Item 1.  Financial Statements.

 

 

  See accompanying notes.

 

See accompanying notes.

See accompanying notes.

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, 2015 , 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.

 

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 our condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and impairment of real estate and intangible assets. We have made reclassifications to the prior years’ condensed consolidated financial statements to conform to the current year’s presentation. These reclassifications had no effect on net income or shareholders’ equity. 

 

Note 2.  Recent Accounting Pronouncements

 

On January 1, 2016, we adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, No. 2015-02, Consolidation . Among other things, this update changed how an entity determines the primary beneficiary of a variable interest entity. The implementation of this update did not have an impact in our condensed consolidated financial statements.

 

On January 1, 2016, we adopted FASB ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs , which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability, and ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting , which addresses the presentation of debt issuance costs related to line of credit arrangements. The implementation of these updates resulted in the reclassification of certain of our capitalized debt issuance costs as an offset to the associated debt liability in our condensed consolidated balance sheets. The classification of capitalized debt issuance costs related to our unsecured revolving credit facility remains unchanged in accordance with ASU No. 2015-15. As of December 31, 2015, debt issuance costs related to our unsecured term loans, senior unsecured notes and secured debt and capital leases of $3,695 , $16,530 and $3,664 , respectively, were reclassified from assets to an offset to the associated debt liability in our condensed consolidated balance sheets.

 

On January 1, 2016, we adopted FASB ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments , which eliminates the requirement for an acquirer in a business combination to account for measurement period adjustments retrospectively. Instead, acquirers must recognize measurement period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The implementation of this update did not have an impact in our condensed consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities , which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. This update is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted subject to certain conditions. Currently, changes in fair value of these investments are recorded through other comprehensive income. Under this ASU, these changes will be recorded through earnings. We are continuing to evaluate this guidance, but we expect the implementation of this guidance will affect how changes in the fair value of available for sale securities we hold are presented in our condensed consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases , which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02

requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have in our condensed consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation , which identifies areas for simplification involving several aspects of accounting for share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU No. 2016-09 is effective for reporting periods beginning after December 15, 2016.  We are currently assessing the potential impact that the adoption of ASU No. 2016-09 will have in our condensed consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact that adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments , which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact that adoption of ASU No. 2016-15 will have in our condensed consolidated financial statements.

 

Note 3.  Real Estate Properties

 

At September 30, 2016 , we owned 431 properties ( 457 buildings) located in 42 states and Washington, D.C. We have accounted for, or expect to account for, the following acquisitions as business combinations unless otherwise noted.

 

Acquisitions:

 

The allocation of the purchase prices of the acquisitions shown below are based upon preliminary estimates of the fair value of assets acquired and liabilities assumed.  The final amounts allocated to assets acquired and liabilities assumed may differ from the preliminary allocations presented in these condensed consolidated financial statements.

Triple Net Leased Senior Living Communities:

 

In June 2016, we acquired seven senior living communities located in four states with 545 living units from Five Star Quality Care, Inc., or, together with its subsidiaries, Five Star, for approximately $112,350 , excluding closing costs, and simultaneously entered into a new long term master lease with Five Star for those communities. We funded this acquisition using cash on hand and borrowings under our revolving credit facility. See Note 10 for further information regarding this sale and leaseback transaction with Five Star.  We accounted for this acquisition as an asset acquisition, and the preliminary allocation of the purchase price is as follows:

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

In September 2016, we entered into an agreement to acquire two senior living communities with a combined 126 living units located in Illinois for approximately $18,600 , excluding closing costs. We expect to acquire these communities in the fourth quarter of 2016. If these communities are acquired, we expect to lease these communities to Five Star under one of our existing master leases with Five Star. These acquisitions are subject to various conditions; accordingly, we cannot be sure that we will complete these acquisitions and that we will lease them to Five Star, that the acquisitions and leasing arrangements will not be delayed or that the terms will not change. See Note 10 for further information regarding our leasing arrangements with Five Star.

