UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2014

 

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):

 

Large accelerated filer x		Accelerated filer o
Non—accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

 

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

 

Number of registrant’s common shares outstanding as of August 1, 2014: 203,767,203.

 

 

 

SENIOR HOUSING PROPERTIES TRUST

FORM 10-Q

 

June 30, 2014

 

INDEX

 

		Page
PART I	Financial Information
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets — June 30, 2014 and December 31, 2013	1
	Condensed Consolidated Statements of Income and Comprehensive Income — Three and Six Months Ended June 30, 2014 and 2013	2
	Condensed Consolidated Statements of Cash Flows — Three and Six Months Ended June 30, 2014 and 2013	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	57
	Warning Concerning Forward Looking Statements	58
	Statement Concerning Limited Liability	62
PART II	Other Information	63
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 6.	Exhibits	63
	Signatures	66

 

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 and per share data)

(unaudited)

 

		June 30,			December 31,
		2014			2013
ASSETS
Real estate properties:
Land		$	680,937		$	623,756
Buildings and improvements		5,486,755			4,639,869
		6,167,692			5,263,625
Less accumulated depreciation		(909,021		)	(840,760		)
		5,258,671			4,422,865
Cash and cash equivalents		79,392			39,233
Restricted cash		10,960			12,514
Deferred financing fees, net		33,500			27,975
Acquired real estate leases and other intangible assets, net		495,782			103,494
Other assets		138,550			158,585
Total assets		$	6,016,855		$	4,764,666
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility		$	—		$	100,000
Unsecured term loan		350,000			—
Senior unsecured notes, net of discount		1,742,893			1,093,337
Secured debt and capital leases		672,761			699,427
Accrued interest		20,401			15,839
Assumed real estate lease obligations, net		128,207			12,528
Other liabilities		73,012			66,546
Total liabilities		2,987,274			1,987,677
Commitments and contingencies
Shareholders’ equity:
Common shares of beneficial interest, $.01 par value: 220,000,000 shares authorized, 203,755,980 and 188,167,643 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively		2,037			1,882
Additional paid in capital		3,821,811			3,497,589
Cumulative net income		1,271,221			1,194,985
Cumulative other comprehensive income		7,173			8,412
Cumulative distributions		(2,072,661		)	(1,925,879		)
Total shareholders’ equity		3,029,581			2,776,989
Total liabilities and shareholders’ equity		$	6,016,855		$	4,764,666

 

See accompanying notes.

 

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SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2014			2013			2014			2013
Revenues:
Rental income		$	127,669		$	112,297		$	239,724		$	224,150
Residents fees and services		79,039			74,631			158,481			149,687
Total revenues		206,708			186,928			398,205			373,837
Expenses:
Property operating expenses		79,786			74,484			157,590			148,163
Depreciation		46,703			38,296			85,058			75,999
General and administrative		9,577			8,168			17,866			16,816
Acquisition related costs		2,512			292			2,635			2,187
Impairment of assets		—			4,371			—			5,675
Total expenses		138,578			125,611			263,149			248,840
Operating income		68,130			61,317			135,056			124,997
Interest and other income		154			397			258			570
Interest expense		(34,112		)	(29,567		)	(63,012		)	(59,131		)
Loss on early extinguishment of debt		—			(105		)	—			(105		)
Income from continuing operations before income tax expense and equity in earnings of an investee		34,172			32,042			72,302			66,331
Income tax expense		(155		)	(140		)	(346		)	(280		)
Equity in earnings of an investee		118			79			21			155
Income from continuing operations		34,135			31,981			71,977			66,206
Discontinued operations:
Income from discontinued operations		741			1,513			2,041			2,523
Impairment of assets from discontinued operations		387			(27,896		)	(334		)	(27,896		)
Income before gain on sale of properties		35,263			5,598			73,684			40,833
Gain on sale of properties		2,396			—			2,552			—
Net income		$	37,659		$	5,598		$	76,236		$	40,833
Other comprehensive income:
Change in net unrealized (loss) / gain on investments		640			(4,404		)	(1,280		)	4,360
Share of comprehensive income (loss) of an investee		31			(73		)	50			(81		)
Comprehensive income		$	38,330		$	1,121		$	75,006		$	45,112
Weighted average shares outstanding		199,810			188,081			194,025			186,350
Income from continuing operations per share		0.18			0.17			0.38			0.36
Income from discontinued operations per share		0.01			(0.14		)	0.01			(0.14		)
Net income per share		$	0.19		$	0.03		$	0.39		$	0.22

 

See accompanying notes.

