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DIVERSIFIED HEALTHCARE TRUST - Quarter Report: 2007 September (Form 10-Q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-Q

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2007

 

OR

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-15319

 

SENIOR HOUSING PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland

 

04-3445278

(State or Other Jurisdiction of Incorporation or 

 

(IRS Employer Identification No.)

Organization)

 

 

 

400 Centre Street, Newton, Massachusetts 02458

(Address of Principal Executive Offices) (Zip Code)

 

617-796-8350

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large Accelerated Filer x

 

Accelerated Filer o

 

Non-Accelerated Filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

Number of registrant’s common shares outstanding as of October 31, 2007: 83,688,712.

 

 



 

SENIOR HOUSING PROPERTIES TRUST

 

FORM 10-Q

 

September 30, 2007

 

INDEX

 

PART I

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

Consolidated Balance Sheet – September 30, 2007 and December 31, 2006

 

 

 

 

 

Consolidated Statement of Income – Three and Nine Months Ended September 30, 2007 and 2006

 

 

 

 

 

Consolidated Statement of Cash Flows – Nine Months Ended September 30, 2007 and 2006

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

 

Warning Concerning Forward Looking Statements

 

 

 

 

 

Statement Concerning Limited Liability

 

 

 

 

PART II

Other Information

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

Item 6.

Exhibits

 

 

 

 

 

Signatures

 

 

In this Quarterly Report on Form 10-Q, the terms “SNH”, “Senior Housing”, “the Company”, “we”, “us” and “our” refer to Senior Housing Properties Trust and its consolidated subsidiaries, unless otherwise noted.

 



 

SENIOR HOUSING PROPERTIES TRUST

 

PART I. Financial Information

 

Item 1.    Financial Statements

 

CONSOLIDATED BALANCE SHEET

(in thousands, except share amounts)

 

 

 

September 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Real estate properties, at cost:

 

 

 

 

 

Land

 

$

198,576

 

$

198,887

 

Buildings and improvements

 

1,648,616

 

1,615,471

 

 

 

1,847,192

 

1,814,358

 

Less accumulated depreciation

 

311,627

 

276,507

 

 

 

1,535,565

 

1,537,851

 

 

 

 

 

 

 

Cash and cash equivalents

 

3,645

 

5,464

 

Restricted cash

 

3,010

 

2,435

 

Deferred financing fees, net

 

6,461

 

8,173

 

Other assets

 

28,257

 

30,851

 

Total assets

 

$

1,576,938

 

$

1,584,774

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Unsecured revolving credit facility

 

$

 

$

112,000

 

Senior unsecured notes due 2012 and 2015, net of discount

 

321,837

 

341,673

 

Secured debt and capital leases

 

90,143

 

91,412

 

Accrued interest

 

8,156

 

11,694

 

Other liabilities

 

11,265

 

8,529

 

Total liabilities

 

431,401

 

565,308

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common shares of beneficial interest, $0.01 par value: 86,700,000 shares authorized, 83,688,712 and 77,613,127 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively

 

837

 

776

 

Additional paid-in capital

 

1,367,921

 

1,214,863

 

Cumulative net income

 

397,288

 

338,504

 

Cumulative distributions

 

(623,933

)

(540,663

)

Unrealized gain on investments

 

3,424

 

5,986

 

Total shareholders’ equity

 

1,145,537

 

1,019,466

 

Total liabilities and shareholders’ equity

 

$

1,576,938

 

$

1,584,774

 

 

See accompanying notes.

 

1



 

SENIOR HOUSING PROPERTIES TRUST

 

CONSOLIDATED STATEMENT OF INCOME

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental income

 

$

44,653

 

$

41,983

 

$

133,361

 

$

123,727

 

Interest and other income

 

571

 

334

 

1,577

 

1,034

 

Total revenues

 

45,224

 

42,317

 

134,938

 

124,761

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Interest

 

9,223

 

11,833

 

28,276

 

34,751

 

Depreciation

 

11,821

 

10,978

 

35,120

 

32,631

 

General and administrative

 

3,567

 

4,088

 

10,732

 

10,870

 

Impairment of assets

 

 

 

 

1,420

 

Loss on early extinguishment of debt

 

 

 

2,026

 

6,526

 

Total expenses

 

24,611

 

26,899

 

76,154

 

86,198

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

20,613

 

$

15,418

 

$

58,784

 

$

38,563

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

83,659

 

71,824

 

82,718

 

71,818

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

Net income

 

$

0.25

 

$

0.21

 

$

0.71

 

$

0.54

 

 

See accompanying notes.

