As of June 30, 2016 and 2015, we leased 184 and 180 senior living communities to Five Star, respectively. We recognized total rental income from Five Star of $48,234 and $47,753 for the three months ended June 30, 2016 and 2015, respectively, and $96,341 and $95,443 for the six months ended June 30, 2016 and 2015, respectively. These amounts exclude estimated percentage rent payments we received from Five Star of $1,388 and $1,393 for the three months ended June 30, 2016 and 2015, respectively, and $2,861 and $2,824 for the six months ended June 30, 2016 and 2015, respectively. We determine actual percentage rent due under our Five Star leases annually and recognize any resulting amount as rental income at year end when all contingencies are met. As of June 30, 2016 and December 31, 2015, we had rents receivable from Five Star of $16,065 and $17,466, respectively. Those amounts are included in other assets in our condensed consolidated balance sheets.
During the six months ended June 30, 2016 and 2015, pursuant to the terms of our leases with Five Star, we purchased $11,836 and $8,902, respectively, of improvements to properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $949 and $717, respectively.
In April 2016, Five Star began managing a senior living community we own located in North Carolina with 87 living units where the prior tenant had defaulted on its lease. In May 2016, Five Star began managing a senior living community located in Georgia with 38 private pay units that we acquired in May 2016 for a purchase price of approximately $8,400, excluding closing costs. We acquired this community using a TRS structure. In July 2016, Five Star began managing an additional senior living community we own located in Alabama with 163 living units where the prior tenant had defaulted on its lease. The terms by which Five Star is managing these senior living communities are described above.
As of June 30, 2016 and 2015, Five Star managed 62 and 60 senior living communities for our account, respectively. We incurred management fees payable to Five Star of $2,819 and $2,699 for the three months ended June 30, 2016 and 2015, respectively, and $5,623 and $5,222 for the six months ended June 30, 2016 and 2015, respectively. These amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income.
D&R Yonkers LLC:
In order to accommodate certain requirements of New York licensing laws, one of our TRSs subleases a part of a senior living community we own that is managed by Five Star to D&R Yonkers LLC. D&R Yonkers LLC is owned by our President and Chief Operating Officer and Five Star’s chief financial officer and treasurer. Our transactions and balances with D&R Yonkers LLC are eliminated upon consolidation for accounting purposes and are not separately stated and do not appear in our condensed consolidated financial statements.
RMR LLC:
Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $9,243 and $9,144 for the three months ended June 30, 2016 and 2015, respectively, and $17,590 and $18,014 for the six months ended June 30, 2016 and 2015, respectively. No incentive fees were estimated to be payable to RMR LLC for the three or six months ended June 30, 2016 and 2015, respectively. The net business management fees we recognized for the 2016 and 2015 periods are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.
In accordance with the terms of our business management agreement, we issued 68,983 of our common shares to RMR LLC for the period from January 1, 2015 through May 31, 2015 as payment for a part of the business management fee we recognized for that period. Beginning June 1, 2015, all management fees under our business management agreement are paid in cash.
Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $2,686 and $2,532 for the three months ended June 30, 2016 and 2015, respectively, and $5,232 and $4,969 for the six months ended June 30, 2016 and 2015, respectively. These amounts are
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 June 30, 2016, we owned 436 properties (462 buildings) located in 43 states and Washington, D.C., (including five properties (five buildings) classified as held for sale). At June 30, 2016, the undepreciated carrying value of our properties was $7.7 billion, excluding properties classified as held for sale. For the three months ended June 30, 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 unit / bed or square foot data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Investment per
|
|
|
|
|
% of
|
|
|
|
Number of
|
|
Units/Beds or
|
|
Investment
|
|
% of Total
|
|
Unit / Bed or
|
|
Q2 2016
|
|
Q2 2016
|
|
(As of June 30, 2016)
|
|
Properties
|
|
Square Feet
|
|
Carrying Value
(1)
|
|
Investment
|
|
Square Foot
(2)
|
|
NOI
(3)
|
|
NOI
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent living
(4)
|
|
68
|
|
16,441
|
|
$
|
2,254,611
|
|
29.4
|
%
|
$
|
137,133
|
|
$
|
46,760
|
|
28.9
|
%
|
Assisted living
(4)
|
|
195
|
|
14,319
|
|
|
1,975,795
|
|
25.8
|
%
|
$
|
137,984
|
|
|
39,048
|
|
24.1
|
%
|
Skilled nursing
facilities
(4)
|
|
40
|
|
4,306
|
|
|
187,620
|
|
2.5
|
%
|
$
|
43,572
|
|
|
4,290
|
|
2.6
|
%
|
Subtotal senior living communities
|
|
303
|
|
35,066
|
|
|
4,418,026
|
|
57.7
|
%
|
$
|
125,992
|
|
|
90,098
|
|
55.6
|
%
|
MOBs
(5)
|
|
123
|
|
11,609,815
|
sq. ft.
|
|
3,056,989
|
|
39.9
|
%
|
$
|
263
|
|
|
67,569
|
|
41.6
|
%
|
Wellness centers
|
|
10
|
|
812,000
|
sq. ft.
|
|
180,017
|
|
2.4
|
%
|
$
|
222
|
|
|
4,578
|
|
2.8
|
%
|
Total
|
|
436
|
|
|
|
$
|
7,655,032
|
|
100.0
|
%
|
|
|
|
$
|
162,245
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant / Operator / Managed Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Star (Lease No. 1)
|
|
83
|
|
6,043
|
|
$
|
698,020
|
|
9.1
|
%
|
$
|
115,509
|
|
$
|
14,734
|
|
9.1
|
%
|
Five Star (Lease No. 2)
|
|
48
|
|
7,032
|
|
|
708,682
|
|
9.3
|
%
|
$
|
100,780
|
|
|
16,054
|
|
10.0
|
%
|
Five Star (Lease No. 3)
|
|
17
|
|
3,281
|
|
|
360,186
|
|
4.7
|
%
|
$
|
109,779
|
|
|
8,638
|
|
5.3
|
%
|
Five Star (Lease No. 4)
|
|
29
|
|
3,335
|
|
|
392,340
|
|
5.1
|
%
|
$
|
117,643
|
|
|
8,763
|
|
5.4
|
%
|
Five Star (Lease No. 5)
(6)
|
|
7
|
|
545
|
|
|
112,493
|
|
1.5
|
%
|
$
|
206,409
|
|
|
47
|
|
0.0
|
%
|
Subtotal Five Star
|
|
184
|
|
20,236
|
|
|
2,271,721
|
|
29.7
|
%
|
$
|
112,261
|
|
|
48,236
|
|
29.8
|
%
|
Sunrise / Marriott
(7)
|
|
4
|
|
1,619
|
|
|
126,326
|
|
1.7
|
%
|
$
|
78,027
|
|
|
3,132
|
|
1.9
|
%
|
Brookdale
|
|
18
|
|
894
|
|
|
62,339
|
|
0.8
|
%
|
$
|
69,730
|
|
|
1,813
|
|
1.1
|
%
|
13 private senior living companies (combined)
|
|
30
|
|
3,683
|
|
|
529,670
|
|
6.9
|
%
|
$
|
143,815
|
|
|
11,189
|
|
6.9
|
%
|
Subtotal triple net leased senior living communities
|
|
236
|
|
26,432
|
|
|
2,990,056
|
|
39.1
|
%
|
$
|
113,123
|
|
|
64,370
|
|
39.7
|
%
|
Managed senior living communities
(8)
|
|
67
|
|
8,634
|
|
|
1,427,970
|
|
18.6
|
%
|
$
|
165,389
|
|
|
25,728
|
|
15.9
|
%
|
Subtotal senior living communities
|
|
303
|
|
35,066
|
|
|
4,418,026
|
|
57.7
|
%
|
$
|
125,992
|
|
|
90,098
|
|
55.6
|
%
|
MOBs
(5)
|
|
123
|
|
11,609,815
|
sq. ft.
|
|
3,056,989
|
|
39.9
|
%
|
$
|
263
|
|
|
67,569
|
|
41.6
|
%
|
Wellness centers
|
|
10
|
|
812,000
|
sq. ft.
