DIVERSIFIED HEALTHCARE TRUST - Quarter Report: 2008 June (Form 10-Q)

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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 June 30, 2008

 

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)

 

 

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, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check One):

 

Large Accelerated Filer x		Accelerated Filer o
Non –Accelerated Filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

 

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 August 7, 2008: 114,488,559.

 

 

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SENIOR HOUSING PROPERTIES TRUST

 

FORM 10-Q

 

June 30, 2008

 

INDEX

 

		Page
PART I	Financial Information
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheet – June 30, 2008 and December 31, 2007	1
	Condensed Consolidated Statement of Income – Three and Six Months Ended June 30, 2008 and 2007	2
	Condensed Consolidated Statement of Cash Flows – Six Months Ended June 30, 2008 and 2007	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 4.	Controls and Procedures	17
	Warning Concerning Forward Looking Statements	18
	Statement Concerning Limited Liability	18
PART II	Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 6.	Exhibits	19
	Signatures	24

 

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.

 

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SENIOR HOUSING PROPERTIES TRUST

 

PART I.         Financial Information

 

Item 1.                Financial Statements

 

CONDENSED CONSOLIDATED BALANCE SHEET

(amounts in thousands, except share data)

(unaudited)

 

		June 30,			December 31,
		2008			2007
ASSETS
Real estate properties, at cost:
Land		$	247,699		$	217,236
Buildings and improvements		2,065,998			1,723,111
		2,313,697			1,940,347
Less accumulated depreciation		351,189			323,891
		1,962,508			1,616,456
Cash and cash equivalents		185,940			43,521
Restricted cash		3,555			3,642
Deferred financing fees, net		4,999			5,974
Acquired real estate leases, net		14,039			2,387
Other assets		28,024			29,914
Total assets		$	2,199,065		$	1,701,894
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility		$	—		$	—
Senior unsecured notes due 2012 and 2015, net of discount		321,945			321,873
Secured debt and capital leases		91,515			104,979
Accrued interest		10,695			10,849
Acquired real estate lease obligations, net		5,795			4,216
Other liabilities		15,939			10,567
Total liabilities		445,889			452,484
Commitments and contingencies
Shareholders’ equity:
Common shares of beneficial interest, $0.01 par value: 149,700,000 shares authorized, 114,488,559 and 88,691,892 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively		1,145			887
Additional paid-in capital		2,000,529			1,476,675
Cumulative net income		468,803			423,807
Cumulative distributions		(717,482		)	(653,225		)
Unrealized gain on investments		181			1,266
Total shareholders’ equity		1,753,176			1,249,410
Total liabilities and shareholders’ equity		$	2,199,065		$	1,701,894

 

See accompanying notes.

 

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SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(amounts in thousands, except per share data)

(unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2008			2007			2008			2007
Revenues:
Rental income		$	52,680		$	44,406		$	101,663		$	88,708
Interest and other income		710			556			1,280			1,006
Total revenues		53,390			44,962			102,943			89,714
Expenses:
Interest		9,810			9,160			19,328			19,053
Depreciation		14,275			11,704			27,298			23,299
General and administrative		4,685			3,449			8,381			7,165
Impairment of assets		2,940			—			2,940			—
Loss on early extinguishment of debt		—			—			—			2,026
Total expenses		31,710			24,313			57,947			51,543
Net income		$	21,680		$	20,649		$	44,996		$	38,171
Weighted average shares outstanding		100,302			83,649			95,691			82,240
Basic and diluted earnings per share:
Net income		$	0.22		$	0.25		$	0.47		$	0.46

 

See accompanying notes.

