Item 1.  Financial Statements.

 

  See accompanying notes.

 

See accompanying notes.

See accompanying notes.

Supplemental disclosure of cash and cash equivalents and restricted cash:

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amount shown in the condensed consolidated statements of cash flows:

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, 2017 , or our Annual Report.  

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period 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.

In March 2017, we entered a joint venture with a sovereign investor for one of our properties leased to medical providers, medical related business, clinics and biotech laboratory tenants, or MOBs ( two buildings), located in Boston, Massachusetts. We have determined that this joint venture is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification. We concluded that we must consolidate this VIE because we have the power to direct the activities that most significantly impact the VIE’s economic performance and we have the obligation to absorb losses of, and the right to receive benefits from, the VIE that could be significant to the VIE, and therefore are the primary beneficiary of the VIE. The assets of this VIE were $1,080,268 and $1,102,986 as of June 30, 2018 and December 31, 2017 , respectively, and consist primarily of the net real estate owned by the joint venture. The liabilities of this VIE were $716,127 and $720,678 as of June 30, 2018 and December 31, 2017 , respectively, and consist primarily of the debt securing the property. The sovereign investor's interest in this consolidated entity is reflected as noncontrolling interest in our condensed consolidated financial statements. See Note 6 for further information about this joint venture.

Note 2 .  Recent Accounting Pronouncements

On January 1, 2018, we adopted FASB Accounting Standards Update, or ASU, No. 2014-09 (and related clarifying guidance issued by the FASB),  Revenue From Contracts With Customers, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU No. 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While ASU No. 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. A substantial portion of our total revenues, including residents fees and services which relate to contracts with residents for housing services at properties leased to our taxable REIT subsidiaries, or TRSs, consists of rental income from leasing arrangements, which is specifically excluded from ASU No. 2014-09. Our contracts with residents that are within the scope of ASU No. 2014-09 are generally short term in nature. We have adopted ASU No. 2014-09 using the modified retrospective approach. The adoption of ASU No. 2014-09 did not have a material impact on the amount or timing of our revenue recognition in our condensed consolidated financial statements.

On January 1, 2018, we adopted FASB 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. The implementation of ASU No. 2016-01 resulted in the reclassification of historical changes in the fair value of our available for sale equity securities of $86,572 from cumulative other comprehensive income to cumulative net income. We also reclassified $841 from cumulative other comprehensive income to cumulative net income for our share of cumulative other comprehensive income of our equity method investee. Effective January 1, 2018, changes in the fair value of our equity securities are recorded through earnings in accordance with ASU No. 2016-01.

On January 1, 2018, we adopted FASB ASU No. 2016-18, Restricted Cash , which requires companies to show the changes in the total of cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU No. 2016-18 also requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. As a result, amounts included in restricted cash in our condensed consolidated balance sheets are presented with cash and cash equivalents in our condensed consolidated statements of cash flows to the related captions in the condensed consolidated balance sheets. Restricted cash totaled $108,704 and $13,776 as of June 30, 2018 and 2017 , respectively. The implementation of ASU No. 2016-18 resulted in a $9,947 decrease to net cash provided by operating activities for the six months ended June 30, 2017 . The adoption of ASU No. 2016-18 did not change our balance sheet presentation.

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 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 the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements. We currently expect to adopt the standard using the modified retrospective approach.

In June 2018, the FASB issued ASU No. 2018-7,  Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting , which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. ASU No. 2018-7 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2018-7 will have in our condensed consolidated financial statements.

Note 3 .  Real Estate Properties

At June 30, 2018 , we owned 443 properties ( 469 buildings) located in 42 states and Washington, D.C.

Acquisitions:

We have accounted for our 2018 acquisitions as acquisitions of assets unless otherwise noted. We funded our 2018 acquisitions using cash on hand and borrowings under our revolving credit facility, unless otherwise noted.

MOBs:

In January 2018, we acquired three MOBs ( three buildings) located in Kansas, Missouri and California with a total of approximately 400,000 square feet for an aggregate purchase price of approximately $91,698 , including closing costs of $544 .

In March 2018, we acquired one MOB ( one building) located in Virginia with approximately 135,000 square feet for a purchase price of approximately $23,275 , including our assumption of a $11,050 mortgage note and closing costs of $525 .