|
|
180,017
|
|
2.4
|
%
|
$
|
222
|
|
|
4,578
|
|
2.8
|
%
|
Total
|
|
436
|
|
|
|
$
|
7,655,032
|
|
100.0
|
%
|
|
|
|
$
|
162,245
|
|
100.0
|
%
|
Tenant / Managed Property Operating Statistics
(9)
|
|
|
|
|
|
|
|
|
|
|
|
Rent Coverage
|
|
Occupancy
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Five Star (Lease No. 1)
|
|
1.13x
|
|
1.19x
|
|
85.0
|
%
|
85.5
|
%
|
Five Star (Lease No. 2)
|
|
1.10x
|
|
1.14x
|
|
82.0
|
%
|
82.7
|
%
|
Five Star (Lease No. 3)
|
|
1.55x
|
|
1.53x
|
|
84.6
|
%
|
86.0
|
%
|
Five Star (Lease No. 4)
|
|
1.31x
|
|
1.22x
|
|
88.1
|
%
|
87.8
|
%
|
Subtotal Five Star
(10)
|
|
1.22x
|
|
1.24x
|
|
84.4
|
%
|
85.0
|
%
|
Sunrise / Marriott
(7)
|
|
1.93x
|
|
2.02x
|
|
90.3
|
%
|
92.5
|
%
|
Brookdale
|
|
2.76x
|
|
2.66x
|
|
87.9
|
%
|
93.7
|
%
|
12 private senior living companies (combined)
(11)
|
|
1.29x
|
|
2.00x
|
|
88.1
|
%
|
84.9
|
%
|
Subtotal triple net leased senior living communities
|
|
1.33x
|
|
1.38x
|
|
85.4
|
%
|
85.8
|
%
|
Managed senior living communities
(8)
|
|
NA
|
|
NA
|
|
87.8
|
%
|
88.5
|
%
|
Subtotal senior living communities
|
|
1.33x
|
|
1.38x
|
|
86.0
|
%
|
86.4
|
%
|
MOBs
(5)
|
|
NA
|
|
NA
|
|
95.9
|
%
|
96.4
|
%
|
Wellness centers
|
|
1.90x
|
|
1.97x
|
|
100.0
|
%
|
100.0
|
%
|
Total
|
|
1.37x
|
|
1.42x
|
|
|
|
|
|
|
(1)
|
|
Amounts are at cost before depreciation, but after impairment write downs, if any. Amounts exclude investment carrying values totaling approximately $21.3 million for five MOBs (five buildings) classified as held for sale as of June 30, 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 June 30, 2016, as applicable.
|
|
(3)
|
|
NOI is defined and calculated by reportable segment and reconciled to net income below in this Item 2. NOI from properties that were sold and NOI that was earned from properties prior to the transfer of operations to one of our TRSs during the second quarter of 2016 is excluded from the table above.
|
|
(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 123 MOB properties are comprised of 149 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)
|
|
We acquired these seven communities on June 29, 2016.
|
|
(7)
|
|
Marriott International, Inc. guarantees the lessee’s obligations under these leases.
|
|
(8)
|
|
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, June 30, 2016 was 87.5%.
|
|
(9)
|
|
Operating data for MOBs are presented as of June 30, 2016 and 2015 and 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; operating data for other properties, tenants and managers are presented based upon the operating results provided by our tenants and managers for the 12 months ended March 31, 2016 and 2015, 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, as well as data for properties sold during the periods presented.
|
|
(10)
|
|
Our new long term lease that we entered into with Five Star on June 29, 2016 (Lease No. 5) in connection with the sale and leaseback transaction is not included in the table above as the operating data for that lease in the periods presented is not applicable to our ownership. See footnote (9) above for more information regarding the periods reflected in the table above. See also Note 10 to our condensed consolidated financial statements for more information about our Five Star Lease No. 5 and the sale and leaseback transaction we completed with Five Star in June 2016.
|
|
(11)
|
|
Excludes one property that was previously leased to a third party private pay tenant, which, as of July 2016, is now managed by Five Star and leased to one of our TRSs.
|
The following tables set forth information regarding our lease expirations as of June 30, 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
|
|
$
|
—
|
|
$
|
16,983
|
|
$
|
—
|
|
$
|
16,983
|
|
2.6
|
%
|
2.6
|
%
|
2017
|
|
|
—
|
|
|
27,421
|
|
|
—
|
|
|
27,421
|
|
4.1
|
%
|
6.7
|
%
|
2018
|
|
|
14,740
|
|
|
25,347
|
|
|
—
|
|
|
40,087
|
|
6.1
|
%
|
12.8
|
%
|
2019
|
|
|
590
|
|
|
39,424
|
|
|
—
|
|
|
40,014
|
|
6.1
|
%
|
18.9
|
%
|
2020
|
|
|
—
|
|
|
30,297
|
|
|
—
|
|
|
30,297
|
|
4.6
|
%
|
23.5
|
%
|
2021
|
|
|
1,424
|
|
|
12,972
|
|
|
—
|
|
|
14,396
|
|
2.2
|
%
|
25.7
|
%
|
2022
|
|
|
—
|
|
|
14,547
|
|
|
—
|
|
|
14,547
|
|
2.2
|
%
|
27.9
|
%
|
2023
|
|
|
15,018
|
|
|
9,709
|
|
|
7,490
|
|
|
32,217
|
|
4.9
|
%
|
32.8
|
%
|
2024
|
|
|
68,617
|
|
|
36,144
|
|
|
—
|
|
|
104,761
|
|
15.8
|
%
|
48.6
|
%
|
Thereafter
|
|
|
177,132
|
|
|
152,778
|
|
|
10,550
|
|
|
340,460
|
|
51.4
|
%
|
100.0
|
%
|
Total
|
|
$
|
277,521
|
|
$
|
365,622
|
|
$
|
18,040
|
|
$
|
661,183
|
|
100.0
|
%
|
|
|
Average remaining lease term for all senior living community, MOB and wellness center properties (weighted by annualized rental income): 8.9 years
(2)
|
(1)
|
|
Annualized rental income is rents pursuant to existing leases as of June 30, 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 June 30, 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 — 2.2%; 2017 — 3.6%; 2018 — 5.2%; 2019 — 5.2%; 2020 — 4.0%; 2021 — 1.9%; 2022 — 1.9%; 2023 — 4.2%; 2024 — 13.7%; and thereafter — 58.1%. 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 9.8 years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
—
|
|
79
|
|
—
|
|
79
|
|
12.1
|
%
|
12.1
|
%
|
2017
|
|
—
|
|
99
|
|
—
|
|
99
|
|
15.2
|
%
|
27.3
|
%
|
2018
|
|
1
|
|
93
|
|
—
|
|
94
|
|
14.4
|
%
|
41.7
|
%
|
2019
|
|
1
|
|
85
|
|
—
|
|
86
|
|
13.2
|
%
|
54.9
|
%
|
2020
|
|
—
|
|
70
|
|
—
|
|
70
|
|
10.8
|
%
|
65.7
|
%
|
2021
|
|
1
|
|
52
|
|
—
|
|
53
|
|
8.1
|
%
|
73.8
|
%
|
2022
|
|
—
|
|
40
|
|
—
|
|
40
|
|
6.1
|
%
|
79.9
|
%
|
2023
|
|
2
|
|
19
|
|
1
|
|
22
|
|
3.4
|
%
|
83.3
|
%
|
2024
|
|
3
|
|
25
|
|
—
|
|
28
|
|
4.3
|
%
|
87.6
|
%
|
Thereafter
|
|
11
|
|
68
|
|
1
|
|
80
|
|
12.4
|
%
|
100.0
|
%
|
Total
|
|
19
|
|
630
|
|
2
|
|
651
|
|
100.0
|
%
|
|
|
|
(1)
|
|
Excludes our managed senior living communities leased to our TRSs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
—
|
|
—
|
%
|
—
|
%
|
542,023
|
|
—
|
|
542,023
|
|
4.5
|
%
|
4.5
|
%
|
2017
|
|
—
|
|
—
|
%
|
—
|
%
|
981,189
|
|
—
|
|
981,189
|
|
8.2
|
%
|
12.7
|
%
|
2018
|
|
1,619
|
|
6.1
|
%
|
6.1
|
%
|
871,923
|
|
—
|
|
871,923
|
|
7.3
|
%
|
20.0
|
%
|
2019
|
|
175
|
|
0.7
|
%
|
6.8
|
%
|
1,259,962
|
|
—
|
|
1,259,962
|
|
10.5
|
%
|
30.5
|
%
|
2020
|
|
—
|
|
—
|
%
|
6.8
|
%
|
1,425,610
|
|
—
|
|
1,425,610
|
|
11.9
|
%
|
42.4
|
%
|
2021
|
|
361
|
|
1.4
|
%
|
8.2
|
%
|
438,336
|
|
—
|
|
438,336
|
|
3.7
|
%
|
46.1
|
%
|
2022
|
|
—
|
|
—
|
%
|
8.2
|
%
|
562,632
|
|
—
|
|
562,632
|
|
4.7
|
%
|
50.8
|
%
|
2023
|
|
807
|
|
3.1
|
%
|
11.3
|
%
|
725,745
|
|
354,000
|
|
1,079,745
|
|
9.0
|
%
|
59.8
|
%
|
2024
|
|
6,561
|
|
24.8
|
%
|
36.1
|
%
|
1,380,986
|
|
—
|
|
1,380,986
|
|
11.6
|
%
|
71.4
|
%
|
Thereafter
|
|
16,909
|
|
63.9
|
%
|
100.0
|
%
|
2,946,583
|
|
458,000
|
|
3,404,583
|
|
28.6
|
%
|
100.0
|
%
|
Total
|
|
26,432
|
|
100.0
|
%
|
|
|
11,134,989
|
|
812,000
|
|
11,946,989
|
|
100.0
|
%
|
|
|
|
(1)
|
|
Excludes 8,634 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 — 0.0%; 2017 — 0.0%; 2018 — 4.6%; 2019 — 0.5%; 2020 — 0.0%; 2021 — 1.0%; 2022 — 0.0%; 2023 — 2.3%; 2024 — 18.7%; and thereafter — 72.9%.