Managed Senior Living Communities:

 

In May 2016, we acquired one senior living community located in Georgia with 38 living units for a purchase price of approximately $8,400 , excluding closing costs. We acquired this community using a taxable REIT subsidiary, or TRS, structure and we have entered into a management agreement with Five Star to manage this community. We funded this acquisition using cash on hand and borrowings under our revolving credit facility. See Note 10 for further information regarding our management arrangements with Five Star. The preliminary allocation of the purchase price for this acquisition is as follows:

 

 

MOBs:

 

In February 2016, we acquired one property ( three buildings) leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or MOBs, located in Minnesota with approximately 128,000 square feet for a purchase price of approximately $22,700 , excluding closing costs. In May 2016, we acquired one MOB ( one building) located in Florida with approximately 166,000 square feet for a purchase price of approximately $45,000 , excluding closing costs. We accounted for the acquisition of the MOB located in Florida as an asset acquisition. We funded these acquisitions using cash on hand and borrowings under our revolving credit facility. The preliminary allocations of the purchase prices for these acquisitions are as follows:

 

 

In October 2016, we acquired one MOB ( one building) located in Ohio with approximately 96,000 square feet for approximately $18,500 , excluding closing costs.

Impairment:

 

We periodically evaluate our assets for impairments. Impairment indicators may include declining tenant or resident occupancy, weak or declining profitability from the property, decreasing tenant cash flows 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 an asset. If indicators of impairment are present, we evaluate the carrying value of the affected asset by comparing it to the expected future undiscounted net cash flows to be generated from that asset. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the asset to its estimated fair value. During the nine months ended September 30, 2016 , we recorded the following impairment charges:

We have one MOB and one former memory care building at a managed senior living community classified as held for sale as of September 30, 2016.

 

Dispositions:

 

In March 2016, we sold a land parcel that was previously classified as held for sale for approximately $700 , excluding closing costs. We did not recognize a gain or loss on sale from this sale.

 

In June 2016, we sold one triple net leased SNF that was previously classified as held for sale for approximately $9,100 , excluding closing costs. We recognized a gain on sale of approximately $4,061 from this sale.

 

In July 2016, we sold four MOBs ( four buildings) that were classified as held for sale at June 30, 2016 for approximately $20,150 , excluding closing costs. In the third quarter of 2016, we recorded a reversal of impairment charges previously recorded of $7 to adjust the carrying values of these MOBs to their sales prices less costs to sell, and we did not recognize a gain or loss on sale from this sale.

In September 2016, we sold one SNF that was previously leased to Five Star for approximately $248 , excluding closing costs. We recorded an impairment charge of approximately $2,191 to reduce the carrying value of this SNF to its sale price less cost to sell, and we did not recognize a gain or loss on this sale. As a result of this sale, Five Star's annual rent payable to us

decreased by $25 in accordance with the terms of the applicable lease. See Note 10 for further information regarding our leasing arrangements with Five Star.

Results of operations for properties sold or held for sale are included in discontinued operations in our condensed consolidated statements of comprehensive income when the criteria for discontinued operations in Accounting Standards Codification 2015-20, Discontinued Operations, are met. The senior living communities and MOBs which we are or were offering for sale during the periods presented did not meet the criteria for discontinued operations and are included in continuing operations.

 

 

Note 4.  Investments in Available for Sale Securities

 

At September 30, 2016 , we owned 4,235,000 common shares of Five Star. We classify these shares as available for sale securities and carry them at fair market value in other assets in our condensed consolidated balance sheets, with unrealized gains and losses reported as a component of shareholders’ equity. Our historical cost basis for these shares is $14,230 . At September 30, 2016 , our investment in Five Star had a fair value of $8,089 , resulting in a cumulative unrealized loss of $6,141 based on Five Star’s quoted share price at September 30, 2016 ( $1.91 per share).

 

At September 30, 2016 , we owned 2,637,408 shares of class A common stock of The RMR Group Inc., or RMR Inc. We classify these shares of RMR Inc. as available for sale securities and carry them at fair value in other assets in our condensed consolidated balance sheets, with unrealized gains and losses reported as a component of shareholders’ equity. Our historical cost basis for these shares is $69,826 . At September 30, 2016 , our investment in RMR Inc. had a fair value of $100,063 , resulting in a cumulative unrealized gain of $30,237 based on RMR Inc.’s quoted share price at September 30, 2016 ( $37.94 per share).

