DIVERSIFIED HEALTHCARE TRUST - Quarter Report: 2009 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, 2009

 

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 (or for such shorter period that the registrant was required to file such reports), 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  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):

 

 

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 November 4, 2009: 127,377,665.

 

 

 

SENIOR HOUSING PROPERTIES TRUST

 

FORM 10-Q

 

September 30, 2009

 

INDEX

 

		Page
PART I	Financial Information
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets – September 30, 2009 and December 31, 2008	1
	Condensed Consolidated Statements of Income – Three and Nine Months Ended September 30, 2009 and 2008	2
	Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2009 and 2008	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	27
	Warning Concerning Forward Looking Statements	28
	Statement Concerning Limited Liability	31
PART II	Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 5.	Other Items	32
Item 6.	Exhibits	32
	Signatures	34

 

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.

 

 

PART I.  Financial Information

 

Item 1.    Financial Statements

 

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)

 

		September 30,			December 31,
		2009			2008
ASSETS
Real estate properties:
Land		$	357,508		$	319,591
Buildings and improvements		2,844,036			2,487,665
		3,201,544			2,807,256
Less accumulated depreciation		435,310			381,339
		2,766,234			2,425,917
Cash and cash equivalents		72,487			5,990
Restricted cash		4,728			4,344
Deferred financing fees, net		14,703			5,068
Acquired real estate leases, net		44,554			30,546
Other assets		52,330			25,009
Total assets		$	2,955,036		$	2,496,874
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility		$	—		$	257,000
Senior unsecured notes due 2012 and 2015, net of discount		322,124			322,017
Secured debt and capital leases		662,116			151,416
Accrued interest		10,894			11,121
Acquired real estate lease obligations, net		10,071			7,974
Other liabilities		33,766			15,988
Total liabilities		1,038,971			765,516
Commitments and contingencies
Shareholders’ equity:
Common shares of beneficial interest, $0.01 par value: 149,700,000 shares authorized, 127,377,665 and 114,542,584 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively		1,274			1,145
Additional paid in capital		2,226,473			2,000,865
Cumulative net income		607,927			530,318
Cumulative distributions		(923,255		)	(797,639		)
Unrealized gain on investments		3,646			(3,331		)
Total shareholders’ equity		1,916,065			1,731,358
Total liabilities and shareholders’ equity		$	2,955,036		$	2,496,874

 

See accompanying notes.

 

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share data)

(unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2009			2008			2009			2008
Revenues:
Rental income		$	72,010		$	58,844		$	209,785		$	160,591
Interest and other income		355			829			750			2,025
Total revenues		72,365			59,673			210,535			162,616
Expenses:
Property operating expenses		4,112			1,024			10,286			1,124
Interest		15,949			9,606			37,432			28,934
Depreciation		19,689			15,859			56,713			43,235
Acquisition costs		517			—			1,911			—
General and administrative		5,284			4,303			15,335			12,506
Impairment of assets		11,249			—			11,249			2,940
Total expenses		56,800			30,792			132,926			88,739
Income before gain on sale of properties		15,565			28,881			77,609			73,877
Gain on sale of properties		—			266			—			266
Net income		$	15,565		$	29,147		$	77,609		$	74,143
Weighted average shares outstanding		121,665			114,493			120,005			102,004
Earnings per share:
Income before gain on sale of properties		$	0.13		$	0.25		$	0.65		$	0.72
Net income		$	0.13		$	0.25		$	0.65		$	0.73

 

