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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2012

 

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)

 

 

 

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 October 30, 2012:  176,553,600.

 

 

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SENIOR HOUSING PROPERTIES TRUST

FORM 10-Q

 

September 30, 2012

 

INDEX

 

		Page
PART I	Financial Information
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets — September 30, 2012 and December 31, 2011	1
	Condensed Consolidated Statements of Income and Comprehensive Income — Three and Nine Months Ended September 30, 2012 and 2011	2
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2012 and 2011	3
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	55
	Warning Concerning Forward Looking Statements	56
	Statement Concerning Limited Liability	59
PART II	Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 5.	Other Information	60
Item 6.	Exhibits	61
	Signatures	64

 

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.

 

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PART I.  Financial Information

 

Item 1.     Financial Statements.

 

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share and per share data)

(unaudited)

 

		September 30,			December 31,
		2012			2011
ASSETS
Real estate properties:
Land		$	604,352		$	564,628
Buildings and improvements		4,487,313			4,156,963
		5,091,665			4,721,591
Less accumulated depreciation		719,224			630,261
		4,372,441			4,091,330
Cash and cash equivalents		20,985			23,560
Restricted cash		11,377			7,128
Deferred financing fees, net		30,328			25,434
Acquired real estate leases and other intangible assets, net		106,943			100,235
Loan receivable		—			38,000
Other assets		104,221			97,361
Total assets		$	4,646,295		$	4,383,048
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility		$	55,000		$	—
Senior unsecured notes, net of discount		1,091,732			965,770
Secured debt and capital leases		721,579			861,615
Accrued interest		22,018			22,281
Assumed real estate lease obligations, net		14,304			17,778
Other liabilities		70,851			42,998
Total liabilities		1,975,484			1,910,442
Commitments and contingencies
Shareholders’ equity:
Common shares of beneficial interest, $.01 par value: 199,700,000 shares authorized, 176,553,600 and 162,646,046 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		1,766			1,626
Additional paid in capital		3,233,262			2,944,212
Cumulative net income		999,185			907,937
Cumulative other comprehensive income		4,675			(3,772		)
Cumulative distributions		(1,568,077		)	(1,377,397		)
Total shareholders’ equity		2,670,811			2,472,606
Total liabilities and shareholders’ equity		$	4,646,295		$	4,383,048

 

See accompanying notes.

 

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2012			2011			2012			2011
Revenues:
Rental income		$	116,281		$	102,969		$	336,772		$	301,839
Residents fees and services		42,352			10,731			113,906			11,575
Total revenues		158,633			113,700			450,678			313,414
Expenses:
Depreciation		35,880			28,824			104,487			82,120
Property operating expenses		47,807			20,153			127,875			41,888
General and administrative		8,352			6,564			24,106			19,513
Acquisition related costs		4,297			2,620			6,814			6,547
Impairment of assets		—			1,028			3,071			1,194
Total expenses		96,336			59,189			266,353			151,262
Operating income		62,297			54,511			184,325			162,152
Interest and other income		248			394			957			870
Interest expense		(30,417		)	(24,730		)	(87,426		)	(70,837		)
Loss on early extinguishment of debt		(6,349		)	—			(6,349		)	(427		)
Loss on lease terminations		(104		)	—			(104		)	—
(Loss) gain on sale of properties		(101		)	—			(101		)	21,315
Equity in earnings of an investee		115			28			236			111
Income before income tax expense		25,689			30,203			91,538			113,184
Income tax expense		(43		)	(207		)	(290		)	(365		)
Net income		25,646			29,996			91,248			112,819
Other comprehensive income:
Change in net unrealized gain / loss on investments		7,499			(15,735		)	8,416			(18,919		)
Share of comprehensive income of an investee		35			15			31			58
Comprehensive income		$	33,180		$	14,276		$	99,695		$	93,958
Weighted average shares outstanding		174,690			153,385			166,698			145,745
Net income per share		$	0.15		$	0.20		$	0.55		$	0.77

 