 

See Notes 7 and 10 below for further information regarding our investments in available for sale securities.

 

Note 5.  Indebtedness

 

Our principal debt obligations at September 30, 2016 were: (1) outstanding borrowings under our $1,000,000 unsecured revolving credit facility; (2)  six public issuances of senior unsecured notes, including: (a)  $400,000 principal amount at an annual interest rate of 3.25% due 2019, (b)  $200,000 principal amount at an annual interest rate of 6.75% due 2020, (c)  $300,000 principal amount at an annual interest rate of 6.75% due 2021, (d)  $250,000 principal amount at an annual interest rate of 4.75% due 2024, (e)  $350,000 principal amount at an annual interest rate of 5.625% due 2042 and (f) $250,000 principal amount at an annual interest rate of 6.25% due 2046; (3) our $350,000 principal amount term loan due 2020; (4) our $200,000 principal amount term loan due 2022; and (5) $1,160,847 aggregate principal amount of mortgages (excluding premiums, discounts and net debt issuance costs) secured by 52 of our properties ( 54 buildings) with maturity dates between 2017 and 2043.  The 52 mortgaged properties ( 54 buildings) had a carrying value (before accumulated depreciation) of $1,693,723 at September 30, 2016 .  We also had two properties subject to capital leases with lease obligations totaling $11,643 at September 30, 2016 ; these two properties had a carrying value (before accumulated depreciation) of $36,061 at September 30, 2016 , and the capital leases expire in 2026.

 

In February 2016, we issued $250,000 of 6.25% senior unsecured notes due 2046. We used the net proceeds of this offering to repay in part the then outstanding amount under our revolving credit facility and for general business purposes.

 

In July 2016, we entered into loan agreements and obtained an aggregate $620,000 secured debt financing that matures in August 2026. These loans are secured by one MOB ( two buildings) located in Massachusetts and require interest at a weighted average fixed annual interest rate of 3.53% . We used the net proceeds from these loans to repay, in part, the then outstanding amount under our revolving credit facility and for general business purposes. The loan agreements contain customary covenants and provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default.

We have a $1,000,000 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 our payment of an extension fee and meeting other conditions, we have an option to extend the stated maturity date by an additional year to January 15, 2019. Our revolving

credit facility provides that we can borrow, repay and re-borrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity.  Our revolving credit facility requires annual interest to be paid on borrowings at LIBOR plus a premium, which was 130 basis points as of September 30, 2016 , plus a facility fee of 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 September 30, 2016 , the annual interest rate payable on borrowings under our revolving credit facility was 1.8% . The weighted average annual interest rates for borrowings under our revolving credit facility were 1.8% and 1.5% for the three months ended September 30, 2016 and 2015 , respectively, and 1.7% and 1.5% for the nine months ended September 30, 2016 and 2015 , respectively. As of September 30, 2016 , we had $215,000 outstanding and $785,000 available for borrowing, and as of November 3, 2016 , we had $265,000 outstanding and $735,000 available for borrowing under our revolving credit facility. We incurred interest expense and other associated costs related to our revolving credit facility of $2,024 and $2,884 for the three months ended September 30, 2016 and 2015 , respectively. We incurred interest expense and other associated costs related to our revolving credit facility of $9,159 and $5,886 for the nine months ended September 30, 2016 and 2015 , respectively. Our revolving credit facility includes an accordion feature pursuant to which maximum borrowings under the facility may be increased to up to $1,500,000 in certain circumstances.

 

We have a $200,000 term loan, which we borrowed in 2015. This term loan matures in September 2022 and is prepayable without penalty beginning September 29, 2017. This term loan requires annual interest to be paid at LIBOR plus a premium of 180 basis points that is subject to adjustment based upon changes to our credit ratings. At September 30, 2016 , the annual interest rate payable for amounts outstanding under this term loan was 2.3% . The weighted average annual interest rate for amounts outstanding under this term loan was 2.3% for both the three and nine months ended September 30, 2016 , and 2.3% for the period from September 28, 2015 (the day we entered into the term loan agreement) to September 30, 2015 . We incurred interest expense and other associated costs related to this term loan of $1,173 and $3,433 for the three and nine months ended September 30, 2016 , respectively, and $33 for both the three and nine months ended September 30, 2015 . This term loan includes an accordion feature under which maximum borrowings may be increased to up to $400,000 in certain circumstances.