See accompanying notes.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

		Nine Months Ended September 30,
		2009			2008
Cash flows from operating activities:
Net income		$	77,609		$	74,143
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		56,713			43,235
Amortization		2,521			953
Impairment of assets		11,249			2,940
Gain on sale of properties		—			(266		)
Equity in losses of Affiliates Insurance Company		133			—
Change in assets and liabilities:
Restricted cash		(384		)	(801		)
Other assets		(6,580		)	1,181
Accrued interest		(227		)	(2,751		)
Other liabilities		19,505			15,091
Cash provided by operating activities		160,539			133,725
Cash flows from investing activities:
Acquisitions		(423,866		)	(688,821		)
Investment in Five Star Quality Care, Inc.		(8,960		)	—
Investment in Affiliates Insurance Company		(5,110		)	—
Proceeds from sale of real estate		3,171			21,336
Cash used for investing activities		(434,765		)	(667,485		)
Cash flows from financing activities:
Proceeds from issuance of common shares, net		223,974			522,907
Proceeds from issuance of mortgage debt		512,934			—
Proceeds from borrowings on revolving credit facility		134,000			314,000
Repayments of borrowings on revolving credit facility		(391,000		)	(221,000		)
Repayment of other debt		(2,234		)	(14,149		)
Deferred financing fees		(11,335		)	—
Distributions to shareholders		(125,616		)	(104,328		)
Cash provided by financing activities		340,723			497,430
Increase (decrease) in cash and cash equivalents		66,497			(36,330		)
Cash and cash equivalents at beginning of period		5,990			43,521
Cash and cash equivalents at end of period		$	72,487		$	7,191
Supplemental cash flow information:
Interest paid		$	35,850		$	30,737
Non-cash investing activities:
Acquisitions funded by assumed debt		—			(61,282		)
Non-cash financing activities:
Assumption of mortgage notes payable		—			61,282
Issuance of common shares pursuant to our incentive share award plan		1,763			1,497

 

See accompanying notes.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar 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 generally accepted accounting principles, or GAAP, 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, 2008.  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 preparing these condensed consolidated financial statements, we evaluated events that occurred through November 4, 2009 for potential recognition or disclosure, the date these financial statements are issued.

 

In June 2009, the Financial Accounting Standards Board, or FASB, issued The FASB Accounting Standards CodificationTM, or the Codification.  The Codification is the single source of authoritative non-governmental U.S. GAAP and is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption of the Codification did not cause any change to our current accounting practices.

 

Effective June 30, 2009, we adopted the Subsequent Events Topic of the Codification.  This topic establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and whether that date represents the date the financial statements are issued or are available to be issued.

 

The Business Combinations Topic of the Codification establishes principles and requirements for how an acquirer will recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree and goodwill acquired in a business combination principally by expanding the definition of what constitutes a business combination, making it more likely that our acquisitions will be accounted for as business combinations, and by requiring the immediate expensing of acquisition costs incurred in connection with such transactions.  This topic is effective for fiscal years beginning after December 15, 2008 and the adoption affects our consolidated financial statements, principally by requiring us to expense acquisition costs.

 

Effective June 30, 2009, we adopted the Interim Disclosures about Fair Value of Financial Instruments subtopic of the Financial Instruments Topic of the Codification.  Please see Note 7, “Fair Value of Assets and Liabilities” for relevant disclosures.

 

In April 2009, the FASB issued the following topics: Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly; Recognition and Presentation of Other-Than-Temporary Impairments; and Interim Disclosures about Fair Value of Financial Instruments.  The first topic provides additional guidance for estimating fair value when the volume and level of activity for the assets or liabilities have significantly decreased.  This topic also includes guidance on identifying circumstances that indicate a transaction is not orderly.  The Other-Than-Temporary Impairments Topic amends existing other than temporary impairment guidance related to debt securities to make the guidance more operational and to improve the presentation and disclosure of other than temporary impairments of debt and equity securities.  The

 

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Interim Disclosures about Fair Value of Financial Instruments Topic requires disclosure about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  Each of these topics was effective for interim and annual reporting periods ending after June 15, 2009.  The adoption of these topics did not cause any significant changes to our disclosures in our consolidated financial statements.

 

Note 2.  Real Estate Properties

 

At September 30, 2009, we owned 289 properties located in 35 states and Washington, D.C.

 