See accompanying notes.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

		Nine Months Ended September 30,
		2012			2011
Cash flows from operating activities:
Net income		$	91,248		$	112,819
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		104,487			82,120
Amortization of deferred financing fees and debt discounts		4,494			3,506
Straight line rental income		(10,248		)	(8,376		)
Amortization of acquired real estate leases and other intangible assets		746			(574		)
Loss on early extinguishment of debt		6,349			427
Impairment of assets		3,071			1,194
Loss on lease terminations		104			—
Loss (gain) on sale of properties		101			(21,315		)
Equity in earnings of an investee		(236		)	(111		)
Change in assets and liabilities:
Restricted cash		(4,249		)	(2,175		)
Other assets		13,978			(26,294		)
Accrued interest		(263		)	940
Other liabilities		29,430			25,682
Cash provided by operating activities		239,012			167,843
Cash flows from investing activities:
Real estate acquisitions and deposits		(255,769		)	(510,416		)
Real estate improvements		(29,645		)	(25,327		)
Loan receivable		—			(80,000		)
Principal payments on loan receivable		38,000			32,000
Investment in Five Star Quality Care, Inc.		—			(5,000		)
Proceeds from sale of properties		1,041			38,663
Cash used for investing activities		(246,373		)	(550,080		)
Cash flows from financing activities:
Proceeds from issuance of common shares, net		287,052			247,499
Proceeds from issuance of unsecured senior notes, net of discount		350,000			247,327
Proceeds from borrowings on revolving credit facility		509,000			590,000
Repayments of borrowings on revolving credit facility		(454,000		)	(508,000		)
Redemption of senior notes		(225,000		)	—
Repayment of other debt		(259,400		)	(7,013		)
Payment of deferred financing fees		(12,186		)	(9,873		)
Distributions to shareholders		(190,680		)	(161,724		)
Cash provided by financing activities		4,786			398,216
(Decrease) increase in cash and cash equivalents		(2,575		)	15,979
Cash and cash equivalents at beginning of period		23,560			10,866
Cash and cash equivalents at end of period		$	20,985		$	26,845

 

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Supplemental cash flow information:
Interest paid		$	83,195		$	66,391
Income taxes paid		389			264
Non-cash investing activities:
Acquisitions funded by assumed debt		(112,153		)	(76,931		)
Non-cash financing activities:
Assumption of mortgage notes payable		112,153			76,931
Issuance of common shares		2,138			1,814

 

See accompanying notes.

 

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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, 2011, 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 material intercompany transactions and balances among us and our consolidated subsidiaries have been eliminated.  Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.  Reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.  These reclassifications were made to conform the prior periods’ rental income, property operating expenses, 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.

 

Note 2.  Recent Accounting Pronouncements

 

In January 2012, we adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS .  This update clarified the application of existing fair value measurement requirements.  This update also required reporting entities to disclose additional information regarding fair value measurements categorized within Level 3 of the fair value hierarchy.  This update was effective for interim and annual reporting periods beginning after December 15, 2011.  The implementation of this update did not cause any material changes to the disclosures in, or presentation of, our condensed consolidated financial statements.

 

In January 2012, we adopted FASB Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income .  This update eliminated the option to report other comprehensive income and its components in the statement of shareholders’ equity.  This update was intended to enhance comparability between entities that report under GAAP and to provide a more consistent method of presenting non-owner transactions that affect an entity’s equity.  This standard was effective for interim and annual reporting periods beginning after December 15, 2011.  The implementation of this update did not cause any material changes to our condensed consolidated financial statements.

 

Note 3.  Real Estate Properties

 

At September 30, 2012, we owned 384 properties located in 40 states and Washington, D.C.

 

In February 2012, we acquired a senior living community located in Alabama with 92 living units for approximately $11,300, excluding closing costs.  We recorded intangible assets of approximately $583 related to this acquisition.  A subsidiary of Five Star Quality Care, Inc., which, together with its subsidiaries, we refer to in this report as Five Star, manages this community for our account pursuant to a long term management agreement.  We funded this acquisition using cash on hand.  As of September 30, 2012, we own 30 communities that are managed by Five Star, or the Managed Communities.  We use the taxable REIT subsidiary, or TRS, structure authorized by the Real Estate Investment Trust Investment Diversification and Empowerment Act, or RIDEA, for our Managed

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Communities, which we began acquiring in June 2011.  The results of operations for the Managed Communities are included in our short and long term residential care communities segment.  See Note 11 for further information regarding the arrangements we have with Five Star regarding the lease, operations and management of our senior living communities and see Note 9 for further information regarding our reportable operating segments.