|
During the three months ended June 30, 2016, we entered into MOB lease renewals for 137,000 leasable square feet and new leases for 46,000 leasable square feet. The weighted average annual rental rate for leases entered into during the quarter was $32.24 per square foot, and these rental rates were, on a weighted average basis, 5.7% below previous rents charged for the same space. Average lease terms for leases entered into during the second quarter of 2016 were 5.4 years based on
annualized rental income pursuant to existing leases as of June 30, 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 second quarter of 2016 totaled $3.1 million, or $17.13 per square foot on average (approximately $3.15 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 within our industry and others. 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, particularly in certain higher demand markets. As the recently developed senior living communities begin operations, we expect to experience continuing challenges in maintaining or increasing occupancy at, or the rates that our tenants and managers charge residents of, 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
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Triple net leased senior living communities
|
|
$
|
66,441
|
|
$
|
61,347
|
|
$
|
131,749
|
|
$
|
116,598
|
|
Managed senior living communities
|
|
|
97,370
|
|
|
91,856
|
|
|
194,323
|
|
|
174,649
|
|
MOBs
|
|
|
92,978
|
|
|
89,591
|
|
|
184,559
|
|
|
175,592
|
|
All other operations
|
|
|
4,578
|
|
|
4,608
|
|
|
9,111
|
|
|
9,139
|
|
Total revenues
|
|
$
|
261,367
|
|
$
|
247,402
|
|
$
|
519,742
|
|
$
|
475,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Triple net leased senior living communities
|
|
$
|
44,524
|
|
$
|
38,013
|
|
$
|
79,294
|
|
$
|
72,154
|
|
Managed senior living communities
|
|
|
2,925
|
|
|
5,821
|
|
|
5,112
|
|
|
15,732
|
|
MOBs
|
|
|
30,753
|
|
|
32,466
|
|
|
62,119
|
|
|
63,894
|
|
All other operations
|
|
|
(38,969)
|
|
|
(39,913)
|
|
|
(76,018)
|
|
|
(75,604)
|
|
Net income
|
|
$
|
39,233
|
|
$
|
36,387
|
|
$
|
70,507
|
|
$
|
76,176
|
|
The following sections analyze and discuss the results of operations of each of our segments for the periods presented.
Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 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 June 30, 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 June 30,
|
|
Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Total properties
|
|
236
|
|
232
|
|
210
|
|
210
|
|
# of units / beds
|
|
26,432
|
|
26,135
|
|
23,684
|
|
23,684
|
|
Tenant operating data
(2)
|
|
|
|
|
|
|
|
|
|
Occupancy
|
|
85.4
|
%
|
85.8
|
%
|
84.9
|
%
|
85.8
|
%
|
Rent coverage
|
|
1.33x
|
|
1.38x
|
|
1.35x
|
|
1.38x
|
|
|
(1)
|
|
Consists of triple net leased senior living communities we have owned continuously since April 1, 2015.
|
|
(2)
|
|
All tenant operating data presented are based upon the operating results provided by our tenants for the 12 months ended March 31, 2016 and 2015 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. Excludes data for historical periods prior to our ownership of certain properties, as well as for properties sold during the periods presented.
|
Triple net leased senior living communities, all properties
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
66,441
|
|
$
|
61,347
|
|
$
|
5,094
|
|
8.3
|
%
|
Property operating expenses
|
|
|
(423)
|
|
|
—
|
|
|
423
|
|
100.0
|
%
|
Net operating income (NOI)
|
|
|
66,018
|
|
|
61,347
|
|
|
4,671
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(19,273)
|
|
|
(17,058)
|
|
|
2,215
|
|
13.0
|
%
|
Operating income
|
|
|
46,745
|
|
|
44,289
|
|
|
2,456
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(6,282)
|
|
|
(6,270)
|
|
|
12
|
|
0.2
|
%
|
Loss on early extinguishment of debt
|
|
|
—
|
|
|
(6)
|
|
|
(6)
|
|
(100.0)
|
%
|
Gain on sale of properties
|
|
|
4,061
|
|
|
—
|
|
|
4,061
|
|
100.0
|
%
|
Net income
|
|
$
|
44,524
|
|
$
|
38,013
|
|
$
|
6,511
|
|
17.1
|
%
|
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 within 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 our acquisitions since April 1, 2015. Rental income also increased due to our purchases of capital improvements at certain of these communities since April 1, 2015. These increases in rental income were partially offset by our sale of four senior living communities since April 1, 2015. Rental income includes non-cash straight line rent adjustments totaling $1,147 and $1,250 for the three months ended June 30, 2016 and 2015, respectively. Rental income increased year over year on a comparable property basis by $442, primarily as a result of our capital improvement purchases at certain of the 210 communities we have owned continuously since April 1, 2015 and the resulting increase in rent pursuant to the terms of the applicable leases.
Property operating expenses.
Property operating expenses recorded in 2016 relate to bad debt reserves associated with the defaulted lease at one triple net leased senior living community we acquired in 2015 which was leased to a third party private operator as of June 30, 2016. In July 2016, we reached an agreement with the tenant and terminated the lease which was in effect at June 30, 2016. The operations of this community were transferred to Five Star, which began managing the community on our behalf under a TRS structure in July 2016.
Net operating income.
NOI increased because of the increase in rental income, partially offset by the property operating expenses described above. We typically incur minimal property operating expenses at these communities, as the majority of those 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 and amortization expense.
Depreciation and amortization expense increased as a result of our acquisitions and capital improvement purchases described above.
Interest expense.
Interest expense relates to mortgage debts and capital leases secured by certain of these communities.
Loss on early extinguishment of debt.
Loss on early extinguishment of debt is a result of our prepayment of three mortgage notes in the second quarter of 2015.
Gain on sale of properties.
Gain on sale of properties is the result of our sale of one SNF in June 2016.
Managed senior living communities
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Properties
|
|
Comparable Properties
(1)
|
|
|
|
As of and for the Three Months
|
|
As of and for the Three Months
|
|
|
|
Ended June 30,
|
|
Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Total properties
|
|
|
67
|
|
|
65
|
|
|
46
|
|
|
46
|
|
# of units / beds
|
|
|
8,634
|
|
|
8,563
|
|
|
7,217
|
|
|
7,217
|
|
Occupancy
|
|
|
87.1
|
%
|
|
88.2
|
%
|
|
86.6
|
%
|
|
87.9
|
%
|
Average monthly rate
|
|
$
|
4,276
|
|
$
|
4,237
|
|
$
|
4,357
|
|
$
|
4,285
|
|
|
(1)
|
|
Consists of managed senior living communities we have owned continuously since April 1, 2015.
|
Managed senior living communities, all properties
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residents fees and services
|
|
$
|
97,370
|
|
$
|
91,856
|
|
$
|
5,514
|
|
6.0
|
%
|
Property operating expenses
|
|
|
(71,642)
|
|
|
(69,792)
|
|
|
1,850
|
|
2.7
|
%
|
Net operating income (NOI)
|
|
|
25,728
|
|
|
22,064
|
|
|
3,664
|
|
16.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(20,140)
|
|
|
(13,649)
|
|
|
6,491
|
|
47.6
|
%
|
Operating income
|
|
|
5,588
|
|
|
8,415
|
|
|
(2,827)
|
|
(33.6)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,663)
|
|
|
(2,561)
|
|
|
102
|
|
4.0
|
%
|
Loss on early extinguishment of debt
|
|
|
—
|
|
|
(33)
|
|
|
(33)
|
|
(100.0)
|
%
|
Net income
|
|
$
|
2,925
|
|
$
|
5,821
|
|
$
|
(2,896)
|
|
(49.8)
|
%
|
Residents fees and services.
Residents fees and services are the revenues earned at our managed senior living communities. We recognize these revenues as fees are charged and services are provided. Residents fees and services increased primarily because of our acquisitions since April 1, 2015.