In May 2008, we entered into a series of agreements to acquire 48 medical office, clinic and biotech laboratory buildings, or MOBs, from HRPT Properties Trust, or HRP, for an aggregate purchase price of approximately $565,000.  As of September 1, 2009, we completed these transactions with HRP.  During 2009, we acquired 10 of these MOBs containing 617,000 square feet for an aggregate purchase price of approximately $214,585, plus closing costs.  We recorded intangible lease assets of $19,281 and intangible lease liabilities of $3,553 for these MOBs acquired during the nine months ended September 30, 2009.  The allocation of the purchase price of our third quarter 2009 acquisitions is based upon preliminary estimates of the fair value of assets acquired and liabilities assumed.  Consequently, amounts preliminarily allocated to assets acquired and liabilities assumed could change significantly from those used in these condensed consolidated financial statements.  One of the remaining buildings with an allocated value of $3,000 is no longer subject to our purchase agreement.  At the request of a tenant for two properties subject to a multi-property lease, in May and September 2009 we sold two of our MOB properties for approximately $3,190, which was their approximate net book value, to two unaffiliated parties.  We now own 45 of these properties containing 2.1 million square feet for an aggregate cost of approximately $558,150, plus closing costs.  We funded these acquisitions using cash on hand, proceeds from our mortgage financing, proceeds from equity issuances, borrowings under our revolving credit facility and by assuming three mortgage loans, on two properties, totaling $10,800 with a weighted average interest rate of 7.1% per annum and a weighted average maturity in 2018.  As of September 30, 2009, the MOBs that we acquired from HRP and continue to own were 98% leased to approximately 200 tenants for an average lease term of 9.2 years.  HRP was formerly our parent company, and both we and HRP are managed by Reit Management & Research LLC, or RMR.  Because we and HRP have three trustees in common and we are both managed by RMR, the terms of these transactions were negotiated by special committees of our and HRP’s boards of trustees composed of trustees who were not also trustees of both companies. For more information about our dealings with HRP and RMR and their affiliates and about the risks which may arise as a result of these and other related person transactions, please see our Annual Report on Form 10-K for the year ended December 31, 2008, or the Annual Report, our Quarterly Report on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009, or the Quarterly Reports, the Other Items in this Quarterly Report on Form 10-Q, and our other filings made with the SEC, and in particular, the section captioned “Risk Factors” in the Annual Report, the sections captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Related Person Transactions” in the Annual Report, Quarterly Reports and this Quarterly Report on Form 10-Q and the section captioned “Related Person Transactions and Company Review of Such Transactions” in our Proxy Statement dated March 30, 2009 relating to our 2009 Annual Shareholders Meeting.

 

On September 30, 2009, we acquired 10 MOBs with a total of 643,000 square feet for approximately $169,000, plus closing costs, from an unaffiliated party.  These buildings are currently 100% leased to one tenant for a lease term of 15 years plus renewal options.  We funded this acquisition using cash on

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

hand, proceeds from our mortgage financing in August 2009 described in Note 5 below and proceeds from our equity offering in September 2009 described in Note 6 below.

 

In October 2009, we acquired one senior living property for approximately $21,000, plus closing costs, from an unaffiliated party.  We leased this property to Five Star Quality Care, Inc., or Five Star, and added this property to Five Star Lease No. 4, which has a current term expiring in 2017.  Percentage rent, based on increases in gross revenues at this property, will commence in 2011.  We funded this acquisition using cash on hand, proceeds from our mortgage financing in August 2009 described in Note 5 below and proceeds from our equity offering in September 2009 described in Note 6 below.

 

In October 2009, we agreed to acquire 10 senior living properties for approximately $97,250 from two unaffiliated parties.  We intend to lease these properties to Five Star.  We expect percentage rent, based on increases in gross revenues at these properties, will commence in 2011.  We expect to fund these acquisitions using cash on hand, proceeds from our equity offering in September 2009 described in Note 6 below and 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.

 

For the three and nine months ended September 30, 2009, we recognized an impairment of assets charge of $11,249 related to eight of our properties, including six skilled nursing facilities and one assisted living property leased to Five Star and one MOB leased entirely to a single tenant.  Two of these properties are classified as held for sale as described below.  For the nine months ended September 30, 2008, we recognized an impairment of assets charge of $2,940 related to one of our assisted living properties classified as held for sale.

 

As of September 30, 2009, four of our properties are classified as held for sale.  These four properties are included in real estate properties on our condensed consolidated balance sheets and have a net carrying value of approximately $3,927 at September 30, 2009.  These properties are currently leased to Five Star.  On October 1, 2009, we sold one of these properties to an unaffiliated party for $500 and on November 1, 2009, we sold another one of these properties to an unaffiliated party for $1,350.  The two sold properties had been included in Five Star Lease No. 1 and Five Star Lease No. 2, respectively.

 

During the nine months ended September 30, 2009, pursuant to the terms of our existing leases with Five Star, we purchased $30,350 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 $2,430.