 

In May 2012, we acquired a senior living community located in South Carolina with 59 assisted living units for approximately $8,059, excluding closing costs.  We recorded intangible assets of approximately $362 related to this acquisition.  Five Star manages this community for our account pursuant to a long term management agreement.  We funded this acquisition using cash on hand and by assuming approximately $4,789 of mortgage debt, which approximated its fair value.

 

In May 2012, we acquired a property leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or an MOB, with 28,440 square feet located in Georgia for approximately $8,600, excluding closing costs.  We recorded intangible lease assets and liabilities of $1,392 and $10, respectively, related to this acquisition.  We funded this acquisition using cash on hand and borrowings under our revolving credit facility.

 

In May 2012, we acquired another MOB with 111,538 square feet located in Georgia for approximately $23,100, excluding closing costs.  We recorded intangible lease assets of $6,421 related to this acquisition.  We funded this acquisition using cash on hand and borrowings under our revolving credit facility.

 

In June 2012, we acquired a MOB with 204,429 square feet located in Hawaii for approximately $70,495, excluding closing costs.  We recorded intangible lease assets and liabilities of $4,306 and $629, respectively, related to this acquisition.  We funded this acquisition using cash on hand, borrowings under our revolving credit facility and by assuming approximately $52,000 of mortgage debt, which approximated its fair value.

 

In June 2012, we acquired another MOB with 92,180 square feet located in Maryland for approximately $18,250, excluding closing costs.  We recorded intangible lease assets and liabilities of $3,570 and $78, respectively, related to this acquisition.  We funded this acquisition using cash on hand and borrowings under our revolving credit facility.

 

In July 2012, we acquired a senior living community located in South Carolina with 232 living units for approximately $37,273, excluding closing costs.  We recorded intangible assets of approximately $1,762 related to this acquisition.  Five Star manages this community for our TRS pursuant to a long term management agreement.  We funded this acquisition using cash on hand and borrowings under our revolving credit facility.

 

In July 2012, we acquired a MOB with 63,082 square feet located in Texas for approximately $16,850, excluding closing costs.  We recorded intangible lease assets of $1,973 related to this acquisition.  We funded this acquisition using cash on hand.

 

In July 2012, we acquired another MOB with 52,858 square feet located in Florida for approximately $7,750, excluding closing costs.  We recorded intangible lease assets of $789 related to this acquisition.  We funded this acquisition using cash on hand.

 

In July 2012, we acquired four senior living communities located in Colorado, Idaho and Washington State with a total of 511 living units for total purchase prices of approximately $36,500, excluding closing

 

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

 

costs.  We recorded intangible assets of approximately $1,900 related to this acquisition.  We leased these properties to Stellar Senior Living, LLC, or Stellar, for an initial term expiring in 2027 at initial rent of approximately $2,920 per year.  Percentage rent, based on increases in gross revenues at these properties, will commence in 2014.  We funded this acquisition using cash on hand, borrowings under our revolving credit facility and by assuming approximately $6,876 of mortgage debt, which was recorded at a fair value of $7,488.

 

In August 2012, we acquired a senior living community located in New York with 310 living units for approximately $99,000, excluding closing costs.  We recorded intangible assets of approximately $2,726 related to this acquisition.  Five Star manages this community for our account pursuant to a long term management agreement.  We funded this acquisition using cash on hand, borrowings under our revolving credit facility and by assuming approximately $31,187 of mortgage debt, which was recorded at a fair value of $33,934.

 

In August 2012, we acquired another senior living community located in Missouri with 87 living units for approximately $11,280, excluding closing costs.  We recorded intangible assets of approximately $330 related to this acquisition.  Five Star manages this community for our account pursuant to a long term management agreement.  We funded this acquisition using cash on hand, borrowings under our revolving credit facility and by assuming approximately $5,838 of mortgage debt, which was recorded at a fair value of $6,530.

 

In September 2012, we acquired a MOB with 33,600 square feet located in Massachusetts for approximately $16,400, excluding closing costs.  We funded this acquisition using cash on hand and by assuming approximately $11,462 of mortgage debt, which was recorded at a fair value of $12,529.

 

We have previously disclosed an agreement to acquire one MOB, which has not yet closed, for approximately $15,275, including the assumption of approximately $9,700 of mortgage debt and excluding closing costs.  The MOB is located in Minnesota and includes 76,637 square feet.  The closing of this acquisition is contingent upon customary closing conditions; accordingly, we can provide no assurance that we will purchase this property.