 

2



 

SENIOR HOUSING PROPERTIES TRUST

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

58,784

 

$

38,563

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

Depreciation

 

35,120

 

32,631

 

Impairment of assets

 

 

1,420

 

Loss on early extinguishment of debt

 

2,026

 

6,526

 

Amortization of deferred financing fees and debt discounts

 

1,601

 

1,355

 

Change in assets and liabilities:

 

 

 

 

 

Restricted cash

 

(575

)

369

 

Other assets

 

31

 

107

 

Accrued interest

 

(3,538

)

(4,491

)

Other liabilities

 

4,185

 

6,836

 

Cash provided by operating activities

 

97,634

 

83,316

 

 

 

 

 

 

 

Cash flows used for investing activities:

 

 

 

 

 

Acquisitions

 

(32,834

)

(78,921

)

Cash used for investing activities, net

 

(32,834

)

(78,921

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common shares, net

 

151,670

 

 

Proceeds from borrowings on revolving bank credit facility

 

22,000

 

179,300

 

Repayments of borrowings on revolving bank credit facility

 

(134,000

)

(41,000

)

Repayment of senior notes

 

(21,750

)

(56,634

)

Repayment of junior subordinated debentures

 

 

(28,241

)

Repayment of other debt

 

(1,269

)

(1,275

)

Distributions to shareholders

 

(83,270

)

(69,660

)

Cash used for financing activities

 

(66,619

)

(17,510

)

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

(1,819

)

(13,115

)

Cash and cash equivalents at beginning of period

 

5,464

 

14,642

 

Cash and cash equivalents at end of period

 

$

3,645

 

$

1,527

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

30,213

 

$

37,890

 

 

 

 

 

 

 

Non-cash investing activity:

 

 

 

 

 

Increase in capital lease assets

 

 

$

(9,975

)

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Increase in capital lease obligations

 

 

$

9,975

 

Issuance of common shares pursuant to our incentive share award plan

 

$

1,450

 

$

645

 

Borrowing under revolving credit facility to fund restricted cash for an acquisition

 

 

$

19,700

 

 

See accompanying notes.

 

3



 

SENIOR HOUSING PROPERTIES TRUST

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1. Basis of Presentation

 

The accompanying consolidated financial statements of Senior Housing Properties Trust and our consolidated subsidiaries have been prepared without audit. Certain information and footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2006. In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances between us and our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

 

Note 2. Real Estate Properties

 

At September 30, 2007, we owned 196 properties located in 32 states.

 

In March 2007, we agreed to purchase, from an unaffiliated third party, two senior living properties with a total of 112 units for approximately $14.1 million. These acquisitions had not occurred as of September 30, 2007. Residents of these communities pay all of their charges with their private resources. We intend to lease these properties to Five Star Quality Care, Inc., or Five Star, and to add them to our combined lease for 114 properties with Five Star, which has a current term expiring in 2020 and we expect the annual rent under this combined lease will increase by $1.1 million. Percentage rent, based on increases in gross revenues at these properties, will commence in 2009. We expect to fund this acquisition using cash on hand, by borrowings under our revolving credit facility and by assuming two mortgages, one for $3.6 million at 5.7% per annum and one for $3.6 million at 6.2% per annum. Both mortgages mature in 2041, but are prepayable beginning in 2008. The purchase of these properties is contingent upon approval of mortgage lenders, completion of our diligence and other customary closing conditions. We can provide no assurance that we will purchase either of these properties.

 

In September 2007, we agreed to purchase, from an unaffiliated third party, six wellness centers for approximately $76.8 million. Members of these wellness centers pay all of their charges with their private resources. Prior to and following the acquisition, these wellness centers were and will continue to be leased to affiliates of Starmark Holdings, LLC, or Starmark, under three separate leases. These affiliates of Starmark will continue to operate each of the wellness centers under the brand name “Wellbridge”. These leases have a current term expiring in 2023, plus renewal options, and require aggregate annual rent of $6.5 million initially, plus consumer price index, or CPI, based increases. We acquired four of these wellness centers for $42.1 million on October 30, 2007 using cash on hand and borrowings under our revolving credit facility. We expect to fund the acquisition of the two remaining wellness centers using cash on hand, by borrowings under our revolving credit facility and by assuming a mortgage for $14.9 million at 6.9% per annum. This mortgage matures in 2013. The purchase of these two remaining wellness centers is contingent upon approval of mortgage lenders, completion of our diligence and other customary closing conditions. We can provide no assurance that we will purchase the two remaining wellness centers.