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

The table below represents the purchase price allocations (including net closing adjustments) of the MOB acquisitions that closed during the six months ended June 30, 2018 , as described above:

Senior Living Community Acquisitions:

In November 2017, we entered a transaction agreement with Five Star Senior Living Inc., or Five Star, pursuant to which we agreed to acquire six senior living communities from Five Star. In December 2017, we acquired two of these senior living communities located in Alabama and Indiana with a combined 229 living units for $39,457 , including closing costs of $307 . In January 2018, we acquired one of these senior living communities located in Tennessee with 88 living units for $19,868 , including closing costs of $201 . In February 2018, we acquired  one of these senior living communities located in Arizona with  127  living units for  $22,622 , including our assumption of approximately $16,748  of mortgage debt principal and closing costs of $372 . In June 2018, we acquired the remaining two of these senior living communities located in Tennessee with a combined 151 living units for $23,860 , including our assumption of approximately  $16,588  of mortgage debt principal and closing costs of  $560 . In connection with our acquisitions of these senior living communities, we entered management and pooling agreements with Five Star for Five Star to manage these senior living communities for us.

The table below represents the purchase price allocations (including net closing adjustments) of the senior living community acquisitions that closed during the six months ended June 30, 2018 , as described above:

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 three months ended June 30, 2018, we recorded an impairment charge of $548 to write off an acquired lease intangible asset associated with a lease default at one of our triple net leased senior living communities, which was leased to a third party private operator. In June 2018, we reached an agreement with this tenant and its guarantor to settle past due

amounts, terminate the lease and transfer operations, and, in connection with this agreement, we received $2,150 . We entered a management agreement with Five Star to operate this community for our account under a TRS structure.

We did not record any impairment charges for our real estate properties during the six months ended June 30, 2017. See Note 5 for further information regarding other than temporary impairment losses recorded in 2017 relating to our investments in equity securities.

Dispositions:

In March 2018, we sold  two  senior living communities that were leased to Sunrise Senior Living LLC, or Sunrise, for an aggregate sales price of $217,000 , excluding closing costs, resulting in a gain of  $181,154 . In May 2018, we sold one senior living community leased to Sunrise for a sales price of $96,000 , excluding closing costs, resulting in a gain of $78,856 . We recognized rental income of $728 and $3,505 during the three and six months ended June 30, 2018 , respectively, related to these three senior living communities. We currently have $94,348 of proceeds from the sale of a senior living community in May 2018 that are being held in trust for our benefit to fund future acquisitions by us. These proceeds from the sale are classified as restricted cash in our condensed consolidated balance sheets.

In June 2018, we sold one skilled nursing facility, or SNF, a type of senior living community, that was leased to Five Star and one senior living community that was leased to a private operator, where the tenant exercised its purchase option, for a combined sales price of approximately $21,865 , excluding closing costs, resulting in a net gain of $1,906 . Pursuant to the terms of our lease with Five Star, our annual rental income decreased by $650 from the sale of the SNF that was previously leased to Five Star. We recognized rental income of $331 and $664 during the three and six months ended June 30, 2018, respectively, related to the senior living community that was leased to a private operator.

Note 4 .  Indebtedness

Our principal debt obligations at June 30, 2018 were: (1) outstanding borrowings under our $1,000,000 unsecured revolving credit facility; (2)  seven 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) $500,000 principal amount at an annual interest rate of 4.75% due 2028, (f)  $350,000 principal amount at an annual interest rate of 5.625% due 2042 and (g) $250,000 principal amount at an annual interest rate of 6.25% due 2046; (3) our $350,000 principal amount unsecured term loan due 2020; (4) our $200,000 principal amount unsecured term loan due 2022; and (5) $833,594 aggregate principal amount of mortgages (excluding premiums, discounts and net debt issuance costs) secured by 26 of our properties ( 27 buildings) with maturity dates between 2018 and 2043. The 26 mortgaged properties ( 27 buildings) had a carrying value (before accumulated depreciation) of $1,266,093 at June 30, 2018 . We also had two properties subject to capital leases with lease obligations totaling $10,270 at June 30, 2018 ; these two properties had a carrying value (before accumulated depreciation) of $36,248 at June 30, 2018 , and the capital leases expire in 2026.