 

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SENIOR HOUSING PROPERTIES TRUST

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

		Six Months Ended June 30,
		2014			2013
Cash flows from operating activities:
Net income		$	76,236		$	40,833
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		85,058			76,798
Amortization of deferred financing fees and debt discounts		3,011			2,068
Straight line rental income		(3,938		)	(3,698		)
Amortization of acquired real estate leases and other intangible assets		153			1,935
Loss on early extinguishment of debt		—			105
Impairment of assets		334			33,571
Gain on sale of properties		(2,552		)	—
Equity in earnings of an investee		(21		)	(155		)
Change in assets and liabilities:
Restricted cash		1,555			(2,973		)
Other assets		7,007			1,135
Accrued interest		4,562			(63		)
Other liabilities		7,597			1,376
Cash provided by operating activities		179,002			150,932
Cash flows from investing activities:
Real estate acquisitions and deposits		(1,143,340		)	(76,006		)
Real estate improvements		(37,334		)	(22,669		)
Investment in Affiliates Insurance Company		(825		)	—
Proceeds from sale of properties		17,900			—
Cash used for investing activities		(1,163,599		)	(98,675		)
Cash flows from financing activities:
Proceeds from issuance of common shares, net		322,864			261,813
Proceeds from issuance of unsecured senior notes, net of discount		648,914			—
Proceeds from unsecured term loan		350,000			—
Proceeds from borrowings on revolving credit facility		90,000			45,000
Repayments of borrowings on revolving credit facility		(190,000		)	(205,000		)
Repayment of other debt		(42,201		)	(16,662		)
Payment of deferred financing fees		(8,038		)	(248		)
Distributions to shareholders		(146,783		)	(142,206		)
Cash provided by (used for) financing activities		1,024,756			(57,303		)
Increase (decrease) in cash and cash equivalents		40,159			(5,046		)
Cash and cash equivalents at beginning of period		39,233			42,382
Cash and cash equivalents at end of period		$	79,392		$	37,336
Supplemental cash flow information:
Interest paid		$	55,439		$	57,126
Income taxes paid		106			516
Non-cash investing activities:
Acquisitions funded by assumed debt		(15,630		)	(12,266		)
Non-cash financing activities:
Assumption of mortgage notes payable		15,630			12,266
Issuance of common shares		1,511			929

 

See accompanying notes.

 

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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)

 

Note 1.  Basis of Presentation

 

The accompanying condensed consolidated financial statements of Senior Housing Properties Trust and its subsidiaries, or we, us, or our, are unaudited.  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, 2013, 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 with or among 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 periods’ rental income, property operating expenses, discontinued operations, general and administrative expenses, interest and other income and impairment of assets to the current classification.  These reclassifications had no effect on net income or shareholders’ equity.

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates.  Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and impairment of real estate and intangible assets.

 

Note 2.  Recent Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  This update amends the criteria for reporting discontinued operations to, among other things, raise the threshold for disposals to qualify as discontinued operations. This update is effective for interim and annual reporting periods, beginning after December 15, 2014, with early adoption permitted.  We currently expect that, when adopted, this update will reduce the number of any future property dispositions to be presented as discontinued operations in our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. This update is effective for interim and annual reporting periods beginning after December 15, 2016.  We are currently in the process of evaluating the impact, if any, the adoption of this ASU will have on our consolidated financial statements.

 

Note 3.  Real Estate Properties

 

At June 30, 2014, we owned 372 properties (399 buildings) located in 39 states and Washington, D.C. We have accounted, or expect to account for, the following acquisitions as business combinations unless otherwise noted.

 

MOB Acquisitions:

 

In April 2014, we acquired one property (one building) leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or an MOB, for approximately $32,658, including the assumption of approximately $15,630 of mortgage debt, and excluding closing costs. This MOB is

 

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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)

 

located in Texas and includes 125,240 square feet of leasable space. We funded this acquisition using cash on hand and borrowings under our revolving credit facility. In May 2014, we acquired one MOB (two buildings) for approximately $1,125,420, excluding closing costs. This MOB is located in Massachusetts and includes approximately 1,651,037 gross building square feet. We funded this acquisition using the proceeds of equity and debt offerings and borrowings under our revolving credit facility.