 

In October 2007, we agreed to purchase, from two unaffiliated third parties, six senior living properties with a total of 707 units for approximately $78.5 million. The majority of the residents of these communities pay their charges with their private resources. We intend to lease these properties to Five Star and to add them to our combined lease for 114 properties with Five Star, which has a current term expiring in 2020 and we expect the annual rent under this combined lease will increase by $6.3 million. Percentage rent, based on increases in gross revenues at these properties, will commence in 2009. We expect to fund these acquisitions using cash on hand and by borrowings under our revolving credit facility. The purchase of

 

4



 

these properties is contingent upon completion of our diligence and other customary closing conditions. We can provide no assurance that we will purchase these properties.

 

During the nine months ended September 30, 2007, pursuant to the terms of our existing leases with Five Star, we purchased $33.1 million of improvements made to our properties which are leased by Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $3.2 million.

 

Note 3. Unrealized Gain on Investments

 

On September 30, 2007, we owned one million common shares of HRPT Properties Trust, or HRPT, and 35,000 common shares of Five Star, which are classified as available for sale securities and are carried at fair market value in other assets on our consolidated balance sheet. The unrealized gain on investments shown on our consolidated balance sheet represents the difference between the closing market prices of these HRPT and Five Star shares on September 28, 2007 ($9.89 and $8.22 per share, respectively) and their costs on the dates they were acquired ($6.50 and $7.26 per share, respectively).

 

Note 4. Comprehensive Income

 

The following is a reconciliation of net income to comprehensive income for the three and nine months ended September 30, 2007 and 2006 (dollars in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended 
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net income

 

$

20,613

 

$

15,418

 

$

58,784

 

$

38,563

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Change in unrealized gain on investments

 

(501

)

379

 

(2,562

)

1,701

 

Comprehensive income

 

$

20,112

 

$

15,797

 

$

56,222

 

$

40,264

 

 

Note 5. FIN 48

 

In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”, or FIN 48. FIN 48 prescribes how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to FIN 48, we can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement.

 

We are subject to U.S federal income tax as well as income tax in multiple state and local jurisdictions but, as a real estate investment trust, or REIT, we generally do not pay income tax on our net income distributed to our shareholders. As required, we adopted FIN 48 effective January 1, 2007 and have concluded that the effect is not material to our consolidated financial statements. Accordingly, we did not record a cumulative effect adjustment related to the adoption of FIN 48.

 

Note 6. Indebtedness

 

We have a $550.0 million, interest only, unsecured revolving credit facility. Our revolving credit facility matures in December 2010 and may be extended at our option to December 2011 upon our payment of an extension fee. The interest rate is LIBOR plus a premium (5.9% at September 30, 2007). As of September 30, 2007, we had no amounts outstanding and $550.0 million was available for borrowing under this credit facility and as of October 31, 2007, we had $30.0 million outstanding under this credit facility.

 

5



 

Note 7. Shareholders’ Equity

 

On August 16, 2007, we paid a $0.34 per share, or $28.4 million, distribution to our common shareholders for the quarter ended June 30, 2007. On October 11, 2007, we declared a distribution of $0.35 per share, or $29.3 million, to be paid to common shareholders of record on October 22, 2007, with respect to our results for the quarter ended September 30, 2007. We expect to pay this distribution on or about November 15, 2007.

 

6



 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in this quarterly report and our Annual Report on Form 10-K for the year ended December 31, 2006.

 

PORTFOLIO OVERVIEW

 

The following tables present an overview of our portfolio:

 

As of September 30, 2007
(dollars in thousands)

 

# of
Properties

 

# of Units/Beds

 

Carrying Value
of Investment (1)

 

% of 
Investment

 

Annualized
 Current Rent

 

% of
 Annualized 
Current Rent

 

Facility Type

 

 

 

 

 

 

 

 

 

 

 

 

 

Independent living communities (2)

 

41

 

11,213

 

$

1,019,596

 

55.2

%

$

98,816

 

54.4

%

Assisted living facilities

 

95

 

6,535

 

560,888

 

30.4

%

54,751

 

30.1

%

Skilled nursing facilities

 

58

 

5,869

 

221,412

 

12.0

%

17,788

 

9.8

%

Rehabilitation hospitals

 

2

 

364

 

45,296

 

2.4

%

10,264

 

5.7

%

Total

 

196

 

23,981

 

$

 1,847,192

 

100.0

%

$

181,619

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tenant/Operator

 

 

 

 

 

 

 

 

 

 

 

 

 

Five Star (Lease No. 1)

 

114

 

9,344

 

$

616,655

 

33.4

%

$

50,229

 

27.7

%

Five Star (Lease No. 2) (3)

 

30

 

7,275

 

662,219

 

35.9

%

66,068

 

36.4

%

Five Star Rehabilitation Hospitals (4)

 

2

 

364

 

45,296

 

