DIVERSIFIED HEALTHCARE TRUST - Quarter Report: 2009 March (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 March 31, 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)

 

 

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):

 

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 May 6, 2009: 120,454,198.

 

 

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SENIOR HOUSING PROPERTIES TRUST

 

FORM 10-Q

 

March 31, 2009

 

INDEX

 

		Page
PART I	Financial Information
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets – March 31, 2009 and December 31, 2008	1
	Condensed Consolidated Statements of Income – Three Months Ended March 31, 2009 and 2008	2
	Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 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	11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
Item 4.	Controls and Procedures	18
	Warning Concerning Forward Looking Statements	19
	Statement Concerning Limited Liability	21
PART II	Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 6.	Exhibits	22
	Signatures	23

 

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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PART I.  Financial Information

 

Item 1.    Financial Statements

 

SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

(unaudited)

 

		March 31,			December 31,
		2009			2008
ASSETS
Real estate properties, at cost:
Land		$	324,491		$	319,591
Buildings and improvements		2,514,260			2,487,665
		2,838,751			2,807,256
Less accumulated depreciation		398,946			381,339
		2,439,805			2,425,917
Cash and cash equivalents		5,566			5,990
Restricted cash		4,777			4,344
Deferred financing fees, net		5,303			5,068
Acquired real estate leases, net		30,636			30,546
Other assets		22,455			25,009
Total assets		$	2,508,542		$	2,496,874
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility		$	181,000		$	257,000
Senior unsecured notes due 2012 and 2015, net of discount		322,053			322,017
Secured debt and capital leases		150,665			151,416
Accrued interest		8,180			11,121
Acquired real estate lease obligations, net		8,166			7,974
Other liabilities		19,079			15,988
Total liabilities		689,143			765,516
Commitments and contingencies
Shareholders’ equity:
Common shares of beneficial interest, $0.01 par value: 149,700,000 shares authorized, 120,398,384 and 114,542,584 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively		1,204			1,145
Additional paid-in capital		2,097,601			2,000,865
Cumulative net income		561,851			530,318
Cumulative distributions		(837,729		)	(797,639		)
Unrealized gain on investments		(3,528		)	(3,331		)
Total shareholders’ equity		1,819,399			1,731,358
Total liabilities and shareholders’ equity		$	2,508,542		$	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 March 31,
		2009			2008
Revenues:
Rental income		$	68,377		$	49,039
Interest and other income		208			514
Total revenues		68,585			49,553
Expenses:
Property operating expenses		2,955			—
Interest		10,776			9,518
Depreciation		18,389			13,023
Acquisition costs		112			—
General and administrative		4,820			3,696
Total expenses		37,052			26,237
Net income		$	31,533		$	23,316
Weighted average shares outstanding		117,853			91,080
Basic and diluted earnings per share:
Net income		$	0.27		$	0.26

 

See accompanying notes.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

		Three Months Ended March 31,
		2009			2008
Cash flows from operating activities:
Net income		$	31,533		$	23,316
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		18,389			13,023
Amortization of deferred financing fees and debt discounts		540			524
Amortization of acquired real estate leases		160			(29		)
Change in assets and liabilities:
Restricted cash		(433		)	(315		)
Other assets		2,274			1,193
Accrued interest		(2,941		)	(2,720		)
Other liabilities		3,119			2,761
Cash provided by operating activities		52,641			37,753
Cash flows from investing activities:
Acquisitions		(32,252		)	(288,944		)
Cash used for investing activities		(32,252		)	(288,944		)
Cash flows from financing activities:
Proceeds from issuance of common shares, net		96,767			129,418
Proceeds from borrowings on revolving credit facility		32,000			176,000
Repayments of borrowings on revolving credit facility		(108,000		)	(61,000		)
Repayment of other debt		(751		)	(514		)
Deferred financing fees		(739		)	—
Distributions to shareholders		(40,090		)	(31,042		)
Cash (used for) provided by financing activities		(20,813		)	212,862
Decrease in cash and cash equivalents		(424		)	(38,329		)
Cash and cash equivalents at beginning of period		5,990			43,521
Cash and cash equivalents at end of period		$	5,566		$	5,192
Supplemental cash flow information:
Interest paid		$	13,717		$	11,714
Non-cash financing activities:
Issuance of common shares pursuant to our incentive share award plan		28			—