 

MOB Acquisitions since January 1, 2014:

 

								Cash Paid												Acquired
				Number				plus									Acquired			Real Estate						Premium
				of		Square		Assumed						Buildings and			Real Estate			Lease			Assumed			on Assumed
Date		Location		Properties		Feet (000’s)		Debt (1)			Land			Improvements			Leases			Obligations			Debt			Debt
April 2014		San Antonio, TX		1		125		$	32,932		$	3,141		$	26,421		$	4,393		$	10		$	15,630		$	1,013
May 2014		Boston, MA		1		1,651		1,124,031			52,643			944,362			245,511			118,485			—			—
				2		1,776		$	1,156,963		$	55,784		$	970,783		$	249,904		$	118,495		$	15,630		$	1,013

 

(1)       These amounts include the cash we paid plus debt we assumed, if any, as well as other settlement adjustments with respect to the acquisitions but exclude closing costs.  The allocation of the purchase price of our acquisitions shown above 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 may change from those used in these condensed consolidated financial statements.

 

In July 2014, we entered into an agreement to acquire one senior living community for approximately $7,000, excluding closing costs.  The senior living community is located in Jackson, Wisconsin and includes 52 assisted living units.  We expect that a subsidiary of Five Star Quality Care, Inc. will manage this community for our account pursuant to a long term management agreement. In this Quarterly Report on Form 10-Q, we refer to Five Star Quality Care, Inc. and its applicable subsidiaries as Five Star.

 

Impairment

 

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 net cash flows to be generated from that property. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value.

 

As of June 30, 2014, we had seven senior living communities with 552 living units and two MOBs (five buildings) with 385,541 square feet categorized as properties held for sale. During the six months ended June 30, 2014, we recorded net impairment of assets charges of $334 to adjust the carrying value of three MOBs included in discontinued operations to their aggregate estimated net sale price. The nine properties are included in other assets in our condensed consolidated

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

balance sheets and have a net book value (after impairment) of approximately $13,249 at June 30, 2014. As of December 31, 2013, we had 10 senior living communities with 744 units and four MOBs (seven buildings) with 831,499 square feet categorized as properties held for sale, which were similarly recorded and categorized at June 30, 2014, except that three of the senior living communities and two of the MOBs were sold during the first and second quarter of 2014, as noted below. These properties are included in other assets in our condensed consolidated balance sheets and had a net book value (after impairment) of approximately $27,888 at December 31, 2013. We decided to sell these properties due to underlying conditions in the markets where these properties are located. We classify all properties as held for sale in our condensed consolidated balance sheets that meet the applicable criteria for that treatment as set forth in the Property, Plant and Equipment Topic of the FASB Accounting Standards Codification, or the Codification.

 

Results of operations for properties sold or held for sale are included in discontinued operations in our condensed consolidated statements of operations once the criteria for discontinued operations in the Presentation of Financial Statements Topic of the Codification are met. Summarized income statement information for the four MOBs (seven buildings) that meet the criteria for discontinued operations is included in discontinued operations as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2014			2013			2014			2013
Rental income		$	1,432		$	2,574		$	3,726		$	5,095
Property operating expenses		(691		)	(862		)	(1,685		)	(1,773		)
Depreciation and amortization		—			(199		)	—			(799		)
Income from discontinued operations		$	741		$	1,513		$	2,041		$	2,523

 

In January 2014, we sold a senior living community with 36 units that was previously classified as held for sale for $2,400 and recorded a gain on the sale of this property of approximately $156.

 

In April 2014, we sold one MOB (one building) with 210,879 square feet that is included in discontinued operations for $5,000 and recorded no gain or loss on the sale.

 

In June 2014, we sold two senior living communities with 156 units that were previously classified as held for sale for $4,500 and recorded a gain on the sale of these properties of approximately $2,396.

 

In June 2014, we sold one MOB (one building) with 235,079 square feet that is included in discontinued operations for $6,000 and recorded no gain or loss on the sale.

 

The senior living properties which we are offering for sale do not meet the criteria for discontinued operations as they are included within combination leases with other properties that we expect to continue leasing.