 

In August and October 2012, we entered into four separate agreements to acquire three senior living communities and one MOB for total purchase prices of approximately $68,300, including the assumption of approximately $12,300 of mortgage debt and excluding closing costs.  The three senior living communities are located in Mississippi, Tennessee and Washington State and include a total of 437 living units and the MOB is located in Tennessee and includes 33,796 square feet.  The closings of these acquisitions are contingent upon completion of our diligence and other customary closing conditions; accordingly, we can provide no assurance that we will purchase these properties.

 

In May 2012, we entered into an operations transfer agreement, or the Operations Transfer Agreement, with Sunrise Senior Living, Inc., or Sunrise, and Five Star related to 10 senior living communities, or the 10 Communities, that we were then leasing to Sunrise.  The Operations Transfer Agreement provides that we and Sunrise will accelerate the December 31, 2013 termination date of these Sunrise leases, that we will lease the 10 Communities to our TRS and that Five Star will manage the 10 Communities pursuant to long term management agreements.  The Operations Transfer Agreement provides that these transactions will occur when we and Five Star have obtained required regulatory approvals to operate the 10 Communities.  In September and October 2012, we and Sunrise terminated Sunrise’s leases for three and five of the 10 Communities, respectively, and we entered into management agreements with Five Star with respect to these eight communities.  We currently expect the termination of the leases for, and the

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

transition of the operations of, the remaining two communities to occur before December 31, 2012.  As a result of these lease terminations, we recorded a loss on lease terminations of approximately $104 during the three and nine months ended September 30, 2012.  Also, as a result of the three lease terminations in September 2012, during the three and nine months ended September 30, 2012, we recognized approximately $350 of percentage rent that is included in rental income in our condensed consolidated statements of income and comprehensive income as the contingencies for recognizing that income were then met.  Pursuant to the Operations Transfer Agreement, we paid Sunrise $1,000 to purchase the inventory and certain improvements owned by Sunrise at these 10 Communities, which were or will be transferred to our TRS.  The termination of the leases for those remaining two communities and Five Star’s management of those communities on our behalf are subject to conditions, including receipt of regulatory approvals.

 

In July 2012, we sold one MOB located in Massachusetts with approximately 18,900 square feet for a sale price of approximately $1,100 and recorded a loss on the sale of this property of approximately $101.  At September 30, 2012, one of our senior living communities located in Pennsylvania is classified as held for sale.  This property is included in real estate properties in our condensed consolidated balance sheets and has a net book value of approximately $850 at both September 30, 2012 and December 31, 2011.

 

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.  During the nine months ended September 30, 2012, we recorded an impairment of assets charge of $3,071 to reduce the carrying value of one of our properties to its estimated sale price less costs to sell.  During the three and nine months ended September 30, 2011, we recorded impairment of assets charges of $1,028 and $1,194, respectively, to reduce the carrying value of one and three of our properties, respectively, to their estimated sales prices less costs to sell.

 

During the three and nine months ended September 30, 2012, pursuant to the terms of our existing leases with Five Star, we purchased $4,156 and $18,249, respectively, of improvements made to our properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $335 and $1,472, respectively.

 

The allocation of the purchase price of certain of our acquisitions described 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 could change significantly from those used in these condensed consolidated financial statements.

 

Note 4.  Unrealized Gain / Loss on Investments

 

As of September 30, 2012, we owned 250,000 common shares of CommonWealth REIT, or CWH, and 4,235,000 common shares of Five Star, which are carried at fair market value in other assets in 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 CWH and Five Star shares as of September 30, 2012 ($14.56 and $5.11 per share, respectively) and our weighted average costs at the time we

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

acquired these shares, as adjusted to reflect any share splits or combinations ($26.00 and $3.36 per share, respectively).

 

Note 5.  Loan Receivable

 

In May 2011, we and Five Star entered into a loan agreement, or the Bridge Loan, under which we agreed to lend Five Star up to $80,000 to fund a portion of Five Star’s purchase of a portfolio of six senior living communities.  By September 30, 2011, Five Star had completed its acquisition of these communities and had borrowed all $80,000 of this Bridge Loan.  By December 31, 2011, Five Star had repaid $42,000 of those borrowings.  In April 2012, Five Star paid the remaining balance of $38,000, resulting in the termination of this Bridge Loan.  The Bridge Loan was secured by mortgages on three of the senior living communities that Five Star acquired and on four other senior living communities owned by Five Star.  The Bridge Loan bore interest at a rate equal to the annual rates of interest applicable to our borrowings under our revolving credit facility, plus 1%.  We recognized interest income from this Bridge Loan of $314 for the nine months ended September 30, 2012 and $187 and $245 for the three and nine months ended September 30, 2011, which are included in interest and other income in our condensed consolidated statements of income and comprehensive income.

