Presentation of Financial Statements Topic of the FASB
Accounting Standards Codification
are met. The senior living communities which we are or were offering for sale during the periods presented did not meet the criteria for discontinued operations and are included in continuing operations.
Dispositions:
In March 2016, we sold a land parcel, previously classified as held for sale, for approximately $700, excluding closing costs. In February 2015, we sold one vacant senior living community for approximately $250, excluding closing costs.
Note 4. Investments in Available for Sale Securities
As of March 31, 2016, we owned 4,235,000 common shares of Five Star. We classify these shares as available for sale securities and carry them at fair market value in other assets in our condensed consolidated balance sheets, with unrealized gains and losses reported as a component of shareholders’ equity. Our historical cost basis for these shares is $14,230. At March 31, 2016, our investment in Five Star had a fair value of $9,698, resulting in an unrealized loss of $4,532 based on Five Star’s quoted share price at March 31, 2016 ($2.29 per share).
In addition, at March 31, 2016, we owned 2,637,408 shares of class A common stock of The RMR Group Inc., or RMR Inc. We also classify these shares of RMR Inc. as available for sale securities and carry them at fair value in other assets in our condensed consolidated balance sheets, with unrealized gains and losses reported as a component of shareholders’ equity. Our historical cost basis for these shares is $69,826. At March 31, 2016, our investment in RMR Inc. had a fair value of $65,962, resulting in an unrealized loss of $3,864 based on RMR Inc.’s quoted share price at March 31, 2016 ($25.01 per share).
See Notes 7 and 10 below for further information regarding our investments in available for sale securities.
Note 5. Indebtedness
Our principal debt obligations at March 31, 2016 were: (1) outstanding borrowings under our $1,000,000 revolving credit facility; (2) six public issuances of senior unsecured notes, including: (a) $400,000 principal amount at an annual interest rate of 3.25% due 2019, (b) $200,000 principal amount at an annual interest rate of 6.75% due 2020, (c) $300,000 principal amount at an annual interest rate of 6.75% due 2021, (d) $250,000 principal amount at an annual interest rate of 4.75% due 2024, (e) $350,000 principal amount at an annual interest rate of 5.625% due 2042 and (f) $250,000 principal amount at an annual interest rate of 6.25% due 2046; (3) our $350,000 principal amount term loan due 2020; (4) our $200,000 principal amount term loan due 2022; and (5) $657,744 aggregate principal amount of mortgages (excluding premiums, discounts and net debt issuance costs) secured by 55 of our properties (56 buildings) with maturity dates between 2016 and 2043. The 55 mortgaged properties (56 buildings) had a carrying value (before accumulated depreciation) of $1,074,085 at March 31, 2016. We also had two properties subject to capital leases with lease obligations totaling $
11,988
at March 31, 2016; these two properties had a carrying value (before accumulated depreciation) of $36,015 at March 31, 2016, and the capital leases expire in 2026.
In February 2016, we issued $250,000 of 6.25% senior unsecured notes due 2046, and raised net proceeds of approximately $241,483 after underwriting discounts and expenses. We used the net proceeds of this offering to repay amounts outstanding under our revolving credit facility and for general business purposes.
We have a $1,000,000 unsecured revolving credit facility that is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is January 15, 2018 and, subject to the payment of an extension fee and meeting other conditions, we have an option to extend the stated maturity date by an additional year to January 15, 2019. Our revolving credit facility provides that we can borrow, repay and re-borrow funds available
Item 2. Management’s 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 with our Annual Report. We are a REIT organized under Maryland law. At March 31, 2016, we owned 428 properties (454 buildings) located in 43 states and Washington, D.C., (including two properties (two buildings) classified as held for sale). At March 31, 2016, the undepreciated carrying value of our properties was $7.5 billion, excluding properties classified as held for sale. For the three months ended March 31, 2016, 97% of our net operating income, or NOI, came from properties where a majority of the revenues are paid from our residents’ and tenants’ private resources.
PORTFOLIO OVERVIEW
The following tables present an overview of our portfolio (dollars in thousands, except per living unit / bed or square foot data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Investment per
|
|
|
|
|
% of
|
|
|
|
Number of
|
|
Units/Beds or
|
|
Investment
|
|
% of Total
|
|
Unit / Bed or
|
|
Q1 2016
|
|
Q1 2016
|
|
(As of March 31, 2016)
|
|
Properties
|
|
Square Feet
|
|
Carrying Value
(1)
|
|
Investment
|
|
Square Foot
(2)
|
|
NOI
(3)
|
|
NOI
(3
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent living
(4)
|
|
68
|
|
16,457
|
|
$
|
2,239,563
|
|
29.9
|
%
|
$
|
136,086
|
|
$
|
46,204
|
|
28.9
|
%
|
Assisted living
(4)
|
|
187
|
|
13,746
|
|
|
1,850,594
|
|
24.7
|
%
|
$
|
134,628
|
|
|
38,992
|
|
24.3
|
%
|
Nursing homes
(4)
|
|
41
|
|
4,446
|
|
|
187,527
|
|
2.5
|
%
|
$
|
42,179
|
|
|
4,525
|
|
2.8
|
%
|
Subtotal senior living communities
|
|
296
|
|
34,649
|
|
|
4,277,684
|
|
57.1
|
%
|
$
|
123,458
|
|
|
89,721
|
|
56.0
|
%
|
MOBs
(5)
|
|
122
|
|
11,444,229
|
sq. ft.
|
|
3,032,415
|
|
40.5
|
%
|
$
|
265
|
|
|
66,174
|
|
41.2
|
%
|
Wellness centers
|
|
10
|
|
812,000
|
sq. ft.
|
|
180,017
|
|
2.4
|
%
|
$
|
222
|
|
|
4,531
|
|
2.8
|
%
|
Total
|
|
428
|
|
|
|
$
|
7,490,116
|
|
100.0
|
%
|
|
|
|
$
|
160,426
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant / Operator / Managed Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Star (Lease No. 1)
|
|
83
|
|
6,043
|
|
$
|
696,551
|
|
9.3
|
%
|
$
|
115,266
|
|
$
|
14,671
|
|
9.1
|
%
|
Five Star (Lease No. 2)
|
|
48
|
|
7,032
|
|
|
707,669
|
|
9.4
|
%
|
$
|
100,636
|
|
|
16,050
|
|
10.1
|
%
|
Five Star (Lease No. 3)
|
|
17
|
|
3,281
|
|
|
356,778
|
|
4.8
|
%
|
$
|
108,741
|
|
|
8,629
|
|
5.4
|
%
|
Five Star (Lease No. 4)
|
|
29
|
|
3,335
|
|
|
392,145
|
|
5.2
|
%
|
$
|
117,585
|
|
|
8,756
|
|
5.5
|
%
|
Subtotal Five Star
|
|
177
|
|
19,691
|
|
|
2,153,143
|
|
28.7
|
%
|
$
|
109,347
|
|
|
48,106
|
|
30.1
|
%
|
Sunrise / Marriott
(6)
|
|
4
|
|
1,619
|
|
|
126,326
|
|
1.7
|
%
|
$
|
78,027
|
|
|
3,135
|
|
2.0
|
%
|
Brookdale
|
|
18
|
|
894
|
|
|
61,811
|
|
0.8
|
%
|
$
|
69,140
|
|
|
1,810
|
|
1.1
|
%
|
13 private senior living companies (combined)
|
|
32
|
|
3,910
|
|
|
544,461
|
|
7.3
|
%
|
$
|
139,248
|
|
|
11,894
|
|
7.4
|
%
|
Subtotal triple net leased senior living communities
|
|
231
|
|
26,114
|
|
|
2,885,741
|
|
38.5
|
%
|
$
|
110,506
|
|
|
64,945
|
|
40.6
|
%
|
Managed senior living communities
(7)
|
|
65
|
|
8,535
|
|
|
1,391,943
|
|
18.6
|
%
|
$
|
163,086
|
|
|
24,776
|
|
15.4
|
%
|
Subtotal senior living communities
|
|
296
|
|
34,649
|
|
|
4,277,684
|
|
57.1
|
%
|
$
|
123,458
|
|
|
89,721
|
|
56.0
|
%
|
MOBs
(5)
|
|
122
|
|
11,444,229
|
sq. ft.
|
|
3,032,415
|
|
40.5
|
%
|
$
|
265
|
|
|
66,174
|
|
41.2
|
%
|
Wellness centers
|
|
10
|
|
812,000
|
sq. ft.
|
|
180,017
|
|
2.4
|
%
|
$
|
222
|
|
|
4,531
|
|
2.8
|
%
|
Total
|
|
428
|
|
|
|
$
|
7,490,116
|
|
100.0
|
%
|
|
|
|
$
|
160,426
|
|
100.0
|
%
|
Tenant / Managed Property Operating Statistics
(8)
|
|
|
|
|
|
|
|
|
|
|
|
Rent Coverage
|
|
Occupancy
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Five Star (Lease No. 1)
|
|
1.12x
|
|
1.17x
|
|
85.1
|
%
|
85.2
|
%
|
Five Star (Lease No. 2)
|
|
1.11x
|
|
1.10x
|
|
81.5
|
%
|
82.2
|
%
|
Five Star (Lease No. 3)
|
|
1.56x
|
|
1.54x
|
|
84.9
|
%
|
86.6
|
%
|
Five Star (Lease No. 4)
|
|
1.29x
|
|
1.20x
|
|
88.2
|
%
|
87.7
|
%
|
Subtotal Five Star
|
|
1.23x
|
|
1.22x
|
|
84.3
|
%
|
84.8
|
%
|
Sunrise / Marriott
(6)
|
|
1.94x
|
|
1.98x
|
|
90.6
|
%
|
92.5
|
%
|
Brookdale
|
|
2.81x
|
|
2.56x
|
|
89.3
|
%
|
94.4
|
%
|
13 private senior living companies (combined)
|
|
1.28x
|
|
1.93x
|
|
86.3
|
%
|
85.2
|
%
|
Subtotal triple net leased senior living communities
|
|
1.33x
|
|
1.35x
|
|
85.1
|
%
|
85.7
|
%
|
Managed senior living communities
(7)
|
|
NA
|
|
NA
|
|
87.9
|
%
|
88.5
|
%
|
Subtotal senior living communities
|
|
1.33x
|
|
1.35x
|
|
85.8
|
%
|
86.3
|
%
|
MOBs
(5)
|
|
NA
|
|
NA
|
|
95.8
|
%
|
96.2
|
%
|
Wellness centers
|
|
1.91x
|
|
2.00x
|
|
100.0
|
%
|
100.0
|
%
|
Total
|
|
1.37x
|
|
1.40x
|
|
|
|
|
|
|
(1)
|
|
Amounts are before depreciation, but after impairment write downs, if any. Amounts exclude investment carrying values totaling approximately $7.1 million for one skilled nursing facility, or SNF, and one MOB classified as held for sale as of March 31, 2016, which are included in other assets in our condensed consolidated balance sheets.
|
|
(2)
|
|
Represents investment carrying value divided by the number of living units, beds or square feet at March 31, 2016, as applicable.
|
|
(3)
|
|
NOI is defined and calculated by reportable segment and reconciled to net income below in this Item 2.
|
|
(4)
|
|
Senior living communities are categorized by the type of living units or beds which constitute a majority of the living units or beds at the community.
|
|
(5)
|
|
These 122 MOB properties are comprised of 148 buildings. Our MOB leases include some triple net leases where, in addition to paying fixed rents, the tenants assume the obligation to operate and maintain the properties at their expense, and some net and modified gross leases where we are responsible for the operation and maintenance of the properties, and we charge tenants for some or all of the property operating costs. A small percentage of our MOB leases are so-called "full-service" leases where we receive fixed rent from our tenants and no reimbursement for our property operating costs.