 

Note 4.  Unrealized Gain / Loss on Investments

 

As of June 30, 2014, we owned 250,000 common shares of Equity Commonwealth (formerly known as CommonWealth REIT), or EQC, and 4,235,000 common shares of Five Star which are carried at fair market value in other assets on our condensed consolidated balance sheets. Cumulative other comprehensive income shown in our condensed consolidated balance sheets includes the net unrealized gain or loss on investments determined as the net difference between the value at quoted market prices of our EQC and Five Star shares as of June 30, 2014 ($26.32 and $5.01 per share, respectively) and our weighted average costs at the time we acquired these shares, as adjusted to reflect any share splits or combinations ($26.00 and $3.36 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 5.  Indebtedness

 

Our principal debt obligations at June 30, 2014 were: (1) six public issuances of unsecured senior notes, including: (a) $250,000 principal amount at an annual interest rate of 4.30% due 2016, (b) $400,000 principal amount at an annual interest rate of 3.25% due 2019, (c) $200,000 principal amount at an annual interest rate of 6.75% due 2020, (d) $300,000 principal amount at an annual interest rate of 6.75% due 2021, (e) $250,000 principal amount at an annual interest rate of 4.75% due 2024 and (f) $350,000 principal amount at an annual interest rate of 5.625% due 2042; (2) our $350,000 principal amount term loan; and (3) $655,324 aggregate principal amount of mortgages secured by 47 of our properties (50 buildings) with maturity dates from 2015 to 2043.  The 47 mortgaged properties (50 buildings) had a carrying value of $886,458 at June 30, 2014.  We also had two properties subject to capital leases totaling $13,047 at June 30, 2014; these two properties had a carrying value of $18,403 at June 30, 2014.

 

We have a $750,000 unsecured revolving credit facility that is available for general business purposes, including acquisitions.  The maturity date of our revolving credit facility is January 15, 2018 and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to further extend the stated maturity date by an additional one year to January 15, 2019.  The revolving credit facility agreement provides that we can borrow, repay and reborrow funds available under the revolving credit facility agreement until maturity, and no principal repayment is due until maturity.  The revolving credit facility agreement includes a feature under which maximum borrowings under the facility may be increased to up to $1,500,000 in certain circumstances. The interest rate paid on borrowings under the revolving credit facility agreement is LIBOR plus a premium of 130 basis points, and the facility fee is 30 basis points per annum on the total amount of lending commitments.  Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings.  As of June 30, 2014, the interest rate payable on borrowings under our revolving credit facility was 1.42% and the weighted average interest rate for borrowings under our revolving credit facility was 1.42% for both the three and six months ended June 30, 2014. The weighted average interest rate for borrowings under our revolving credit facility was 2.56% and 1.86% for the three and six months ended June 30, 2013, respectively. We incurred interest expense and other associated costs related to our revolving credit facility of $969 and $1,880 for the three and six months ended June 30, 2014, respectively.  As of both June 30, 2014 and August 4, 2014, we had no amounts outstanding and $750,000 available for borrowing by us.

 

Our revolving credit facility agreement provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes Reit Management & Research LLC, or RMR, ceasing to act as our business manager and property manager.

 

In April 2014, we sold $400,000 of 3.25% senior unsecured notes due 2019 and $250,000 of 4.75% senior unsecured notes due 2024, raising net proceeds of approximately $644,889, after underwriting discounts but before expenses. Interest on the notes is payable semi-annually in arrears. We used the net proceeds of this offering for general business purposes, including funding the acquisitions described in Note 3.

 

On May 30, 2014, we entered into a term loan agreement with Wells Fargo Bank, National Association and a syndicate of other lenders, pursuant to which we obtained a $350,000 unsecured term loan. Our term loan matures on January 15, 2020, and is prepayable without penalty at any time.  In addition, our term loan includes a feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances. Our term loan bears interest at a rate of LIBOR plus a premium of 140 basis points that is subject to adjustment based upon changes to our credit ratings.  We used the net proceeds of our

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

term loan to repay amounts outstanding under our revolving credit facility, to repay existing mortgage notes and for general business purposes. As of June 30, 2014, the interest rate payable for amounts outstanding under our term loan was 1.55%.  The weighted average annual interest rate for amounts outstanding on our term loan was 1.55% for the period from May 30, 2014 to June 30, 2014.

 

Our public debt indentures and related supplements and our credit facility agreement contain a number of financial and other covenants, including covenants that restrict our ability to incur indebtedness or to make distributions under certain circumstances and require us to maintain financial ratios and a minimum net worth.

 

In connection with the acquisitions discussed in Note 3 above, during the three months ended June 30, 2014, we assumed $15,630 of mortgage debt, which was recorded at a fair value of $16,643.  This mortgage has a contractual interest rate of 6.28% and matures in July 2022.  We recorded the assumed mortgage at its fair value, which exceeded its outstanding principal balance by $1,013.  We determined the fair value of the assumed mortgage using a market approach based upon Level 3 inputs (significant other unobservable inputs) in the fair value hierarchy.