 

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SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 (amounts in thousands)

(unaudited)

 

		Six Months Ended June 30,
		2008			2007
Cash flows from operating activities:
Net income		$	44,996		$	38,171
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		27,298			23,299
Amortization of deferred financing fees and debt discounts		1,047			1,084
Amortization of acquired real estate leases		(7		)	—
Impairment of assets		2,940			—
Loss on early extinguishment of debt		—			2,026
Change in assets and liabilities:
Restricted cash		87			(43		)
Investments in trading securities		—			(10,153		)
Other assets		1,167			5,228
Accrued interest		(154		)	(972		)
Other liabilities		5,984			(252		)
Cash provided by operating activities		83,358			58,388
Cash flows from investing activities:
Acquisitions		(386,356		)	(17,167		)
Cash used for investing activities		(386,356		)	(17,167		)
Cash flows from financing activities:
Proceeds from issuance of common shares, net		523,138			151,670
Proceeds from borrowings on revolving credit facility		210,000			22,000
Repayments of borrowings on revolving credit facility		(210,000		)	(134,000		)
Redemption of senior notes		—			(21,750		)
Repayment of other debt		(13,464		)	(853		)
Distributions to shareholders		(64,257		)	(54,828		)
Cash provided by (used for) financing activities		445,417			(37,761		)
Increase in cash and cash equivalents		142,419			3,460
Cash and cash equivalents at beginning of period		43,521			5,464
Cash and cash equivalents at end of period		$	185,940		$	8,924
Supplemental cash flow information:
Interest paid		$	19,482		$	18,942
Non-cash financing activities:
Issuance of common shares		$	974		$	959

 

See accompanying notes.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in thousands, except per share data or as otherwise stated)

 

Note 1.  Basis of Presentation

 

The accompanying condensed consolidated financial statements of Senior Housing Properties Trust and its subsidiaries, or the Company, have been prepared without audit.  Certain information and 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 condensed 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, 2007.  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.  Reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.  These reclassifications had no effect on net income or shareholders’ equity.

 

In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurement”, or SFAS No. 157, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurement.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  As required, we adopted SFAS No. 157 on January 1, 2008 and the effect was not material to our consolidated financial statements.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations”, or SFAS No. 141(R). SFAS No. 141(R) establishes principles and requirements for how an acquirer shall recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in a business combination.  SFAS No. 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company is currently evaluating the effect that the adoption of SFAS No. 141(R) will have on our consolidated financial statements.

 

Note 2.  Real Estate Properties

 

At June 30, 2008, we owned 226 properties located in 33 states.

 

In May 2008, we announced that we have entered into a series of agreements to acquire 48 medical office, clinic and biotech laboratory buildings from HRPT Properties Trust, or HRPT, for an aggregate purchase price of approximately $565.0 million.  These buildings were 98.3% leased to more than 370 tenants for an average term of 6.7 years at the time of the announcement.  We expect the closings of these acquisitions to occur over the next three quarters.  Our obligations to complete these purchases are subject to various conditions typical of commercial real estate purchases including, with respect to certain of these properties, obtaining waivers of rights of first refusal from tenants.  Also, we have a financing contingency relating to certain properties.  We can provide no assurance that we will purchase all of these buildings or that the purchases will be completed in the next three quarters.  In addition, we also acquired a right of first refusal to purchase any of 45 additional buildings (containing approximately 4.6 million square feet of rental space) that are leased to tenants in medical related business which the seller will continue to own after these transactions.  Because we and the seller are both managed by Reit Management & Research LLC, or RMR, the terms of these transactions were negotiated by special committees of our and the seller’s board of trustees composed solely of Independent Trustees of each company.

 

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in thousands, except per share data or as otherwise stated)

 

In June 2008, we acquired five medical office, clinic and biotech laboratory buildings from HRPT pursuant to these contracts for approximately $83.8 million, excluding closing costs.  On July 9, 2008, we acquired three additional medical office and clinic properties from HRPT for approximately $39.1 million, excluding closing costs. We funded these acquisitions using cash on hand and assumed three mortgage loans on two properties totaling $10.8 million with a weighted average interest rate of 7.08% per annum.  Intangible lease assets and liabilities recorded by us for these acquisitions totaled $11.8 million and $1.7 million, respectively.

