DIVERSIFIED HEALTHCARE TRUST - Quarter Report: 2011 March (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 March 31, 2011

 

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)

 

 

Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634

(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 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):

 

 

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 April 28, 2011: 141,863,596.

 

 

 

SENIOR HOUSING PROPERTIES TRUST

 

FORM 10-Q

 

March 31, 2011

 

INDEX

 

		Page
PART I	Financial Information
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets — March 31, 2011 and December 31, 2010	1
	Condensed Consolidated Statements of Income — Three Months Ended March 31, 2011 and 2010	2
	Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2011 and 2010	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	32
	Warning Concerning Forward Looking Statements	33
	Statement Concerning Limited Liability	36
PART II	Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 6.	Exhibits	37
	Signatures	38

 

In this Quarterly Report on Form 10-Q, the terms “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)

 

		March 31,			December 31,
		2011			2010
ASSETS
Real estate properties:
Land		$	464,022		$	446,622
Buildings and improvements		3,409,096			3,315,090
		3,873,118			3,761,712
Less accumulated depreciation		562,609			538,872
		3,310,509			3,222,840
Cash and cash equivalents		14,810			10,866
Restricted cash		5,158			4,994
Deferred financing fees, net		17,372			16,262
Acquired real estate leases, net		72,339			63,593
Other assets		105,220			74,101
Total assets		$	3,525,408		$	3,392,656
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility		$	25,000		$	128,000
Senior unsecured notes due 2012, 2016 and 2020, net of discount		670,410			422,880
Secured debt and capital leases		651,657			654,010
Accrued interest		16,063			14,993
Acquired real estate lease obligations, net		18,806			18,239
Other liabilities		32,554			26,557
Total liabilities		1,414,490			1,264,679
Commitments and contingencies
Shareholders’ equity:
Common shares of beneficial interest, $0.01 par value: 149,700,000 shares authorized, 141,863,596 and 141,854,657 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		1,419			1,418
Additional paid in capital		2,510,476			2,510,373
Cumulative net income		788,293			756,518
Cumulative distributions		(1,206,354		)	(1,153,868		)
Unrealized gain on investments		17,084			13,536
Total shareholders’ equity		2,110,918			2,127,977
Total liabilities and shareholders’ equity		$	3,525,408		$	3,392,656

 

See accompanying notes.

 

1

 

SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands, except per share data)

(unaudited)

 

		Three Months Ended March 31,
		2011			2010
Rental income		$	98,077		$	80,447
Expenses:
Depreciation		26,361			22,289
Property operating expenses		10,003			4,385
General and administrative		6,134			5,491
Acquisition costs		1,113			35
Total expenses		43,611			32,200
Operating income		54,466			48,247
Interest and other income		255			257
Interest expense		(22,746		)	(18,414		)
Impairment of assets		(166		)	—
Equity in earnings (losses) of an investee		37			(28		)
Income before income tax expense		31,846			30,062
Income tax expense		(71		)	(78		)
Net income		$	31,775		$	29,984
Weighted average shares outstanding		141,855			127,380
Earnings per share:
Net income		$	0.22		$	0.24

 

See accompanying notes.

 

2

 

SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

		Three Months Ended March 31,
		2011			2010
Cash flows from operating activities:
Net income		$	31,775		$	29,984
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		26,361			22,289
Amortization of deferred financing fees and debt discounts		1,071			558
Amortization of acquired real estate leases		(216		)	275
Impairment of assets		166			—
Equity in (earnings) losses of an investee		(37		)	28
Change in assets and liabilities:
Restricted cash		(164		)	(421		)
Other assets		(1,170		)	747
Accrued interest		1,070			(2,857		)
Other liabilities		6,205			1,406
Cash provided by operating activities		65,061			52,009
Cash flows from investing activities:
Acquisitions		(148,525		)	(6,362		)
Investment in Affiliates Insurance Company		—			(20		)
Cash used for investing activities		(148,525		)	(6,382		)
Cash flows from financing activities:
Costs of issuing common shares		(103		)	—
Proceeds from issuance of unsecured senior notes, net		247,327			—
Proceeds from borrowings on revolving credit facility		45,000			30,000
Repayments of borrowings on revolving credit facility		(148,000		)	(32,000		)
Repayment of other debt		(2,353		)	(2,196		)
Payment of deferred financing fees		(1,977		)	(583		)
Distributions to shareholders		(52,486		)	(45,856		)
Cash provided by (used for) financing activities		87,408			(50,635		)
Increase (decrease) in cash and cash equivalents		3,944			(5,008		)
Cash and cash equivalents at beginning of period		10,866			10,494
Cash and cash equivalents at end of period		$	14,810		$	5,486
Supplemental cash flow information:
Interest paid		$	20,605		$	21,271
Income taxes paid		102			144
Non-cash financing activities:
Issuance of common shares		207			590

 

See accompanying notes.

 

3

 

SENIOR HOUSING PROPERTIES TRUST

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 we, us, or our, have been prepared without audit.  Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, 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, 2010, or our Annual Report.  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 were made to conform the prior year property operating expenses to the current year classification.  These reclassifications had no effect on net income or shareholders’ equity.

 

Note 2.  Real Estate Properties

 

At March 31, 2011, we owned 327 properties located in 37 states and Washington, D.C.

 

In November 2010, we entered into a series of agreements to acquire 27 medical office buildings, or MOBs, located in 12 states from CommonWealth REIT, or CWH, for an aggregate purchase price of approximately $470,000, excluding closing costs.  Between November and December 31, 2010, we acquired 21 of these properties containing 2.1 million square feet for approximately $374,130, excluding closing costs.  In January 2011, we acquired the remaining six properties containing 737,000 square feet for approximately $95,870, excluding closing costs.  We recorded intangible lease assets and liabilities of approximately $9,217 and $1,600, respectively, related to these six MOB acquisitions in 2011.  We funded these acquisitions using cash on hand, proceeds from an equity issuance, proceeds from a debt issuance and borrowings under our revolving credit facility.

 

In January 2011, we acquired one MOB with 82,854 square feet located in Mendota Heights, Minnesota for approximately $14,150, excluding closing costs.  We recorded intangible lease assets of approximately $2,722 related to this acquisition.  We funded this acquisition using cash on hand and proceeds from a debt offering.

 

In March 2011, we agreed to acquire 20 senior living communities located in five states with an aggregate of 2,111 living units for approximately $304,000, excluding closing costs.  We expect to lease 15 of the 20 communities, costing approximately $211,500, to our taxable REIT subsidiary and that our former subsidiary, Five Star Quality Care, Inc., or Five Star, will manage them under a long term contract.  We expect to lease the remaining five communities, which will cost approximately $92,500, to Five Star and to add them to the combination leases currently in effect between us and Five Star.  We expect to acquire these communities during the second quarter of 2011, subject to required regulatory approvals and lender approval of our assumption of mortgage debts on certain properties.  We expect to fund this acquisition with cash on hand, borrowings under our revolving credit facility and the assumption of approximately $79,000 of mortgage debt.

 

As of April 28, 2011, we have agreed to acquire one additional senior living facility, with 73 living units, and five MOBs with an aggregate of approximately 206,900 square feet, for combined purchase prices totaling approximately $36,500, excluding closing costs.  We expect to acquire these properties during the second quarter of 2011 and to fund these acquisitions using cash on hand and borrowings under our revolving credit facility.  The purchase of these properties is contingent upon our completion of diligence and other customary closing conditions; accordingly, we can provide no assurance that we will purchase these properties.

 

4

 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

At March 31, 2011, six of our properties are classified as held for sale.  These six properties are included in real estate properties on our consolidated balance sheets and have a net book value of approximately $9,192 and $9,422 at March 31, 2011 and December 31, 2010, respectively.  We have entered agreements to sell these six properties for combined sales prices totaling approximately $19,635.  We expect the sale of these properties to occur during the second quarter of 2011.  The sale of these properties is contingent upon the buyer’s completion of diligence and other customary closing conditions; accordingly, we can provide no assurance that we will sell these properties.