 

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, 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 May 2008, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles”, or SFAS 162.  SFAS 162 identifies sources of accounting principles and a framework for selecting principles to be used in preparation of financial statements of nongovernmental entities that are prepared in conformity with generally accepted accounting principles in the United States (the GAAP Hierarchy).  SFAS 162 is effective 60 days following the Securities and Exchange Commission’s, or SEC’s, approval of the Public Company Accounting Oversight Board’s amendments to auditing standard AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”.  We do not expect this standard will result in any change to our current accounting practices.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations”, or SFAS No. 141(R).  SFAS No. 141(R) establishes principles and requirements for how the 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 fiscal years beginning after December 15, 2008.  The adoption of SFAS No. 141(R) does affect our consolidated financial statements, principally by requiring us to expense acquisition costs.

 

On January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”, or SFAS No. 157, for our financial assets and liabilities, primarily investments in available for sale securities and senior notes (see Note 7).  The provisions of SFAS No. 157 relating to non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis was delayed in February 2008 with the issuance of Financial Accounting Standards Board Staff Position No. 157-2, “Effective Date of FASB Statement No. 157”, or FSP FASB No. 157-2.  Fair value measurements identified in FSP FASB No. 157-2 were effective for our fiscal year beginning January 1, 2009.  The adoption of FSP FASB No. 157-2 primarily resulted in additional disclosures in our consolidated financial statements with respect to our properties classified as held for sale.

 

In April 2009, the FASB issued FASB Staff Position No. FAS 157-4 “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”, or FSP FAS 157-4, FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, or FSP FAS 115-2 and FAS 124-2, and FASB Staff Position No. FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments”, or FSP FAS 107-1 and APB 28-1.  FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, when the volume and level of activity for the assets or liabilities have significantly decreased. FSP FAS 157-4 also includes guidance on

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

identifying circumstances that indicate a transaction is not orderly.  FSP FAS 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities.  FSP FAS 107-2 and APB 28-1 amend FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements, and also amend APB Opinion No. 28, “Interim Financial Reporting” to require those disclosures in summarized financial information at interim reporting periods.   Each of these FSPs is effective for interim and annual reporting periods ending after June 15, 2009. We are currently evaluating the impact, if any, that these FSPs will have on our consolidated financial statements.

 

Note 2.  Real Estate Properties

 

At March 31, 2009, we owned 272 properties located in 34 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 $565.0 million.  To date, we have acquired 38 of these properties containing 1.6 million square feet for approximately $366.0 million, excluding closing costs.  One of the remaining buildings with an allocated value of $3.0 million is no longer subject to our purchase agreement.  We expect the closings of the remaining nine buildings to occur in 2010. We and HRP may mutually agree to accelerate the closings of these acquisitions.  We funded these acquisitions using cash on hand, proceeds from equity issuances, borrowings under our revolving credit facility and by assuming three mortgage loans on two properties totaling $10.8 million with a weighted average interest rate of 7.1% per annum and a weighted average maturity in 2018.  Our obligations to complete the remaining purchases from HRP are subject to various conditions typical of commercial real estate purchases.  We can provide no assurance that we will purchase all of these buildings or that the remaining purchases will be completed in 2010 or sooner.  As of March 31, 2009, the 47 buildings acquired and to be acquired were 98% leased to approximately 210 tenants for an average lease term of 7.8 years.  As part of this transaction, we also acquired rights of first refusal to purchase any of 45 additional buildings (containing approximately 4.6 million square feet of rental space) from HRP that are leased to tenants in medical related businesses.  HRP was formerly our parent company, and both we and HRP are managed by Reit Management & Research LLC, or RMR.  Because we and HRP are both managed by RMR, the terms of these transactions were negotiated by special committees of our and HRP’s boards of trustees composed solely of independent trustees who were not also independent trustees of both companies.  For more information about our dealings with HRP and RMR and about the risks which may arise as a result of these related party transactions, please see our Annual Report on Form 10-K for the year ended December 31, 2008.