Property operating expenses.
Property operating expenses 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 communities. Property operating expenses increased primarily because of our acquisitions since April 1, 2015.
Net operating income.
NOI increased because of the increases in residents fees and services, partially offset by the 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 and amortization expense.
Depreciation and amortization 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 and amortization expense increased primarily as a result of our acquisitions since April 1, 2015.
Interest expense.
Interest expense relates to mortgage debts secured by certain of these communities. The increase in interest expense is due to our assumption of $94,786 in aggregate principal amount of mortgage debts with a weighted average annual interest rate of 4.12% in connection with our acquisitions since April 1, 2015, partially offset by our prepayment or repayment of $22,842 in aggregate principal amount of mortgage debts since April 1, 2015 with a weighted average annual interest rate of 5.77%, as well as regularly scheduled amortization of our mortgage debts.
Loss on early extinguishment of debt.
Loss on early extinguishment of debt is a result of our prepayment of four mortgage notes in the second quarter of 2015.
Managed senior living communities, comparable properties
(managed senior living communities we have owned continuously since April 1, 2015):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residents fees and services
|
|
$
|
82,635
|
|
$
|
83,028
|
|
$
|
(393)
|
|
(0.5)
|
%
|
Property operating expenses
|
|
|
(61,374)
|
|
|
(63,441)
|
|
|
(2,067)
|
|
(3.3)
|
%
|
Net operating income (NOI)
|
|
|
21,261
|
|
|
19,587
|
|
|
1,674
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(9,323)
|
|
|
(8,509)
|
|
|
814
|
|
9.6
|
%
|
Operating income
|
|
|
11,938
|
|
|
11,078
|
|
|
860
|
|
7.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,537)
|
|
|
(1,835)
|
|
|
(298)
|
|
(16.2)
|
%
|
Loss on early extinguishment of debt
|
|
|
—
|
|
|
(33)
|
|
|
(33)
|
|
(100.0)
|
%
|
Net income
|
|
$
|
10,401
|
|
$
|
9,210
|
|
$
|
1,191
|
|
12.9
|
%
|
Residents fees and services.
Residents fees and services are the revenues earned at our managed senior living communities. We recognize these revenues as fees are charged and services are provided. Residents fees and services decreased year over year on a comparable property basis primarily because of a decrease in occupancy from 87.9% for the 2015 period to 86.6% for the 2016 period at the 46 communities we owned continuously since April 1, 2015, partially offset by an increase in average monthly rates.
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 communities. Property operating expenses decreased primarily due to decreased salaries and benefits costs in the three months ended June 30, 2016 compared to the three months ended June 30, 2015.
Net operating income.
The increase in NOI reflects the net changes in residents fees and services and property operating expenses described above. The reconciliation of NOI to net income for our managed senior living communities segment, comparable properties, is shown in the table above. Our definition of NOI and our reconciliation of consolidated NOI to net income are included below under the heading “Non-GAAP Financial Measures”.
Depreciation and amortization expense.
Depreciation and amortization 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 and amortization expense results from our purchase of capital improvements at these communities since April 1, 2015.
Interest expense.
Interest expense relates to mortgage debts secured by certain of these communities. Interest expense decreased as a result of our prepayment or repayment of $22,842 in aggregate principal amount of mortgage debts since April 1, 2015 with a weighted average annual interest rate of 5.77%, as well as regularly scheduled amortization of our mortgage debts.
Loss on early extinguishment of debt.
Loss on early extinguishment of debt is a result of our prepayment of four mortgage notes in the second quarter of 2015.
MOBs
:
|
|
|
|
|
|
|
|
|
|
|
|
All Properties
(1)
|
|
Comparable Properties
(1) (2)
|
|
|
|
As of and for the Three Months
|
|
As of and for the Three Months
|
|
|
|
Ended June 30,
|
|
Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Total properties
|
|
123
|
|
121
|
|
121
|
|
121
|
|
Total buildings
|
|
149
|
|
145
|
|
145
|
|
145
|
|
Total square feet
(3)
|
|
11,610
|
|
11,315
|
|
11,316
|
|
11,315
|
|
Occupancy
(4)
|
|
95.9
|
%
|
96.4
|
%
|
95.8
|
%
|
96.4
|
%
|
|
(1)
|
|
Excludes properties classified in discontinued operations.
|
|
(2)
|
|
Consists of MOBs we have owned continuously since April 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 June 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
92,978
|
|
$
|
89,591
|
|
$
|
3,387
|
|
3.8
|
%
|
Property operating expenses
|
|
|
(25,409)
|
|
|
(23,800)
|
|
|
1,609
|
|
6.8
|
%
|
Net operating income (NOI)
|
|
|
67,569
|
|
|
65,791
|
|
|
1,778
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(31,011)
|
|
|
(30,856)
|
|
|
155
|
|
0.5
|
%
|
Impairment of assets
|
|
|
(4,961)
|
|
|
—
|
|
|
4,961
|
|
100.0
|
%
|
Operating income
|
|
|
31,597
|
|
|
34,935
|
|
|
(3,338)
|
|
(9.6)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(844)
|
|
|
(1,758)
|
|
|
(914)
|
|
(52.0)
|
%
|
Income from continuing operations
|
|
|
30,753
|
|
|
33,177
|
|
|
(2,424)
|
|
(7.3)
|
%
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
—
|
|
|
(109)
|
|
|
(109)
|
|
(100.0)
|
%
|
Impairment of assets from discontinued operations
|
|
|
—
|
|
|
(602)
|
|
|
(602)
|
|
(100.0)
|
%
|
Net income
|
|
$
|
30,753
|
|
$
|
32,466
|
|
$
|
(1,713)
|
|
(5.3)
|
%
|
Rental income.
Rental income increased primarily because of our acquisitions since April 1, 2015, as well as certain changes at our comparable MOB properties discussed below. Rental income includes non-cash straight line rent adjustments totaling $3,459 and $3,803 and net amortization of approximately $1,248 and $1,123 of above and below market lease adjustments for the three months ended June 30, 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 our acquisitions since April 1, 2015, as well as certain changes at our comparable MOB properties discussed below.
Net operating income.
NOI increased because of the increases in rental income, partially offset by the 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 and amortization expense.
Depreciation and amortization expense increased primarily because of an increase in depreciation expense related to our acquisitions and capital expenditures since April 1, 2015, partially offset by a decrease in the amortization of leasing costs during the three months ended June 30, 2016.
Impairment of assets.
Impairment of assets for the three months ended June 30, 2016 relates to reducing the carrying value of five MOBs (five buildings) classified as held for sale as of June 30, 2016 to their estimated sales prices less costs to sell.
Interest expense.
Interest expense relates to mortgage debts secured by certain of these properties. The decrease in interest expense is the result of our repayment of $70,000 in aggregate principal amount of mortgage debts since April 1, 2015 with a weighted average annual interest rate of 5.39% as well as the regularly scheduled amortization of our mortgage debts.
Loss from discontinued operations.
Loss from discontinued operations for the three months ended June 30, 2015 relates to one MOB (four buildings) which we sold in April 2015.
MOBs, comparable properties
(MOBs we have owned continuously since April 1, 2015):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
90,731
|
|
|
89,591
|
|
$
|
1,140
|
|
1.3
|
%
|
Property operating expenses
|
|
|
(24,957)
|
|
|
(23,787)
|
|
|
1,170
|
|
4.9
|
%
|
Net operating income (NOI)
|
|
|
65,774
|
|
|
65,804
|
|
|
(30)
|
|
(0.0)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(30,519)
|
|
|
(30,856)
|
|
|
(337)
|
|
(1.1)
|
%
|
Impairment of assets
|
|
|
(4,961)
|
|
|
—
|
|
|
4,961
|
|
100.0
|
%
|
Operating income
|
|
|
30,294
|
|
|
34,948
|
|
|
(4,654)
|
|
(13.3)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(844)
|
|
|
(1,758)
|
|
|
(914)
|
|
(52.0)
|
%
|
Net income
|
|
$
|
29,450
|
|
$
|
33,190
|
|
$
|
(3,740)
|
|
(11.3)
|
%
|
Rental income.
Rental income increased primarily due to an increase in tax escalation income and other reimbursable expenses at certain of these properties. Rental income includes non-cash straight line rent adjustments totaling $3,279 and $3,803 and net amortization of approximately $1,185 and $1,123 of above and below market lease adjustments for the three months ended June 30, 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 primarily as the result of increases in real estate taxes and salaries and benefit costs at certain of these properties and other direct costs of operating these properties, partially offset by decreased utilities expenses at certain of these properties during the second quarter of 2016 compared to the second 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 and amortization expense.