2.4

%

10,264

 

5.7

%

Sunrise/Marriott (5)

 

14

 

4,091

 

325,165

 

17.6

%

30,815

 

17.0

%

NewSeasons/IBC (6)

 

10

 

873

 

87,641

 

4.7

%

9,298

 

5.1

%

Alterra/Brookdale (7)

 

18

 

894

 

61,122

 

3.3

%

7,827

 

4.3

%

6 private companies (combined)

 

8

 

1,140

 

49,094

 

2.7

%

7,118

 

3.8

%

Total

 

196

 

23,981

 

$

 1,847,192

 

100.0

%

$

 181,619

 

100.0

%

 

Tenant Operating Statistics (Quarter Ended June 30,) (8)

 

 

 

 

 

 

 

 

 

 

 

Percentage of Operating Revenue Sources

 

 

 

Rent Coverage

 

Occupancy

 

Private Pay

 

Medicare

 

Medicaid

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Five Star (Lease No. 1)(9)

 

1.34

1.45

x

89

%

89

%

54

%

50

%

16

%

15

%

30

%

35

%

Five Star (Lease No. 2)(3)

 

1.61

x

1.50

x

91

%

93

%

80

%

81

%

17

%

15

%

3

%

4

%

Five Star Rehabilitation Hospitals (4)

 

0.67

x

NA

 

60

%

NA

 

31

%

NA

 

63

%

NA

 

6

%

NA

 

Sunrise/Marriott (5)

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

 

NewSeasons/IBC (6)

 

1.16

x

1.21

x

83

%

85

%

100

%

100

%

 

 

 

 

Alterra/Brookdale (7)

 

2.06

x

1.97

x

87

%

86

%

98

%

98

%

 

 

2

%

2

%

6 private companies (combined)

 

2.07

x

2.00

x

89

%

90

%

25

%

26

%

24

%

24

%

51

%

50

%

 

Tenant Operating Statistics (Six Months Ended June 30,) (8)

 

 

 

 

 

 

 

 

 

 

 

Percentage of Operating Revenue Sources

 

 

 

Rent Coverage

 

Occupancy

 

Private Pay

 

Medicare

 

Medicaid

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Five Star (Lease No. 1)(9)

 

1.33

x

1.45

x

89

%

90

%

54

%

48

%

16

%

17

%

30

%

35

%

Five Star (Lease No. 2)(3)

 

1.53

x

1.33

x

92

%

93

%

80

%

82

%

17

%

15

%

3

%

4

%

Five Star Rehabilitation Hospitals (4)

 

0.83

x

NA

 

60

%

NA

 

32

%

NA

 

62

%

NA

 

6

%

NA

 

Sunrise/Marriott (5)

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

 

NA

 

NewSeasons/IBC (6)

 

1.11

x

1.18

x

83

%

85

%

100

%

100

%

 

 

 

 

Alterra/Brookdale (7)

 

2.05

x

1.99

x

87

%

88

%

98

%

98

%

 

 

2

%

2

%

6 private companies (combined)

 

1.90

x

1.98

x

89

%

91

%

25

%

25

%

24

%

25

%

51

%

50

%

 


(1)   Amounts are before depreciation, but after impairment write downs.

(2)   Properties where the majority of living units are independent living apartments are classified as independent living communities.

(3)   Historically, some of these properties were managed by Sunrise Senior Living, Inc., or Sunrise, until November 30, 2006. The rent coverage presented for this lease has been adjusted to exclude management fees paid to Sunrise during the periods presented. Some of the data provided by Sunrise may not be accurate. See footnote (5) below. However, the data provided by Sunrise does not materially affect the amounts presented.

(4)   On October 1, 2006, Five Star assumed the operations of these rehabilitation hospitals. These hospitals were formerly operated by HealthSouth Corporation, or HealthSouth. Because we do not have reliable information about the operations of the hospitals by HealthSouth, we do not report operating data for these hospitals before October 1, 2006. The occupancy percentage is based on a 342 available beds capacity.

(5)   Marriott International, Inc., or Marriott, guarantees this lease. Sunrise has not filed its Annual Reports on Form 10-K for 2005 and 2006, and Quarterly Reports on Form 10-Q for the three quarters of 2006 and the first two quarters of 2007 with the Securities and Exchange Commission due to accounting issues. Because we do not know what impact the resolution of these accounting issues may have on the reported performance of our properties, we do not report operating data for this tenant.

(6)   Independence Blue Cross, or IBC, a Pennsylvania health insurer, guarantees this lease.

(7)   Brookdale Senior Living, Inc., or Brookdale, guarantees this lease.