 

As of March 31, 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 $8.7 million at March 31, 2009.  In 2008, we entered into an agreement to sell one of these properties to an unaffiliated party for approximately $1.2 million.  In April 2009, we entered into another agreement to sell one of these properties to an unaffiliated party for approximately $3.1 million. The sales of these properties are subject to various contingencies, and we can provide no assurance that we will sell these properties.

 

During the three months ended March 31, 2009, pursuant to the terms of our existing leases with Five Star Quality Care, Inc., or Five Star, we purchased $12.7 million 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 $1.0 million.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Note 3.  Net Unrealized Loss on Investments

 

On March 31, 2009, we owned 1,000,000 common shares of HRP and 35,000 common shares of Five Star, which are carried at fair market value in other assets on our condensed consolidated balance sheets. The net unrealized loss on investments shown on our condensed consolidated balance sheets represents the difference between the quoted market prices of such shares on March 31, 2009 ($3.19 and $1.04 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 months ended March 31, 2009 and 2008:

 

		Three Months Ended March 31,
		2009			2008
Net income		$	31,533		$	23,316
Other comprehensive income:
Change in net unrealized loss on investments		(197		)	(1,068		)
Comprehensive income		$	31,336		$	22,248

 

Note 5.  Indebtedness

 

We have an unsecured revolving credit facility that matures in December 2010.  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 weighted average interest rate payable on borrowings under this revolving credit facility was 1.3% and 3.5% at March 31, 2009 and 2008, respectively.  Our revolving credit facility is available for acquisitions, working capital and general business purposes. As of March 31, 2009 and 2008, we had $181.0 million and $115.0 million outstanding under this credit facility, respectively.  Subject to certain conditions, at our option, this credit facility’s maturity date can be extended to December 31, 2011 upon payment of a fee.

 

Note 6.  Shareholders’ Equity

 

On February 13, 2009, we paid a $0.35 per share, or $40.1 million, distribution to our common shareholders for the quarter ended December 31, 2008.  On April 7, 2009, we declared a distribution of $0.35 per share, or $42.2 million, to be paid to common shareholders of record on April 17, 2009, with respect to our results for the quarter ended March 31, 2009. We expect to pay this distribution on or about May 15, 2009.

 

In February 2009, we issued 5.9 million common shares in a public offering, raising net proceeds of approximately $96.8 million.  We used the net proceeds from this offering to repay borrowings outstanding on our revolving credit facility, to fund the acquisitions described above and for general business purposes.

 

On February 24, 2009, pursuant to our incentive share award plan, we granted 2,000 common shares of beneficial interest, par value $0.01 per share, valued at $14.23 per share, the closing price of our common shares on the New York Stock Exchange on that day, as compensation to Jeffrey P. Somers, one of our Independent Trustees, who was appointed as a trustee effective January 30, 2009.  We made this grant pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Under the terms of our business management agreement with RMR, on April 8, 2009 we issued 55,814 common shares in payment of an incentive fee of approximately $789 for services rendered by RMR during 2008. We issued these shares pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended.

 

Note 7.  Fair Value of Assets and Liabilities

 

The table below presents the assets and liabilities measured at fair value at March 31, 2009 categorized by the level of inputs used in the valuation of each asset, in accordance with SFAS No. 157.

 

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)		$	8,671		$	—		$	8,671		$	—
Investments in available for sale securities (2)		3,226			3,226			—			—
Senior notes (3)		282,107			—			282,107			—

 

(1) Assets held for sale consist of four of our properties we expect to sell that are reported at fair value.  Level 2 inputs used to determine fair value include offers to purchase the properties made by third parties, or comparable sales transactions.  As of March 31, 2009, the net carrying value of these properties was approximately $8.7 million.  We have recorded impairments to these properties subsequent to their acquisition by us of approximately $8.6 million in order to reduce their carrying value to fair value.