Depreciation and amortization 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 June 30, 2016 relates to reducing the carrying value of five MOBs (five buildings) classified as held for sale as of June 30, 2016 to their estimated sales prices less costs to sell.
Interest expense.
Interest expense relates to mortgage debts secured by certain of these properties. The decrease in interest expense is the result of our repayment of $70,000 in aggregate principal amount of mortgage debts since April 1, 2015 with a weighted average annual interest rate of 5.39%, as well as the regularly scheduled amortization of our mortgage debts.
All other operations
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
4,578
|
|
$
|
4,608
|
|
$
|
(30)
|
|
(0.7)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(948)
|
|
|
(948)
|
|
|
—
|
|
—
|
%
|
General and administrative
|
|
|
(11,965)
|
|
|
(11,674)
|
|
|
291
|
|
2.5
|
%
|
Acquisition related costs
|
|
|
(180)
|
|
|
(4,617)
|
|
|
(4,437)
|
|
(96.1)
|
%
|
Total expenses
|
|
|
(13,093)
|
|
|
(17,239)
|
|
|
(4,146)
|
|
(24.1)
|
%
|
Operating loss
|
|
|
(8,515)
|
|
|
(12,631)
|
|
|
(4,116)
|
|
(32.6)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
|
789
|
|
|
—
|
|
|
789
|
|
100.0
|
%
|
Interest and other income
|
|
|
177
|
|
|
142
|
|
|
35
|
|
24.6
|
%
|
Interest expense
|
|
|
(31,329)
|
|
|
(27,318)
|
|
|
4,011
|
|
14.7
|
%
|
Loss before income tax expense and equity in earnings of an investee
|
|
|
(38,878)
|
|
|
(39,807)
|
|
|
(929)
|
|
(2.3)
|
%
|
Income tax expense
|
|
|
(108)
|
|
|
(129)
|
|
|
(21)
|
|
(16.3)
|
%
|
Equity in earnings of an investee
|
|
|
17
|
|
|
23
|
|
|
(6)
|
|
(26.1)
|
%
|
Net loss
|
|
$
|
(38,969)
|
|
$
|
(39,913)
|
|
$
|
(944)
|
|
(2.4)
|
%
|
|
(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 June 30, 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 June 30, 2016 and 2015.
Depreciation and amortization expense.
Depreciation and amortization expense remained consistent as we had no acquisitions or capital improvements in this segment for either the three months ended June 30, 2016 or 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 April 1, 2015.
Acquisition related costs.
Acquisition related costs represent legal and due diligence costs incurred in connection with our acquisition activity during the three months ended June 30, 2016 and 2015. Acquisition related costs decreased during the three months ended June 30, 2016 due to a decrease in acquisitions during the three months ended June 30, 2016 compared to the three months ended June 30, 2015.
Dividend income.
Dividend income recognized for the three months ended June 30, 2016 is a result of cash dividends received in May 2016 from our investment in RMR Inc. shares for
the period from December 14, 2015 through March 31, 2016.
Interest and other income.
The increase in
interest and other income is primarily due to increased investable cash on hand during the second quarter of 2016 compared to the second 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.
Equity in earnings of an investee.
Equity in earnings of an investee represents our proportionate share of earnings from AIC.
Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 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 six months ended June 30, 2016 against the comparable 2015 period.
Triple net leased senior living communities
:
|
|
|
|
|
|
|
|
|
|
|
|
All Properties
|
|
Comparable Properties
(1)
|
|
|
|
As of and for the Six Months
|
|
As of and for the Six Months
|
|
|
|
Ended June 30,
|
|
Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Total properties
|
|
236
|
|
232
|
|
210
|
|
210
|
|
# of units / beds
|
|
26,432
|
|
26,135
|
|
23,684
|
|
23,684
|
|
Tenant operating data
(2)
|
|
|
|
|
|
|
|
|
|
Occupancy
|
|
85.4
|
%
|
85.8
|
%
|
84.9
|
%
|
85.8
|
%
|
Rent coverage
|
|
1.33x
|
|
1.38x
|
|
1.35x
|
|
1.38x
|
|
|
(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 March 31, 2016 and 2015 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. Excludes data for historical periods prior to our ownership of certain properties, as well as for properties sold during the periods presented.
|
Triple net leased senior living communities, all properties
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
131,749
|
|
$
|
116,598
|
|
$
|
15,151
|
|
13.0
|
%
|
Property operating expenses
|
|
|
(786)
|
|
|
—
|
|
|
786
|
|
100.0
|
%
|
Net operating income (NOI)
|
|
|
130,963
|
|
|
116,598
|
|
|
14,365
|
|
12.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(38,674)
|
|
|
(32,183)
|
|
|
6,491
|
|
20.2
|
%
|
Impairment of assets
|
|
|
(4,391)
|
|
|
—
|
|
|
4,391
|
|
100.0
|
%
|
Operating income
|
|
|
87,898
|
|
|
84,415
|
|
|
3,483
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(12,665)
|
|
|
(12,255)
|
|
|
410
|
|
3.3
|
%
|
Loss on early extinguishment of debt
|
|
|
—
|
|
|
(6)
|
|
|
(6)
|
|
(100.0)
|
%
|
Gain on sale of properties
|
|
|
4,061
|
|
|
—
|
|
|
4,061
|
|
100.0
|
%
|
Net income
|
|
$
|
79,294
|
|
$
|
72,154
|
|
$
|
7,140
|
|
9.9
|
%
|
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 our acquisitions since January 1, 2015. Rental income also increased due to our purchases of capital improvements at certain of these communities since January 1, 2015. These increases in rental income were partially offset by our sale of five senior living communities since January 1, 2015. Rental income includes non-cash straight line rent adjustments totaling $2,320 and $1,302 for the six months ended June 30, 2016 and 2015, respectively. Rental income increased year over year on a comparable property basis by $1,325, primarily as a result of our capital improvement purchases at certain of the 210 communities we have owned continuously since January 1, 2015 and the resulting increase in rent pursuant to the terms of the applicable 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 previously leased to third party private operators in the first half of 2016. In April and July 2016, we reached agreements with these tenants and terminated the leases which were then in effect. The operations of these communities were transferred to Five Star, which began managing the communities on our behalf under a TRS structure in April and July 2016, respectively.
Net operating income.
NOI increased because of the increases in rental income, partially offset by the property operating expenses described above. We typically incur minimal property operating expenses at these communities, as the majority of those 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 and amortization expense.
Depreciation and amortization expense increased primarily as a result of our acquisitions and capital improvement purchases described above.
Impairment of assets.
Impairment of assets relates to the recording of impairment of assets charges to write off acquired lease intangible assets associated with the two lease defaulted communities discussed above.
Interest expense.
Interest expense relates to mortgage debts and capital leases secured by certain of these communities.
Loss on early extinguishment of debt.
Loss on early extinguishment of debt is a result of our prepayment of three mortgage notes in the second quarter of 2015.
Gain on sale of properties.
Gain on sale of properties is the result of our sale of one SNF in June 2016.
Managed senior living communities
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Properties
|
|
Comparable Properties
(1)
|
|
|
|
As of and for the Six Months
|
|
As of and for the Six Months
|
|
|
|
Ended June 30,
|
|
Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Total properties
|
|
|
67
|
|
|
65
|
|
|
46
|
|
|
46
|
|
# of units / beds
|
|
|
8,634
|
|
|
8,563
|
|
|
7,217
|
|
|
7,217
|
|
Occupancy
|
|
|
87.4
|
%
|
|
88.2
|
%
|
|
87.0
|
%
|
|
88.0
|
%
|
Average monthly rate
|
|
$
|
4,276
|
|
$
|
4,274
|
|
$
|
4,357
|
|
$
|
4,299
|
|
|
(1)
|
|
Consists of managed senior living communities we have owned continuously since January 1, 2015.
|
Managed senior living communities, all properties
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residents fees and services
|
|
$
|
194,323
|
|
$
|
174,649
|
|
$
|
19,674
|
|
11.3
|
%
|
Property operating expenses
|
|
|
(143,820)
|
|
|
(132,195)
|
|
|
11,625
|
|
8.8
|
%
|
Net operating income (NOI)
|
|
|
50,503
|
|
|
42,454
|
|
|
8,049
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(40,158)
|
|
|
(22,109)
|
|
|
18,049
|
|
81.6
|
%
|
Operating income
|
|
|
10,345
|
|
|
20,345
|
|
|
(10,000)
|
|
(49.2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(5,227)
|
|
|
(4,580)
|
|
|
647
|
|
14.1
|
%
|
Loss on early extinguishment of debt
|
|
|
(6)
|
|
|
(33)
|
|
|
(27)
|
|
(450.0)
|
%
|
Net income
|
|
$
|
5,112
|
|
$
|
15,732
|
|
$
|
(10,620)
|
|
(67.5)
|
%
|
Residents fees and services.