 

On June 30, 2008, we realigned our three leases with Five Star Quality Care, Inc., or Five Star.  Lease no. 1 now includes 100 properties, including nine properties acquired during the first quarter of 2008. This lease includes independent living communities, assisted living communities and skilled nursing facilities, and expires in 2022. Lease no. 2 now includes 32 properties, including independent living communities, assisted living communities, skilled nursing facilities and two rehabilitation hospitals, and expires in 2026. Lease no. 3 now includes 33 properties, including 10 properties acquired during the first quarter of 2008; this lease includes independent living communities, assisted living communities and skilled nursing facilities, and expires in 2024. The rent payable by Five Star to us is unchanged as a result of this lease realignment and the increased rent payable, if and as we purchase improvements to the leased properties, will be the greater of 8.0% per annum or the 10 year Treasury rate plus 300 basis points.

 

On July 1, 2008, we sold three assisted living properties with 259 living units that were formerly operated by NewSeasons Assisted Living Communities, Inc., or NewSeasons, to Five Star for $21.4 million and Five Star assumed the NewSeasons and Independence Blue Cross, or IBC, lease obligations to SNH for the remaining seven properties that were formerly operated by NewSeasons.  The rent payable by Five Star for these seven properties is approximately $7.6 million per annum under a separate lease between us and Five Star which we call our Five Star lease no. 4.

 

On August 1, 2008, we acquired, from an unaffiliated party, two senior living properties with a total of 112 units for approximately $14.1 million, excluding closing costs.  The properties have been leased to Five Star until 2024 under our Five Star lease no. 3 described above and rent under that lease was increased by $1.1 million.  Percentage rent, based on increases in gross revenues at these properties, will commence in 2010.  We funded this acquisition using cash on hand.

 

In June 2008, we agreed to purchase, from an unaffiliated party, eight senior living properties with a total of 451 units for approximately $62.7 million.  This acquisition has not closed as of the date of this report.  We intend to lease these properties to Five Star and to add them to our Five Star lease no. 3, as described above, for a term expiring in 2024, and we expect the annual rent under this lease will increase by approximately $5.0 million.  We expect percentage rent, based on increases in gross revenues at these properties, will commence in 2010.  We expect to fund this acquisition using cash on hand and by assuming 15 mortgages on these eight properties for a total of $50.5 million at a weighted average interest rate of 6.54% per annum maturing in 2017.  The purchase of these properties is contingent upon our and Five Star’s completion of diligence, other customary closing conditions and the approval of mortgage lenders.  We can provide no assurance that we will purchase or lease these properties.

 

As of June 30, 2008, two of our properties are classified as held for sale as we intend to sell them in 2008.  At December 31, 2007 and June 30, 2008, we recorded an impairment charge on one of these properties of $1.4 million and $2.9 million, respectively, to reduce the carrying value to its estimated fair value.  These two properties are included in real estate properties on our condensed consolidated balance sheet and have a net carrying value of approximately $6.6 million at June 30, 2008.

 

During the six months ended June 30, 2008 and 2007, pursuant to the terms of our existing leases with Five Star, we purchased $27.3 million and $17.1 million, respectively, of improvements made to our properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star was increased by approximately $2.4 million and $1.7 million, respectively.

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in thousands, except per share data or as otherwise stated)

 

 

Note 3.  Unrealized Gain on Investments

 

On June 30, 2008, we owned 1,000,000 common shares of HRPT Properties Trust and 35,000 common shares of Five Star, which are carried at fair market value in other assets on our condensed consolidated balance sheet. The net unrealized gain on investments shown on our condensed consolidated balance sheet represents the difference between the quoted market prices (level 1) of such shares on June 30, 2008 ($6.77 and $4.73 per share, respectively) and their cost 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 six months ended June 30, 2008 and 2007 (dollars in thousands):

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2008			2007			2008			2007
Net income		$	21,680		$	20,649		$	44,996		$	38,171
Other comprehensive income:
Change in unrealized gain on investments		(17		)	(1,981		)	(1,085		)	(2,061		)
Comprehensive income		$	21,663		$	18,668		$	43,911		$	36,110

 

Note 5.  Indebtedness

 

We have an unsecured revolving credit facility that matures in December 2010, with our option to extend the maturity by one additional year upon payment of a fee.  Our revolving credit facility permits borrowings up to $550.0 million.  The annual interest payable for amounts drawn under the facility is LIBOR plus a premium. The interest rate payable on borrowings under this revolving credit facility was 3.26% and 6.10% at June 30, 2008 and 2007, respectively.  Our revolving credit facility is available for acquisitions, working capital and general business purposes. As of June 30, 2008 and 2007, we had no amounts outstanding under this credit facility.