 

In June 2014, we repaid mortgage notes that encumbered two of our properties that had an aggregate principal balance of $35,300 and a weighted average interest rate of 5.8%.

 

Note 6.  Shareholders’ Equity

 

On February 21, 2014, we paid a distribution to common shareholders of $0.39 per share, or approximately $73,386, that was declared on January 3, 2014 and was payable to shareholders of record on January 13, 2014.

 

On May 21, 2014, we paid a distribution to common shareholders of $0.39 per share, or approximately $73,397, that was declared on April 2, 2014 and was payable to shareholders of record on April 14, 2014.

 

On July 7, 2014, we declared a distribution payable to common shareholders of record on July 18, 2014, of $0.39 per share, or approximately $79,469. We expect to pay this distribution on or about August 21, 2014 using cash on hand and borrowings under our revolving credit facility.

 

We issued 30,900 and 50,837 common shares to RMR during the three and six months ended June 30, 2014, respectively, and 11,223 shares in July 2014, as part of its compensation under our business management agreement. See Note 10 for further information regarding this agreement.

 

In April 2014, we issued 15,525,000 common shares in a public offering, raising net proceeds of approximately $323,318, after underwriting discounts but before expenses. We used the net proceeds from this offering to repay borrowings outstanding under our revolving credit facility and for general business purposes, including the partial funding of the acquisitions described in Note 3.

 

On June 5, 2014, we granted 2,500 common shares valued at $24.50 per share, the closing price of our common shares on the New York Stock Exchange on that day, to each of our five Trustees.

 

Note 7.  Fair Value of Assets and Liabilities

 

The following table presents certain of our assets and liabilities that are measured at fair value on a recurring and non recurring basis at June 30, 2014 categorized by the level of inputs used in the valuation of each asset or liability.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

					Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
Description		Total			(Level 1)			(Level 2)			(Level 3)
Assets held for sale(1)		$	13,249		$	—		$	13,249		$	—
Investments in available for sale securities(2)		$	27,797		$	27,797		$	—		$	—
Unsecured senior notes(3)		$	1,827,753		$	1,827,753		$	—		$	—
Secured debt(4)		$	735,341		$	—		$	—		$	735,341

 

(1)       Assets held for sale consist of nine of our properties that we expect to sell that are reported at fair value less costs to sell.  We used offers to purchase these properties made by third parties or comparable sales transactions (Level 2 inputs) to determine the fair value of these properties.  We have recorded cumulative impairments of approximately $22,545 to these properties in order to reduce their book value to fair value.

(2)       Our investments in available for sale securities include our 250,000 common shares of EQC and 4,235,000 common shares of Five Star. The fair values of these shares are based on quoted prices at June 30, 2014 in active markets (Level 1 inputs).

(3)       We estimate the fair values of our unsecured senior notes using an average of the bid and ask price of our outstanding six issuances of senior notes (Level 1 inputs) on or about June 30, 2014.  The fair values of these senior note obligations exceed their aggregate book values of $1,742,893 by $84,860 because these notes were trading at premiums to their face amounts.

(4)       We estimate the fair values of our secured debt by using discounted cash flow analyses and currently prevailing market terms at June 30, 2014 (Level 3 inputs).  Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

 

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, other unsecured debt and other liabilities. The fair values of these additional financial instruments approximate their carrying values at June 30, 2014 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 four operating segments, of which three are separately reportable operating segments:  (i) triple net leased senior living communities that provide short term and long term residential care and dining services for residents that are leased to third parties, (ii) managed senior living communities that provide short term and long term residential care and dining services for residents that are managed for our account and (iii) MOBs.  Our triple net leased and managed senior living communities both include independent living communities, assisted living communities, skilled nursing facilities, or SNFs, and some communities that offer a combination of the independent and assisted living and skilled nursing services.  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.

 