(8)   All tenant operating data presented are based upon the operating results provided by our tenants for the indicated periods. Rent coverage is calculated as operating cash flow from our tenants’ facility operations, before subordinated charges and capital expenditure reserves, divided by the minimum rent payable to us. We have not independently verified our tenants’ operating data.

(9)   Includes data for periods prior to our ownership of certain properties included in this lease.

 

7



 

RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2007, Compared to Three Months Ended September 30, 2006:

 

 

 

2007

 

2006

 

Change

 

% Change

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

Rental income

 

$

44,653

 

$

41,983

 

$

2,670

 

6.4

%

Interest and other income

 

571

 

334

 

237

 

71.0

%

 

 

 

 

 

 

 

 

 

 

Interest expense

 

9,223

 

11,833

 

(2,610

)

(22.1

)%

Depreciation expense

 

11,821

 

10,978

 

843

 

7.7

%

General and administrative expense

 

3,567

 

4,088

 

(521

)

(12.7

)%

 

 

 

 

 

 

 

 

 

 

Net income

 

$

20,613

 

$

15,418

 

$

5,195

 

33.7

%

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

83,659

 

71,824

 

11,835

 

16.5

%

 

 

 

 

 

 

 

 

 

 

Net income per share

 

$

0.25

 

$

0.21

 

$

0.04

 

19.0

%

 

Rental income increased because of rents from our real estate acquisitions totaling $148.0 million since July 1, 2006, offset by rent reductions resulting from the sale of three properties during the fourth quarter of 2006. Interest and other income increased as a result of higher levels of investable cash and increased yields on our cash and marketable securities.

 

Interest expense decreased as a result of our repayment of $20.0 million of our 8 5/8% senior notes due 2012 in January 2007. It has also decreased due to lower amounts outstanding under our revolving credit facility during the 2007 period versus the 2006 period. Our weighted average balance outstanding and interest rate under our revolving credit facility was $160.2 million and 6.3% for the three months ended September 30, 2006 and there were no amounts outstanding for the three months ended September 30, 2007.

 

Depreciation expense for the third quarter of 2007 increased as a result of real estate acquisitions totaling $148.0 million since July 1, 2006, offset by the sale of three properties during the fourth quarter of 2006. General and administrative expenses decreased in the third quarter of 2007 due to a decrease in the litigation costs associated with HealthSouth during the three months ended September 30, 2007 offset by an increase in expenses resulting from acquisitions since July 1, 2006.

 

Net income increased because of the changes in revenues and expenses described above. Net income per share increased because of the changes in revenues and expenses described above offset by an increase in the weighted average number of shares outstanding resulting from our issuances of common shares in November 2006 and February 2007.

 

8



 

Nine Months Ended September 30, 2007, Compared to Nine Months Ended September 30, 2006:

 

 

 

2007

 

2006

 

Change

 

% Change

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

Rental income

 

$

133,361

 

$

123,727

 

$

9,634

 

7.8

%

Interest and other income

 

1,577

 

1,034

 

543

 

52.5

%

 

 

 

 

 

 

 

 

 

 

Interest expense

 

28,276

 

34,751

 

(6,475

)

(18.6

)%

Depreciation expense

 

35,120

 

32,631

 

2,489

 

7.6

%

General and administrative expense

 

10,732

 

10,870

 

(138

)

(1.3

)%

Impairment of assets

 

 

1,420

 

(1,420

)

(100.0

)%

Loss on early extinguishment of debt

 

2,026

 

6,526

 

(4,500

)

(69.0

)%

 

 

 

 

 

 

 

 

 

 

Net income

 

$

58,784

 

$

38,563

 

$

20,211

 

52.4

%

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

82,718

 

71,818

 

10,900

 

15.2

%

 

 

 

 

 

 

 

 

 

 

Net income per share

 

$

0.71

 

$

0.54

 

$

0.17

 

31.5

%

 

Rental income increased because of rents from our real estate acquisitions totaling $151.0 million since January 1, 2006, offset by rent reductions resulting from the sale of three properties during the fourth quarter of 2006. Interest and other income increased as a result of higher levels of investable cash and increased yields on our cash and marketable securities.

 

Interest expense decreased as a result of our repayment of $20.0 million of our 8 5/8% senior notes due 2012 in January 2007 and $28.2 million of our junior subordinated debentures in June 2006. It has also decreased due to lower amounts outstanding under our revolving credit facility during the 2007 period versus the 2006 period. Our weighted average balance outstanding and interest rate under our revolving credit facility was $18.3 million and 6.2% and $124.7 million and 6.0% for the nine months ended September 30, 2007 and 2006, respectively.