 

(2) Investments in available for sale securities include our 1,000,000 common shares of HRP and 35,000 common shares of Five Star. The fair values of the common shares are based on quoted prices in active markets.  We have evaluated the near-term prospects of HRP and Five Star in relation to the severity and duration of the decline in fair value of their common shares.  Based on that evaluation and our ability and intent to hold these investments for a reasonable period of time sufficient for a recovery of fair value, we do not consider these investments to be other-than-temporarily impaired at March 31, 2009.

 

(3) We estimate the fair values of our senior notes using discounted cash flow analyses and currently prevailing interest rates. As of March 31, 2009, the book value carrying amount of our senior notes was $322.1 million.

 

In addition to the assets and liabilities described in the above table, additional financial instruments of ours 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 value at March 31, 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 services are offered 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

 

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

 

fitness, wellness and spa service 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 March 31, 2009
		Short and Long Term Residential Care Facilities			MOB			All Other			Consolidated
Rental income		$	54,037		$	10,446		$	3,894		$	68,377
Interest and other income		—			13			195			208
Total revenues		54,037			10,459			4,089			68,585
Property operating expenses		—			2,955			—			2,955
Interest expense		2,030			184			8,562			10,776
Depreciation expense		14,873			2,594			922			18,389
Acquisition costs		—			112			—			112
General and administrative expense		—			—			4,820			4,820
Total expenses		16,903			5,845			14,304			37,052
Net income (loss)		$	37,134		$	4,614		$	(10,215	)	$	31,533
Total assets		$	1,885,213		$	392,770		$	230,559		$	2,508,542

 

		For the Three Months Ended March 31, 2008
		Short and Long Term Residential Care Facilities			MOB			All Other			Consolidated
Rental income		$	47,353		$	—		$	1,686		$	49,039
Interest and other income		—			—			514			514
Total revenues		47,353			—			2,200			49,553
Interest expense		1,449			—			8,069			9,518
Depreciation expense		12,640			—			383			13,023
General and administrative expense		—			—			3,696			3,696
Total expenses		14,089			—			12,148			26,237
Net income (loss)		$	33,264		$	—		$	(9,948	)	$	23,316
Total assets		$	1,831,412		$	—		$	105,560		$	1,936,972

 

Note 9.  Significant Tenant

 

Five Star is the lessee of 66% of our investments, at cost, as of March 31, 2009.  The following tables present summary financial information for Five Star for the three months ended March 31, 2009 and 2008, as reported in its Quarterly Report on Form 10-Q.

 

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

 

Summary Financial Information of Five Star Quality Care, Inc.

 

		As of and for the Three Months Ended March 31,
		2009			2008
Total revenues		$	295,165		$	258,877
Operating income		3,361			7,355
Income from continuing operations		24,962			4,419
Net income		25,372			1,617
Current assets		116,305			146,314
Non-current assets		298,535			240,156
Total indebtedness		129,679			142,452
Current liabilities		135,797			124,980
Non-current liabilities		167,272			172,210
Total shareholders’ equity		111,771			89,280
Net cash provided by operating activities		23,090			21,689
Net cash provided by (used in) discontinued operations		1,532			(58		)
Net cash used in investing activities		(6,173		)	(543		)
Net cash used in financing activities		(6,161		)	(58		)
Net increase in cash		12,288			21,030
Cash and cash equivalents at the beginning of the period		16,138			30,999
Cash and cash equivalents at the end of the period		28,426			52,029

 

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 such 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 about the risks which may arise as a result of these related party transactions, please see our Annual Report on Form 10-K for the year ended December 31, 2008.