 

Note 3.  Net Unrealized Gain on Investments

 

On September 30, 2009, we owned 1,000,000 common shares of HRP and 3,235,000 common shares of Five Star, which are carried at fair market value in other assets on our condensed consolidated balance sheets. The net unrealized gain on investments shown on our condensed consolidated balance sheets represents the difference between the quoted market prices of our HRP and Five Star shares on September 30, 2009 ($7.52 and $3.66 per share, respectively) and our weighted costs on the dates we acquired these shares ($6.50 and $2.85 per share, respectively).

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Note 4.  Comprehensive Income

 

The following is a reconciliation of net income to comprehensive income for the three and nine months ended September 30, 2009 and 2008:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2009			2008			2009			2008
Net income		$	15,565		$	29,147		$	77,609		$	74,143
Other comprehensive income:
Change in net unrealized gain / (loss) on investments		6,273			86			6,977			(999		)
Comprehensive income		$	21,838		$	29,233		$	84,586		$	73,144

 

Note 5.  Indebtedness

 

We have an unsecured revolving credit facility that matures on December 31, 2010.  Our revolving credit facility permits borrowings up to $550,000.  The annual interest payable for amounts drawn under the facility is LIBOR plus a premium. The weighted average interest rate payable on borrowings under this revolving credit facility was 1.1% and 4.5% at September 30, 2009 and 2008, respectively.  In addition to interest, we pay certain fees to maintain this credit facility and we amortize certain set up costs.  Our revolving credit facility is available for acquisitions, working capital and general business purposes. As of September 30, 2009 and 2008, we had zero and $93,000 amounts outstanding under this credit facility, respectively, and $550,000 and $457,000 available under this credit facility, respectively.  Subject to certain conditions, this credit facility’s maturity date can be extended at our option to December 31, 2011 upon payment of a fee.

 

On August 4, 2009, a special purpose subsidiary of ours closed a $512,900 mortgage financing with the Federal National Mortgage Association, or FNMA. This mortgage loan is secured by first liens on 28 senior living properties that we own and lease to Five Star with 5,618 living units / beds located in 16 states. We used the proceeds from this mortgage financing to repay amounts outstanding under our revolving credit facility, to purchase the remaining seven MOBs from HRP and to acquire 10 MOBs and one senior living property from unaffiliated parties as described in Note 2 above.  In connection with the FNMA transaction, we realigned our four leases with Five Star.  Lease No. 1 (which is comprised of four separate leases) now includes 79 properties (excluding one property sold subsequent to September 30, 2009 as described in Note 2 above), including independent living communities, assisted living communities and skilled nursing facilities, and expires in 2024.  Lease No. 2 now includes 49 properties (excluding one property sold subsequent to September 30, 2009 as described in Note 2 above), including independent living communities, assisted living communities, skilled nursing facilities and two rehabilitation hospitals, and expires in 2026.  Lease No. 3 now includes the 28 FNMA financed properties, including independent living communities and assisted living communities, and expires in 2028.  Lease No. 4 now includes 26 properties (including one property acquired subsequent to September 30, 2009 as described in Note 2 above), including independent living communities, assisted living communities and skilled nursing facilities, and expires in 2017.  In connection with the lease realignment and the FNMA financing, we entered into a lease realignment agreement with Five Star, or the Lease Realignment Agreement.  Pursuant to the terms of the Lease Realignment Agreement, (1) the four leases, or the Leases, were reconfigured as described above, (2) we acquired certain personal property located at 28 properties in 16 states, or the Properties, from subsidiaries of Five Star and pledged that personal property to FNMA, (3) we purchased 3,200,000 shares, or the Shares, of Five Star common stock, $.01 par value per share, which represent approximately 9% of its total common stock outstanding, (4) Five Star assumed certain reporting and other operating obligations required by FNMA and (5) subsidiaries of Five Star pledged certain tangible and intangible personal property, such as accounts receivable and contract rights, located at, or arising from the operations of, the Properties to secure certain obligations to us and arising under the FNMA loan.  To compensate Five Star for its sale of personal property to us, its sale of the Shares to us, the pledge of Five Star’s intangible assets and for the services and obligations that Five Star has assumed, (1) we reduced the annual rent payable to us under Lease No. 2 by $2,000 per year for the term of that Lease; (2) we paid Five Star $18,600; and (3) we reimbursed Five Star for its out of

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

pocket expenses incurred in connection with the negotiation and closing of this transaction.  Five Star has granted certain registration rights to us with regard to the Shares and our future transfer of the Shares are subject to certain restrictions. For more information about this FNMA financing and the agreement we entered with Five Star to facilitate this financing, please see Part II, Item 5 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.