 

In April 2008, we paid in full a mortgage loan on one of our properties for $12.6 million.  We used cash on hand and borrowings under our revolving credit facility to fund this payment.

 

Note 6.  Shareholders Equity

 

Under the terms of our management agreement with RMR, on April 11, 2008 we issued 27,310 common shares in payment of an incentive fee of approximately $624,000 for services rendered by RMR during 2007.  These restricted securities were issued pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended.

 

On May 15, 2008, we granted each of our five trustees 2,000 common shares of beneficial interest, par value $0.01 per share, valued at $22.91 per share, the closing price of our common shares on the New York Stock Exchange on that day. We made these grants pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended.

 

On May 15, 2008, we paid a $0.35 per share, or $33.2 million, distribution to our common shareholders for the quarter ended March 31, 2008.  On July 8, 2008, we declared a distribution of $0.35 per share, or $40.1 million, to be paid to common shareholders of record on July 18, 2008, with respect to our results for the quarter ended June 30, 2008. We expect to pay this distribution on or about August 14, 2008.

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in thousands, except per share data or as otherwise stated)

 

In June 2008, we issued 19.6 million of our common shares in a public offering, raising net proceeds of $393.7 million. We used the net proceeds from this offering to repay borrowings outstanding on our revolving credit facility and for general business purposes, including funding, in part, the acquisitions described in Note 2 above.

 

Note 7. Segment Reporting

 

We have one reportable operating segment: short term and long term residential care facilities that offer dining for residents.  Properties in this segment include independent living facilities, assisted living facilities, skilled nursing facilities and rehabilitation hospitals.  The “All Other” category in the following table includes amounts related to corporate business activities and the operating results of our specialized facilities that offer medical related services, fitness, wellness and spa service to members operating segment. Prior to October 2007, our only operating segment was short term and long term residential care facilities that offer dining for residents.

 

		For the three months ended June 30, 2008
		Short and Long Term Residential Care Facilities			All Other			Consolidated
Rental income		$	50,789		$	1,891		$	52,680
Interest and other income		—			710			710
Total revenues		50,789			2,601			53,390
Interest expense		1,220			8,590			9,810
Depreciation and amortization expense		13,824			451			14,275
General and administrative expense		—			4,685			4,685
Impairment of assets		2,940			—			2,940
Total expenses		17,984			13,726			31,710
Net income (loss)		$	32,805		$	(11,125	)	$	21,680
Total assets		$	1,827,693		$	371,372		$	2,199,065

 

		For the six months ended June 30, 2008
		Short and Long Term Residential Care Facilities			All Other			Consolidated
Rental income		$	98,024		$	3,639		$	101,663
Interest and other income		—			1,280			1,280
Total revenues		98,024			4,919			102,943
Interest expense		2,668			16,660			19,328
Depreciation and amortization expense		26,464			834			27,298
General and administrative expense		—			8,381			8,381
Impairment of assets		2,940			—			2,940
Total expenses		32,072			25,875			57,947
Net income (loss)		$	65,952		$	(20,956	)	$	44,996
Total assets		$	1,827,693		$	371,372		$	2,199,065

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in thousands, except per share data or as otherwise stated)

 

Note 8. Significant Tenant

 

Five Star is the lessee of 70.8% of our investments, at cost, as of June 30, 2008.  The following tables present summary financial information for Five Star for the three and six months ended June 30, 2008 and 2007, as reported in its Quarterly Report on Form 10-Q.