 

Note 10.  Pro Forma Information

 

During the three months ended March 31, 2009, we purchased one MOB for $19.3 million and, pursuant to the terms of our existing leases with Five Star, we purchased $12.7 million of improvements made to our properties leased to Five Star.  During 2008, we purchased 30 senior living properties, four wellness centers and 38 MOBs for an aggregate of $842.9 million and $69.4 million of improvements made to our properties leased to Five Star; repaid in full a mortgage loan on one of our properties for $12.6 million in April 2008; assumed $61.3 million of mortgage debt in conjunction with our 2008 acquisitions; recorded an impairment charge on four of our properties for $8.4 million; and sold three assisted living facilities to Five Star for $21.4 million for a gain on sale of approximately $266 in July 2008.  During 2009 and 2008, we issued 5.9 million and 25.8 million of our common shares, respectively.  The following table presents our pro forma results of operations as if all of these acquisitions and related financings were completed on

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

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 structure.

 

		Pro Forma Information For the Three Months Ended March 31,
		2009			2008
Total revenues		$	68,934		$	69,166
Income before gain on sale of properties		$	31,742		$	25,031
Net income		$	31,742		$	25,297
Per common share data:
Income before gain on sale of properties		$	0.26		$	0.21
Net income		$	0.26		$	0.21

 

Note 11.  Affiliates Insurance Company

 

In February 2009 we invested $25 in an insurance company with RMR and other companies to which RMR provides management services, and in April 2009 we invested an additional $5.0 million in this insurance company.  We currently own approximately 16.67% of this insurance company.

 

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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:

 

As of March 31, 2009 (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)		42		11,465		$	1,101,141		38.8%		$	108,029		38.0%
Assisted living facilities		121		8,531		908,621			32.0%		85,162			30.0%
Skilled nursing facilities		58		5,844		229,798			8.1%		19,954			7.1%
Rehabilitation hospitals		2		364		57,279			2.0%		11,348			4.0%
Wellness centers (3)		10		—		180,017			6.3%		17,069			6.0%
MOBs (4)		39		—		361,895			12.8%		42,355			14.9%
Total		272		26,204		$	2,838,751		100.0%		$	283,917		100.0%
Tenant/Operator
Five Star (Lease No. 1)		100		8,600		$	718,621		25.3%		$	63,764		22.4%
Five Star (Lease No. 2)		32		7,639		765,062			27.0%		81,942			28.9%
Five Star (Lease No. 3)		44		3,251		311,167			11.0%		23,746			8.4%
Five Star (Lease No. 4)		7		614		66,608			2.3%		7,596			2.7%
Sunrise/Marriott (5)		14		4,091		325,165			11.5%		32,547			11.5%
Brookdale Senior Living, Inc.		18		894		61,122			2.2%		8,000			2.8%
6 private companies (combined)		8		1,115		49,094			1.6%		6,898			2.4%
Starmark (3)		6		—		80,008			2.8%		6,519			2.3%
Life Time Fitness (3)		4		—		100,009			3.5%		10,550			3.7%
Multi-tenant MOBs (4)		39		—		361,895			12.8%		42,355			14.9%
Total		272		26,204		$	2,838,751		100.0%		$	283,917		100.0%

Tenant Operating Statistics (Quarter Ended December 31, 2008) (6)

 

										Percentage of Operating Revenue Sources
		Rent Coverage				Occupancy				Private Pay				Medicare				Medicaid
		2008		2007		2008		2007		2008		2007		2008		2007		2008		2007
Five Star (Lease No. 1) (7)		1.22x		1.37x		89%		90%		65%		63%		13%		13%		22%		24%
Five Star (Lease No. 2)		1.40x		1.56x		87%		90%		68%		69%		29%		28%		3%		3%
Five Star (Lease No. 3) (7)		1.19x		2.07x		85%		85%		55%		23%		14%		24%		31%		53%
Five Star (Lease No. 4)		0.83x		1.36x		83%		81%		98%		100%		—		—		2%		—
Sunrise/Marriott (5)		1.31x		1.90x		91%		90%		77%		79%		19%		17%		4%		4%
Brookdale Senior Living, Inc.		2.01x		1.85x		95%		91%		99%		98%		—		—		1%		2%
6 private companies (combined)		1.97x		2.09x		83%		88%		23%		24%		24%		24%		53%		52%
Starmark (3)		1.91x		1.93x		100%		100%		NA		NA		NA		NA		NA		NA
Life Time Fitness (3)		2.59x		NA		100%		NA		NA		NA		NA		NA		NA		NA
Multi-tenant MOBs (4)		NA		NA		99%		NA		NA		NA		NA		NA		NA		NA

