILL ACQUIRE OTHER COMMUNITIES OR THAT WE AND FIVE STAR WILL ENTER INTO ANY ADDITIONAL MANAGEMENT AGREEMENTS,
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THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE HAVE ENTERED INTO AGREEMENTS TO ACQUIRE A MOB AND FOUR SENIOR LIVING COMMUNITIES. THESE TRANSACTIONS ARE SUBJECT TO VARIOUS TERMS AND CONDITIONS TYPICAL OF COMMERCIAL REAL ESTATE TRANSACTIONS. THEIR TERMS AND CONDITIONS MAY NOT BE MET. AS A RESULT, THESE TRANSACTIONS MAY NOT OCCUR OR MAY BE DELAYED OR THEIR TERMS MAY CHANGE,
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THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE HAVE EIGHTEEN PROPERTIES CLASSIFIED AS HELD FOR SALE AS OF JUNE 2013. WE MAY NOT BE ABLE TO SELL THESE PROPERTIES ON TERMS ACCEPTABLE TO US OR OTHERWISE, AND THE SALE OF ANY OR ALL OF THESE PROPERTIES MAY NOT OCCUR,
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THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE HAVE ONE SENIOR LIVING COMMUNITY UNDER AGREEMENT TO BE SOLD FOR $2.6 MILLION AND THAT THE SALE IS EXPECTED TO CLOSE BEFORE THE END OF 2013. THIS SALE AGREEMENT IS SUBJECT TO CUSTOMARY CLOSING CONDITIONS AND WE CAN PROVIDE NO ASSURANCE THAT THE SALE WILL BE COMPLETED BEFORE THE END OF 2013 OR WILL BE COMPLETED AT ALL, OR THAT THE TERMS OF THE SALE WILL NOT CHANGE, AND
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THIS QUARTERLY REPORT ON FORM 10-Q STATES THAT WE BELIEVE THAT OUR CONTINUING RELATIONSHIPS WITH FIVE STAR, RMR, AIC, D&R YONKERS LLC AND THEIR AFFILIATED AND RELATED PERSONS AND ENTITIES MAY BENEFIT US AND PROVIDE US WITH COMPETITIVE ADVANTAGES IN OPERATING AND GROWING OUR BUSINESS. IN FACT, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE.
THESE RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH ARE BEYOND OUR CONTROL, SUCH AS CHANGED MEDICARE AND MEDICAID RATES, NEW LEGISLATION, REGULATIONS OR RULE MAKING AFFECTING OUR BUSINESS OR THE BUSINESSES OF OUR TENANTS OR MANAGER, CHANGES IN OUR TENANTS OR MANAGERS REVENUES OR COSTS, CHANGES IN OUR TENANTS OR MANAGERS FINANCIAL CONDITIONS, CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY OR NATURAL DISASTERS.
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THE INFORMATION CONTAINED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q OR IN OUR FILINGS WITH THE SEC, INCLUDING UNDER THE CAPTION RISK FACTORS, OR INCORPORATED HEREIN OR THEREIN, IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES FROM OUR FORWARD LOOKING STATEMENTS. OUR FILINGS WITH THE SEC ARE AVAILABLE ON THE SECS WEBSITE AT WWW.SEC.GOV.
YOU SHOULD NOT PLACE UNDUE RELIANCE UPON OUR 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.
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.
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