 

Depreciation expense for the first nine months of 2007 increased as a result of real estate acquisitions totaling $151.0 million since January 1, 2006, offset by the sale of three properties during the fourth quarter of 2006. General and administrative expenses decreased in 2007 due to a decrease in the litigation costs associated with HealthSouth during the nine months ended September 30, 2007 offset by an increase in expenses resulting from acquisitions since January 1, 2006.

 

During the nine months ended September 30, 2006, we recognized an impairment of assets charge of $1.4 million related to three properties that were sold in the fourth quarter of 2006.

 

During the nine months ended September 30, 2007, we purchased and retired $20.0 million of our 8 5/8% senior notes due 2012 and recognized a loss on early extinguishment of debt of $2.0 million in connection with this purchase. During the nine months ended September 30, 2006, we recognized a loss on early extinguishment of debt of $1.3 million in connection with our redemption of our junior subordinated debentures and $5.2 million in connection with our redemption of some of our 7 7/8% unsecured senior notes due 2015.

 

Net income increased because of the changes in revenues and expenses described above. Net income per share increased because of the changes in revenues and expenses described above offset by an increase in the weighted average number of shares outstanding resulting from our issuances of common shares in November 2006 and February 2007.

 

9



 

LIQUIDITY AND CAPITAL RESOURCES

 

Our Operating Liquidity and Resources

 

Rents from our properties are our principal source of funds for current expenses and distributions to shareholders. We generally receive minimum rents monthly or quarterly from our tenants and we receive percentage rents monthly, quarterly or annually. This flow of funds has historically been sufficient for us to pay our operating expenses, debt service and distributions to shareholders. We believe that this operating cash flow will be sufficient to meet our operating expenses, debt service and distribution payments for the foreseeable future.

 

Our Investment and Financing Liquidity and Resources

 

In order to fund acquisitions and to accommodate cash needs that may result from timing differences between our receipt of rents and our need or desire to pay operating expenses and distributions to our shareholders and to fund acquisitions and capital expenditures, we maintain a revolving credit facility with a group of lenders. Our revolving credit facility matures in December 2010, and we may extend it to December 2011 upon payment of an extension fee. The revolving credit facility permits us to borrow up to $550.0 million, and includes a feature which may permit us to increase the maximum borrowing to $1.1 billion, in certain circumstances. Borrowings under our revolving credit facility are unsecured. We may borrow, repay and reborrow funds until maturity. No principal repayment is due until maturity. We pay interest on borrowings under the revolving credit facility at LIBOR plus a premium. At September 30, 2007, the annual interest rate payable on our revolving credit facility was 5.9%. As of September 30, 2007, we had no amounts outstanding under this credit facility and as of October 31, 2007, we had $30.0 million outstanding under this credit facility.

 

In January 2007, we purchased and retired $20.0 million of our 8 5/8% senior notes due 2012 and recognized a loss on early extinguishment of $2.0 million. The loss on early extinguishment of debt includes a $1.8 million premium and a $276,000 write off of deferred financing fees and unamortized discounts related to these senior notes. We funded this purchase with borrowings under our revolving credit facility.

 

In February 2007, we issued 6.0 million common shares in a public offering, raising net proceeds of $151.7 million. We used the net proceeds from this offering to repay borrowings outstanding on our revolving credit facility and for general business purposes.

 

In March 2007, we agreed to purchase, from an unaffiliated third party, two senior living properties with a total of 112 units for approximately $14.1 million. These acquisitions had not occurred as of September 30, 2007. Residents of these communities pay all of their charges with their private resources. We intend to lease these properties to Five Star and to add them to our combined lease for 114 properties with Five Star, which has a current term expiring in 2020 and we expect the annual rent under this combined lease will increase by $1.1 million. Percentage rent, based on increases in gross revenues at these properties, will commence in 2009. We expect to fund this acquisition using cash on hand, by borrowings under our revolving credit facility and by assuming two mortgages, one for $3.6 million at 5.7% per annum and one for $3.6 million at 6.2% per annum. Both mortgages mature in 2041, but are prepayable beginning in 2008. The purchase of these properties is contingent upon approval of mortgage lenders, completion of our diligence and other customary closing conditions. We can provide no assurance that we will purchase either of these properties.