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 June 30, 2014
		Triple Net Leased Senior Living Communities			Managed Senior Living Communities			MOBs			All Other Operations			Consolidated
Revenues:
Rental income		$	55,166		$	—		$	68,027		$	4,476		$	127,669
Residents fees and services		—			79,039			—			—			79,039
Total revenues		55,166			79,039			68,027			4,476			206,708
Expenses:
Property operating expenses		—			60,624			19,162			—			79,786
Depreciation		15,515			8,333			21,907			948			46,703
General and administrative		—			—			—			9,577			9,577
Acquisition related costs		—			—			—			2,512			2,512
Total expenses		15,515			68,957			41,069			13,037			138,578
Operating income (loss)		39,651			10,082			26,958			(8,561		)	68,130
Interest and other income		—			—			—			154			154
Interest expense		(6,472		)	(2,806		)	(1,507		)	(23,327		)	(34,112		)
Income (loss) before income tax expense and equity in earnings of an investee		33,179			7,276			25,451			(31,734		)	34,172
Income tax expense		—			—			—			(155		)	(155		)
Equity in earnings of an investee		—			—			—			118			118
Income (loss) from continuing operations		33,179			7,276			25,451			(31,771		)	34,135
Discontinued operations:
Income from discontinued operations		—			—			741			—			741
Impairment of assets from discontinued operations		—			—			387			—			387
Income (loss) before gain on sale of properties		33,179			7,276			26,579			(31,771		)	35,263
Gain on sale of properties		2,396			—			—			—			2,396
Net income (loss)		$	35,575		$	7,276		$	26,579		$	(31,771	)	$	37,659
Total assets		$	1,806,867		$	922,557		$	2,967,167		$	320,264		$	6,016,855

 

10

 

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 June 30, 2013
		Triple Net Leased Senior Living Communities			Managed Senior Living Communities			MOBs			All Other Operations			Consolidated
Revenues:
Rental income		$	56,957		$	—		$	50,899		$	4,441		$	112,297
Residents fees and services		—			74,631			—			—			74,631
Total revenues		56,957			74,631			50,899			4,441			186,928
Expenses:
Property operating expenses		—			58,231			16,253			—			74,484
Depreciation		17,019			7,028			13,301			948			38,296
General and administrative		—			—			—			8,168			8,168
Acquisition related costs		—			—			—			292			292
Impairment of assets		4,371			—			—			—			4,371
Total expenses		21,390			65,259			29,554			9,408			125,611
Operating income (loss)		35,567			9,372			21,345			(4,967		)	61,317
Interest and other income		—			—			—			397			397
Interest expense		(6,596		)	(3,073		)	(1,387		)	(18,511		)	(29,567		)
Loss on early extinguishment of debt		—			—			—			(105		)	(105		)
Income (loss) before income tax expense and equity in earnings of an investee		28,971			6,299			19,958			(23,186		)	32,042
Income tax expense		—			—			—			(140		)	(140		)
Equity in earnings of an investee		—			—			—			79			79
Income (loss) from continuing operations		28,971			6,299			19,958			(23,247		)	31,981
Discontinued operations:
Income from discontinued operations		—			—			1,513			—			1,513
Impairment of assets from discontinued operations		—			—			(27,896		)	—			(27,896		)
Net income (loss)		$	28,971		$	6,299		$	(6,425	)	$	(23,247	)	$	5,598
Total assets		$	1,829,372		$	964,610		$	1,742,120		$	212,529		$	4,748,631

 

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 the Six Months Ended June 30, 2014
		Triple Net Leased Senior Living Communities			Managed Senior Living Communities			MOBs			All Other Operations			Consolidated
Revenues:
Rental income		$	110,055		$	—		$	120,791		$	8,878		$	239,724
Residents fees and services		—			158,481			—			—			158,481
Total revenues		110,055			158,481			120,791			8,878			398,205
Expenses:
Property operating expenses		—			121,412			36,178			—			157,590
Depreciation		31,152			16,488			35,522			1,896			85,058
General and administrative		—			—			—			17,866			17,866
Acquisition related costs		—			—			—			2,635			2,635
Total expenses		31,152			137,900			71,700			22,397			263,149
Operating income (loss)		78,903			20,581			49,091			(13,519		)	135,056
Interest and other income		—			—			—			258			258
Interest expense		(12,860		)	(5,794		)	(2,844		)	(41,514		)	(63,012		)
Income (loss) before income tax expense and equity in earnings of an investee		66,043			14,787			46,247			(54,775		)	72,302
Income tax expense		—			—			—			(346		)	(346		)
Equity in earnings of an investee		—			—			—			21			21
Income (loss) from continuing operations		66,043			14,787			46,247			(55,100		)	71,977
Discontinued operations:
Income from discontinued operations		—			—			2,041			—			2,041
Impairment of assets from discontinued operations		—			—			(334		)	—			(334		)
Income (loss) before gain on sale of properties		66,043			14,787			47,954			(55,100		)	73,684
Gain on sale of properties		2,552			—			—			—			2,552
Net income (loss)		$	68,595		$	14,787		$	47,954		$	(55,100	)	$	76,236
Total assets		$	1,806,867		$	922,557		$	2,967,167		$	320,264		$	6,016,855

 

12