Tenant Operating Statistics (Twelve Months Ended December 31, 2008) (6)

 

										Percentage of Operating Revenue Sources
		Rent Coverage				Occupancy				Private Pay				Medicare				Medicaid
		2008		2007		2008		2007		2008		2007		2008		2007		2008		2007
Five Star (Lease No. 1) (7)		1.27x		1.33x		89%		90%		65%		64%		13%		13%		22%		23%
Five Star (Lease No. 2)		1.46x		1.53x		88%		90%		69%		69%		28%		28%		3%		3%
Five Star (Lease No. 3) (7)		1.41x		2.73x		85%		86%		45%		24%		17%		24%		38%		52%
Five Star (Lease No. 4)		1.10x		1.40x		84%		88%		99%		100%		—		—		1%		—
Sunrise/Marriott (5)		1.47x		1.42x		91%		89%		79%		79%		17%		18%		4%		3%
Brookdale Senior Living, Inc.		2.11x		2.05x		93%		89%		99%		98%		—		—		1%		2%
6 private companies (combined)		1.95x		1.92x		84%		88%		26%		24%		23%		24%		51%		52%
Starmark (3)		2.00x		NA		100%		NA		NA		NA		NA		NA		NA		NA
Life Time Fitness (3)		NA		NA		NA		NA		NA		NA		NA		NA		NA		NA
Multi-tenant MOBs (4)		NA		NA		NA		NA		NA		NA		NA		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)	The Starmark and Life Time Fitness wellness centers have a total of 812,000 square feet.
(4)	Since June 2008, we have acquired a total of 39 medical office, clinic and biotech laboratory buildings, or MOBs. The carrying value of these investments is before depreciation and includes intangible lease assets and liabilities. These MOBs have a total of approximately 1.7 million square feet.
(5)	Marriott International, Inc., or Marriott, guarantees this lease.
(6)	All tenant operating data presented are based upon the operating results provided by our tenants for the indicated quarterly or annual 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 independently verified our tenants’ operating data.
(7)	Excludes data for periods prior to our ownership of certain properties included in this lease.

 

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RESULTS OF OPERATIONS

 

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008:

 

 

Rental income increased because of rents earned from our real estate acquisitions since April 1, 2008, including $10.4 million of rental income in the first quarter of 2009 due to our acquisition of 39 MOBs, offset by rent reductions resulting from the sale of three properties during the third quarter of 2008.  Interest and other income decreased as a result of lower levels of investable cash in money market funds and lower interest rates.

 

Property operating expenses for the quarter ended March 31, 2009 is the result of our acquisition of 39 MOBs since June 2008 and principally includes expenses related to real estate taxes, utilities, cleaning costs and property management fees paid to Reit Management & Research LLC, or RMR.

 

Interest expense increased because of greater amounts outstanding under our revolving credit facility offset by lower interest rates under our revolving credit facility. Our weighted average balance outstanding and interest rate under our revolving credit facility was $216.2 million and 1.3% and $24.0 million and 4.6% for the three months ended March 31, 2009 and 2008, respectively.  This increase was also due to $61.3 million of debt assumed as part of our third quarter 2008 acquisitions offset by our prepayment of a mortgage of $12.6 million on April 1, 2008.

 

Depreciation expense for the first quarter of 2009 increased because of acquisitions since April 1, 2008. Acquisition costs represent the closing costs associated with our acquisitions that are expensed under Statement of Financial Accounting Standards No. 141(R), “Business Combinations”, commencing January 1, 2009.  General and administrative expenses increased in 2009 principally due to our acquisitions since April 1, 2008, and higher legal fees and accounting fees.

 

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 June 2008 and February 2009.

 

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