 

We periodically evaluate our properties for impairments. Impairment indicators may include declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life and legislative, market or industry changes that could permanently reduce the value of a property. If indicators of impairment are present, we evaluate the carrying value of the affected property by comparing it to the expected future undiscounted cash flows to be generated from that property. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value.  During the three months ended March 31, 2011, we recorded impairment of assets charges of $166 to reduce the carrying value of two of our properties to their estimated fair value based upon expected sales prices less costs to sell.

 

During the three months ended March 31, 2011, pursuant to the terms of our leases with Five Star, we purchased approximately $10,837 of improvements made to our properties which are leased by Five Star and the annual rent payable to us by Five Star increased by approximately $869 for the affected leases.

 

Note 3.  Unrealized Gain on Investments

 

On March 31, 2011, we owned 250,000 common shares of CWH, 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 value at quoted market prices of our CWH and Five Star shares on March 31, 2011 ($25.97 and $8.13 per share, respectively) and our weighted average costs on the dates we acquired these shares ($26.00 and $2.85 per share, respectively).

 

Note 4.  Indebtedness

 

Our principal debt obligations at March 31, 2011 were our $550,000 unsecured revolving credit facility, with $25,000 outstanding on March 31, 2011, three public issues of unsecured senior notes totaling $670,410 and $637,171 of mortgages secured by 62 of our properties.  These 62 collateralized properties had a carrying value of $735,425 at March 31, 2011.  We also have two properties recorded under capital leases totaling $14,486 at March 31, 2011.  These two properties had a carrying value of $17,510 at March 31, 2011.

 

The interest payable for amounts drawn under our $550,000 revolving credit facility is LIBOR plus a spread.  We can borrow, repay and reborrow until maturity, and no principal repayment is due until maturity.  The interest rate payable on borrowings under this revolving credit facility was 1.1% and 1.0% at March 31, 2011 and 2010, respectively.  In addition to interest, we pay certain fees to maintain this revolving 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 March 31, 2011 and 2010, we had $25,000 and $58,000 outstanding under this revolving credit facility, respectively, and $525,000 and $492,000 available under this revolving credit facility, respectively.  Our revolving credit facility contains financial covenants and requires us to maintain financial ratios and a minimum net worth.  We believe we were in compliance with these covenants during the periods presented.  This revolving credit facility matures in December 2011.  We are currently monitoring market conditions for comparable revolving credit facilities and expect to refinance our revolving credit facility prior to its maturity.

 

5

 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

In January 2011, we sold $250,000 of senior unsecured notes.  The notes require interest at a fixed rate of 4.30% per annum and are due in 2016.  Net proceeds from these sale of the notes, after underwriting discounts and fees and before other expenses, were approximately $245,828.  Interest on the notes is payable semi-annually in arrears.  No principal payments are due until maturity.  We used the net proceeds of this offering to repay $120,000 in borrowings under our revolving credit facility and for general business purposes, including funding in part the acquisitions described in Note 2 above.

 

Note 5.  Shareholders’ Equity

 

On February 11, 2011, we paid a $0.37 per share, or $52,486, distribution to our common shareholders with respect to our operating results in the quarter ended December 31, 2010.  On April 4, 2011, we declared a distribution of $0.37 per share, or $52,490, to be paid to common shareholders of record on April 15, 2011, with respect to our results for the quarter ended March 31, 2011; we expect to pay this distribution on or about May 12, 2011.  On May 14, 2010, we paid a $0.36 per share, or $45,865, distribution to our common shareholders for the quarter ended March 31, 2010.

 

Under the terms of our business management agreement with Reit Management & Research LLC, or RMR, on March 30, 2011, we issued 8,939 common shares in payment of an incentive fee of approximately $207 for services rendered to us by RMR during 2010. We issued these shares pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended, or the Securities Act.