Residents fees and services are the revenues earned at our managed senior living communities. We recognize these revenues as fees are charged and services are provided. The increase in residents fees and services is primarily because of our acquisitions since January 1, 2015.
Property operating expenses.
Property operating expenses 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 communities. The increase in property operating expenses is primarily the result of our acquisitions since January 1, 2015.
Net operating income.
NOI increased because of the increases in residents fees and services, partially offset by the 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 and amortization expense.
Depreciation and amortization 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 and amortization expense increased primarily as a result of our acquisitions since January 1, 2015.
Interest expense.
Interest expense relates to mortgage debts secured by certain of these communities. The increase in interest expense is due to our assumption of $94,786 in aggregate principal amount of mortgage debts with a weighted average annual interest rate of 4.12% in connection with our acquisitions since January 1, 2015, partially offset by our prepayment or repayment of $52,069 in aggregate principal amount of mortgage debts since January 1, 2015 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.
Loss on early extinguishment of debt is a result of our prepayment of mortgage notes in 2016 and 2015.
Managed senior living communities, comparable properties
(managed senior living communities we have owned continuously since January 1, 2015):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residents fees and services
|
|
$
|
166,107
|
|
|
165,821
|
|
$
|
286
|
|
0.2
|
%
|
Property operating expenses
|
|
|
(123,784)
|
|
|
(125,887)
|
|
|
(2,103)
|
|
(1.7)
|
%
|
Net operating income (NOI)
|
|
|
42,323
|
|
|
39,934
|
|
|
2,389
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(18,797)
|
|
|
(16,967)
|
|
|
1,830
|
|
10.8
|
%
|
Operating income
|
|
|
23,526
|
|
|
22,967
|
|
|
559
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,090)
|
|
|
(3,854)
|
|
|
(764)
|
|
(19.8)
|
%
|
Loss on early extinguishment of debt
|
|
|
(6)
|
|
|
(33)
|
|
|
(27)
|
|
(450.0)
|
%
|
Net income
|
|
$
|
20,430
|
|
$
|
19,080
|
|
$
|
1,350
|
|
7.1
|
%
|
Residents fees and services.
Residents fees and services are the revenues earned at our managed senior living communities. We recognize these revenues as fees are charged and services are provided. Residents fees and services increased year over year on a comparable property basis primarily because of an increase in average monthly rates of approximately 1.3% 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 communities. Property operating expenses decreased primarily due to decreased salaries and benefits costs in the first six months of 2016 compared to the first six months of 2015.
Net operating income.
The increase in NOI reflects the net changes in residents fees and services and property operating expenses described above. The reconciliation of NOI to net income for our managed senior living communities segment, comparable properties, is shown in the table above. Our definition of NOI and our consolidated reconciliation of NOI to net income are included below under the heading “Non-GAAP Financial Measures”.
Depreciation and amortization expense.
Depreciation and amortization 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 and amortization expense results from our purchase of capital improvements at these communities since January 1, 2015.
Interest expense.
Interest expense relates to mortgage debts secured by certain of these communities. Interest expense decreased as a result of our 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.
Loss on early extinguishment of debt is a result of our prepayment of mortgage notes in 2016 and 2015.
MOBs
:
|
|
|
|
|
|
|
|
|
|
|
|
All Properties
(1)
|
|
Comparable Properties
(1)
(2)
|
|
|
|
As of and for the Six Months
|
|
As of and for the Six Months
|
|
|
|
Ended June 30,
|
|
Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Total properties
|
|
123
|
|
121
|
|
98
|
|
98
|
|
Total buildings
|
|
149
|
|
145
|
|
122
|
|
122
|
|
Total square feet
(3)
|
|
11,610
|
|
11,315
|
|
9,146
|
|
9,145
|
|
Occupancy
(4)
|
|
95.9
|
%
|
96.4
|
%
|
94.8
|
%
|
95.6
|
%
|
|
(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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
184,559
|
|
$
|
175,592
|
|
$
|
8,967
|
|
5.1
|
%
|
Property operating expenses
|
|
|
(50,816)
|
|
|
(47,191)
|
|
|
3,625
|
|
7.7
|
%
|
Net operating income (NOI)
|
|
|
133,743
|
|
|
128,401
|
|
|
5,342
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(61,866)
|
|
|
(60,030)
|
|
|
1,836
|
|
3.1
|
%
|
Impairment of assets
|
|
|
(7,960)
|
|
|
—
|
|
|
7,960
|
|
100.0
|
%
|
Operating income
|
|
|
63,917
|
|
|
68,371
|
|
|
(4,454)
|
|
(6.5)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,798)
|
|
|
(3,525)
|
|
|
(1,727)
|
|
(49.0)
|
%
|
Income from continuing operations
|
|
|
62,119
|
|
|
64,846
|
|
|
(2,727)
|
|
(4.2)
|
%
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
—
|
|
|
(350)
|
|
|
(350)
|
|
(100.0)
|
%
|
Impairment of assets from discontinued operations
|
|
|
—
|
|
|
(602)
|
|
|
(602)
|
|
(100.0)
|
%
|
Net income
|
|
$
|
62,119
|
|
$
|
63,894
|
|
$
|
(1,775)
|
|
(2.8)
|
%
|
Rental income.
Rental income increased primarily because of our acquisitions since January 1, 2015, as well as certain changes at our comparable MOB properties discussed below. Rental income includes non-cash straight line rent adjustments totaling $6,711 and $7,122 and net amortization of approximately $2,447 and $2,266 of above and below market lease adjustments for the six months ended June 30, 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 our acquisitions since January 1, 2015, as well as certain changes at our comparable MOB properties discussed below.
Net operating income.
NOI increased because of the increases in rental income, partially offset by the increased 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 and amortization expense.
Depreciation and amortization expense increased primarily because of our acquisitions and capital expenditures since January 1, 2015.
Impairment of assets.
Impairment of assets for the six months ended June 30, 2016 relates to reducing the carrying value of five MOBs (five buildings) and one land parcel to their estimated sales prices less costs to sell. As of June 30, 2016, five MOBs (five buildings) were classified as held for sale. Four of these MOBs (four buildings) were sold in July 2016.
Interest expense.
Interest expense relates to mortgage debts secured by certain of these properties. The decrease in interest expense is the result of our repayment of $70,000 in aggregate principal amount of mortgage debts since January 1, 2015 with a weighted average annual interest rate of 5.39%, as well as the regularly scheduled amortization of our mortgage debts.
Impairment of assets and loss from discontinued operations.
Impairment of assets and loss from discontinued operations for the six months ended June 30, 2016 relate to one MOB (four buildings) which we sold in April 2015.
MOBs, comparable properties
(MOBs we have owned continuously since January 1, 2015):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
160,979
|
|
|
158,371
|
|
$
|
2,608
|
|
1.6
|
%
|
Property operating expenses
|
|
|
(46,432)
|
|
|
(44,553)
|
|
|
1,879
|
|
4.2
|
%
|
Net operating income (NOI)
|
|
|
114,547
|
|
|
113,818
|
|
|
729
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(51,379)
|
|
|
(51,892)
|
|
|
(513)
|
|
(1.0)
|
%
|
Impairment of assets
|
|
|
(7,936)
|
|
|
—
|
|
|
7,936
|
|
100.0
|
|
Operating income
|
|
|
55,232
|
|
|
61,926
|
|
|
(6,694)
|
|
(10.8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,365)
|
|
|
(3,013)
|
|
|
(1,648)
|
|
(54.7)
|
%
|
Net income
|
|
$
|
53,867
|
|
$
|
58,913
|
|
$
|
(5,046)
|
|
(8.6)
|
%
|
Rental income.
Rental income increased primarily due to an increase in tax escalation income and other reimbursable expenses at certain of these properties. Rental income includes non-cash straight line rent adjustments totaling $5,225 and $5,863 and net amortization of approximately $2,367 and $2,283 of above and below market lease adjustments for the six months ended June 30, 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 primarily because of increases in real estate taxes and salaries and benefit costs at certain of these properties and other direct costs of operating these properties, partially offset by decreased landscaping, snow removal and utilities expenses at certain of these properties during the first six months of 2016 compared to the first six months 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 and amortization expense.
Depreciation and amortization 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 six months ended June 30, 2016 relates to reducing the carrying value of five MOBs (five buildings) to their estimated sales prices less costs to sell. These five MOBs (five buildings) were classified as held for sale as of June 30, 2016. Four of these MOBs (four buildings) were sold in July 2016.
Interest expense.