 

Note 6.  Indebtedness

 

Our principal debt obligations at September 30, 2012 were: our $750,000 unsecured revolving credit facility; four public issuances of unsecured senior notes, including: $250,000 principal amount due 2016 at an annual interest rate of 4.30%, $200,000 principal amount due 2020 at an annual interest rate of 6.75%, $300,000 principal amount due 2021 at an annual interest rate of 6.75% and $350,000 principal amount due 2042 at an annual interest rate of 5.625%; and $702,636 aggregate principal amount of mortgages secured by 56 of our properties with maturity dates from 2013 to 2043.  The 56 mortgaged properties had a carrying value of $975,116 at September 30, 2012.  We also have two properties subject to capital leases totaling $13,900 at September 30, 2012; these two properties had a carrying value of $15,667 at September 30, 2012.

 

In connection with the acquisitions discussed in Note 3 above, during the nine months ended September 30, 2012, we assumed $112,153 of mortgage debt, which was recorded at an aggregate fair value of $117,271.  These mortgages have a weighted average interest rate of 5.77% and a weighted average maturity of 4.6 years.  We recorded the assumed mortgages at their fair value, which exceeded their outstanding principal balances by $5,118.  We determined the fair value of the assumed mortgages using a market approach based upon Level 2 inputs (significant other observable inputs) in the fair value hierarchy.

 

In January 2012, we repaid all $225,000 of our 8.625% unsecured senior notes at their maturity date.  We funded this repayment using borrowings under our revolving credit facility.

 

In February 2012, we paid in full a mortgage loan encumbering one of our properties that had a principal balance of approximately $12,400, an interest rate of 6.03% and a maturity date in March 2012.  In April 2012, we paid in full 17 mortgage loans encumbering 17 of our properties that had an aggregate principal balance of $32,576, weighted average interest rate of 6.95% and maturity dates in June and July 2012.  In June 2012, we paid in full a mortgage loan encumbering one of our properties that had a principal balance of approximately $3,140, an interest rate of 6.07% and a maturity date in September 2012.  In October 2012, we paid in full a mortgage loan encumbering one of our properties that had a principal balance of approximately $4,159, an interest rate of 6.50% and a maturity date in January 2013.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

In July 2012, we sold $350,000 of unsecured senior notes.  The notes require interest at a fixed rate of 5.625% per annum and are due in 2042.  Net proceeds from this sale of the notes, after underwriting discounts, fees and other expenses were approximately $338,566.  Interest on the notes is payable quarterly in arrears.  We used a part of the net proceeds of this offering to repay borrowings outstanding under our revolving credit facility and we used the remaining net proceeds from this offering to prepay a part of our Federal National Mortgage Association, or FNMA, secured term loan and for general business purposes, which included funding a part of our recent acquisitions of properties discussed in Note 3 above.

 

In August 2012, we prepaid approximately $199,197 of the outstanding principal balance of our FNMA secured term loan that had an interest rate of 6.4% at August 31, 2012 and a maturity date in September 2019, using, among other funds, net proceeds from our July 2012 debt offering.  As a result of this prepayment, 11 of the 28 properties securing this loan were released from the related mortgage.  Also, as a result of this prepayment, we recorded a loss on early extinguishment of debt of approximately $6,349 consisting of a debt prepayment premium, legal fees and the write off of unamortized deferred financing fees.

 

We have a $750,000 unsecured revolving credit facility that is available for acquisitions, working capital and general business purposes.  Our revolving credit facility has a maturity date in June 2015 and, subject to meeting certain conditions and our payment of a fee, we may extend the maturity date for one year to June 2016.  In addition, our revolving credit facility includes a feature under which maximum borrowings may be increased to up to $1,500,000 in certain circumstances.  Borrowings under our revolving credit facility bear interest at LIBOR plus a spread of 160 basis points.  We also pay a facility fee of 35 basis points per annum on the maximum amount of borrowings available under our revolving credit facility.  Both the interest rate spread and the facility fee are subject to adjustment based upon changes to our credit ratings.  The weighted average annual interest rate for borrowings under our revolving credit facility was 1.8% for the three and nine months ended September 30, 2012, respectively.  As of September 30, 2012, we had $55,000 outstanding and $695,000 available under our revolving credit facility.