 

Note 6.  Comprehensive Income

 

Cumulative other comprehensive income represents the net unrealized gain on the shares of CWH and Five Star common stock we own and our share of the comprehensive income of Affiliates Insurance Company, or AIC.  See Note 3 and Note 10 for a description of these investments.  The following is a reconciliation of net income to comprehensive income for the three months ended March 31, 2011 and 2010:

 

 

Note 7.  Fair Value of Assets and Liabilities

 

The table below presents certain of our assets and liabilities measured at fair value at March 31, 2011 categorized by the level of inputs used in the valuation of each asset or liability.

 

6

 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Description		Total			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)
Assets held for sale (1)		$	9,192		$	—		$	9,192
Investments in available for sale securities (2)		32,793			32,793			—
Senior notes (3)		700,566			700,566			—

 

(1) Assets held for sale consist of six 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.  We have recorded cumulative impairments of approximately $5,006 to three of these properties in order to reduce their book values to fair values.

 

(2) Our investments in available for sale securities include our 250,000 common shares of CWH and 3,235,000 common shares of Five Star. The fair values of these shares are based on quoted prices at March 31, 2011 in active markets (level 1 inputs).

 

(3) We estimate the fair values of our senior notes using an average of the bid and ask price of our three issues of senior notes (level 1 inputs) on or about March 31, 2011.  The fair values of these senior note obligations exceed their book values of $670,410 by $30,156 because these notes were trading at a premium to their face amounts.

 

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 March 31, 2011 based upon their liquidity, short term maturity, variable rate pricing or our estimate of fair value using discounted cash flow analyses and prevailing interest rates.

 

Note 8.  Segment Reporting

 

We have three operating segments, of which two are reportable operating segments.  The two reportable operating segments are: (i) short term and long term residential care facilities that offer dining for residents and (ii) MOBs where medical related services are offered that do not provide residential overnight stays or dining services.  Properties in the short term and long term residential care facilities segment include independent living communities, assisted living communities, 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.

 

7

 

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 March 31, 2011
		Short and Long Term Residential Care Facilities			MOB			All Other			Consolidated
Rental income		$	57,108		$	36,616		$	4,353		$	98,077
Expenses:
Depreciation expense		16,730			8,683			948			26,361
Property operating expenses		—			10,003			—			10,003
General and administrative		—			—			6,134			6,134
Acquisition related costs		—			1,113			—			1,113
Total expenses		16,730			19,799			7,082			43,611
Operating income (loss)		40,378			16,817			(2,729		)	54,466
Interest and other income		—			—			255			255
Interest expense		(10,274		)	(217		)	(12,255		)	(22,746		)
Impairment of assets		—			(166		)	—			(166		)
Equity in earnings of an investee		—			—			37			37
Income (loss) before income tax expense		30,104			16,434			(14,692		)	31,846
Income tax expense		—			—			(71		)	(71		)
Net income (loss)		$	30,104		$	16,434		$	(14,763	)	$	31,775
Total assets		$	1,883,430		$	1,276,755		$	365,223		$	3,525,408

 

8

 

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 March 31, 2010
		Short and Long Term Residential Care Facilities			MOB			All Other			Consolidated
Rental income		$	56,597		$	19,560		$	4,290		$	80,447
Expenses:
Depreciation expense		16,435			4,906			948			22,289
Property operating expenses		—			4,385			—			4,385
General and administrative		—			—			5,491			5,491
Acquisition costs		—			35			—			35
Total expenses		16,435			9,326			6,439			32,200
Operating income (loss)		40,162			10,234			(2,149		)	48,247
Interest and other income		—			—			257			257
Interest expense		(10,243		)	(169		)	(8,002		)	(18,414		)
Equity in losses of an investee		—			—			(28		)	(28		)
Income (loss) before income tax expense		29,919			10,065			(9,922		)	30,062
Income tax expense		—			—			(78		)	(78		)
Net income (loss)		$	29,919		$	10,065		$	(10,000	)	$	29,984
Total assets		$	1,959,151		$	733,703		$	273,168		$	2,966,022