|
|
(6)
|
|
Marriott International, Inc. guarantees the lessee’s obligations under these leases.
|
|
(7)
|
|
These senior living communities are managed by Five Star and one other third party private operator. The occupancy for the 12 month period ended, or, if shorter, from the date of acquisitions through, March 31, 2016 was 87.7%.
|
|
(8)
|
|
Operating data for MOBs are presented as of March 31, 2016 and 2015; 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 December 31, 2015 and 2014, 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 certain properties.
|
The following tables set forth information regarding our lease expirations as of March 31, 2016 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
Cumulative
|
|
|
|
Annualized Rental Income
(1) (2)
|
|
Total
|
|
Percentage of
|
|
|
|
Triple Net Leased
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
Annualized
|
|
|
|
Senior Living
|
|
|
|
|
Wellness
|
|
|
|
|
Rental Income
|
|
Rental Income
|
|
Year
|
|
Communities
|
|
MOBs
|
|
Centers
|
|
Total
|
|
Expiring
(2)
|
|
Expiring
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
(3)
|
|
$
|
974
|
|
$
|
21,133
|
|
$
|
—
|
|
$
|
22,107
|
|
3.4
|
%
|
3.4
|
%
|
2017
|
|
|
—
|
|
|
28,314
|
|
|
—
|
|
|
28,314
|
|
4.4
|
%
|
7.8
|
%
|
2018
|
|
|
14,719
|
|
|
25,676
|
|
|
—
|
|
|
40,395
|
|
6.2
|
%
|
14.0
|
%
|
2019
|
|
|
590
|
|
|
39,046
|
|
|
—
|
|
|
39,636
|
|
6.1
|
%
|
20.1
|
%
|
2020
|
|
|
—
|
|
|
29,822
|
|
|
—
|
|
|
29,822
|
|
4.6
|
%
|
24.7
|
%
|
2021
|
|
|
1,424
|
|
|
9,923
|
|
|
—
|
|
|
11,347
|
|
1.8
|
%
|
26.5
|
%
|
2022
|
|
|
—
|
|
|
12,427
|
|
|
—
|
|
|
12,427
|
|
1.9
|
%
|
28.4
|
%
|
2023
|
|
|
16,839
|
|
|
9,715
|
|
|
7,490
|
|
|
34,044
|
|
5.3
|
%
|
33.7
|
%
|
2024
|
|
|
68,678
|
|
|
36,101
|
|
|
—
|
|
|
104,779
|
|
16.2
|
%
|
49.9
|
%
|
Thereafter
|
|
|
168,607
|
|
|
144,577
|
|
|
10,550
|
|
|
323,734
|
|
50.1
|
%
|
100.0
|
%
|
Total
|
|
$
|
271,831
|
|
$
|
356,734
|
|
$
|
18,040
|
|
$
|
646,605
|
|
100.0
|
%
|
|
|
Average remaining lease term for all senior living community, MOB and wellness center properties (weighted by annualized rental income): 9.0 years
|
(1)
|
|
Annualized rental income is rents pursuant to existing leases as of March 31, 2016, 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.
|
|
(2)
|
|
Excludes rent received from our managed senior living communities leased to our TRSs. If the NOI from our TRSs (three months ended March 31, 2016, annualized) were included in the foregoing table, the percent of total annualized rental income expiring in each of the following years would be: 2016 — 3.0%; 2017 — 3.8%; 2018 — 5.4%; 2019 — 5.3%; 2020 — 4.0%; 2021 — 1.5%; 2022 — 1.7%; 2023 — 4.6%; 2024 — 14.1%; and thereafter — 56.6%. In addition, if our leases to our TRSs using the terms of the management agreements for these communities were included, the average remaining lease term for all properties (weighted by annualized rental income) would be 9.9 years.
|
|
(3)
|
|
Includes one SNF classified as held for sale as of March 31, 2016. The tenant continues to occupy this community and is obligated by the lease in effect at December 31, 2015, including the payment of rent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Percentage of
|
|
|
|
Number of Tenants
(1)
|
|
Number of
|
|
Number of
|
|
|
|
Senior Living
|
|
|
|
Wellness
|
|
|
|
Tenancies
|
|
Tenancies
|
|
Year
|
|
Communities
|
|
MOBs
|
|
Centers
|
|
Total
|
|
Expiring
(1)
|
|
Expiring
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
(2)
|
|
1
|
|
116
|
|
—
|
|
117
|
|
17.8
|
%
|
17.8
|
%
|
2017
|
|
—
|
|
105
|
|
—
|
|
105
|
|
15.9
|
%
|
33.7
|
%
|
2018
|
|
1
|
|
95
|
|
—
|
|
96
|
|
14.6
|
%
|
48.3
|
%
|
2019
|
|
1
|
|
80
|
|
—
|
|
81
|
|
12.3
|
%
|
60.6
|
%
|
2020
|
|
—
|
|
68
|
|
—
|
|
68
|
|
10.3
|
%
|
70.9
|
%
|
2021
|
|
1
|
|
35
|
|
—
|
|
36
|
|
5.5
|
%
|
76.4
|
%
|
2022
|
|
—
|
|
32
|
|
—
|
|
32
|
|
4.9
|
%
|
81.3
|
%
|
2023
|
|
2
|
|
17
|
|
1
|
|
20
|
|
3.0
|
%
|
84.3
|
%
|
2024
|
|
3
|
|
25
|
|
—
|
|
28
|
|
4.2
|
%
|
88.5
|
%
|
Thereafter
|
|
10
|
|
65
|
|
1
|
|
76
|
|
11.5
|
%
|
100.0
|
%
|
Total
|
|
19
|
|
638
|
|
2
|
|
659
|
|
100.0
|
%
|
|
|
|
(1)
|
|
Excludes our managed senior living communities leased to our TRSs.
|
|
(2)
|
|
Includes one SNF classified as held for sale as of March 31, 2016. The tenant continues to occupy this community and is obligated by the lease in effect at December 31, 2015, including the payment of rent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Living Units / Beds or Square Feet with Leases Expiring
|
|
|
|
Living Units / Beds
(1)
|
|
Square Feet
|
|
|
|
Triple Net
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased Senior
|
|
Percent of
|
|
Percentage of
|
|
|
|
Wellness
|
|
|
|
Percent of
|
|
Cumulative
|
|
|
|
Living
|
|
Total Living
|
|
Living Units /
|
|
|
|
Centers
|
|
|
|
Total
|
|
Percent of
|
|
|
|
Communities
|
|
Units / Beds
|
|
Beds
|
|
MOBs
|
|
(Square
|
|
Total Square
|
|
Square Feet
|
|
Total Square
|
|
Year
|
|
(Units / Beds)
|
|
Expiring
|
|
Expiring
|
|
(Square Feet)
|
|
Feet)
|
|
Feet
|
|
Expiring
|
|
Feet Expiring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
(2)
|
|
140
|
|
0.5
|
%
|
0.5
|
%
|
640,234
|
|
—
|
|
640,234
|
|
5.4
|
%
|
5.4
|
%
|
2017
|
|
—
|
|
—
|
%
|
0.5
|
%
|
1,041,651
|
|
—
|
|
1,041,651
|
|
8.8
|
%
|
14.2
|
%
|
2018
|
|
1,619
|
|
6.2
|
%
|
6.7
|
%
|
879,038
|
|
—
|
|
879,038
|
|
7.5
|
%
|
21.7
|
%
|
2019
|
|
175
|
|
0.7
|
%
|
7.4
|
%
|
1,255,205
|
|
—
|
|
1,255,205
|
|
10.7
|
%
|
32.4
|
%
|
2020
|
|
—
|
|
—
|
%
|
7.4
|
%
|
1,419,674
|
|
—
|
|
1,419,674
|
|
12.1
|
%
|
44.5
|
%
|
2021
|
|
361
|
|
1.4
|
%
|
8.8
|
%
|
369,099
|
|
—
|
|
369,099
|
|
3.1
|
%
|
47.6
|
%
|
2022
|
|
—
|
|
—
|
%
|
8.8
|
%
|
482,201
|
|
—
|
|
482,201
|
|
4.1
|
%
|
51.7
|
%
|
2023
|
|
894
|
|
3.4
|
%
|
12.2
|
%
|
725,745
|
|
354,000
|
|
1,079,745
|
|
9.2
|
%
|
60.9
|
%
|
2024
|
|
6,561
|
|
25.1
|
%
|
37.3
|
%
|
1,379,412
|
|
—
|
|
1,379,412
|
|
11.7
|
%
|
72.6
|
%
|
Thereafter
|
|
16,364
|
|
62.7
|
%
|
100.0
|
%
|
2,775,173
|
|
458,000
|
|
3,233,173
|
|
27.4
|
%
|
100.0
|
%
|
Total
|
|
26,114
|
|
100.0
|
%
|
|
|
10,967,432
|
|
812,000
|
|
11,779,432
|
|
100.0
|
%
|
|
|
|
(1)
|
|
Excludes 8,535 living units from our managed senior living communities leased to our TRSs. If the number of living units included in our TRS leases using the terms of the management agreements for these communities were included in the foregoing table, the percent of total living units / beds expiring in each of the following years would be: 2016 — 0.4%; 2017 — 0.0%; 2018 — 4.7%; 2019 — 0.5%; 2020 — 0.0%; 2021 — 1.0%; 2022 — 0.0%; 2023 — 2.6%; 2024 — 18.9%; and thereafter — 71.9%.
|
|
(2)
|
|
Includes one SNF classified as held for sale as of March 31, 2016. The tenant continues to occupy this community and is obligated by the lease in effect at December 31, 2015, including the payment of rent.
|
During the three months ended March 31, 2016, we entered into MOB lease renewals for 309,000 leasable square feet and new leases for 34,000 leasable square feet. The weighted average annual rental rate for leases entered into during the quarter was $15.34 per square foot, and these rental rates were, on a weighted average basis, 1.4% above previous rents charged for the same space. Average lease terms for leases entered into during the first quarter of 2016 were 6.2 years based on
annualized rental income pursuant to existing leases as of March 31, 2016, including straight line rent adjustments and estimated recurring expense reimbursements and excluding lease value amortization
. Commitments for tenant improvement, leasing commission costs and concessions for leases we entered into during the first quarter of 2016 totaled $2.9 million, or $8.35 per square foot on average (approximately $1.34 per square foot per year of the lease term).
During the past several years, weak economic conditions throughout the country have negatively affected many businesses both in and outside of our industry. These conditions have resulted in, among other things, a decrease in our senior living communities’ occupancy, and it is unclear when these conditions may materially improve. Although many of the services that our senior living community tenants and managers provide to residents are needs driven, some prospective residents may be deferring decisions to relocate to senior living communities in light of current economic circumstances. In recent years, economic indicators reflect an improving housing market; however, it is unclear how sustainable the improvements will be and whether any such improvements will result in any increased demand for the services that our tenants and managers provide. For the past two to three years, low capital costs appear to have encouraged increased senior living development. As the recently developed senior living communities begin operations during the next two years, we expect to experience continuing challenges in maintaining or increasing occupancy or the rates that our tenants and managers charge at our senior living communities.
RESULTS OF OPERATIONS (dollars and square feet in thousands, unless otherwise noted)
We have four operating segments, of which three are separate reporting segments: (i) triple net senior living communities that provide short term and long term residential care and other services for residents, (ii) managed senior living communities that provide short term and long term residential care and other services for residents and (iii) MOBs. The “All Other” category includes the remainder of our operations, including certain properties that offer wellness, fitness and spa services to members, which we do not consider to be sufficiently material to constitute a separate reporting segment, and all of our other operations.