Interest expense relates to mortgage debts secured by certain of these properties. The decrease in interest expense is the result of our 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.
All other operations
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
9,111
|
|
$
|
9,139
|
|
$
|
(28)
|
|
(0.3)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(1,896)
|
|
|
(1,896)
|
|
|
—
|
|
—
|
|
General and administrative
|
|
|
(22,828)
|
|
|
(22,248)
|
|
|
580
|
|
2.6
|
%
|
Acquisition related costs
|
|
|
(619)
|
|
|
(5,775)
|
|
|
(5,156)
|
|
(89.3)
|
%
|
Total expenses
|
|
|
(25,343)
|
|
|
(29,919)
|
|
|
(4,576)
|
|
(15.3)
|
%
|
Operating loss
|
|
|
(16,232)
|
|
|
(20,780)
|
|
|
(4,548)
|
|
(21.9)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
|
789
|
|
|
—
|
|
|
789
|
|
100.0
|
%
|
Interest and other income
|
|
|
242
|
|
|
217
|
|
|
25
|
|
11.5
|
%
|
Interest expense
|
|
|
(60,709)
|
|
|
(53,488)
|
|
|
7,221
|
|
13.5
|
%
|
Loss on early extinguishment of debt
|
|
|
—
|
|
|
(1,409)
|
|
|
(1,409)
|
|
(100.0)
|
%
|
Loss before income tax expense and equity in earnings of an investee
|
|
|
(75,910)
|
|
|
(75,460)
|
|
|
450
|
|
0.6
|
%
|
Income tax expense
|
|
|
(202)
|
|
|
(239)
|
|
|
(37)
|
|
(15.5)
|
%
|
Equity in earnings of an investee
|
|
|
94
|
|
|
95
|
|
|
(1)
|
|
(1.1)
|
%
|
Net loss
|
|
$
|
(76,018)
|
|
$
|
(75,604)
|
|
$
|
414
|
|
0.5
|
%
|
|
(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 $275 for each of the six months ended June 30, 2016 and 2015. Rental income also includes net amortization of approximately $110 of acquired real estate leases and obligations for each of the six months ended June 30, 2016 and 2015.
Depreciation and amortization expense.
Depreciation and amortization expense remained consistent as we had no acquisitions or other capital improvements in this segment for either the six months ended June 30, 2016 or 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.
Acquisition related costs.
Acquisition related costs represent legal and due diligence costs incurred in connection with our acquisition activity during the six months ended June 30, 2016 and 2015. Acquisition related costs decreased during the six months ended June 30, 2016 due to a decrease in acquisitions during the first six months of 2016 compared to the first six months of 2015.
Dividend income.
Dividend income recognized for the six months ended June 30, 2016 is a result of cash dividends received in May 2016 from our investment in RMR Inc. shares for
the period from December 14, 2015 through March 31, 2016.
Interest and other income.
The increase in
interest and other income is primarily due to increased investable cash on hand during the first six months of 2016 compared to the first six months 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 and six months ended June 30, 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 or operating income as an indicator of our operating performance or as a measure
of our liquidity. 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 business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will ultimately be payable when all contingencies for determining any such fees are determined at the end of the calendar year 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 supplemental 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 and six months ended June 30, 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
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,233
|
|
$
|
36,387
|
|
$
|
70,507
|
|
$
|
76,176
|
|
Depreciation and amortization expense
|
|
|
71,372
|
|
|
62,511
|
|
|
142,594
|
|
|
116,218
|
|
Gain on sale of properties
|
|
|
(4,061)
|
|
|
—
|
|
|
(4,061)
|
|
|
—
|
|
Impairment of assets from continuing operations
|
|
|
4,961
|
|
|
—
|
|
|
12,351
|
|
|
—
|
|
Impairment of assets from discontinued operations
|
|
|
—
|
|
|
602
|
|
|
—
|
|
|
602
|
|
FFO
|
|
|
111,505
|
|
|
99,500
|
|
|
221,391
|
|
|
192,996
|
|
Acquisition related costs from continuing operations
|
|
|
180
|
|
|
4,617
|
|
|
619
|
|
|
5,775
|
|
Loss on early extinguishment of debt
|
|
|
—
|
|
|
39
|
|
|
6
|
|
|
1,448
|
|
Normalized FFO
(1)
|
|
$
|
111,685
|
|
$
|
104,156
|
|
$
|
222,016
|
|
$
|
200,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (basic)
|
|
|
237,325
|
|
|
235,549
|
|
|
237,320
|
|
|
228,501
|
|
Weighted average shares outstanding (diluted)
|
|
|
237,363
|
|
|
235,592
|
|
|
237,349
|
|
|
228,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic and diluted)
|
|
$
|
0.17
|
|
$
|
0.15
|
|
$
|
0.30
|
|
$
|
0.33
|
|
FFO per share (basic and diluted)
|
|
$
|
0.47
|
|
$
|
0.42
|
|
$
|
0.93
|
|
$
|
0.84
|
|
Normalized FFO per share (basic and diluted)
|
|
$
|
0.47
|
|
$
|
0.44
|
|
$
|
0.94
|
|
$
|
0.88
|
|
Distributions declared per share
|
|
$
|
0.39
|
|
$
|
0.39
|
|
$
|
0.78
|
|
$
|
0.78
|
|
|
(1)
|
|
Effective with the quarter ended June 30, 2016, we have changed the calculation of Normalized FFO to no longer include adjustments for estimated percentage rent. Historically, when calculating Normalized FFO, we estimated an amount of percentage rental income for each of the first three quarters of the year and then, in the fourth quarter, excluded the amounts that had been included in the first three quarters. In calculating net income in accordance with GAAP, we recognize percentage rental income for the full year in the fourth quarter, which is when all contingencies are met and the income is earned. Normalized FFO for historical periods has been restated to be comparable with the current period calculation.
|
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 because we record those amounts as depreciation and amortization. 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 and six months ended June 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Reconciliation of NOI to Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Triple net leased communities NOI
|
|
$
|
66,018
|
|
$
|
61,347
|
|
$
|
130,963
|
|
$
|
116,598
|
|
Managed communities NOI
|
|
|
25,728
|
|
|
22,064
|
|
|
50,503
|
|
|
42,454
|
|
MOB NOI
|
|
|
67,569
|
|
|
65,791
|
|
|
133,743
|
|
|
128,401
|
|
All other operations NOI
|
|
|
4,578
|
|
|
4,608
|
|
|
9,111
|
|
|
9,139
|
|
Total NOI
|
|
|
163,893
|
|
|
153,810
|
|
|
324,320
|
|
|
296,592
|
|
Depreciation and amortization expense
|
|
|
(71,372)
|
|
|
(62,511)
|
|
|
(142,594)
|
|
|
(116,218)
|
|
General and administrative expense
|
|
|
(11,965)
|
|
|
(11,674)
|
|
|
(22,828)
|
|
|
(22,248)
|
|
Acquisition related costs
|
|
|
(180)
|
|
|
(4,617)
|
|
|
(619)
|
|
|
(5,775)
|
|
Impairment of assets
|
|
|
(4,961)
|
|
|
—
|
|
|
(12,351)
|
|
|
—
|
|
Operating income
|
|
|
75,415
|
|
|
75,008
|
|
|
145,928
|
|
|
152,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
|
789
|
|
|
—
|
|
|
789
|
|
|
—
|
|
Interest and other income
|
|
|
177
|
|
|
142
|
|
|
242
|
|
|
217
|
|
Interest expense
|
|
|
(41,118)
|
|
|
(37,907)
|
|
|
(80,399)
|
|
|
(73,848)
|
|
Loss on early extinguishment of debt
|
|
|
—
|
|
|
(39)
|
|
|
(6)
|
|
|
(1,448)
|
|
Income from continuing operations before income tax expense and equity in earnings of an investee
|
|
|
35,263
|
|
|
37,204
|
|
|
66,554
|
|
|
77,272
|
|
Income tax expense
|
|
|
(108)
|
|
|
(129)
|
|
|
(202)
|
|
|
(239)
|
|
Equity in earnings of an investee
|
|
|
17
|
|
|
23
|
|
|
94
|
|
|
95
|
|
Income from continuing operations
|
|
|
35,172
|
|
|
37,098
|
|
|
66,446
|
|
|
77,128
|
|
Loss from discontinued operations
|
|
|
—
|
|
|
(109)
|
|
|
—
|
|
|
(350)
|
|
Impairment of assets from discontinued operations
|
|
|
—
|
|
|
(602)
|
|
|
—
|
|
|
(602)
|
|
Income before gain on sale of assets
|
|
|
35,172
|
|
|
36,387
|
|
|
66,446
|
|
|
76,176
|
|
Gain on sale of assets
|
|
|
4,061
|
|
|
—
|
|
|
4,061
|
|
|
—
|
|
Net income
|
|
$
|
39,233
|
|
$
|
36,387
|
|
$
|
70,507
|
|
$
|
76,176
|
|
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 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 six months ended June 30, 2016 compared to the six months ended June 30, 2015 were as follows: (i) cash provided by operating activities decreased to $216.2 million in 2016 from $216.5 million in 2015; (ii) cash used for investing activities decreased to $226.5 million in 2016 from $1.1 billion in 2015; and (iii) cash flows (used for) provided by financing activities decreased to $1.7 million used in 2016 from $955.4 million provided in 2015.