 

Note 9. Significant Tenant

 

Rent from Five Star was 47% of our annual rents as of March 31, 2011.  The following tables present summary financial information for Five Star for the three months ended March 31, 2011 and 2010, 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 March 30,
Operations		2011			2010
Total revenues		$	308,341		$	298,844
Operating income		6,070			5,111
Income from continuing operations		5,622			4,592
Net income		4,133			4,085

 

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 March 31,
Cash Flows		2011			2010
Cash provided by operating activities		$	20,360		$	15,173
Net cash used in discontinued operations		(1,114		)	(92		)
Cash used in investing activities		(18,371		)	(6,127		)
Cash provided by (used in) financing activities		4,363			(2,831		)
Change in cash and cash equivalents		5,238			6,123
Cash and cash equivalents at beginning of period		20,770			5,017
Cash and cash equivalents at end of period		26,008			11,140

 

		As of March 31,
Financial Position		2011			2010
Current assets		$	156,741		$	182,574
Non-current assets		244,954			230,412
Total indebtedness		50,073			98,458
Current liabilities		155,334			175,315
Non-current liabilities		76,863			93,216
Total shareholders’ equity		169,498			144,455

 

The summary financial information of Five Star is presented to comply with applicable regulations of the Securities and Exchange Commission, or 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 on Form 10-Q is not incorporated by reference into these financial statements.

 

Note 10.  Related Person Transactions

 

Five Star is our former subsidiary, Five Star is our largest tenant, and we are Five Star’s largest shareholder.  As of March 31, 2011, we owned 3.2 million shares of common stock of Five Star, which represented approximately 9.0% of Five Star’s outstanding shares of common stock.  RMR provides management services to both us and Five Star.  As of March 31, 2011, we leased 186 senior living communities and two rehabilitation hospitals to Five Star.  Under Five Star’s leases with us, Five Star pays us rent based on minimum annual rent amounts plus percentage rent based on increases in gross revenues at certain properties.  Five Star’s total minimum annual rent payable to us under those leases as of March 31, 2011 was $187,656, excluding percentage rent.  The total rent we recognized from Five Star for the three months ended March 31, 2011 and 2010 was $46,694 and $46,089, respectively, and as of March 31, 2011 and December 31, 2010, our rents receivable from Five Star were $16,819 and $16,762, respectively, and are included in other assets on our condensed consolidated balance sheets.  Additional information regarding our leases with Five Star appears in our Annual Report.

 

Since January 2011, pursuant to the terms of our leases with Five Star, we purchased approximately $10,837 of improvements made to our properties leased by Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $869.

 

In March 2011, we agreed to acquire 20 senior living communities located in five states with an aggregate of 2,111 living units for approximately $304,000, excluding closing costs.  We expect to lease 15 of the 20 communities, costing approximately $211,500, to our taxable REIT subsidiary and that Five Star will manage them under a long term contract.  We expect to lease the remaining five communities, which will cost approximately $92,500, to Five Star and to add them to the combination leases currently in effect between us and Five Star.  The terms of the agreements between us and Five Star are subject to approval by special committees of each of our Board of Trustees and Five Star’s Board of Directors composed solely of Independent Trustees / Directors who are not also Trustees / Directors of the other party.  We expect to acquire these communities during the second quarter of 2011, subject to required regulatory approvals and lender approval of our assumption of mortgage debts on certain properties.

 

10

 

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

In November 2010, at Five Star’s request, we agreed to sell three skilled nursing facilities in Georgia with a total of 329 licensed beds that are leased to Five Star for an aggregate sales price of approximately $18,000, and we expect Five Star’s annual rent to us to decrease by approximately $1,800 if and after this sale closes.  We expect the sale of these properties to occur during the second quarter of 2011.  The sale of these properties is contingent upon the buyer’s completion of diligence and other customary closing conditions; accordingly, we can provide no assurance that the closing of our sale of these properties will be completed.