In February 2018, we issued  $500,000  of  4.75%  senior unsecured notes due 2028, raising net proceeds of approximately $487,264 after underwriting discounts and expenses. We used the net proceeds of this offering to reduce amounts outstanding under our revolving credit facility.

In January 2018, we prepaid, at par plus accrued interest, a mortgage note secured by one of our properties with an outstanding principal balance of approximately  $4,338 , a maturity date in September 2043 and an annual interest rate of  4.38% . In July 2018, we prepaid, at par plus accrued interest, mortgage notes secured by 12 of our properties with an aggregate outstanding principal balance of approximately $90,602 , maturity dates in October 2018 and a weighted average annual interest rate of 5.0% . In July 2018, we gave notice of our intention to prepay, at par plus accrued interest, a mortgage note secured by one of our properties with an outstanding principal balance of approximately  $6,360 , a maturity date in January 2019 and an annual interest rate of  4.69% . We expect to make this prepayment in September 2018.

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, 2022, and, subject to the payment of an extension fee and meeting other conditions, we have the option to extend the maturity date of the facility for an additional year. 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

the rate of LIBOR plus a premium of 120 basis points, plus a facility fee of 25 basis points per annum on the total amount of lending commitments under the facility. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. As of June 30, 2018 , the annual interest rate payable on borrowings under our revolving credit facility was 3.2% . The weighted average annual interest rates for borrowings under our revolving credit facility were 3.0% and 2.3% for the three months ended June 30, 2018 and 2017 , respectively, and 2.7% and 2.2% for the six months ended June 30, 2018 and 2017 , respectively. As of June 30, 2018 , we had $64,000 outstanding and $936,000 available for borrowing, and as of August 6, 2018 , we had $125,000 outstanding and $875,000 available for borrowing under our revolving credit facility. We incurred interest expense and other associated costs related to our revolving credit facility of $1,504 and $3,129 for the three months ended June 30, 2018 and 2017 , respectively, and $5,581 and $5,959 for the six months ended June 30, 2018 and 2017 , respectively. The facility also includes a feature pursuant to which in certain circumstances maximum borrowings under the facility may be increased to up to $2,000,000 .

Our $350,000 term loan matures in January 2020, and is prepayable without penalty at any time. This term loan requires annual interest to be paid at the rate of LIBOR plus a premium of 140 basis points, subject to adjustment based upon changes to our credit ratings. At June 30, 2018 , the annual interest rate payable on amounts outstanding under this term loan was 3.4% . The weighted average annual interest rate for amounts outstanding under this term loan was 3.4% and 2.5% for the three months ended June 30, 2018 and 2017 , respectively, and 3.2% and 2.3% for the six months ended June 30, 2018 and 2017 , respectively. We incurred interest expense and other associated costs related to this term loan of $3,077 and $2,268 for the three months ended June 30, 2018 and 2017 , respectively, and $5,843 and $4,311 for the six months ended June 30, 2018 and 2017 , respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances.

Our $200,000 term loan matures in September 2022, and is prepayable without penalty at any time. This term loan requires annual interest to be paid at the rate of LIBOR plus a premium of 135 basis points, subject to adjustment based upon changes to our credit ratings. At June 30, 2018 , the annual interest rate payable on amounts outstanding under this term loan was 3.4% . The weighted average annual interest rate for amounts outstanding under this term loan was 3.3% and 2.9% for the three months ended June 30, 2018 and 2017 , respectively, and 3.2% and 2.8% for the six months ended June 30, 2018 and 2017 , respectively. We incurred interest expense and other associated costs related to this term loan of $1,738 and $1,488 for the three months ended June 30, 2018 and 2017 , respectively, and $3,302 and $2,847 for the six months ended June 30, 2018 and 2017 , respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $400,000 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 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 June 30, 2018 .

SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 5 .  Fair Value of Assets and Liabilities

The table below presents certain of our assets measured at fair value at June 30, 2018 , categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset: 

In addition to the assets described in the table above, our financial instruments at June 30, 2018 and December 31, 2017 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, term loans, senior unsecured notes, secured debt and capital leases and other unsecured obligations and liabilities. The fair values of these financial instruments approximated their carrying values in our condensed consolidated financial statements as of such dates, except as follows: 

We estimated the fair value of our two issuances of senior unsecured notes due 2042 and 2046 based on the closing price on The Nasdaq Stock Market LLC, or Nasdaq, (a Level 1 input) as of June 30, 2018 . We estimated the fair values of our five issuances of senior unsecured notes due 2019, 2020, 2021, 2024 and 2028 using an average of the bid and ask price on or about June 30, 2018 (Level 2 inputs as defined in the fair value hierarchy under GAAP). We estimated the fair values of our secured debts by using discounted cash flows analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined

in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

Note 6. Noncontrolling Interest

In March 2017, we entered a joint venture with a sovereign investor for one of our MOBs ( two buildings) located in Boston, Massachusetts. The investor contributed approximately $261,009 for a 45% equity interest in the joint venture, and we retained the remaining 55% equity interest in the joint venture. Net proceeds from this transaction were approximately $255,931 , after transaction costs. We continue to effectively control this property and therefore continue to account for this property on a consolidated basis in our condensed consolidated financial statements under the VIE model.

We recognized a noncontrolling interest in our condensed consolidated balance sheets of approximately $181,859 as of completion of the transaction, which was equal to 45% of the aggregate carrying value of the total equity of the property immediately prior to the transaction. The difference between the net proceeds received from this transaction and the noncontrolling interest recognized, which was approximately $74,072 , was reflected as an increase in additional paid in capital in our condensed consolidated balance sheets upon the closing of the transaction. The portion of the joint venture's net income and comprehensive income not attributable to us, or $1,401 and $1,360 for the three months ended June 30, 2018 and 2017, respectively, and $2,784 and $1,486 for the six months ended June 30, 2018 and 2017 , respectively, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income. We made aggregate cash distributions to our joint venture partner of $5,113 and $3,483 for the three months ended June 30, 2018 and 2017, respectively, and $10,781 and $3,483 for the six months ended June 30, 2018 and 2017 , respectively, which are reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. As of June 30, 2018 , this joint venture held real estate assets with an aggregate net book value of $754,732 , subject to mortgage notes of $620,000 .

In assessing whether we have a controlling interest in this joint venture arrangement and are required to consolidate the accounts of the joint venture entity, we considered the members' rights to residual gains and obligation to absorb losses, which activities most significantly impact the economic performance of the entity and which member has the power to direct those activities.

Note 7 .  Shareholders’ Equity

Share Based Compensation:

On January 1, 2018, we purchased 4,628 of our common shares, valued at $19.15 per share, the closing price of our common shares on Nasdaq on December 29, 2017, from a former employee of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.

On March 29, 2018, in accordance with our Trustee compensation arrangements, and in connection with the election of one of our Managing Trustees, we granted  3,000  of our common shares, valued at  $15.66  per share, the closing price of our common shares on Nasdaq on that day, to the Managing Trustee who was elected as a Managing Trustee on that day.

On May 22, 2018, in accordance with our Trustee compensation arrangements, we granted  3,000  of our common shares, valued at  $16.56  per share, the closing price of our common shares on Nasdaq on that day, to each of our five Trustees as part of their annual compensation.

Distributions:

On February 22, 2018 , we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,674 , that was declared on January 19, 2018 and was payable to shareholders of record on January 29, 2018. On May 17, 2018, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,676 , that was declared on April 19, 2018 and was payable to shareholders of record on April 30, 2018. On July 19, 2018, we declared a regular quarterly distribution payable to common shareholders of record on July 30, 2018, of $0.39 per share, or approximately $92,681 . We expect to pay this distribution on or about August 16, 2018.

Note 8 .  Segment Reporting

As of June 30, 2018 , we have four operating segments, of which three are separate reporting segments. We aggregate the reporting units in each of our MOBs, our triple net leased senior living communities and our managed senior living communities into three reporting segments, based on their similar operating and economic characteristics. The first reporting segment includes MOBs where the tenants pay us rent. The second reporting segment includes triple net leased senior living communities that provide short term and long term residential care and other services for residents and with respect to which we receive rents from the operators. The third reporting segment includes managed senior living communities that provide short term and long term residential care and other services for residents where we pay fees to the operator to manage the communities for our account. The fourth segment includes all of our other operations, including certain properties that offer wellness, fitness and spa services to members and with respect to which we receive rents from operators, which we do not consider to be sufficiently material to constitute a separate reporting segment.