 

In September 2007, we agreed to purchase, from an unaffiliated third party, six wellness centers for approximately $76.8 million. Members of these wellness centers pay all of their charges with their private resources. Prior to and following the acquisition, these wellness centers were and will continue to be leased to affiliates of Starmark under three separate leases. These affiliates of Starmark will continue to operate each of the wellness centers under the brand name “Wellbridge”. These leases have a current

 

10



 

term expiring in 2023, plus renewal options, and require aggregate annual rent of $6.5 million initially, plus consumer price index, or CPI, based increases. We acquired four of these wellness centers for $42.1 million on October 30, 2007 using cash on hand and borrowings under our revolving credit facility. We expect to fund the acquisition of the two remaining wellness centers using cash on hand, by borrowings under our revolving credit facility and by assuming a mortgage for $14.9 million at 6.9% per annum. This mortgage matures in 2013. The purchase of these two remaining wellness centers is contingent upon approval of mortgage lenders, completion of our diligence and other customary closing conditions. We can provide no assurance that we will purchase the two remaining wellness centers.

 

In October 2007, we agreed to purchase, from two unaffiliated third parties, six senior living properties with a total of 707 units for approximately $78.5 million. The majority of the residents of these communities pay their charges with their private resources. We intend to lease these properties to Five Star and to add them to our combined lease for 114 properties with Five Star, which has a current term expiring in 2020 and we expect the annual rent under this combined lease will increase by $6.3 million. Percentage rent, based on increases in gross revenues at these properties, will commence in 2009. We expect to fund these acquisitions using cash on hand and by borrowings under our revolving credit facility. The purchase of these properties is contingent upon completion of our diligence and other customary closing conditions. We can provide no assurance that we will purchase these properties.

 

During 2007, we purchased $33.1 million of improvements made to certain of our properties. We used cash on hand to fund these purchases.

 

At September 30, 2007, we had $3.6 million of cash and cash equivalents and $550.0 million available under our revolving credit facility. We expect to use cash balances, borrowings under our revolving credit facility and net proceeds of offerings of equity or debt securities to fund future working capital requirements, property acquisitions and expenditures related to the repair, maintenance or renovation of our properties.

 

When significant amounts are outstanding under our revolving credit facility or as the maturity dates of our revolving credit facility and term debts approach, we will explore alternatives for the repayment of amounts due. Such alternatives may include incurring additional debt and issuing new equity securities. We have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities. Although there can be no assurance that we will complete any debt or equity offerings or other financings, we believe we will have access to various types of financings, including debt or equity offerings, to finance future acquisitions and to pay our debts and other obligations.

 

On February 16, 2007, we paid a $0.34 per common share, or $26.4 million, distribution to our common shareholders for the quarter ended December 31, 2006. On May 16, 2007, we paid a $0.34 per common share, or $28.4 million, distribution to our common shareholders for the quarter ended March 31, 2007. On August 16, 2007, we paid a $0.34 per common share, or $28.4 million, distribution to our common shareholders for the quarter ended June 30, 2007. On October 11, 2007, we declared a distribution of $0.35 per common share, or $29.3 million, to be paid to our common shareholders of record on October 22, 2007, with respect to our results for the quarter ended September 30, 2007. We expect to pay this distribution on or about November 15, 2007, using cash on hand and borrowings under our revolving credit facility.

 

As of October 31, 2007, we had no off balance sheet arrangements, commercial paper, derivatives, swaps, hedges, joint ventures or partnerships.

 

11



 

Debt Covenants

 

Our principal debt obligations at September 30, 2007, were our unsecured revolving credit facility, two issues totaling $322.5 million of unsecured senior notes and $74.5 million of mortgage debts and bonds secured by 22 of our properties. Our senior notes are governed by an indenture. This indenture and related supplements and our revolving credit facility contain a number of financial ratio covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties in excess of calculated amounts, require us to maintain a minimum net worth, restrict our ability to make distributions under certain circumstances and require us to maintain other ratios. As of September 30, 2007, we believe we were in compliance with all of the covenants under our indenture and related supplements and our revolving credit facility.

 

None of our indenture and related supplements, our revolving credit facility or our other debt obligations contains provisions for acceleration which could be triggered by our debt ratings. However, in certain circumstances our revolving credit facility uses our senior debt rating to determine the fees and the interest rate payable.

 

Our public debt indenture and related supplements contain cross default provisions with any other debts of $10.0 million or more. Similarly, a default on our public debt indenture would be a default under our revolving credit facility.

 

Related Person Transactions

 

Five Star is our former subsidiary. In March 2007, we agreed to purchase, from an unaffiliated third party, two senior living properties for approximately $14.1 million. These acquisitions had not occurred as of September 30, 2007. In October 2007, we agreed to purchase, from two unaffiliated third parties, six senior living properties for approximately $78.5 million. When these purchases are completed, we intend to lease these properties to Five Star and to add them to our combined lease for 114 properties with Five Star, which has a current term expiring in 2020 and we expect the aggregate annual rent under this combined lease will increase by approximately $7.4 million. Percentage rent, based on increases in gross revenues at these properties, will commence in 2009. The purchase of these properties is contingent upon approval of mortgage lenders, completion of diligence by us and Five Star and other customary closing conditions. We can provide no assurances that we will purchase these properties.