 

Note 6.  Shareholders’ Equity

 

In September 2009, we issued 6.9 million common shares in a public offering, raising net proceeds of approximately $127,160.  We used a portion of the net proceeds from this offering to acquire the 10 MOBs and one senior living property from unaffiliated parties as described in Note 2 above.  We intend to use the balance of these proceeds for general business purposes, including funding pending acquisitions and for possible future acquisitions.

 

On August 14, 2009, we paid a $0.36 per share, or $43,400, distribution to our common shareholders for the quarter ended June 30, 2009.  On October 5, 2009, we declared a distribution of $0.36 per share, or $45,856, to be paid to common shareholders of record on October 15, 2009, with respect to our results for the quarter ended September 30, 2009. We expect to pay this distribution on or about November 17, 2009.

 

On September 17, 2009, pursuant to our incentive share award plan, we granted 63,450 common shares of beneficial interest, par value $0.01 per share, valued at $19.36 per share, the closing price of our common shares on the New York Stock Exchange on that day, to our officers and certain employees of our manager, RMR.  We made these grants pursuant to an exemption from registration contained in Section 4(2) of the Securities Act.

 

Note 7.  Fair Value of Assets and Liabilities

 

The table below presents certain of our assets and liabilities measured at fair value at September 30, 2009 categorized by the level of inputs used in the valuation of each asset or liability.

 

Description		Total			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets held for sale (1)		$	3,927		$	—		$	3,927		$	—
Long-lived assets held and used (2)			16,857			—			16,857			—
Investments in available for sale securities (3)		19,360			19,360			—			—
Senior notes (4)		322,543			—			322,543			—

 

(1) Assets held for sale consist of four of our properties that we expect to sell that are reported at fair value.  We used offers to purchase the properties made by third parties or comparable sales transactions (level 2 inputs) to determine fair value of these properties.  As of September 30, 2009, the net carrying value of these properties was approximately $3,927 and we recorded an impairment charge of $1,621 for the three and nine months ended September 30, 2009 related to two of these properties.  We have recorded cumulative impairments of approximately $9,953 to these properties in order to reduce their carrying value to fair value.

 

(2) Long-lived assets held and used consist of six of our properties with a carrying amount of $26,485 that were written down to their fair value of $16,857, resulting in an impairment charge of $9,628, which was included in earnings for the period.  We used broker information and comparable sales transactions (level 2 inputs) to determine fair value of these properties.

 

(3) Our investments in available for sale securities include our 1,000,000 common shares of HRP and 3,235,000 common shares of Five Star. The fair values of these shares are based on quoted prices in active markets (level 1 inputs).

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

(4) We estimate the fair values of our senior notes using as average of the bid and ask price of our two issues of senior notes at the balance sheet date (level 2 inputs). As of September 30, 2009, the historic book value of our senior notes was $322,124.

 

In addition to the assets and liabilities described in the above table, our additional financial instruments include rents receivable, cash and cash equivalents, restricted cash, secured and unsecured debt and other liabilities. The fair values of these additional financial instruments approximate their carrying values at September 30, 2009 based upon their liquidity, short term maturity, variable rate pricing or our estimate of fair value using discounted cash flows analyses and prevailing interest rates.

 

Note 8. Segment Reporting

 

We have two reportable operating segments: (i) short term and long term residential care facilities that offer dining for residents and (ii) properties where medical related activities occur but where residential overnight stays or dining services are not provided, or MOBs.  Properties in the short term and long term residential care facilities segment include independent living facilities, assisted living facilities, skilled nursing facilities and rehabilitation hospitals.  Properties in the MOB segment include medical office, clinic and biotech laboratory buildings.  The “All Other” category in the following table includes amounts related to corporate business activities and the operating results of certain properties that offer fitness, wellness and spa services to members.  Prior to June 2008, our only operating segments were short term and long term residential care facilities that offer dining for residents and properties that offer fitness, wellness and spa services to members included in the “All Other” category.