 

We also have a $350,000 term loan, which we borrowed in 2014. This term loan matures in January 2020 and is prepayable without penalty at any time.  This term loan requires annual interest to be paid at LIBOR plus a premium of 140 basis points that is subject to adjustment based upon changes to our credit ratings. At September 30, 2016 , the annual interest rate payable on amounts outstanding under this term loan was 1.9% .  The weighted average annual interest rate for amounts outstanding under this term loan was 1.9% and 1.6% for the three months ended September 30, 2016 and 2015 , respectively, and 1.9% and 1.6% for the nine months ended September 30, 2016 and 2015 , respectively. We incurred interest expense and other associated costs related to this term loan of $1,707 and $1,423 for three months ended September 30, 2016 and 2015 , respectively. We incurred interest expense and other associated costs related to this term loan of $4,956 and $4,246 for nine months ended September 30, 2016 and 2015 , respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances.

 

Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our revolving credit facility and term loan agreements, a change of control of us, as defined, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business manager and property manager. Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements also contain a number of covenants, including covenants that restrict our ability to incur debts, and generally require us to maintain certain financial ratios, and our revolving credit facility and term loan agreements restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements at September 30, 2016 .

In January 2016, we prepaid, at par plus accrued interest, a $6,115 mortgage note secured by one of our properties with a maturity date in April 2016 and an annual interest rate of 5.97% . In April 2016, we prepaid, at par plus accrued interest, an $18,000 mortgage note secured by one of our properties with a maturity date in July 2016 and an annual interest rate of 4.65% . In July 2016, we prepaid, at par plus accrued interest, an $11,871 mortgage note secured by one of our properties with a maturity date in November 2016 and an annual interest rate of 6.25% . In September 2016, we prepaid, at par plus accrued interest, two mortgage notes secured by two properties with an aggregate principal balance of $79,957 , maturity dates in November 2016 and a weighted average annual interest rate of 5.92% . In October 2016, we prepaid, at par plus prepayment premiums and accrued interest, mortgage notes secured by eight properties with an aggregate principal balance of $42,542 , maturity dates in May 2017 and a weighted average annual interest rate of 6.54% .  Also in October 2016, we gave notice of our

intention to prepay, at par plus accrued interest, one mortgage note secured by one of our properties with an outstanding principal balance of approximately $5,428 , a maturity date in March 2017 and an annual interest rate of 5.86% ; we expect to make this prepayment in December 2016.

 

Note 6.  Shareholders’ Equity

Distributions:

 

On February 23, 2016, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,614 , that was declared on January 11, 2016 and was payable to shareholders of record on January 22, 2016. On May 19, 2016, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,614 , that was declared on April 13, 2016 and was payable to shareholders of record on April 25, 2016. On August 18, 2016, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,619 , that was declared on July 12, 2016 and was payable to shareholders of record on July 22, 2016. On October 11, 2016, we declared a regular quarterly distribution payable to common shareholders of record on October 21, 2016 of $0.39 per share, or approximately $92,643 . We expect to pay this distribution on or about November 17, 2016.

Share Issuances and Purchases:

On May 18, 2016, we granted 2,500 of our common shares, valued at $18.26 per share, the closing price of our common shares on the New York Stock Exchange (where our common shares were then listed) on that day, to each of our five Trustees as part of their annual compensation.

On September 15, 2016, pursuant to our equity compensation plan, we granted an aggregate of 79,650 of our common shares to our officers and certain other employees of our manager, RMR LLC, valued at $21.64 per share, the closing price of our common shares on The NASDAQ Stock Market LLC, or the Nasdaq, on that day.

On September 26, 2016, we purchased an aggregate of 17,667 of our common shares valued at $23.53 per common share, the closing price of our common shares on the Nasdaq on that day, from certain employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.