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Triple net leased senior living communities
|
|
$
|
65,308
|
|
$
|
55,251
|
Managed senior living communities
|
|
|
96,954
|
|
|
82,793
|
MOBs
|
|
|
91,582
|
|
|
86,001
|
All other operations
|
|
|
4,531
|
|
|
4,532
|
Total revenues
|
|
$
|
258,375
|
|
$
|
228,577
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
Triple net leased senior living communities
|
|
$
|
34,771
|
|
$
|
34,141
|
Managed senior living communities
|
|
|
2,188
|
|
|
9,911
|
MOBs
|
|
|
31,366
|
|
|
31,427
|
All other operations
|
|
|
(37,053)
|
|
|
(35,690)
|
Net income
|
|
$
|
31,272
|
|
$
|
39,789
|
The following sections analyze and discuss the results of operations of each of our segments for the periods presented.
Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015 (dollars in thousands, except average monthly rate):
Unless otherwise indicated, references in this section to changes or comparisons of results, income or expenses refer to comparisons of the results for the three months ended March 31, 2016 against the comparable 2015 period.
Triple net leased senior living communities
:
|
|
|
|
|
|
|
|
|
|
|
|
All Properties
|
|
Comparable Properties
(1)
|
|
|
|
As of and for the Three Months
|
|
As of and for the Three Months
|
|
|
|
Ended March 31,
|
|
Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Total properties
|
|
231
|
|
214
|
|
211
|
|
211
|
|
# of units / beds
|
|
26,114
|
|
24,016
|
|
23,824
|
|
23,824
|
|
Tenant operating data
(2)
|
|
|
|
|
|
|
|
|
|
Occupancy
|
|
84.5
|
%
|
85.3
|
%
|
84.8
|
%
|
85.7
|
%
|
Rent coverage
|
|
1.33x
|
|
1.33x
|
|
1.35x
|
|
1.35x
|
|
|
(1)
|
|
Consists of triple net leased senior living communities we have owned continuously since January 1, 2015.
|
|
(2)
|
|
All tenant operating data presented are based upon the operating results provided by our tenants for the 12 months ended December 31, 2015 and 2014 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 certain of these properties.
|
Triple net leased senior living communities, all properties
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
65,308
|
|
$
|
55,251
|
|
$
|
10,057
|
|
18.2
|
%
|
Property operating expenses
|
|
|
(363)
|
|
|
—
|
|
|
(363)
|
|
(100.0)
|
%
|
Net operating income (NOI)
|
|
|
64,945
|
|
|
55,251
|
|
|
9,694
|
|
17.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
(19,401)
|
|
|
(15,125)
|
|
|
(4,276)
|
|
(28.3)
|
%
|
Impairment of assets
|
|
|
(4,391)
|
|
|
—
|
|
|
(4,391)
|
|
100.0
|
%
|
Operating income
|
|
|
41,153
|
|
|
40,126
|
|
|
1,027
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(6,382)
|
|
|
(5,985)
|
|
|
(397)
|
|
(6.6)
|
%
|
Net income
|
|
$
|
34,771
|
|
$
|
34,141
|
|
$
|
630
|
|
1.8
|
%
|
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 leased senior living communities segment as we believe that a comparison of the results for our comparable properties for our triple net leased senior living communities segment is generally consistent from quarter to quarter and a separate, comparable properties comparison is not meaningful.
Rental income.
Rental income increased primarily because of rents from 20 triple net leased senior living communities we acquired in May and September 2015. Rental income also increased due to increased rents resulting from our purchase of approximately $27,199 of improvements made to our properties that are leased to Five Star since January 1, 2015. These increases in rental income were partially offset by the sale of four senior living communities since January 1, 2015. Rental income includes non-cash straight line rent adjustments totaling $1,172 and $52 for the three months ended March 31, 2016 and 2015, respectively. Rental income increased year over year on a comparable property basis by $892, primarily as a result of our improvement purchases at certain of the 211 communities we have owned continuously since January 1, 2015 and the resulting increased rent pursuant to the terms of the leases.
Property operating expenses.
Property operating expenses recorded in 2016 relate to bad debt reserves associated with the defaulted leases at two triple net leased senior living communities we acquired in 2015 which were leased to third party private operators as of March 31, 2016. In April 2016 we reached an agreement with one of these tenants and its guarantor and terminated the lease which was in effect at March 31, 2016. The community’s operations were transferred to Five Star, which began managing this community on our behalf under a TRS structure. We
expect that Five Star will assume operations of the other lease defaulted community on our behalf under a TRS structure in the second quarter of 2016.
Net operating income.
NOI increased because of the changes in rental income described above. We typically incur minimal property operating expenses at our triple net leased senior living communities, as almost all of these expenses are paid by our tenants. The reconciliation of NOI to net income for our triple net leased senior living communities segment is shown in the table above. Our definition of NOI and our reconciliation of consolidated NOI to net income are included below under the heading “Non-GAAP Financial Measures”.
Depreciation expense.
Depreciation expense recognized in this segment increased primarily as a result of the acquisitions and capital improvement purchases described above.
Impairment of assets.
We recorded impairment of assets charges to write off acquired lease intangible assets associated with the two communities where the tenants defaulted on their leases as discussed above.
Interest expense.
Interest expense for our triple net leased senior living communities arises from mortgage debt and capital leases which encumber certain of these properties. The increase in interest expense is due to the assumption of $56,691 in aggregate principal amount of mortgage debts encumbering four properties with a weighted average annual interest rate of 5.33% in connection with the May and September 2015 acquisitions of 20 triple net leased senior
living communities. The increase in interest expense is partially offset by the repayment of mortgage debts with an aggregate principal balance of $13,842 and a weighted average annual interest rate of 5.77% since January 1, 2015, as well as regularly scheduled amortization of our mortgage debts.
Managed senior living communities
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Properties
|
|
Comparable Properties
(1)
|
|
|
|
As of and for the Three Months
|
|
As of and for the Three Months
|
|
|
|
Ended March 31,
|
|
Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Total properties
|
|
|
65
|
|
|
46
|
|
|
46
|
|
|
46
|
|
# of units / beds
|
|
|
8,535
|
|
|
7,290
|
|
|
7,290
|
|
|
7,290
|
|
Occupancy:
|
|
|
87.5
|
%
|
|
88.0
|
%
|
|
87.1
|
%
|
|
88.0
|
%
|
Average monthly rate
|
|
$
|
4,274
|
|
$
|
4,300
|
|
$
|
4,353
|
|
$
|
4,300
|
|
|
(1)
|
|
Consists of managed senior living communities we have owned continuously since January 1, 2015.
|
Managed senior living communities, all properties
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residents fees and services
|
|
$
|
96,954
|
|
$
|
82,793
|
|
$
|
14,161
|
|
17.1
|
%
|
Property operating expenses
|
|
|
(72,178)
|
|
|
(62,403)
|
|
|
(9,775)
|
|
(15.7)
|
%
|
Net operating income (NOI)
|
|
|
24,776
|
|
|
20,390
|
|
|
4,386
|
|
21.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
(20,018)
|
|
|
(8,460)
|
|
|
(11,558)
|
|
(136.6)
|
%
|
Operating income
|
|
|
4,758
|
|
|
11,930
|
|
|
(7,172)
|
|
(60.1)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,564)
|
|
|
(2,019)
|
|
|
(545)
|
|
(27.0)
|
%
|
Loss on early extinguishment of debt
|
|
|
(6)
|
|
|
—
|
|
|
(6)
|
|
(100.0)
|
%
|
Net income
|
|
$
|
2,188
|
|
$
|
9,911
|
|
$
|
(7,723)
|
|
(77.9)
|
%
|
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 is primarily because of residents fees and services from 20 managed senior living communities we acquired in May 2015.
Property operating expenses.
Property operating expenses include expenses incurred at our managed senior living communities and consist of management fees, real estate taxes, utility expense, insurance, salaries and benefits of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating these properties. The increase in property operating expenses is primarily the result of the acquisitions described above.
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 reconciliation of consolidated NOI to net income are included below under the heading “Non-GAAP Financial Measures”.
Depreciation expense.
Depreciation expense includes the depreciation of owned property and equipment as well as the amortization expense of in place resident agreements assumed upon the acquisition of a community. Depreciation expense increased primarily as a result of the acquisitions described above.
Interest expense.
Interest expense for our managed senior living communities arises from mortgage debts secured by certain of these properties. The increase in interest expense is due to the assumption of $94,786 in aggregate principal amount of mortgage debts encumbering 13 properties with a weighted average annual interest rate of 4.12% in
connection with our May 2015 acquisition of 20 managed senior living communities, partially offset by the prepayment or repayment of $52,069 in aggregate principal amount of mortgage debts with a weighted average annual interest rate of 5.90%, as well as regularly scheduled amortization of our mortgage debts.
Loss on early extinguishment of debt.
We recognized a loss on early extinguishment of debt in connection with the prepayment of one mortgage in January 2016.
Managed senior living communities, comparable properties
(managed senior living communities we have owned continuously since January 1, 2015):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residents fees and services
|
|
$
|
83,472
|
|
$
|
82,793
|
|
$
|
679
|
|
0.8
|
%
|
Property operating expenses
|
|
|
(62,411)
|
|
|
(62,403)
|
|
|
(8)
|
|
(0.0)
|
%
|
Net operating income (NOI)
|
|
|
21,061
|
|
|
20,390
|
|
|
671
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
(9,475)
|
|
|
(8,457)
|
|
|
(1,018)
|
|
(12.0)
|
%
|
Operating income
|
|
|
11,586
|
|
|
11,933
|
|
|
(347)
|
|
(2.9)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,553)
|
|
|
(2,019)
|
|
|
466
|
|
23.1
|
%
|
Loss on early extinguishment of debt
|
|
|
(6)
|
|
|
—
|
|
|
(6)
|
|
(100.0)
|
%
|
Net income
|
|
$
|
10,027
|
|
$
|
9,914
|
|
$
|
113
|
|
1.1
|
%
|
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 primarily because of an increase in the average monthly rate of approximately 1.2% at the 46 communities we have owned continuously since January 1, 2015, partially offset by a decrease in occupancy.
Property operating expenses.
Property operating expenses consist of management fees, real estate taxes, utility expense, insurance, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating these properties. Property operating expenses remained essentially unchanged during the first quarter of 2016 compared to the first quarter of 2015.
Net operating income.
The increase in NOI reflects the net changes in residents fees and services less the 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 under the heading “Non-GAAP Financial Measures”.
Depreciation expense.
Depreciation expense includes the depreciation of owned property and equipment as well as the amortization expense of in place resident agreements assumed upon the acquisition of a community. The increase in depreciation expense results from our purchase of improvements at these properties since January 1, 2015.
Interest expense.
Interest expense for our managed senior living communities arises from mortgage debts secured by certain of these properties. Interest expense decreased as a result of the prepayment or repayment of $52,069 in aggregate principal amount of mortgage debts with a weighted average annual interest rate of 5.90%, as well as regularly scheduled amortization of our mortgage debts.
Loss on early extinguishment of debt.
We recognized a loss on early extinguishment of debt in connection with the prepayment of one mortgage in January 2016.