The decrease in cash provided by operating activities for the six months ended June 30, 2016 compared to the prior year was primarily a result of working capital changes in 2016, including prepaid expenses, prepaid rent and various accrued expenses and liabilities. Cash used for investing activities decreased in 2016 primarily due to higher acquisition activity in the first six months of 2015 than in the first six months of 2016. The decrease in cash provided by financing activities for the six months ended June 30, 2016 compared to the prior year was due primarily to (i) proceeds of $659.5 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) net repayments of borrowings under our revolving credit facility in 2016 compared to borrowings under our revolving credit facility in 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 June 30, 2016, we had $25.6 million of cash and cash equivalents and $251.0 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, property acquisitions, capital 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 our 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. We pay interest on borrowings under our revolving credit facility at a rate of LIBOR plus a premium, which was 130 basis points per annum as of June 30, 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 June 30, 2016, the annual interest rate required on borrowings under our revolving credit facility was 1.7%. As of June 30, 2016 and August 4, 2016, we had $749.0 million and $100.0 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, senior unsecured notes and our mortgage debts 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 June 30, 2016, the annual interest rate payable for amounts outstanding under this term loan was 1.9%.
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 June 30, 2016, the annual interest rate payable for amounts outstanding under this term loan was 2.3%.
In July 2016, we entered into loan agreements and obtained an aggregate $620.0 million secured debt financing that matures in August 2026. These loans are secured by one MOB (two buildings) located in Massachusetts and require interest at a weighted average fixed annual interest rate of 3.53%. We used the net proceeds from these loans to repay in part the outstanding amount under our revolving credit facility and for general business purposes.
In February 2016, we issued $250.0 million of 6.25% senior unsecured notes due 2046, raising net proceeds of approximately $241.4 million after underwriting discounts and expenses. We used the net proceeds of this offering to repay in part the outstanding amount under our revolving credit facility and for general business purposes.
In January 2016, we prepaid, at par plus accrued interest, a $6.1 million note secured by one of our properties with a maturity date in April 2016 and an annual interest rate of 5.97%. In April 2016, we prepaid, at par plus accrued interest, an $18 million mortgage note secured by one of our properties with a maturity date in July 2016 and an annual interest rate of 4.65%. In July 2016, we prepaid, at par plus accrued interest, an $11.9 million mortgage note secured by one of our properties with a maturity date in November 2016 and an annual interest rate of 6.25%. Also in July 2016, we gave notice of our intention to prepay, at par plus accrued interest, two mortgage notes secured by two of our properties with an aggregate principal balance of approximately $80.0 million, maturity dates in November 2016 and a weighted average annual interest rate of 5.92%; we expect to make these prepayments in September 2016.
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 166,000 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 June 2016, we acquired seven senior living communities located in four states with 545 private pay units from Five Star for approximately $112.4 million, excluding closing costs, and simultaneously entered into a new long term lease with Five Star for those communities. We funded this acquisition using cash on hand and borrowings under our revolving credit facility. See Note 10 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding this sale and leaseback transaction with Five Star.
In March 2016, we sold a land parcel that was previously classified as held for sale for approximately $0.7 million, excluding closing costs. In June 2016, we sold one triple net leased senior living community that was previously classified as held for sale for approximately $9.1 million, excluding closing costs. We recognized a gain on sale of approximately $4.1 million during the second quarter of 2016 related to the sale of the senior living community. In July 2016, we sold four MOBs (four buildings) that were classified as held for sale at June 30, 2016 for approximately $20.2 million, excluding closing costs.
During the three and six months ended June 30, 2016, we invested $7.6 million and $16.1 million, respectively, 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 $0.6 million and $1.3 million, respectively, pursuant to the terms of certain of our leases. We used cash on hand to fund these purchases.
During the three and six months ended June 30, 2016 and 2015, amounts capitalized for leasing costs and building improvements at our MOBs and capital expenditures at our managed senior living communities were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
MOB tenant improvements
(1) (2)
|
|
$
|
1,743
|
|
$
|
2,457
|
|
$
|
2,132
|
|
$
|
3,805
|
|
MOB leasing costs
(1) (3)
|
|
|
965
|
|
|
2,413
|
|
|
1,822
|
|
|
3,482
|
|
MOB building improvements
(1) (4)
|
|
|
4,759
|
|
|
1,332
|
|
|
6,736
|
|
|
1,819
|
|
Managed senior living communities capital improvements
|
|
|
2,628
|
|
|
2,770
|
|
|
6,248
|
|
|
4,932
|
|
Development, redevelopment and other activities
(5)
|
|
|
10,847
|
|
|
4,342
|
|
|
17,306
|
|
|
9,868
|
|
Total capital expenditures
|
|
$
|
20,942
|
|
$
|
13,314
|
|
$
|
34,244
|
|
$
|
23,906
|
|
|
(1)
|
|
Excludes capital 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 capital expenditures to replace obsolete building components and capital 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 acquisition of a property and incurred within a short period thereafter; and (ii) capital expenditure projects that reposition a property or result in new sources of revenues.
|
During the three months ended June 30, 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
|
|
|
46
|
|
|
137
|
|
|
183
|
|
Total leasing costs and concession commitments
(1)
|
|
$
|
1,441
|
|
$
|
1,692
|
|
$
|
3,133
|
|
Total leasing costs and concession commitments per square foot
(1)
|
|
$
|
31.14
|
|
$
|
12.39
|
|
$
|
17.13
|
|
Weighted average lease term (years)
(2)
|
|
|
5.8
|
|
|
5.3
|
|
|
5.4
|
|
Total leasing costs and concession commitments per square foot per year
(1)
|
|
$
|
5.40
|
|
$
|
2.33
|
|
$
|
3.15
|
|
|
(1)
|
|
Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. Excludes expenditures at properties classified in discontinued operations.
|
|
(2)
|
|
Weighted based on annualized rental income pursuant to existing leases as of June 30, 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. As of June 30, 2016, we have estimated unspent leasing related obligations of approximately $26.0 million.
On February 23, 2016, we paid a regular quarterly distribution of $0.39 per common share, or $92.6 million, to our common shareholders for the quarter ended December 31, 2015. On
May 19, 2016,
we paid
a regular quarterly distribution of $0.39 per common share, or $92.6 million, to our common shareholders for the quarter ended March 31, 2016. We funded these
distributions using cash on hand and borrowings under our revolving credit facility.
On July 12, 2016, we declared a regular quarterly distribution of $0.39 per common share, or $92.6 million, to our common shareholders of record on July 22, 2016 for the quarter ended June 30, 2016. We expect to pay this
distribution to shareholders on or about August 18, 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 and equity 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 June 30, 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 June 30, 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) $636.1 million aggregate principal amount of mortgage notes secured by 54 of our properties (55 buildings) with maturity dates between 2016 and 2043. We also have two properties encumbered by capital leases with lease obligations totaling $11.8 million at June 30, 2016; the capital leases expire in 2026. We had $749.0 million outstanding under our revolving credit facility as of June 30, 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 June 30, 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.
The loan agreements governing the aggregate $620 million secured debt financing we obtained in July 2016 contain customary covenants and provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default.
Related Person Transactions
We have relationships and historical and continuing transactions with Five Star, RMR LLC and others related to them. 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. 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; 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. 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, our Current Report on Form 8-K dated June 29, 2016, 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 six months ended June 30, 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 are 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 and other federal and state healthcare payment programs. Also, some of our MOB tenants participate in federal Medicare and state Medicaid programs and other government healthcare payment programs.
Because of the current and projected federal budget deficit, 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, state Medicaid rates and federal payments to states for Medicaid programs. We cannot currently predict the type and magnitude of the potential Medicare and Medicaid policy changes, rate reductions or other changes that may cause these government funded healthcare programs to not increase rates to match our tenants’ and managers’ increasing expenses, but such changes may be adverse and material to their or our operations and to their or our future financial results. For more information regarding the government healthcare funding and regulation of our business, please see the section captioned “Business—Government Regulation and Reimbursement” in our Annual Report and the section captioned “Impact of Government Reimbursement” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.