Summary Financial Information of Five Star Quality Care, Inc.
(in thousands)

 

		Three Months Ended June 30, 2008			Three Months Ended June 30, 2007
Total revenues		$	271,144		$	240,138
Operating income		6,075			4,751
Income from continuing operations		4,237			5,143
Net income		3,489			4,080

 

		Six Months Ended June 30, 2008			Six Months Ended June 30, 2007
Total revenues		$	530,021		$	477,165
Operating income		13,430			7,242
Income from continuing operations		8,656			10,625
Net income		5,106			8,844
Current assets		137,455			171,826
Non-current assets		243,390			180,640
Total indebtedness		142,393			142,582
Current liabilities		116,315			105,622
Non-current liabilities		172,980			171,282
Total shareholders’ equity		91,550			75,562
Net cash provided by operating activities		22,229			48,377
Net cash used in discontinued operations		(398		)	(1,726		)
Net cash used in investing activities		(6,829		)	(21,649		)
Net cash used in financing activities		(117		)	(28,757		)
Net increase (decrease) in cash		14,885			(3,755		)
Cash and cash equivalents at the beginning of the period		30,999			46,241
Cash and cash equivalents at the end of the period		45,884			42,486

 

The summary financial information of Five Star is presented to comply with applicable accounting regulations of the Securities and Exchange Commission.

 

References in these financial statements to the Quarterly Report on Form 10-Q for Five Star are included as textual references only, and the information in such Quarterly Report is not incorporated by reference into these financial statements.

 

Note 9.  Pro Forma Information

 

During the three months ended June 30, 2008, we purchased five properties for $83.8 million and, pursuant to the terms of our existing leases with Five Star, we purchased $10.7 million of improvements made to our properties leased to Five Star.  During the six months ended June 30, 2008, we purchased 24 properties for $356.1 million and $27.3 million of improvements made to our properties leased to Five Star.  On April 1, 2008, we paid in full a mortgage loan on one of our properties for $12.6 million.  During the three and six months ended June 30, 2008, we recorded an impairment charge on one of our properties for $2.9 million.  During the three and six months ended June 30, 2008, we issued 19.6 million and 25.8 million of our common shares, respectively.

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(amounts in thousands, except per share data or as otherwise stated)

 

 

During 2007, we purchased six wellness centers for $76.8 million and $47.7 million of improvements made to our properties lease to Five Star.  We assumed $14.9 million of mortgage debt in conjunction with the wellness centers acquisition.  We purchased and redeemed $20.0 million of our senior notes in January 2007.  We recorded an impairment charge on one of our properties for $1.4 million.  In February and December 2007, we issued 5.0 million and 6.0 million of our common shares, respectively.

 

The following table presents our pro forma results of operations as if these acquisitions and related financings were completed on January 1, 2007.  This pro forma data is not necessarily indicative of what actual results of operations would have been for the periods presented, nor does it represent the results of operations for any future period.  Differences could result from, but are not limited to, additional property sales or investments, changes in interest rates and changes in our debt or equity structure.

 

		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2008			2007			2008			2007
Total revenues		$	55,591		$	55,727		$	111,450		$	111,452
Net income		$	23,213		$	26,131		$	50,816		$	50,681
Per common share data:
Net income		$	0.20		$	0.23		$	0.44		$	0.44

 

 

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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, 2007.

 

PORTFOLIO OVERVIEW

 

The following tables present an overview of our portfolio:

 

As of June 30, 2008 (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		$	1,041,038		45.5	%	$	103,248		46.0	%
Assisted living facilities (3)		111		7,968		817,326			35.7	%	75,918			33.8	%
Skilled nursing facilities		58		5,869		226,941			9.9	%	19,237			8.6	%
Rehabilitation hospitals		2		364		49,931			2.2	%	10,760			4.8	%
Wellness centers (4)		6		—		80,008			3.5	%	6,519			2.9	%
Medical office buildings (MOBs) (5)		5		—		75,010			3.2	%	8,770			3.9	%
Total (3)		223		25,414		$	2,290,254		100.0	%	$	224,452		100.0	%
Tenant/Operator
Five Star (Lease No. 1) (6)		100		8,600		$	700,423		30.6	%	$	61,091		27.2	%
Five Star (Lease No. 2) (6)		32		7,639		732,288			32.0	%	80,197			35.8	%
Five Star (Lease No. 3) (6)		33		2,436		202,946			8.9	%	14,619			6.5	%
Five Star (Lease No. 4) (3)		7		614		64,198			2.8	%	6,807			3.0	%
Sunrise/Marriott (7)		14		4,091		325,165			14.2	%	31,746			14.2	%
Alterra/Brookdale (8)		18		894		61,122			2.7	%	7,873			3.5	%
6 private companies (combined)		8		1,140		49,094			2.1	%	6,830			3.0	%
Starmark (4)		6		—		80,008			3.5	%	6,519			2.9	%
Multi-tenant MOBs (5)		5		—		75,010			3.2	%	8,770			3.9	%
Total (3)		223		25,414		$	2,290,254		100.0	%	$	224,452		100.0	%