MOBs
:
|
|
|
|
|
|
|
|
|
|
|
|
All Properties
(1)
|
|
Comparable Properties
(1) (2)
|
|
|
|
As of and for the Three Months
|
|
As of and for the Three Months
|
|
|
|
Ended March 31,
|
|
Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Total properties
|
|
122
|
|
121
|
|
98
|
|
98
|
|
Total buildings
|
|
148
|
|
145
|
|
122
|
|
122
|
|
Total square feet
(3)
|
|
11,444
|
|
11,312
|
|
9,146
|
|
9,142
|
|
Occupancy
(4)
|
|
95.8
|
%
|
96.2
|
%
|
94.8
|
%
|
95.3
|
%
|
|
(1)
|
|
Excludes properties classified in discontinued operations.
|
|
(2)
|
|
Consists of MOBs we have owned continuously since January 1, 2015.
|
|
(3)
|
|
Prior periods exclude space remeasurements made subsequent to those periods.
|
|
(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 March 31,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
91,582
|
|
$
|
86,001
|
|
$
|
5,581
|
|
6.5
|
%
|
Property operating expenses
|
|
|
(25,408)
|
|
|
(23,391)
|
|
|
(2,017)
|
|
(8.6)
|
%
|
Net operating income (NOI)
|
|
|
66,174
|
|
|
62,610
|
|
|
3,564
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
(30,856)
|
|
|
(29,174)
|
|
|
(1,682)
|
|
(5.8)
|
%
|
Impairment of assets
|
|
|
(2,999)
|
|
|
—
|
|
|
(2,999)
|
|
(100.0)
|
%
|
Operating income
|
|
|
32,319
|
|
|
33,436
|
|
|
(1,117)
|
|
(3.3)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(953)
|
|
|
(1,768)
|
|
|
815
|
|
46.1
|
%
|
Income from continuing operations
|
|
|
31,366
|
|
|
31,668
|
|
|
(302)
|
|
(1.0)
|
%
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
—
|
|
|
(241)
|
|
|
241
|
|
100.0
|
%
|
Net income
|
|
$
|
31,366
|
|
$
|
31,427
|
|
$
|
(61)
|
|
(0.2)
|
%
|
Rental income.
Rental income increased primarily because of rents from 24 MOBs (26 buildings) we acquired since January 1, 2015, as well as the changes at our comparable MOB properties, which are further discussed below. Rental income includes non-cash straight line rent adjustments totaling $3,252 and $3,320 and net amortization of approximately $1,199 and $1,143 of above and below market lease adjustments for the three months ended March 31, 2016 and 2015, 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 these properties. Property operating expenses increased primarily because of the acquisitions described above, as well as the changes at our comparable MOB properties, which are further discussed below.
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 reconciliation of consolidated NOI to net income are included below under the heading “Non-GAAP Financial Measures”.
Depreciation expense.
Depreciation expense increased primarily because of our MOB acquisitions since January 1, 2015, as well as capital improvement expenditures of $35,507 since January 1, 2015.
Impairment of assets.
Impairment of assets for the three months ended March 31, 2016 relates to reducing the carrying value of one MOB classified as held for sale to its estimated sale price less costs to sell, as well as reducing the carrying value of a land parcel that was sold in March 2016 to its sale price.
Interest expense.
Interest expense for our MOBs arises from mortgage debts secured by certain of these properties. The decrease in interest expense is the result of the repayment of $52,000 in aggregate principal amount of mortgage debts since January 1, 2015 with a weighted average annual interest rate of 5.64% as well as the regularly scheduled amortization of our mortgage debts, partially offset by the assumption of $29,955 in aggregate principal amount of mortgage debts in connection with our acquisition of two MOBs (two buildings) since January 1, 2015 with a weighted average annual interest rate of 4.73%.
Loss from discontinued operations.
Loss from discontinued operations for the three months ended March 31, 2015 relates to one MOB (four buildings) which was sold in April 2015.
MOBs, comparable properties
(MOBs we have owned continuously since January 1, 2015):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
80,698
|
|
$
|
78,942
|
|
$
|
1,756
|
|
2.2
|
%
|
Property operating expenses
|
|
|
(23,360)
|
|
|
(22,263)
|
|
|
(1,097)
|
|
(4.9)
|
%
|
Net operating income (NOI)
|
|
|
57,338
|
|
|
56,679
|
|
|
659
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
(25,754)
|
|
|
(25,888)
|
|
|
134
|
|
0.5
|
%
|
Impairment of assets
|
|
|
(2,975)
|
|
|
—
|
|
|
(2,975)
|
|
(100.0)
|
%
|
Operating income
|
|
|
28,609
|
|
|
30,791
|
|
|
(2,182)
|
|
(7.1)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(685)
|
|
|
(1,536)
|
|
|
851
|
|
55.4
|
%
|
Net income
|
|
$
|
27,924
|
|
$
|
29,255
|
|
$
|
(1,331)
|
|
(4.5)
|
%
|
Rental income.
Rental income increased during the three months ended March 31, 2016 compared to the same period in the prior year. The increase in rental income primarily resulted from an increase in tax escalation income and other reimbursable expenses at certain of our properties. Rental income includes non-cash straight line rent adjustments totaling $2,565 and $2,793 and net amortization of approximately $1,169 and $1,150 of above and below market lease adjustments for the three months ended March 31, 2016 and 2015, 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 these properties. Property operating costs increased principally because of increases in real estate tax expenses and salaries and benefits expenses at certain of these properties and other direct costs of operating these properties. These expenses were partially offset by a decrease in landscaping and snow removal expenses at various properties during the first quarter of 2016 compared to the first quarter of 2015.
Net operating income.
NOI reflects the net 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 reconciliation of consolidated NOI to net income are included below under the heading “Non-GAAP Financial Measures”.
Depreciation expense.
Depreciation expense decreased slightly due to a reduction in amortization of acquired in place real estate leases that we amortize over the respective lease terms, partially offset by an increase in the amortization of leasing costs and depreciation expense on fixed assets.
Impairment of assets.
Impairment of assets for the three months ended March 31, 2016 relates to reducing the carrying value of one MOB classified as held for sale to its estimated sale price less costs to sell.
Interest expense.
Interest expense for our MOBs arises from mortgage debts secured by certain of these properties. The decrease in interest expense is the result of the repayment of $52,000 in aggregate principal amount of mortgage debts with a weighted average annual interest rate of 5.64%, as well as the regularly scheduled amortization of our mortgage debts.
All other operations
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
4,531
|
|
$
|
4,532
|
|
$
|
(1)
|
|
(0.0)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
(948)
|
|
|
(948)
|
|
|
—
|
|
—
|
%
|
General and administrative
|
|
|
(10,863)
|
|
|
(10,574)
|
|
|
(289)
|
|
(2.7)
|
%
|
Acquisition related costs
|
|
|
(439)
|
|
|
(1,158)
|
|
|
719
|
|
62.1
|
%
|
Total expenses
|
|
|
(12,250)
|
|
|
(12,680)
|
|
|
430
|
|
3.4
|
%
|
Operating loss
|
|
|
(7,719)
|
|
|
(8,148)
|
|
|
429
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
64
|
|
|
75
|
|
|
(11)
|
|
(14.7)
|
%
|
Interest expense
|
|
|
(29,381)
|
|
|
(26,170)
|
|
|
(3,211)
|
|
(12.3)
|
%
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
(1,409)
|
|
|
1,409
|
|
100.0
|
%
|
Loss before income tax expense and equity in earnings of an investee
|
|
|
(37,036)
|
|
|
(35,652)
|
|
|
(1,384)
|
|
(3.9)
|
%
|
Income tax expense
|
|
|
(94)
|
|
|
(110)
|
|
|
16
|
|
14.5
|
%
|
Equity in earnings of an investee
|
|
|
77
|
|
|
72
|
|
|
5
|
|
6.9
|
%
|
Net loss
|
|
$
|
(37,053)
|
|
$
|
(35,690)
|
|
$
|
(1,363)
|
|
(3.8)
|
%
|
|
(1)
|
|
All other operations includes our wellness center operations that we do not consider a significant operating segment of our business and our operating expenses that are not attributable to a specific reporting segment.
|
Rental income.
Rental income includes non-cash straight line rent totaling approximately $137 for each of the three months ended March 31, 2016 and 2015. Rental income also includes net amortization of approximately $55 of acquired real estate leases and obligations for each of the three months ended March 31, 2016 and 2015.
Depreciation expense.
Depreciation expense remained consistent as we did not make any wellness center acquisitions or other capital improvements in this segment for the three months ended March 31, 2016 and 2015. 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 paid to RMR LLC under our business management agreement, equity compensation expense, legal and accounting fees and other costs relating to our status as a publicly owned company.
General and administrative expenses increased principally as a result of property acquisitions made since January 1, 2015, partially offset by lower business management fees payable to RMR LLC in 2016 due to the fees being based on an average market capitalization calculation rather than average historical cost of assets.
Acquisition related costs.
Acquisition related costs represent legal and due diligence costs incurred in connection with our acquisition activity during the three months ended March 31, 2016 and 2015. Acquisition related costs decreased during the three months ended March 31, 2016 due to a decrease in the number of properties acquired during the first three months of 2016 compared to the first three months of 2015.
Interest and other income.
The decrease in
interest and other income is primarily a result of less investable cash on hand during the first quarter of 2016 compared to the first quarter of 2015.
Interest expense.
Interest expense increased due to our borrowing a $200,000 term loan in September 2015 at an interest rate of LIBOR plus a premium of 180 basis points as well as increased borrowings under our revolving credit facility and our issuance of $250,000 of 6.25% senior unsecured notes due 2046 in February 2016. These increases were partially offset by the November 2015 prepayment of our $250,000 of 4.30% senior unsecured notes due 2016.
Loss on extinguishment of debt.
In December 2014, we entered an agreement to acquire 38 senior living communities. Simultaneous with entering this agreement, we obtained a bridge loan commitment for $700,000. In February 2015, we terminated the bridge loan commitment and we recognized a loss of $1,409 on early extinguishment of debt in the first quarter of 2015 in connection with that termination.
Equity in earnings of an investee.
Equity in earnings of an investee represents our proportionate share of earnings from AIC.
Non-GAAP Financial Measures (dollars in thousands, except per share amounts)
We provide below calculations of our funds from operations, or FFO, normalized funds from operations, or Normalized FFO, and NOI for the three months ended March 31, 2016 and 2015. 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 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 activities.
Other real estate companies and REITs 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 certain other adjustments currently not applicable to us. Our calculation of Normalized FFO differs from NAREIT’s 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, we include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as expense in accordance with GAAP and we exclude acquisition related costs and gains and losses on early extinguishment of debt, 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 with 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 qualification for taxation as a REIT, limitations in our revolving credit facility and term loan agreements and our public debt covenants, the availability to us of debt and equity capital, 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 months ended March 31, 2016 and 2015 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. This table also provides a comparison of distributions to shareholders, FFO, Normalized FFO and net income per share for these periods.