 

In January 2011, at Five Star’s request, we agreed to sell one assisted living community in Pennsylvania with 70 licensed living units that is leased to Five Star for a sales price of approximately $800, and we expect Five Star’s annual rent to us to decrease by approximately $72 if and after this sale closes.  We expect the sale of this property to occur during the second quarter of 2011.  The sale of this property is contingent upon the buyer’s completion of diligence and other customary closing conditions; accordingly, we can provide no assurance that the closing of our sale of this property will be completed.

 

CWH was formerly our parent.  We were spun off to CWH’s shareholders in 1999.  In November 2010, we entered into a series of agreements for our purchase from CWH of 27 properties which are majority leased as MOBs for an aggregate purchase price of approximately $470,000, excluding closing costs.  These properties include approximately 2.8 million square feet and were subject to our rights of first refusal to purchase in the event CWH determined to sell these properties.  In November and December 2010, we acquired 21 of these properties; in January 2011, we acquired the remaining six properties containing 737,000 square feet for approximately $95,870, excluding closing costs.

 

Pursuant to our business management agreement with RMR, we recognized expenses of $4,818 and $4,218 for the three months ended March 31, 2011 and 2010, respectively.  These amounts are included in general and administrative expenses in our condensed consolidated statements of income.  Pursuant to our property management agreement with RMR, we recognized expenses of $1,024 and $552 for the three months ended March 31, 2011 and 2010, respectively.  These amounts are included in property operating expenses in our condensed consolidated statements of income.  Under the terms of our business management agreement with RMR, on March 30, 2011, we issued 8,939 common shares to RMR in payment of an incentive fee of approximately $207 for services rendered to us by RMR during 2010.

 

We, RMR, Five Star, CWH and other companies to which RMR provides management services each currently owns approximately 14.29% of AIC.  All of our Trustees and nearly all of the trustees and directors of the other shareholders of AIC currently serve on the board of directors of AIC.  RMR, in addition to being a shareholder, provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC. Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because each of our Trustees is a director of AIC.  As of March 31, 2011, we have invested approximately $5,209 in AIC.  We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.  We carry this investment on our condensed consolidated balance sheets in other assets at $5,117 and $5,076 as of March 31, 2011 and December 31, 2010, respectively.  During the three months ended March 31, 2011 and 2010, we recognized income of $37 and a loss of $(28), respectively, related to this investment.  In 2010, AIC designed a combination property insurance program for us and other AIC shareholders in which AIC participated as a reinsurer. Our total premiums paid under this program in 2010 were approximately $275.  We are currently investigating the possibilities to expand our insurance relationships with AIC to include other types of insurance. By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro-rata share of any profits of this insurance business.

 

11

 

Senior Housing Properties Trust

Notes to CONDENSED Consolidated Financial Statements (unauditeD)

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

 

For more information about our related person transactions, including our dealings with Five Star, CWH, RMR, AIC, our Managing Trustees 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 and our other filings made with the SEC, and, in particular, the sections captioned “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Related Person Transactions” in our Annual Report and the section captioned “Related Person Transactions and Company Review of Such Transactions” in our Proxy Statement dated February 24, 2011 relating to our 2011 Annual Meeting of Shareholders and our Current Report on Form 8-K filed on March 8, 2011.  Our Annual Report, Current Report and Proxy Statement are available at the SEC’s website: www.sec.gov.

 

12

 

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

 

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and our Annual Report.