 

Note 7.  Shareholders’ Equity

 

On February 9, 2012, we paid a $0.38 per share, or $61,806, distribution to our common shareholders with respect to our operating results for the quarter ended December 31, 2011.  On May 9, 2012, we paid a $0.38 per share, or $61,813, distribution to our common shareholders with respect to our operating results for the quarter ended March 31, 2012.  On August 24, 2012, we paid a $0.38 per share, or $67,061, distribution to our common shareholders with respect to our operating results for the quarter ended June 30, 2012.  On October 9, 2012, we declared a quarterly distribution of $0.39 per share, or $68,856, to our common shareholders of record on October 22, 2012, with respect to our operating results for the quarter ended September 30, 2012; we expect to pay this distribution on or about November 20, 2012.

 

On February 10, 2011, we paid a $0.37 per share, or $52,486, distribution to our common shareholders with respect to our operating results for the quarter ended December 31, 2010.  On May 12, 2011, we paid a $0.37 per share, or $52,490, distribution to our common shareholders with respect to our operating results for the quarter ended March 31, 2011.  On August 11, 2011, we paid a $0.37 per share, or $56,748, distribution to our common shareholders with respect to our operating results for the quarter ended June 30, 2011.  On November 11, 2011, we paid a $0.38 per share, or $61,805, distribution to our common shareholders with respect to our operating results for the quarter ended September 30, 2011.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Under the terms of our business management agreement with Reit Management & Research LLC, or RMR, on March 29, 2012, we issued 20,462 common shares in payment of an incentive fee of approximately $453 for services rendered to us by RMR during 2011.

 

On May 17, 2012, we granted 2,000 common shares of beneficial interest, par value $.01 per share, valued at $20.48 per share, the closing price of our common shares on the New York Stock Exchange, or the NYSE, on that day, to each of our five Trustees.

 

In July 2012, we issued 13,800,000 common shares in a public offering, raising net proceeds of approximately $287,052.  We used the net proceeds of this offering to repay borrowings outstanding under our revolving credit facility.

 

On September 14, 2012, pursuant to our 2012 Equity Compensation Plan, we granted an aggregate of 78,492 common shares of beneficial interest, par value $.01 per share, valued at $22.62 per share, the closing price of our common shares on the NYSE on that day, to our officers and certain employees of our manager, RMR.

 

Note 8.  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 September 30, 2012 categorized by the level of inputs used in the valuation of each asset or liability.

 

					Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs
Description		Total			(Level 1)			(Level 2)
Assets held for sale (1)		$	850		$	—		$	850
Long-lived assets held and used (2)		$	1,975		$	—		$	1,975
Investments in available for sale securities (3)		$	25,281		$	25,281		$	—
Unsecured senior notes (4)		$	1,174,322		$	1,174,322		$	—

 

(1)              Assets held for sale consist of one of our properties that we expect to sell that is reported at fair value.  We used offers to purchase the property made by third parties or comparable sales transactions (Level 2 inputs) to determine the fair value of this property.  We have previously recorded cumulative impairments of approximately $5,738 to this property in order to reduce its book value to fair value.

(2)              Long-lived assets held and used consist of one of our properties.  We used broker information and comparable sales transactions (Level 2 inputs) to determine the fair value of this property and recognized an impairment of assets charge of $3,071 during the nine months ended September 30, 2012 to reduce its carrying value to the amount stated.

(3)              Our investments in available for sale securities include our 250,000 common shares of CWH and 4,235,000 common shares of Five Star. The fair values of these shares are based on quoted prices at September 30, 2012 in active markets (Level 1 inputs).

(4)              We estimate the fair values of our unsecured senior notes using an average of the bid and ask price of our then outstanding four issuances of senior notes (Level 1 inputs) on or about September 30, 2012.  The fair

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

values of these senior note obligations exceed their book values of $1,091,732 by $82,590 because these notes were trading at a premium to their face amounts.