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Net income
|
|
$
|
31,272
|
|
$
|
39,789
|
Depreciation expense from continuing operations
|
|
|
71,223
|
|
|
53,707
|
Impairment of assets from continuing operations
|
|
|
7,390
|
|
|
—
|
FFO
|
|
|
109,885
|
|
|
93,496
|
Acquisition related costs from continuing operations
|
|
|
439
|
|
|
1,158
|
Loss on early extinguishment of debt
|
|
|
6
|
|
|
1,409
|
Percentage rent adjustment
(1)
|
|
|
2,600
|
|
|
2,500
|
Normalized FFO
|
|
$
|
112,930
|
|
$
|
98,563
|
|
|
|
|
|
|
|
Weighted average shares outstanding (basic)
|
|
|
237,315
|
|
|
221,375
|
Weighted average shares outstanding (diluted)
|
|
|
237,329
|
|
|
221,397
|
|
|
|
|
|
|
|
FFO per share (basic and diluted)
|
|
$
|
0.46
|
|
$
|
0.42
|
Normalized FFO per share (basic and diluted)
|
|
$
|
0.48
|
|
$
|
0.45
|
Net income per share (basic and diluted)
|
|
$
|
0.13
|
|
$
|
0.18
|
Distributions declared per share
|
|
$
|
0.39
|
|
$
|
0.39
|
|
(1)
|
|
In calculating net income in accordance with GAAP, we recognize percentage rental income received for the full year 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 of the first three quarters of the year, and the fourth quarter Normalized FFO calculation excludes the amounts that had been included during the first three quarters.
|
Property Net Operating Income (NOI)
We calculate NOI as shown below. The calculation of NOI excludes certain components of net income in order to provide results that are more closely related to our property level results of operations. 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 generated and incurred at the property level and may facilitate comparisons of our operating performance between periods and with other REITs.
Other real estate companies and REITs may calculate FFO, Normalized FFO or NOI differently than we do.
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 months ended March 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2016
|
|
2015
|
Reconciliation of NOI to Net Income:
|
|
|
|
|
|
|
Triple net leased communities NOI
|
|
$
|
64,945
|
|
$
|
55,251
|
Managed communities NOI
|
|
|
24,776
|
|
|
20,390
|
MOB NOI
|
|
|
66,174
|
|
|
62,610
|
All other operations NOI
|
|
|
4,531
|
|
|
4,532
|
Total NOI
|
|
|
160,426
|
|
|
142,783
|
Depreciation expense
|
|
|
(71,223)
|
|
|
(53,707)
|
General and administrative expense
|
|
|
(10,863)
|
|
|
(10,574)
|
Acquisition related costs
|
|
|
(439)
|
|
|
(1,158)
|
Impairment of assets
|
|
|
(7,390)
|
|
|
—
|
Operating income
|
|
|
70,511
|
|
|
77,344
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
64
|
|
|
75
|
Interest expense
|
|
|
(39,280)
|
|
|
(35,942)
|
Loss on early extinguishment of debt
|
|
|
(6)
|
|
|
(1,409)
|
Income before income tax expense and equity in earnings of an investee
|
|
|
31,289
|
|
|
40,068
|
Income tax expense
|
|
|
(94)
|
|
|
(110)
|
Equity in earnings of an investee
|
|
|
77
|
|
|
72
|
Income from continuing operations
|
|
|
31,272
|
|
|
40,030
|
Loss from discontinued operations
|
|
|
—
|
|
|
(241)
|
Net income
|
|
$
|
31,272
|
|
$
|
39,789
|
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds to meet operating and capital expenses and debt service obligations and to pay distributions on our common shares are rental income revenues from our leased properties, residents fees and services revenues from our managed communities and borrowings under our revolving credit facility. We believe that these sources will be sufficient to meet our operating and capital expenses and debt service and pay distributions on our common 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 increase the occupancy of, and the rental rates at, our properties;
|
|
·
|
|
our ability to control operating expenses at our properties;
|
|
·
|
|
our managers’ ability to operate our managed senior living communities so as to increase our returns; and
|
|
·
|
|
our ability to purchase additional properties which produce cash flows from operations in excess of our cost of acquisition capital and property operating expenses.
|
Our Operating Liquidity and Resources
We generally receive minimum rents monthly or quarterly from our tenants, we receive percentage rents from our 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. Our changes in cash flows for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 were as follows: (i) cash provided by
operating activities increased from $105.5 million in 2015 to $122.8 million in 2016; (ii) cash used for investing activities decreased from $521.1 million in 2015 to $46.2 million in 2016; and (iii) cash flows provided by (used for) financing activities decreased from $465.8 million provided in 2015 to $75.1 million used in 2016.
The increase in cash provided by operating activities for the three months ended March 31, 2016 compared to the prior year was due primarily to increased operating cash flow from our acquisitions since January 1, 2015. Cash used for investing activities decreased in 2016 primarily due to higher acquisition activity in the first three months of 2015 than in the first three months of 2016. The decrease in cash provided by financing activities for the three months ended March 31, 2016 compared to the prior year was due primarily to (i) proceeds of $659.8 million from our issuance of common shares in 2015, (ii) increased aggregate distributions to shareholders in 2016 due to additional common shares outstanding and (iii) increased net repayments of borrowings in 2016 compared to the prior year, partially offset by our issuance of $250.0 million senior unsecured notes in 2016.
Our Investment and Financing Liquidity and Resources
As of March 31, 2016, we had $39.2 million of cash and cash equivalents and $439.0 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 debt or equity 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 other general business purposes. We believe these funding sources 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 need or desire to make distributions or pay operating or capital expenses, we maintain a $1.0 billion unsecured revolving credit facility with a group of institutional lenders. The maturity date of our revolving credit facility is January 15, 2018 and, subject to the payment of an extension fee and meeting other conditions, we have an option to extend the stated maturity date of our revolving credit facility by one year to January 15, 2019. In addition, our revolving credit facility includes a feature under which the maximum borrowing availability under the facility may be increased to up to $1.5 billion in certain circumstances. Our revolving credit facility requires interest to be paid at LIBOR plus a premium, which was 130 basis points per annum as of March 31, 2016. We also pay a facility fee of 30 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 re-borrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of March 31, 2016, the annual interest rate required on borrowings under our revolving credit facility was 1.7%. As of March 31, 2016 and May 4, 2016, we had $561.0 million and $621.0 million outstanding 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, term loans, mortgages and senior unsecured notes approach, we intend to explore alternatives for the repayment of amounts due. Such alternatives may include incurring additional debt, selling certain properties and issuing new equity securities. 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 may also assume mortgage debts in connection with our acquisitions of properties or place new mortgages on properties we own.
We have a $350.0 million unsecured term loan that matures on January 15, 2020, and is prepayable without penalty, at any time. In addition, this term loan includes a feature under which maximum borrowings may be increased to up to $700.0 million in certain circumstances. This term loan requires interest to be paid at LIBOR plus a premium (currently 140 basis points per annum) that is subject to adjustment based upon changes to our credit ratings. As of March 31, 2016, the annual interest rate payable for amounts outstanding under this term loan was 1.8%.
We also have a $200.0 million unsecured term loan that matures on September 28, 2022, and is prepayable without penalty beginning September 29, 2017. In addition, this term loan includes a feature under which maximum borrowings may be increased to up to $400.0 million in certain circumstances. This term loan requires interest to be paid at LIBOR plus a premium (currently 180 basis points per annum) that is subject to adjustment based upon changes to our
credit ratings.
As of March 31, 2016, the annual interest rate payable for amounts outstanding under this term loan was 2.2%.
In February 2016, we issued $250.0 million of 6.25% senior unsecured notes due 2046, raising net proceeds of approximately $241.5 million after underwriting discounts and expenses. We used the net proceeds of this offering to repay amounts outstanding under our revolving credit facility and for general business purposes.
In January 2016, we prepaid, at par, a $6.1 million mortgage note with an annual interest rate of 5.97% which was secured by one of our properties. In April 2016, we prepaid, at par, an $18.0 million mortgage note with an annual interest rate of 4.65% which was secured by one of our properties.
In February 2016, we acquired one MOB (three buildings) in Minnesota with approximately 128,000 square feet for a purchase price of approximately $22.7 million, excluding closing costs. We funded this acquisition using cash on hand and borrowings under our revolving credit facility.
In May 2016, we acquired one senior living community located in Georgia with 38 private pay units for a purchase price of approximately $8.4 million, excluding closing costs. We acquired this community using a TRS structure, and entered into a management agreement with Five Star to manage this community on our behalf. Also in May 2016, we
acquired one MOB (one building) located in Florida with approximately 183,000 square feet for a purchase price of approximately $45.0 million, excluding closing costs. We funded these acquisitions using cash on hand and borrowings under our revolving credit facility.
In March 2016, we sold a land parcel, previously classified as held for sale, for approximately $0.7 million, excluding closing costs.
During the three months ended March 31, 2016, we invested $8.5 million in revenue producing capital improvements at certain of our triple net leased senior living communities, and as a result, annual rent payable to us will increase by approximately $0.7 million, pursuant to the terms of certain of our leases. We used cash on hand to fund these purchases.
During the three months ended March 31, 2016 and 2015, 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
|
|
|
March 31,
|
|
|
2016
|
|
2015
|
MOB tenant improvements
(1) (2)
|
|
$
|
389
|
|
$
|
1,348
|
MOB leasing costs
(1) (3)
|
|
|
857
|
|
|
1,069
|
MOB building improvements
(1) (4)
|
|
|
1,977
|
|
|
487
|
Managed senior living communities capital improvements
|
|
|
3,620
|
|
|
2,162
|
Development, redevelopment and other activities
(5)
|
|
|
6,459
|
|
|
5,526
|
Total capital expenditures
|
|
$
|
13,302
|
|
$
|
10,592
|
|
(1)
|
|
Excludes expenditures at properties classified in discontinued operations.
|
|
(2)
|
|
MOB tenant improvements generally include capital expenditures to improve tenants’ space or amounts paid directly to tenants to improve their space.
|
|
(3)
|
|
MOB leasing costs generally include leasing related costs, such as brokerage commissions and other tenant inducements.
|
|
(4)
|
|
MOB building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets.
|
|
(5)
|
|
Development, redevelopment and other activities generally include (i) capital expenditures that are identified at the time of a property acquisition and incurred within a short period after acquiring the property; and (ii) capital expenditure projects that reposition a property or result in new sources of revenue.
|
During the three months ended March 31, 2016, commitments made for expenditures in connection with leasing space in our MOBs, such as tenant improvements and leasing costs, were as follows (dollars and square feet in thousands, except per square foot amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
New
|
|
|
|
|
|
|
|
|
|
Leases
|
|
Renewals
|
|
Total
|
|
Square feet leased during the quarter
|
|
|
34
|
|
|
309
|
|
|
343
|
|
Total leasing costs and concession commitments
(1)
|
|
$
|
804
|
|
$
|
2,058
|
|
$
|
2,862
|
|
Total leasing costs and concession commitments per square foot
(1)
|
|
$
|
23.78
|
|
$
|
6.66
|
|
$
|
8.35
|
|
Weighted average lease term (years)
(2)
|
|
|
5.0
|
|
|
6.5
|
|
|
6.2
|
|
Total leasing costs and concession commitments per square foot per year
(1)
|
|
$
|
4.80
|
|
$
|
1.03
|
|
$
|
1.34
|
|
|
(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 March 31, 2016, including straight line rent adjustments and estimated recurring expense reimbursements and excluding lease value amortization.
|
We funded or expect to fund the foregoing capital commitments at our MOBs using cash on hand and borrowings under our revolving credit facility.
On January 11, 2016, we declared a regular quarterly distribution of $0.39 per common share, or $92.6 million, to our common shareholders of record on January 22, 2016 for the quarter ended December 31, 2015. We paid this distribution to shareholders on February 23, 2016 using cash on hand and borrowings under our revolving credit facility.
On April 13, 2016, we declared a regular quarterly distribution of $0.39 per common share, or $92.6 million, to our common shareholders of record on April 25, 2016 for the quarter ended March 31, 2016. We expect to pay this distribution to shareholders on May 19, 2016 using cash on hand and borrowings under our revolving credit facility.
We believe we will have access to various types of financings, including debt or equity offerings, to fund our future acquisitions and to pay our debts and other obligations as they become due. Our ability to complete and the costs of our future debt transactions 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, including our ability to maintain our earnings, to stagger our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipated 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, but we cannot assure that we will be able to successfully carry out this intention.