 

Tenant Operating Statistics (Quarter Ended March 31, 2008) (9)

 

										Percentage of Operating Revenue Sources
		Rent Coverage				Occupancy				Private Pay				Medicaid				Medicare
		2008		2007		2008		2007		2008		2007		2008		2007		2008		2007
Five Star (Lease No. 1) (6) (10)		1.27	x	1.21	x	87	%	89	%	64	%	65	%	14	%	13	%	22	%	22	%
Five Star (Lease No. 2) (6)		1.59	x	1.38	x	89	%	91	%	68	%	68	%	29	%	28	%	3	%	4	%
Five Star (Lease No. 3) (6) (10)		2.67	x	2.73	x	84	%	88	%	25	%	24	%	24	%	25	%	51	%	51	%
Five Star (Lease No. 4) (3)		1.28	x	1.45	x	88	%	88	%	100	%	100	%	—		—		—		—
Sunrise/Marriott (7)		NA		NA		NA		NA		NA		NA		NA		NA		NA		NA
Alterra/Brookdale (8)		2.23	x	2.13	x	91	%	87	%	99	%	98	%	—		—		1	%	2	%
6 private companies (combined)		2.25	x	1.68	x	87	%	88	%	27	%	25	%	24	%	24	%	49	%	51	%
Starmark(4)		1.91	x	NA		NA		NA		100	%	NA		—		NA		—		NA

 

(1)		Amounts are before depreciation, but after impairment write downs, if any.
(2)		Properties where the majority of units are independent living apartments are classified as independent living communities.
(3)		On July 1, 2008, we sold three assisted living properties with 259 living units that were formerly operated by NewSeasons to Five Star for $21.4 million and Five Star assumed the NewSeasons and IBC lease obligations to SNH for the remaining seven properties that were formerly operated by NewSeasons. The data provided above represents the seven properties we continue to own.
(4)		In October and November 2007, we acquired six wellness centers that are leased to affiliates of Starmark Holdings, LLC, or Starmark. These wellness centers have a total of 354,000 square feet.
(5)		In June 2008, we acquired five medical office, clinic and biotech laboratory buildings, or MOBs. The carrying value of this investment is before depreciation and includes intangible lease assets and liabilities. These MOBs have a total of 449,000 square feet.
(6)		On June 30, 2008, we realigned our three leases with Five Star. The rent payable by Five Star to us is unchanged as a result of this lease realignment and the increased rent payable, if and as we purchase improvements to the leased properties, will be the greater of 8.0% per annum or the 10 year Treasury rate plus 300 basis points.
(7)		Marriott International, Inc., or Marriott, guarantees this lease. Sunrise has not filed its Quarterly Report on Form 10-Q for the first quarter of 2008 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.
(8)		Brookdale Senior Living, Inc., or Brookdale, guarantees this lease.
(9)		All tenant operating data presented are based upon the operating results provided by our tenants for the indicated quarterly periods, or the most recent prior period for which tenant operating results are available to us from our tenants. Rent coverage is calculated as operating cash flow from our tenants’ operations of our properties, before subordinated charges, divided by rent payable to us. We have not included operating data for our medical office buildings because we acquired them in June 2008. We have not independently verified our tenants’ operating data.
(10)		Includes data for periods prior to our ownership of certain properties included in this lease.