 

		For the Three Months Ended September 30, 2009
		Short and Long Term Residential Care Facilities			MOB			All Other			Consolidated
Rental income		$	54,401		$	13,706		$	3,903		$	72,010
Interest and other income		—			—			355			355
Total revenues		54,401			13,706			4,258			72,365
Property operating expenses		—			4,112			—			4,112
Interest expense		7,475			185			8,289			15,949
Depreciation expense		15,348			3,419			922			19,689
Acquisition costs		—			517			—			517
General and administrative		—			—			5,284			5,284
Impairment of assets		3,784			7,465			—			11,249
Total expenses		26,607			15,698			14,495			56,800
Net income (loss)		$	27,794		$	(1,992	)	$	(10,237	)	$	15,565
Total assets		$	1,866,832		$	746,218		$	341,986		$	2,955,036

 

9

 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

		For the Three Months Ended September 30, 2008
		Short and Long Term Residential Care Facilities			MOB			All Other			Consolidated
Rental income		$	51,434		$	4,767		$	2,643		$	58,844
Interest and other income		—			—			829			829
Total revenues		51,434			4,767			3,472			59,673
Property operating expenses		—			1,024			—			1,024
Interest expense		1,243			173			8,190			9,606
Depreciation expense		14,025			1,181			653			15,859
General and administrative		—			—			4,303			4,303
Total expenses		15,268			2,378			13,146			30,792
Income (loss) before gain on sale of properties		36,166			2,389			(9,674		)	28,881
Gain on sale of properties		266			—			—			266
Net income (loss)		$	36,432		$	2,389		$	(9,674	)	$	29,147
Total assets		$	1,856,097		$	262,525		$	230,420		$	2,349,042

 

		For the Nine Months Ended September 30, 2009
		Short and Long Term Residential Care Facilities			MOB			All Other			Consolidated
Rental income		$	162,920		$	35,157		$	11,708		$	209,785
Interest and other income		—			—			750			750
Total revenues		162,920			35,157			12,458			210,535
Property operating expenses		—			10,286			—			10,286
Interest expense		11,544			560			25,328			37,432
Depreciation expense		45,203			8,743			2,767			56,713
Acquisition costs		—			1,911			—			1,911
General and administrative		—			—			15,335			15,335
Impairment of assets		3,784			7,465			—			11,249
Total expenses		60,531			28,965			43,430			132,926
Net income (loss)		$	102,389		$	6,192		$	(30,972	)	$	77,609
Total assets		$	1,866,832		$	746,218		$	341,986		$	2,955,036

 

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

		For the Nine Months Ended September 30, 2008
		Short and Long Term Residential Care Facilities			MOB			All Other			Consolidated
Rental income		$	149,687		$	5,000		$	5,904		$	160,591
Interest and other income		—			—			2,025			2,025
Total revenues		149,687			5,000			7,929			162,616
Property operating expenses		—			1,124			—			1,124
Interest expense		3,909			173			24,852			28,934
Depreciation expense		40,541			1,275			1,419			43,235
General and administrative		—			—			12,506			12,506
Impairment of assets		2,940			—			—			2,940
Total expenses		47,390			2,572			38,777			88,739
Income (loss) before gain on sale of properties		102,297			2,428			(30,848		)	73,877
Gain on sale of properties		266			—			—			266
Net income (loss)		$	102,563		$	2,428		$	(30,848	)	$	74,143
Total assets		$	1,856,097		$	262,525		$	230,420		$	2,349,042

 

Note 9. Significant Tenant

 

Five Star is the lessee of 59% of our investments, at cost, as of September 30, 2009.  The following tables present summary financial information for Five Star for the three and nine months ended September 30, 2009 and 2008, as reported in its Quarterly Report on Form 10-Q.

 

Summary Financial Information of Five Star Quality Care, Inc.