 

During the nine months ended September 30, 2007, pursuant to the terms of our existing leases with Five Star, we purchased $33.1 million of improvements made to certain our properties leased by Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $3.2 million.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates is unchanged since December 31, 2006. Other than as described below, we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the future.

 

Our unsecured revolving credit facility accrues interest at floating rates and matures in December 2010, and we have an option to extend the maturity by one additional year upon the payment of a fee. At September 30, 2007, we had no amounts outstanding and $550.0 million was available for borrowing under our revolving credit facility. We may make repayments and drawings under our revolving credit facility at any time without penalty. We borrow in U.S. dollars and borrowings under our revolving credit facility accrue interest at LIBOR plus a premium. Accordingly, we are vulnerable to changes in U.S.

 

12



 

dollar based short term interest rates, specifically LIBOR. A change in interest rates would not affect the value of this floating rate debt, but would affect our operating results, if we have any floating rate debt outstanding at that time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under our revolving credit facility or other floating rate obligations.

 

Item 4. Controls and Procedures

 

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our managing trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, our managing trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

 

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

13



 

WARNING CONCERNING FORWARD LOOKING STATEMENTS

 

THIS QUARTERLY REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER FEDERAL SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE” OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.

 

FOR EXAMPLE, THIS QUARTERLY REPORT STATES THAT WE HAVE ENTERED INTO AGREEMENTS FOR $92.6 MILLION TO PURCHASE EIGHT SENIOR LIVING PROPERTIES AND TO LEASE THEM TO FIVE STAR AND TO PURCHASE TWO WELLNESS CENTERS LEASED TO STARMARK HOLDINGS, LLC. OUR DILIGENCE REGARDING THESE TRANSACTIONS HAS NOT YET BEEN COMPLETED AND WE MAY DECIDE NOT TO PROCEED WITH THESE PURCHASES. CERTAIN OF THESE PURCHASES ARE CONTINGENT UPON APPROVALS FROM THIRD PARTY MORTGAGES, WHICH APPROVALS MAY NOT BE OBTAINED. AS A RESULT, ONE OR MORE OF THESE PROPOSED PURCHASES AND LEASES MAY NOT OCCUR.

 

OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD LOOKING STATEMENTS ARE DESCRIBED MORE FULLY UNDER “ITEM 1A. RISK FACTORS” IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006.

 

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.

 

EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

 

STATEMENT CONCERNING LIMITED LIABILITY

 

THE ARTICLES OF AMENDMENT AND RESTATEMENT OF THE DECLARATION OF TRUST ESTABLISHING SENIOR HOUSING PROPERTIES TRUST, DATED SEPTEMBER 20, 1999, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, IS DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT THE NAME “SENIOR HOUSING PROPERTIES TRUST” REFERS TO THE TRUSTEES UNDER THE DECLARATION OF TRUST, AS AMENDED AND SUPPLEMENTED, AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SENIOR HOUSING PROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SENIOR HOUSING PROPERTIES TRUST. ALL PERSONS DEALING WITH SENIOR HOUSING PROPERTIES TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF SENIOR HOUSING PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

 

14



 

PART II. Other Information

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

 

On September 18, 2007, pursuant to our incentive share award plan, we granted 34,800 common shares of beneficial interest, par value $0.01 per share, valued at $21.86 per share, the closing price of our common shares on the New York Stock Exchange, or NYSE, on that day to our officers and certain employees or our manager, Reit Management & Research LLC. All of these grants were made pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended.

 

Item 6.    Exhibits

 

12.1         Computation of Ratio of Earnings to Fixed Charges. (Filed herewith.)

 

31.1         Rule 13a-14(a) Certification. (Filed herewith.)

 

31.2         Rule 13a-14(a) Certification. (Filed herewith.)

 

31.3         Rule 13a-14(a) Certification. (Filed herewith.)

 

31.4         Rule 13a-14(a) Certification. (Filed herewith.)

 

32.1         Section 1350 Certification. (Furnished herewith.)

 

15



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

SENIOR HOUSING PROPERTIES TRUST

 

 

 

 

 

By:

/s/ David J. Hegarty

 

 

 

David J. Hegarty

 

 

President and Chief Operating Officer

 

 

Dated: November 1, 2007

 

 

 

 

 

 

 

By:

/s/ Richard A. Doyle

 

 

 

Richard A. Doyle

 

 

Treasurer and Chief Financial Officer

 

 

(principal financial and accounting officer)

 

 

Dated: November 1, 2007

 

16