 

PORTFOLIO OVERVIEW

 

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

 

				Number of
		Number of		Units/Beds or		Investment			% of					% of Q1
(As of March 31, 2011)		Properties		Square Feet		Carrying Value (1)			Investment		Q1 2011 NOI (2)			2011 NOI
Facility Type
Independent living communities (3)		43		11,524		$	1,143,052		29.5%		$	26,619		30.2 %
Assisted living facilities (3)		131		9,342		1,039,257			26.8%		23,283			26.4 %
Skilled nursing facilities (3)		52		5,514		226,410			5.9%		4,625			5.3 %
Rehabilitation hospitals		2		364		69,654			1.8%		2,581			2.9 %
Wellness centers		10		812,000	sq. ft.	180,017			4.6%		4,353			5.0 %
MOBs		89		5,982,000	sq. ft.	1,214,728			31.4%		26,613			30.2 %
Total		327				$	3,873,118		100.0%		$	88,074		100.0%
Tenant / Operator
Five Star (Lease No. 1)		88		6,421		$	633,535		16.3%		$	13,252		15.0 %
Five Star (Lease No. 2)		46		5,885		515,005			13.3%		12,281			13.9 %
Five Star (Lease No. 3)		28		5,618		637,997			16.5%		15,392			17.4 %
Five Star (Lease No. 4)		26		2,720		256,455			6.6%		5,769			6.6 %
Sunrise / Marriott (4)		14		4,091		325,165			8.4%		7,025			8.0 %
Brookdale		18		894		61,122			1.6%		1,758			2.0 %
6 private companies (combined)		8		1,115		49,094			1.3%		1,631			1.9 %
Wellness centers		10		812,000	sq. ft.	180,017			4.6%		4,353			5.0 %
Multi-tenant MOBs		89		5,982,000	sq. ft.	1,214,728			31.4%		26,613			30.2 %
Total		327				$	3,873,118		100.0%		$	88,074		100.0%

 

Tenant Operating Statistics (5)

 

										Q1 NOI per Living Unit, Bed
		Rent Coverage				Occupancy				or Square Foot (6)
		2010		2009		2010		2009		2011			2010
Five Star (Lease No. 1)		1.30x		1.27x		86.9%		87.7%		$	2,064		$	2,040
Five Star (Lease No. 2) (7)		1.37x		1.31x		81.9%		82.1%		$	1,757		$	1,700
Five Star (Lease No. 3)		1.53x		1.51x		87.7%		88.8%		$	2,740		$	2,671
Five Star (Lease No. 4)		1.15x		1.05x		83.8%		84.5%		$	2,121		$	2,144
Sunrise / Marriott (4)		1.40x		1.39x		89.8%		89.3%		$	1,717		$	1,712
Brookdale		2.21x		2.11x		92.9%		91.2%		$	1,966		$	1,973
6 private companies (combined)		2.30x		1.94x		85.3%		83.7%		$	1,463		$	1,561
Wellness centers (8)		2.18x		2.27x		100.0%		100.0%		NA			NA
Multi-tenant MOBs (9)		NA		NA		97.0%		96.4%		$	4		$	5

 

 

13

 

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

 

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

(2)          Property net operating income, or NOI, is defined as rental income from real estate less our property operating expenses.  We consider NOI to be appropriate supplemental information to net income because it helps both investors and management to understand the operations of our properties.  We use NOI internally as a performance measure and believe NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are incurred at the property level.  NOI excludes certain components from net income in order to provide results that are more closely related to our properties’ results of operations.  NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income or cash flow from operating activities as a measure of financial performance.  See below for the calculation of NOI and a reconciliation of NOI to Net Income.

(3)          Properties are categorized by the type of living units or beds which constitute a majority of the living units or beds at the property.

(4)          Marriott International, Inc. guarantees this lease.

(5)          All tenant operating data presented are based upon the operating results provided by our tenants for the 12 months ended December 31, 2010 and 2009, or the most recent prior period for which tenant operating results are available to us.  Rent coverage is calculated as operating cash flow from our tenants’ operations of our properties, before subordinated charges, divided by minimum rents payable to us.  We have not independently verified our tenants’ operating data.  The table excludes data for periods prior to our ownership of some of these properties.

(6)          Represents Q1 NOI by lease divided by the number of living units, beds or square feet leased at March 31, 2011 and 2010.