Our strategy related to property acquisitions and dispositions is materially unchanged from that disclosed in our Annual Report. We continue to explore and evaluate for possible acquisition additional properties primarily for income and secondarily for appreciation potential; however, we can provide no assurance that we will reach any agreement to acquire such properties, or that if we do reach any such agreement, that we will complete any acquisitions. We expect to periodically identify properties for sale based on future changes in market conditions, changes in property performance, our expectation regarding lease renewals, our plans with regard to particular properties or alternative opportunities we may wish to pursue. Our plans for particular properties and other strategic considerations may cause us to change our acquisition and disposition strategies, and we may do so at any time and without shareholder approval.
Off Balance Sheet Arrangements
As of March 31, 2016, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a 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 March 31, 2016 were:
(1) outstanding borrowings under our $1.0 billion revolving credit facility; (2) six public issuances of senior unsecured notes, including: (a) $400.0 million principal amount at an annual interest rate of 3.25% due 2019, (b) $200.0 million principal amount at an annual interest rate of 6.75% due 2020, (c) $300.0 million principal amount at an annual interest rate of 6.75% due 2021, (d) $250.0 million principal amount at an annual interest rate of 4.75% due 2024, (e) $350.0 million principal amount at an annual interest rate of 5.625% due 2042 and (f) $250.0 million principal amount at an annual interest rate of 6.25% due 2046; (3) our $350.0 million principal amount term loan due 2020; (4) our $200.0 million principal amount term loan due 2022; and
(5) $657.7 million aggregate principal amount of mortgage notes secured by 55 of our properties (56 buildings) with maturity dates between 2016 and 2043. We also have two properties encumbered by capital leases with lease obligations totaling $12.0 million at March 31, 2016; the capital leases expire in 2026. We had $561.0 million outstanding under our revolving credit facility as of March 31, 2016. Our senior unsecured notes are governed by our senior unsecured notes indentures and their supplements. Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our revolving credit facility and term loan agreements, a change of control of us, which includes RMR LLC ceasing to act as our business manager and property manager. Our senior unsecured notes indentures and their supplements and our revolving credit facility and term loan agreements also 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 and require us to maintain various financial ratios, and our revolving credit facility and term loan agreements contains covenants which restrict our ability to make distributions in certain circumstances. As of March 31, 2016, we believe we were in compliance with all of the covenants under our senior unsecured notes indentures and their supplements, our revolving credit facility and term loan agreements and our other debt obligations.
Neither our senior unsecured notes indentures and their supplements, nor our revolving credit facility and term loan agreements, contain provisions for acceleration which could be triggered by our debt ratings. However, under our revolving credit facility and term loan agreements, our senior unsecured debt ratings are used to determine the fees and interest rates we pay. Accordingly, if our debt ratings are downgraded by credit rating agencies, our interest expense and related costs under our revolving credit facility and term loan agreements would increase.
Our senior unsecured notes indentures and their supplements contain cross default provisions to any other debts of more than $20.0 million ($50 million or more in the case of our senior unsecured notes indenture and supplement entered into in February 2016). Similarly, our revolving credit facility and term loan agreements have cross default provisions to other indebtedness that is recourse of $25.0 million or more and indebtedness that is non-recourse of $75.0 million or more.
Related Person Transactions
We have relationships and historical and continuing transactions with RMR LLC and others related to it. For example, Five Star is our former subsidiary, our largest tenant and a manager of certain of our senior living communities and we are Five Star’s largest stockholder; and we and six other companies to which RMR LLC provides management services own in equal amounts AIC, an insurance company, and we participate in a combined property insurance program arranged and reinsured in part by AIC. Also, we have no employees and the personnel and various services we require to operate our business are provided to us by RMR LLC pursuant to management agreements; RMR Inc. is the managing member of RMR LLC and we own shares of class A common stock of RMR Inc.; and the controlling shareholder of RMR Inc., ABP Trust, is owned by our Managing Trustees. For further information about these and other such relationships and related person transactions, please see Note 10 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, our Annual Report, our definitive Proxy Statement for our 2016 Annual Meeting of Shareholders and our other filings with the Securities and Exchange Commission, or SEC. 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 and copies of certain of our agreements with these related parties are publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website, www.sec.gov. We may
engage in additional transactions with related persons, including companies to which RMR LLC or its affiliates provide management services.
Impact of Government Reimbursement
For the three months ended March 31, 2016, approximately 97% of our NOI was generated from properties where a majority of the revenues are derived from our tenants’ and residents’ private resources, and the remaining 3% of our NOI was generated from properties where a majority of the revenues were derived from Medicare and Medicaid payments. Nonetheless, we own and our tenants and managers operate facilities in many states that participate in federal and state healthcare payment programs, including the federal Medicare and state Medicaid programs for services in SNFs and other similar facilities, state Medicaid programs for services in certain assisted living communities, and other federal and state healthcare payment programs. Also, some of our MOB tenants participate in federal Medicare and state Medicaid programs. Because of the current and projected federal budget deficit and other federal spending priorities and 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 below as well as under the caption “Business—Government Regulation and Reimbursement” in our Annual Report.
The Centers for Medicare & Medicaid Services, or CMS, updates prospective payment system rates each year. CMS issued updated Medicare prospective payment system rates for SNFs for federal fiscal year 2016, which went into effect on October 1, 2015. As part of this rule, CMS applied a net increase of 1.2% to Medicare payment rates for SNFs, which takes into account a 2.3% market basket increase for inflation reduced by a 0.6% forecast error adjustment and a 0.5% productivity adjustment. On April 21, 2016, CMS proposed a rule updating Medicare payments to SNFs for federal fiscal year 2017, which CMS estimated would increase payments to SNFs by an aggregate of 2.1%, or approximately $800.0 million, compared to federal fiscal year 2016. As discussed in our Annual Report, Medicare rates have also been subject to reductions since April 2013 due to sequestration. The Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, discussed below, limits the market basket increase for SNFs to 1.0% in federal fiscal year 2018.
As part of its rule for federal fiscal year 2016, CMS amended the Medicare and Medicaid conditions of participation to require SNFs to submit staffing information based on payroll and other verifiable data to CMS. CMS also will implement a SNF quality reporting program, as required by the Improving Medicare Post-Acute Transformation Act of 2014, or the IMPACT Act. Starting in federal fiscal year 2018, SNFs that fail to timely comply with the reporting requirements will be subject to a 2.0% reduction in their Medicare payment rates for that fiscal year. The U.S. Department of Health and Human Services will also make this data publicly available pursuant to certain procedures to be established. As part of the Protecting Access to Medicare Act of 2014 in the SNF prospective payment system final rule for fiscal year 2016, CMS adopted a 30 day all-cause, all-condition hospital readmission measure for SNFs, which, by October 1, 2016, will be replaced with an all-condition, risk-adjusted potentially preventable hospital readmission rate for SNFs. Beginning in federal fiscal year 2019, Medicare payment rates will be partially based on SNFs’ performance scores on this measure. To fund the program, CMS will reduce Medicare payments to all SNFs by 2.0% through a withhold mechanism starting on October 1, 2018 and then redistribute between 50% and 70% of the withheld payments as incentive payments to those SNFs with the highest rankings on this measure.
On August 27, 2015, CMS announced that it will conduct the second phase of the “Initiative to Reduce Avoidable Hospitalizations Among Nursing Facility Residents”, a pilot program first announced in 2012, which will be continued in partnership with selected organizations from October 2016 to October 2020. In this phase of the initiative, participants will test whether a new payment model for SNFs and practitioners, together with evidence based clinical and educational interventions that participants are currently implementing, will further reduce avoidable hospitalizations, lower combined Medicare and Medicaid spending and improve the quality of care received by long stay SNF residents.
On July 13, 2015, CMS released a proposed rule to comprehensively update the requirements for long term care facilities that participate in Medicare and Medicaid, including the SNFs our tenants and managers operate. The proposed rule would institute a broad range of new requirements, some of which stem from statutory modifications under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the ACA, and the IMPACT Act. In particular, the proposed rule would require SNFs to: train staff on care for residents with
dementia and on abuse prevention; consider residents’ health needs when making decisions about the kinds and levels of staffing; ensure that staff have the appropriate skill and competencies to provide individualized centered care; augment care planning activities, including considering residents’ goals and preferences, and, on discharge, giving residents necessary follow up information and improving communication with receiving facilities or services; permit dietitians and therapy providers to write orders under certain circumstances; provide greater food choice for residents; implement an updated infection prevention and control program, including requiring each SNF to designate an infection prevention and control officer; and strengthen residents’ rights. In addition, the proposed rule would require SNFs to: alter their staffing levels and competencies based on the results of mandated facility assessments; develop, implement and maintain a compliance and ethics program and quality assurance and performance improvement program; and implement new practices surrounding the preparation and implementation of care plans and discharge summaries, among other new requirements. CMS has stated its intention to finalize the rule prior to the three-year statutory deadline for finalization, or by July 2018. These proposals, if finalized, would increase the cost of operations for long term care facilities that participate in Medicare and Medicaid, including the SNFs our tenants and managers operate. Specifically, CMS estimates in the proposed rule that the per facility cost of complying with all of the new requirements would be approximately $46,000 in the first year, and approximately $41,000 each year thereafter. However, we believe new requirements often cost considerably more than CMS estimates.
Revenues received at our managed communities, by some of our tenants and by some of our MOB tenants that are received under Medicare Part B for outpatient therapies are tied to the Medicare Physician Fee Schedule, or MPFS. On April 14, 2015, Congress passed MACRA, which extended the outpatient therapy cap exceptions process from March 31, 2015 through December 31, 2017, further postponing the implementation of strict limits on Medicare payments for outpatient therapies. MACRA also repealed the Sustainable Growth Rate, or SGR, formula for calculating updates to MPFS rates, which would have led to a 21.2% rate reduction effective April 1, 2015, and replaced the SGR formula with a different reimbursement methodology. In addition, starting in 2019, providers may be subject to either Merit-Based Incentive System, or MIPS, payment adjustments or alternative payment model, or APM, incentive payments. MIPS is a new Medicare program that combines certain parts of existing quality and incentive programs into a single program that addresses quality, resource use, clinical practice improvement and meaningful use of electronic health records. APMs are new models approved by CMS for paying healthcare providers for services provided to Medicare beneficiaries, such as bundled payments.
Under the ACA, the federal government will pay for 100% of a state’s Medicaid expansion costs for the first three years (2014-2016) and gradually reduce its subsidy to 90% for 2020 and future years. As of March 14, 2016, 19 states have elected not to broaden Medicaid eligibility under the ACA; those states choosing not to participate in Medicaid expansion are forgoing the federal funds that would otherwise be available for that purpose. In addition, some of the states in which our senior living communities 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.
The ACA requires various changes in healthcare insurance programs and healthcare delivery systems to be implemented and some new systems to be developed. Expanded insurance availability may provide more paying customers to us and our tenants. However, the changes implemented under the ACA may result in reduced payments for services that our tenants or our managers provide or the failure of Medicare, Medicaid or insurance payment rates to cover our or our tenants’ costs.
The ACA also 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. Governmental authorities are devoting increasing attention and resources to the prevention, detection and prosecution of healthcare fraud and abuse, as well as monitoring quality of care and patient outcomes. For example, on March 30, 2016, the U.S. Department of Justice announced the launch of ten regional intergovernmental task forces across the country to help identify and take enforcement action against nursing homes that provide substandard care to residents. We expect that increased enforcement and monitoring by government agencies will cause us and our tenants to expend considerable amounts on regulatory compliance and likely reduce the profits available from providing healthcare services.