(unaudited)

 

		For the Three Months Ended September 30,
Operations		2009			2008
Total revenues		$	297,208		$	280,619
Operating income		1,392			2,957
Income (loss) from continuing operations		4,362			(1,587		)
Net income (loss)		4,108			(2,250		)

 

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

		For the Nine Months Ended September 30,
		2009			2008
Total revenues		$	887,731		$	808,006
Operating income		9,020			16,495
Income from continuing operations		38,569			7,177
Net income		38,058			2,856
Cash Flows
Cash provided by operating activities		32,509			44,593
Net cash provided by (used in) discontinued operations		611			(1,136		)
Cash used in investing activities		(11,036		)	(31,842		)
Cash used in financing activities		(11,790		)	(2,642		)
Change in cash and cash equivalents		10,294			8,973
Cash and cash equivalents at beginning of period		16,138			30,999
Cash and cash equivalents at end of period		26,432			39,972

 

		As of September 30,
Financial Position		2009			2008
Current assets		$	195,763		$	131,424
Non-current assets		223,825			258,096
Total indebtedness		103,725			139,125
Current liabilities		180,054			127,492
Non-current liabilities		101,199			175,824
Total shareholders’ equity		138,335			86,204

 

The summary financial information of Five Star is presented to comply with applicable accounting regulations of the SEC.  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 Five Star’s Quarterly Report is not incorporated by reference into these financial statements.

 

Five Star is our former subsidiary and both we and Five Star have management contracts with RMR.  For information about our dealings with Five Star and RMR and about the risks which may arise as a result of these related person transactions, please see our Annual Report on Form 10-K for the year ended December 31, 2008, especially the section titled “Risk Factors”.

 

Note 10.  Pro Forma Information

 

During the three months ended September 30, 2009, we purchased 17 MOBs for approximately $313,565, sold one MOB for $100 and, pursuant to the terms of our existing leases with Five Star, we purchased $6,114 of improvements made to our properties leased to Five Star.  During the nine months ended September 30, 2009, we purchased 20 MOBs for approximately $383,585, sold two MOBs for $3,190 and, pursuant to the terms of our existing leases with Five Star, we purchased $30,350 of improvements made to our properties leased to Five Star.  During the three and nine months ended September 30, 2009, we recognized an impairment of assets charge of $11,249 related to eight properties.  In August 2009, we closed on a $512,900 mortgage financing with FNMA, acquired $8,497 of personal property at the FNMA leased properties, acquired 3.2 million shares of Five Star common stock, reduced the annual rent payable to us under Five Star Lease No. 2 by $2,000 per year for the term of that Lease and incurred $11,815 of deferred financing fees related to this mortgage financing.  During 2008, we purchased 30

 

12

 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

senior living properties, four wellness centers and 38 MOBs for an aggregate of $842,900; we purchased $69,400 of improvements made to our properties leased to Five Star; we repaid in full a mortgage loan on one of our properties for $12,600 in April 2008; we assumed $61,300 of mortgage debt in conjunction with our 2008 acquisitions; we recorded an impairment charge on four of our properties for $8,380; and we sold three assisted living facilities to Five Star for $21,350 and realized a gain on sale of approximately $266 in July 2008.  During 2009 and 2008, we also issued 12,704 and 25,759 of our common shares, respectively.  The following table presents our pro forma results of operations as if all of these acquisitions, dispositions and financing transactions were completed on January 1, 2008.  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 capital structure.

 

		Pro Forma Results
		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2009			2008			2009			2008
Total revenues		$	77,985		$	77,891		$	233,224		$	233,408
Income before gain on sale of properties		$	15,798		$	10,577		$	69,769		$	65,533
Net income		$	15,798		$	10,843		$	69,769		$	65,799
Per common share data:
Income before gain on sale of properties		$	0.12		$	0.08		$	0.56		$	0.51
Net income		$	0.12		$	0.09		$	0.56		$	0.52

 

Note 11.  Affiliates Insurance Company

 

As of September 30, 2009, we have invested $5,110 in Affiliates Insurance Company, or AIC, an insurance company, that is owned by RMR and other companies to which RMR provides management services.  We own 16.67% of the common shares of AIC which has a current carrying value of $4,977.  This investment is included in other assets on our condensed consolidated balance sheets.  Although we own less than 20% of AIC, we use the equity method to account for our investment in AIC because we believe that we have significant influence over AIC since each of our trustees is a director of AIC and since we expect to procure some of our insurance from AIC.  Under the equity method, we record our percentage share of net earnings from AIC in our consolidated statements of income.  For the three and nine month periods, our share of AIC’s net losses totaled $23 and $133, respectively, and are included in general and administrative expenses on our condensed consolidated statements of income.  If we determine there is an “other than temporary” decline in the fair value of this investment, we would record a charge to earnings.  In evaluating the fair value of this investment, we consider, among other things, the assets and liabilities held by AIC, AIC’s overall financial condition and earning trends, and the financial condition and prospects for the insurance industry generally.  Subsequent to September 30, 2009, we invested an additional $24 in order to fund our share of formation and licensing costs for AIC.