(7)          Q1 NOI per living unit, bed or square foot excludes the two rehabilitation hospitals because these properties have extensive clinic space for services to both overnight patients and patients who receive treatment and do not stay overnight, and these properties are not comparable to residential senior living properties.

(8)          Q1 NOI per living unit, bed or square foot excludes the wellness centers because these properties have extensive indoor and outdoor recreation space which is not comparable to properties where rent is based on interior space only.

(9)          Our MOB leases include both triple net leases where, in addition to paying fixed rents, the tenants assume the obligation to operate and maintain the properties at their expense, and net and modified gross leases where we are responsible to operate and maintain the properties and we charge tenants for some or all of the property operating costs.  A small percentage of our MOB leases are so-called “full-service” leases where we receive fixed rent from our tenants and no reimbursement for our property operating costs.

 

14

 

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

 

The following table shows our calculation of NOI and reconciles NOI to net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, for the three months ended March 31, 2011 and 2010.

 

		Three Months Ended March 31,
		2011			2010
Rental income		$	98,077		$	80,447
Property operating expenses		(10,003		)	(4,385		)
Property net operating income (NOI)		$	88,074		$	76,062
NOI		$	88,074		$	76,062
Depreciation		(26,361		)	(22,289		)
General and administrative		(6,134		)	(5,491		)
Acquisition costs		(1,113		)	(35		)
Operating income		54,466			48,247
Interest and other income		255			257
Interest expense		(22,746		)	(18,414		)
Impairment of assets		(166		)	—
Equity in earnings (losses) of an investee		37			(28		)
Income before income tax expense		31,846			30,062
Income tax expense		(71		)	(78		)
Net income		$	31,775		$	29,984

 

15

 

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

 

The following tables set forth information regarding our lease expirations as of March 31, 2011 (dollars in thousands):

 

																Cumulative
														Percent of		Percentage
														Total		of
		Annualized Rental Income (1)												Annualized		Annualized
		Short and Long												Rental		Rental
		Term Residential						Wellness						Income		Income
Year		Care Facilities			MOBs			Centers			Total			Expiring		Expiring
2011		$	—		$	5,236		$	—		$	5,236		1.3%		1.3%
2012		—			16,688			—			16,688			4.1%		5.4%
2013		32,919			9,212			—			42,131			10.3%		15.7%
2014		—			19,399			—			19,399			4.8%		20.5%
2015		3,013			15,089			—			18,102			4.4%		24.9%
2016		2,912			10,607			—			13,519			3.3%		28.2%
2017		32,148			9,809			—			41,957			10.3%		38.5%
2018		—			4,513			—			4,513			1.1%		39.6%
2019		599			26,039			—			26,638			6.5%		46.1%
2020 and thereafter		169,120			32,960			17,337			219,417			53.9%		100.0%
Total		$	240,711		$	149,552		$	17,337		$	407,600		100.0%

 

Average remaining lease term for all properties (weighted by rent):  10.4 years

 

(1)                Annualized rental income is rents pursuant to signed leases as of March 31, 2011, including estimated expense reimbursements for certain net and modified gross leases and excluding lease value amortization in certain of our MOBs and wellness centers.

 

		Number of Tenants										Cumulative
		Short and								Percent of		Percentage
		Long Term								Total Number		of Number
		Residential				Wellness				of Tenants		of Tenants
Year		Care Facilities		MOBs		Centers		Total		Expiring		Expiring
2011		—		69		—		69		16.3%		16.3%
2012		—		76		—		76		17.9%		34.2%
2013		1		46		—		47		11.1%		45.3%
2014		—		65		—		65		15.3%		60.6%
2015		3		51		—		54		12.7%		73.3%
2016		2		29		—		31		7.3%		80.6%
2017		2		21		—		23		5.4%		86.0%
2018		—		15		—		15		3.5%		89.5%
2019		1		16		—		17		4.0%		93.5%
2020 and thereafter		3		22		2		27		6.5%		100.0%
Total		12		410		2		424		100.0%

 

16