We are unable to predict the overall impact on us of these or other recent legislative and regulatory actions or proposed actions with respect to federal Medicare and state Medicaid payment systems and rates. The changes implemented
or to be implemented could result in the failure of Medicare, Medicaid or private payment rates to cover our or our tenants’ costs of providing required services to patients and 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
generally.
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, 2015. 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.
Fixed Rate Debt
At March 31, 2016, our outstanding fixed rate debt included the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
Annual
|
|
|
|
|
|
|
|
Principal
|
|
Interest
|
|
Interest
|
|
|
|
Interest
|
|
Debt
|
|
Balance
(1)
|
|
Rate
(1)
|
|
Expense
|
|
Maturity
|
|
Payments Due
|
|
Senior unsecured notes
|
|
$
|
400,000
|
|
3.25
|
%
|
$
|
13,000
|
|
2019
|
|
Semi-Annually
|
|
Senior unsecured notes
|
|
|
350,000
|
|
5.63
|
%
|
|
19,705
|
|
2042
|
|
Quarterly
|
|
Senior unsecured notes
|
|
|
300,000
|
|
6.75
|
%
|
|
20,250
|
|
2021
|
|
Semi-Annually
|
|
Senior unsecured notes
|
|
|
250,000
|
|
4.75
|
%
|
|
11,875
|
|
2024
|
|
Semi-Annually
|
|
Senior unsecured notes
|
|
|
250,000
|
|
6.25
|
%
|
|
15,625
|
|
2046
|
|
Quarterly
|
|
Senior unsecured notes
|
|
|
200,000
|
|
6.75
|
%
|
|
13,500
|
|
2020
|
|
Semi-Annually
|
|
Mortgage
|
|
|
282,981
|
|
6.71
|
%
|
|
18,988
|
|
2019
|
|
Monthly
|
|
Mortgages
|
|
|
81,288
|
|
5.92
|
%
|
|
4,816
|
|
2016
|
|
Monthly
|
|
Mortgages
|
|
|
71,544
|
|
4.47
|
%
|
|
3,198
|
|
2018
|
|
Monthly
|
|
Mortgages
|
|
|
45,112
|
|
3.79
|
%
|
|
1,710
|
|
2019
|
|
Monthly
|
|
Mortgages
|
|
|
43,252
|
|
6.54
|
%
|
|
2,829
|
|
2017
|
|
Monthly
|
|
Mortgage
(2)
|
|
|
18,000
|
|
4.65
|
%
|
|
837
|
|
2016
|
|
Monthly
|
|
Mortgage
|
|
|
14,697
|
|
6.28
|
%
|
|
923
|
|
2022
|
|
Monthly
|
|
Mortgages
|
|
|
12,924
|
|
6.31
|
%
|
|
816
|
|
2018
|
|
Monthly
|
|
Mortgages
|
|
|
12,203
|
|
6.24
|
%
|
|
761
|
|
2018
|
|
Monthly
|
|
Mortgage
|
|
|
11,939
|
|
6.25
|
%
|
|
746
|
|
2016
|
|
Monthly
|
|
Mortgage
|
|
|
11,740
|
|
4.85
|
%
|
|
569
|
|
2022
|
|
Monthly
|
|
Mortgage
|
|
|
10,810
|
|
6.15
|
%
|
|
665
|
|
2017
|
|
Monthly
|
|
Mortgage
|
|
|
9,006
|
|
5.95
|
%
|
|
536
|
|
2038
|
|
Monthly
|
|
Mortgage
|
|
|
8,883
|
|
6.73
|
%
|
|
598
|
|
2018
|
|
Monthly
|
|
Mortgage
|
|
|
6,660
|
|
4.69
|
%
|
|
312
|
|
2019
|
|
Monthly
|
|
Mortgage
|
|
|
5,498
|
|
5.86
|
%
|
|
322
|
|
2017
|
|
Monthly
|
|
Mortgage
|
|
|
4,491
|
|
4.38
|
%
|
|
197
|
|
2043
|
|
Monthly
|
|
Mortgages
|
|
|
3,497
|
|
7.49
|
%
|
|
262
|
|
2022
|
|
Monthly
|
|
Mortgage
|
|
|
3,219
|
|
6.25
|
%
|
|
201
|
|
2033
|
|
Monthly
|
|
|
|
$
|
2,407,744
|
|
|
|
$
|
133,241
|
|
|
|
|
|
|
(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.
|
|
(2)
|
|
We prepaid this debt in April 2016.
|
No principal repayments are due under our unsecured notes until maturity. Our mortgage debts require principal and interest payments through maturity pursuant to amortization schedules. Because these debts require interest to be
paid at a fixed rate, changes in market interest rates during the term of these debts will not affect 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 $24.1 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 March 31, 2016, 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 $18.4 million.
Our senior unsecured notes and certain of our mortgages 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. In the past, we have 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.
Floating Rate Debt
At March 31, 2016, our floating rate debt obligations consisted of our $1.0 billion unsecured revolving credit facility, under which we had $561.0 million outstanding, our $350.0 million unsecured term loan and our $200.0 million unsecured term loan. Our revolving credit facility matures in January 2018, and, subject to the payment of an extension fee and our meeting other conditions, we have the option to extend the stated maturity date by one year to January 2019. No principal repayments are required under our revolving credit facility prior to maturity, and we can borrow, repay and re-borrow funds available, subject to conditions, at any time without penalty. Our $350.0 million term loan matures on January 15, 2020, and our $200.0 million term loan matures on September 28, 2022. Our $350.0 million term loan is prepayable without penalty at any time. Our $200.0 million term loan is prepayable without penalty beginning September 29, 2017.
Borrowings under our revolving credit facility and term loans are in U.S. dollars and interest is required to be paid at LIBOR plus premiums that are subject to adjustment based upon changes to our credit ratings. Accordingly, we are exposed to interest rate risk for changes in U.S. dollar based short term rates, specifically LIBOR. In addition, upon renewal or refinancing of our revolving credit facility or our term loans, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit characteristics. 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 as of March 31, 2016 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of Changes in Interest Rates
|
|
Annual
|
|
|
|
|
|
Outstanding
|
|
Total Interest
|
|
Earnings per
|
|
|
|
Interest Rate
(1)
|
|
Floating Rate Debt
|
|
Expense Per Year
|
|
Share Impact
(2)
|
|
At March 31, 2016
|
|
1.84
|
%
|
$
|
1,111,000
|
|
$
|
20,442
|
|
$
|
(0.09)
|
|
100 basis point increase
|
|
2.84
|
%
|
$
|
1,111,000
|
|
$
|
31,552
|
|
$
|
(0.13)
|
|
|
(1)
|
|
Weighted based on the respective interest rates and outstanding borrowings under our credit facility and term loans as of March 31, 2016.
|
|
(2)
|
|
Based on weighted average number of shares outstanding (basic and diluted) for the three months ended March 31, 2016.
|
The following table presents the impact a 100 basis point increase in interest rates would have on our annual floating rate interest expense as of March 31, 2016 if we were fully drawn on our revolving credit facility and our term loan remained outstanding (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of Changes in Interest Rates
|
|
|
|
|
|
Outstanding
|
|
Total Interest
|
|
Annual Earnings
|
|
|
|
Interest Rate
(1)
|
|
Floating Rate Debt
|
|
Expense Per Year
|
|
per Share Impact
(2)
|
|
At March 31, 2016
|
|
1.80
|
%
|
$
|
1,550,000
|
|
$
|
27,900
|
|
$
|
(0.12)
|
|
100 basis point increase
|
|
2.80
|
%
|
$
|
1,550,000
|
|
$
|
43,400
|
|
$
|
(0.18)
|
|
|
(1)
|
|
Weighted based on the respective interest rates and outstanding borrowings under our credit facility (assuming fully drawn) and term loans as of March 31, 2016.
|
|
(2)
|
|
Based on weighted average number of shares outstanding (basic and diluted) for the three months ended March 31, 2016.
|
The foregoing tables show the impact of an immediate increase 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 borrowings under our revolving credit facility or other floating rate debt.
Although we have no present plans to do so, we may in the future enter into hedge arrangements from time to time to mitigate our exposure to changes in interest rates.
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 Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Managing Trustees, President and Chief Operating Officer and Chief Financial Officer and Treasurer 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 March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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”, “MAY” 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 POLICIES AND PLANS REGARDING INVESTMENTS, FINANCINGS AND DISPOSITIONS,
|
|
·
|
|
OUR ABILITY TO RAISE DEBT OR EQUITY CAPITAL,
|
|
·
|
|
OUR ABILITY TO RETAIN OUR EXISTING TENANTS, ATTRACT NEW TENANTS AND MAINTAIN OR INCREASE CURRENT RENTAL RATES,
|
|
·
|
|
THE CREDIT QUALITIES OF OUR TENANTS,
|
|
·
|
|
OUR ABILITY TO COMPETE FOR ACQUISITIONS AND TENANCIES EFFECTIVELY,
|
|
·
|
|
OUR ACQUISITIONS AND SALES OF PROPERTIES,
|
|
·
|
|
OUR ABILITY TO PAY DISTRIBUTIONS TO OUR SHAREHOLDERS AND THE AMOUNT OF SUCH DISTRIBUTIONS,
|
|
·
|
|
THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY,
|
|
·
|
|
OUR ABILITY TO PAY INTEREST ON AND PRINCIPAL OF OUR DEBT,
|
|
·
|
|
OUR ABILITY TO APPROPRIATELY BALANCE OUR DEBT AND EQUITY CAPITAL,
|
|
·
|
|
OUR EXPECTATION THAT WE BENEFIT FROM OUR OWNERSHIP OF RMR INC.,
|
|
·
|
|
OUR EXPECTATION THAT WE BENEFIT FROM OUR OWNERSHIP OF AIC, AND OUR PARTICIPATION IN INSURANCE PROGRAMS ARRANGED BY AIC,
|
|
·
|
|
OUR QUALIFICATION FOR TAXATION AS A REIT,
|
|
·
|
|
OUR BELIEF THAT THE AGING U.S. POPULATION WILL INCREASE THE DEMAND FOR EXISTING SENIOR LIVING COMMUNITIES,
|
|
·
|
|
OUR BELIEF THAT FIVE STAR, OUR FORMER SUBSIDIARY, WHICH IS OUR LARGEST TENANT AND WHICH MANAGES CERTAIN OF OUR SENIOR LIVING COMMUNITIES FOR OUR ACCOUNT, HAS ADEQUATE FINANCIAL RESOURCES, LIQUIDITY AND ABILITY TO MEET ITS OBLIGATIONS TO US AND TO MANAGE OUR SENIOR LIVING COMMUNITIES SUCCESSFULLY, AND
|
OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FFO, NORMALIZED FFO, NOI, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:
|
·
|
|
THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR TENANTS AND MANAGERS,
|
|
·
|
|
THE IMPACT OF THE ACA AND OTHER EXISTING OR PROPOSED LEGISLATION OR REGULATIONS ON US, ON OUR TENANTS AND MANAGERS AND ON THEIR ABILITY TO PAY OUR RENTS AND RETURNS,
|
|
·
|
|
ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR RELATED PARTIES, INCLUDING OUR MANAGING TRUSTEES, FIVE STAR, RMR LLC, RMR INC., AIC, D&R YONKERS LLC, SIR AND OTHERS AFFILIATED WITH THEM,
|
|
·
|
|
COMPLIANCE WITH, AND CHANGES TO, FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, ACCOUNTING RULES, TAX LAWS AND SIMILAR MATTERS,
|
|
·
|
|
LIMITATIONS IMPOSED ON OUR BUSINESS AND OUR ABILITY TO SATISFY COMPLEX RULES IN ORDER FOR US TO QUALIFY FOR TAXATION AS A REIT FOR U.S. FEDERAL INCOME TAX PURPOSES,
|
|
·
|
|
COMPETITION WITHIN THE HEALTHCARE AND REAL ESTATE INDUSTRIES, AND
|
|
·
|
|
ACTS OF TERRORISM, OUTBREAKS OF SO CALLED PANDEMICS OR OTHER MANMADE OR NATURAL DISASTERS BEYOND OUR CONTROL.