 

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RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2008, Compared to Three Months Ended June 30, 2007:

 

		2008			2007			Change			% Change
		(in thousands, except per share amounts)
Rental income		$	52,680		$	44,406		$	8,274		18.6	%
Interest and other income		710			556			154			27.7	%
Interest expense		9,810			9,160			650			7.1	%
Depreciation expense		14,275			11,704			2,571			22.0	%
General and administrative expense		4,685			3,449			1,236			35.8	%
Impairment of assets		2,940			—			2,940			100.0	%
Net income		$	21,680		$	20,649		$	1,031		5.0	%
Weighted average shares outstanding		100,302			83,649			16,653			19.9	%
Net income per share		$	0.22		$	0.25		$	(0.03	)	(12.0	)%

 

Rental income increased because of rents earned from our real estate acquisitions since April 1, 2007. Interest and other income increased as a result of higher levels of investable cash in money market funds.

 

Interest expense increased because of greater amounts outstanding under our revolving credit facility offset by lower rates under our revolving credit facility. This increase was also reduced by our prepayment of a mortgage on April 1, 2008 that had a maturity date of June 30, 2008.  Our weighted average balance outstanding and interest rate under our revolving credit facility was $87.6 million and 3.6% and $53.5 million and 6.1% for the three months ended June 30, 2008 and 2007, respectively.

 

Depreciation expense for the second quarter of 2008 increased because of acquisitions since April 1, 2007. General and administrative expenses increased in 2008 due to our acquisitions since April 1, 2007, and higher state taxes, accounting fees and stock grants in the second quarter of 2008 than in 2007, offset by decreases in legal fees.

 

During the second quarter of 2008, we recognized an impairment of assets charge of $2.9 million related to one property that we intend to sell in 2008.

 

Net income increased because of the changes in revenues and expenses described above. Net income per share decreased because of the changes in revenues and expenses described above offset by the effect of an increase in the weighted average number of shares outstanding resulting from our issuance of common shares in December 2007 and February and June 2008.

 

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Six Months Ended June 30, 2008, Compared to Six Months Ended June 30, 2007:

 

		2008			2007			Change			% Change
		(in thousands, except per share amounts)
Rental income		$	101,663		$	88,708		$	12,955		14.6	%
Interest and other income		1,280			1,006			274			27.2	%
Interest expense		19,328			19,053			275			1.4	%
Depreciation expense		27,298			23,299			3,999			17.2	%
General and administrative expense		8,381			7,165			1,216			17.0	%
Impairment of assets		2,940			—			2,940			100.0	%
Loss on early extinguishment of debt		—			2,026			(2,026		)	(100.0	)%
Net income		$	44,996		$	38,171		$	6,825		17.9	%
Weighted average shares outstanding		95,691			82,240			13,451			16.4	%
Net income per share		$	0.47		$	0.46		$	0.01		2.2	%

 

Rental income increased because of rents earned from our real estate acquisitions since January 1, 2007. Interest and other income increased as a result of higher levels of investable cash in money market funds.

 

Interest expense increased because of greater amounts outstanding under our revolving credit facility offset by lower rates under our revolving credit facility. This increase was also reduced by our prepayment of a mortgage on April 1, 2008 that had a maturity date of June 30, 2008.  Our weighted average balance outstanding and interest rate under our revolving credit facility was $56.3 million and 3.8% and $53.5 million and 6.1% for the six months ended June 30, 2008 and 2007, respectively.

 

Depreciation expense for the first six months of 2008 increased as a result of real estate acquisition since January 1, 2007.  General and administrative expenses increased in 2008 due to our acquisitions since January 1, 2007, and higher state taxes, accounting fees and stock grants in the six months of 2008 than in the 2007 period, offset by decreases in legal fees.

 

During the six months ended June 30, 2008, we recognized an impairment of assets charge of $2.9 million related to one property that we intend to sell in 2008.

 

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 retirement of debt of $2.0 million in connection with this purchase.

 

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 the effect of an increase in the weighted average number of shares outstanding resulting from our issuance of common shares in February and December 2007 and February and June 2008.

 

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