 

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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, 2008.

 

PORTFOLIO OVERVIEW

 

The following tables present an overview of our portfolio (dollars in thousands except per unit/square foot):

 

(As of September 30, 2009)		Number of Properties		Number of Units/Beds or Square Feet		Investment Carrying Value (1)			% of Investment		Annualized Current Rent			% of Annualized Current Rent
Facility Type
Independent living communities (2)		43		11,524		$	1,119,530		35.1%		$	109,878		34.2%
Assisted living facilities (2)		120		8,472		910,129			28.4%		84,822			26.4%
Skilled nursing facilities (2)		58		5,844		228,536			7.1%		20,413			6.4%
Rehabilitation hospitals		2		364		61,025			1.9%		9,648			3.0%
Wellness centers		10		812,000	sq. ft.	180,017			5.6%		17,069			5.3%
MOBs		56		2,867,862	sq. ft.	702,307			21.9%		79,124			24.7%
Total		289				$	3,201,544		100.0%		$	320,954		100.0%
Tenant / Operator
Five Star (Lease No. 1) (3)		80		5,919		$	533,304		16.7%		$	45,273		14.1%
Five Star (Lease No. 2) (3)		50		6,106		502,738			15.7%		49,294			15.4%
Five Star (Lease No. 3) (3)		28		5,618		617,161			19.3%		61,564			19.2%
Five Star (Lease No. 4) (3)		25		2,461		230,636			7.2%		21,144			6.6%
Sunrise / Marriott (4)		14		4,091		325,165			10.2%		32,416			10.1%
Brookdale		18		894		61,122			1.9%		8,173			2.5%
6 private companies (combined)		8		1,115		49,094			1.5%		6,897			2.1%
Wellness centers		10		812,000	sq. ft	180,017			5.6%		17,069			5.3%
Multi-tenant MOBs		56		2,867,862	sq. ft	702,307			21.9%		79,124			24.7%
Total		289				$	3,201,544		100.0%		$	320,954		100.0%

 

Tenant Operating Statistics (Quarter Ended June 30) (5)

 

		Rent Coverage				Occupancy				Annualized Rental Income per Living Unit, Bed or Square Foot (6)
		2009		2008		2009		2008		2009			2008
Five Star (Lease No. 1) (3)		1.37x		1.23x		87%		88%		$	7,649		$	7,520
Five Star (Lease No. 2) (3) (7)		1.37x		1.44x		82%		84%		$	6,905		$	6,520
Five Star (Lease No. 3) (3)		1.52x		1.56x		89%		91%		$	10,958		$	10,670
Five Star (Lease No. 4) (3)		1.06x		1.38x		85%		90%		$	8,592		$	8,280
Sunrise / Marriott (4)		1.44x		1.43x		89%		90%		$	7,924		$	7,817
Brookdale		2.14x		2.19x		90%		91%		$	9,142		$	8,965
6 private companies (combined)		1.96x		1.92x		81%		83%		$	6,186		$	6,134
Wellness centers (8)		2.36x		2.37x		100%		100%		NA			NA
Multi-tenant MOBs (9)		NA		NA		98%		99%		$	28		$	22

 

		Short and Long Term Residential Care Facilities Percentage of Operating Revenue Sources
		Private Pay (10)				Medicare				Medicaid
		2009		2008		2009		2008		2009		2008
Five Star (Lease No. 1) (3)		60%		60%		14%		14%		26%		26%
Five Star (Lease No. 2) (3)		52%		51%		32%		32%		16%		17%
Five Star (Lease No. 3) (3)		87%		88%		12%		11%		1%		1%
Five Star (Lease No. 4) (3)		67%		69%		14%		14%		19%		17%
Sunrise / Marriott (4)		69%		81%		27%		16%		4%		3%
Brookdale		100%		99%		—		—		—		1%
6 private companies (combined)		24%		26%		24%		23%		52%		51%

 

14