|
FOR EXAMPLE:
|
·
|
|
FIVE STAR IS OUR LARGEST TENANT AND MANAGES CERTAIN OF OUR SENIOR LIVING COMMUNITIES FOR OUR ACCOUNT AND IT MAY EXPERIENCE FINANCIAL DIFFICULTIES AS A RESULT OF A NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO:
|
|
·
|
|
CHANGES IN MEDICARE AND MEDICAID PAYMENTS, INCLUDING THOSE THAT MAY RESULT FROM THE ACA AND OTHER EXISTING OR PROPOSED LEGISLATION OR REGULATIONS, WHICH COULD RESULT IN REDUCED RATES OR A FAILURE OF SUCH RATES TO COVER FIVE STAR’S COSTS,
|
|
·
|
|
CHANGES IN REGULATIONS AFFECTING FIVE STAR’S OPERATIONS,
|
|
·
|
|
CHANGES IN THE ECONOMY OR GOVERNMENTAL POLICIES WHICH REDUCE THE DEMAND FOR THE SERVICES FIVE STAR OFFERS,
|
|
·
|
|
INCREASES IN INSURANCE AND TORT LIABILITY COSTS,
|
|
·
|
|
INEFFECTIVE INTEGRATION OF NEWLY ACQUIRED LEASED OR MANAGED SENIOR LIVING COMMUNITIES,
|
|
·
|
|
INSUFFICIENT ACCESS TO CAPITAL AND FINANCING, AND
|
|
·
|
|
POTENTIAL MATERIAL WEAKNESSES IN ITS INTERNAL CONTROLS,
|
|
·
|
|
IF FIVE STAR’S OPERATIONS REMAIN 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,
|
|
·
|
|
OUR OTHER TENANTS MAY EXPERIENCE LOSSES AND BECOME UNABLE TO PAY OUR RENTS,
|
|
·
|
|
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,
|
|
·
|
|
OUR ABILITY TO MAKE FUTURE DISTRIBUTIONS TO OUR SHAREHOLDERS AND TO MAKE PAYMENTS OF PRINCIPAL AND INTEREST ON OUR INDEBTEDNESS DEPENDS UPON A NUMBER OF FACTORS, INCLUDING OUR FUTURE EARNINGS, THE CAPITAL COSTS WE INCUR TO LEASE AND OPERATE OUR PROPERTIES AND WORKING CAPITAL REQUIREMENTS. WE MAY BE UNABLE TO PAY OUR DEBT OBLIGATIONS OR TO MAINTAIN OUR CURRENT RATE OF DISTRIBUTIONS ON OUR COMMON SHARES AND FUTURE DISTRIBUTIONS MAY BE REDUCED OR ELIMINATED,
|
|
·
|
|
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, LESS PROPERTY OPERATING EXPENSES, 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,
|
|
·
|
|
RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE BECAUSE OF CHANGING MARKET CONDITIONS OR OTHERWISE,
|
|
·
|
|
CONTINGENCIES IN OUR ACQUISITION AND SALE AGREEMENTS MAY NOT BE SATISFIED AND OUR PENDING ACQUISITIONS AND/OR SALES AND ANY RELATED LEASES OR MANAGEMENT AGREEMENTS MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS OF SUCH TRANSACTIONS MAY CHANGE,
|
|
·
|
|
WE MAY ENTER INTO ADDITIONAL, EXPANDED OR AMENDED LEASES, MANAGEMENT AGREEMENTS OR POOLING AGREEMENTS WITH FIVE STAR FOR FIVE STAR TO LEASE OR MANAGE ADDITIONAL SENIOR LIVING COMMUNITIES THAT WE ACQUIRE OR THAT WE CURRENTLY OWN OR OTHER TRANSACTIONS WITH FIVE STAR. HOWEVER, THERE CAN BE NO ASSURANCE THAT WE AND FIVE STAR WILL ENTER INTO ANY ADDITIONAL, EXPANDED OR AMENDED LEASES, MANAGEMENT AGREEMENTS OR POOLING AGREEMENTS OR OTHER TRANSACTIONS,
|
|
·
|
|
CONTINUED AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND OTHER CUSTOMARY CREDIT FACILITY CONDITIONS THAT WE MAY BE UNABLE TO SATISFY,
|
|
·
|
|
ACTUAL COSTS UNDER OUR REVOLVING CREDIT FACILITY OR OTHER FLOATING RATE CREDIT FACILITIES WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF OTHER FEES AND EXPENSES ASSOCIATED WITH SUCH FACILITIES,
|
|
·
|
|
THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY AND TERM LOANS MAY BE INCREASED TO UP TO $2.6 BILLION ON A COMBINED BASIS IN CERTAIN CIRCUMSTANCES. HOWEVER, INCREASING THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY AND TERM LOANS IS SUBJECT TO OUR OBTAINING ADDITIONAL COMMITMENTS FROM LENDERS, WHICH MAY NOT OCCUR,
|
|
·
|
|
WE HAVE THE OPTION TO EXTEND THE MATURITY DATE OF OUR REVOLVING CREDIT FACILITY UPON PAYMENT OF A FEE AND MEETING OTHER CONDITIONS. HOWEVER, THE APPLICABLE CONDITIONS MAY NOT BE MET,
|
|
·
|
|
THE PREMIUMS USED TO DETERMINE THE INTEREST RATE PAYABLE ON OUR REVOLVING CREDIT FACILITY AND TERM LOANS AND THE FACILITY FEE PAYABLE ON OUR REVOLVING CREDIT FACILITY ARE BASED ON OUR CREDIT RATINGS. FUTURE CHANGES IN OUR CREDIT RATINGS MAY CAUSE THE INTEREST AND FEES WE PAY TO INCREASE,
|
|
·
|
|
WE MAY BE UNABLE TO REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE,
|
|
·
|
|
FOR THE THREE MONTHS ENDED MARCH 31, 2016, APPROXIMATELY 97% OF OUR NOI WAS GENERATED FROM PROPERTIES WHERE A MAJORITY OF THE REVENUES ARE DERIVED FROM OUR TENANTS’ AND RESIDENTS’ PRIVATE RESOURCES. THIS MAY IMPLY THAT WE WILL MAINTAIN OR INCREASE THE PERCENTAGE OF OUR NOI GENERATED FROM PRIVATE RESOURCES AT OUR SENIOR LIVING COMMUNITIES. HOWEVER, OUR RESIDENTS AND PATIENTS MAY BECOME UNABLE TO FUND OUR CHARGES WITH PRIVATE RESOURCES IN THE FUTURE AND WE MAY BE REQUIRED OR MAY ELECT FOR BUSINESS REASONS TO ACCEPT OR PURSUE REVENUES FROM GOVERNMENT PAID SOURCES, WHICH COULD RESULT IN AN INCREASED PART OF OUR NOI AND REVENUE BEING GENERATED FROM GOVERNMENT PAYMENTS,
|
|
·
|
|
IN RECENT YEARS ECONOMIC INDICATORS REFLECT AN IMPROVING HOUSING MARKET AND MANY OF THE SERVICES OUR SENIOR LIVING COMMUNITY TENANTS AND MANAGERS PROVIDE ARE NEEDS DRIVEN. THESE FACTORS MAY IMPLY THAT ECONOMIC CONDITIONS WILL IMPROVE AND THAT THOSE TENANTS’ AND MANAGERS’ AND OUR REVENUES AND PROFITABILITY WILL IMPROVE. HOWEVER, THERE CAN BE NO ASSURANCE THAT GENERAL ECONOMIC CONDITIONS WILL IMPROVE, THAT THERE EXISTS ANY PENT UP DEMAND FOR THOSE SERVICES OR THAT, EVEN IF THERE IS SUCH DEMAND, THAT OUR TENANTS AND MANAGERS WOULD BE SUCCESSFUL IN ATTRACTING SUCH DEMAND, OR THAT OUR TENANTS’ OR MANAGERS' OR OUR REVENUES AND PROFITS WILL IMPROVE. FURTHER, MORE RECENT ECONOMIC INDICATORS MAY INDICATE DECLINING ECONOMIC ACTIVITY, WHICH COULD BE HARMFUL TO OUR TENANTS’, MANAGERS’ AND OUR BUSINESSES AND CAUSE THEM OR US TO EXPERIENCE LOSSES,
|
|
·
|
|
WE MAY NOT BE ABLE TO SELL OUR ASSETS CLASSIFIED AS HELD FOR SALE ON TERMS ACCEPTABLE TO US OR OTHERWISE,
|
|
·
|
|
WE BELIEVE THAT OUR RELATIONSHIPS WITH OUR RELATED PARTIES, INCLUDING FIVE STAR, RMR LLC, RMR INC., AIC, D&R YONKERS LLC, SIR AND OTHERS AFFILIATED WITH THEM 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,
|
|
·
|
|
OUR SENIOR LIVING COMMUNITIES ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, LICENSURE AND OVERSIGHT. WE SOMETIMES EXPERIENCE DEFICIENCIES IN THE OPERATION OF OUR SENIOR LIVING COMMUNITIES AND SOME OF OUR COMMUNITIES MAY BE PROHIBITED FROM ADMITTING NEW RESIDENTS OR OUR LICENSE TO CONTINUE OPERATIONS AT A COMMUNITY MAY BE REVOKED. ALSO, OPERATING DEFICIENCIES OR A LICENSE REVOCATION AT ONE OR MORE OF OUR SENIOR LIVING COMMUNITIES MAY HAVE AN ADVERSE IMPACT ON OUR ABILITY TO OBTAIN LICENSES FOR OR ATTRACT RESIDENTS TO OUR OTHER COMMUNITIES, AND
|
|
·
|
|
THE BUSINESS MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS BETWEEN US AND RMR LLC HAVE CONTINUING 20 YEAR TERMS. HOWEVER, THOSE AGREEMENTS INCLUDE TERMS WHICH PERMIT EARLY TERMINATION IN CERTAIN CIRCUMSTANCES. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THESE AGREEMENTS WILL REMAIN IN EFFECT FOR CONTINUING 20 YEAR TERMS OR FOR SHORTER TERMS.
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THESE RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH ARE BEYOND OUR CONTROL, SUCH AS NEW LEGISLATION OR REGULATIONS AFFECTING OUR BUSINESS OR THE BUSINESSES OF OUR TENANTS OR MANAGERS, CHANGES IN OUR TENANTS’ OR MANAGERS’ REVENUES OR COSTS, CHANGES IN OUR TENANTS’ OR MANAGERS’ FINANCIAL CONDITIONS, DEFICIENCIES IN OPERATIONS BY THE TENANTS OR MANAGERS OF OUR SENIOR LIVING COMMUNITIES, CHANGED MEDICARE AND MEDICAID RATES, ACTS OF TERRORISM, NATURAL DISASTERS OR CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY.
THE INFORMATION CONTAINED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OUR ANNUAL REPORT OR IN OUR OTHER 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 SEC’S WEBSITE AT
WWW.SEC.GOV
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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.