 

In addition to the assets and liabilities described in the above table, our additional financial instruments include rents receivable, cash and cash equivalents, restricted cash, secured and unsecured debt and other liabilities. The fair values of these additional financial instruments approximate their carrying values at September 30, 2012 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 9.  Segment Reporting

 

We have three operating segments, of which two are reportable operating segments.  The two reportable operating segments are: (i) short term and long term residential care communities that offer dining for residents and (ii) properties where medical related activities occur but where residential overnight stays and dining services are not provided, or MOBs.  Properties in the short term and long term residential care communities segment include leased and managed independent living communities, assisted living communities, skilled nursing facilities and rehabilitation hospitals.  We earn rental income revenues from the tenants that lease and operate our leased communities and we earn fees and services revenues from the residents of our Managed Communities.  Five Star began managing our Managed Communities for our account in June 2011.  Properties in the MOB segment include those leased to medical providers, medical related businesses, clinics and biotech laboratory tenants.  We earn rental income revenues from tenants of our MOBs.  The “All Other Operations” 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

		For the Three Months Ended September 30, 2012
		Short and Long Term Residential Care Communities			MOBs			All Other Operations			Consolidated
Revenues:
Rental income		$	60,496		$	51,346		$	4,439		$	116,281
Residents fees and services		42,352			—			—			42,352
Total revenues		102,848			51,346			4,439			158,633
Expenses:
Depreciation		22,470			12,462			948			35,880
Property operating expenses		31,233			16,574			—			47,807
General and administrative		—			—			8,352			8,352
Acquisition related costs		—			—			4,297			4,297
Total expenses		53,703			29,036			13,597			96,336
Operating income (loss)		49,145			22,310			(9,158		)	62,297
Interest and other income		—			—			248			248
Interest expense		(11,594		)	(1,014		)	(17,809		)	(30,417		)
Loss on early extinguishment of debt		—			—			(6,349		)	(6,349		)
Loss on lease terminations		(104		)	—			—			(104		)
Loss on sale of properties		—			(101		)	—			(101		)
Equity in earnings of an investee		—			—			115			115
Income (loss) before income tax expense		37,447			21,195			(32,953		)	25,689
Income tax expense		—			—			(43		)	(43		)
Net income (loss)		$	37,447		$	21,195		$	(32,996	)	$	25,646
Total assets		$	2,604,149		$	1,625,180		$	416,966		$	4,646,295

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

		For the Three Months Ended September 30, 2011
		Short and Long Term Residential Care Communities			MOBs			All Other Operations			Consolidated
Rental income		$	58,391		$	40,139		$	4,439		$	102,969
Residents fees and services		10,731			—			—			10,731
Total revenues		69,122			40,139			4,439			113,700
Expenses:
Depreciation		18,369			9,507			948			28,824
Property operating expenses		8,603			11,550			—			20,153
General and administrative		—			—			6,564			6,564
Acquisition related costs		—			—			2,620			2,620
Impairment of assets		1,028			—			—			1,028
Total expenses		28,000			21,057			10,132			59,189
Operating income (loss)		41,122			19,082			(5,693		)	54,511
Interest and other income		—			—			394			394
Interest expense		(11,152		)	(254		)	(13,324		)	(24,730		)
Equity in earnings of an investee		—			—			28			28
Income (loss) before income tax expense		29,970			18,828			(18,595		)	30,203
Income tax expense		—			—			(207		)	(207		)
Net income (loss)		$	29,970		$	18,828		$	(18,802	)	$	29,996
Total assets		$	2,079,432		$	1,465,833		$	458,048		$	4,003,313

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

		For the Nine Months Ended September 30, 2012
		Short and Long Term Residential Care Communities			MOBs			All Other Operations			Consolidated
Revenues:
Rental income		$	178,964		$	144,491		$	13,317		$	336,772
Residents fees and services		113,906			—			—			113,906
Total revenues		292,870			144,491			13,317			450,678
Expenses:
Depreciation		64,432			37,211			2,844			104,487
Property operating expenses		82,976			44,899			—			127,875
General and administrative		—			—			24,106			24,106
Acquisition related costs		—			—			6,814			6,814
Impairment of assets		—			3,071			—			3,071
Total expenses		147,408			85,181			33,764			266,353
Operating income (loss)		145,462			59,310			(20,447		)	184,325
Interest and other income		—			—			957			957
Interest expense		(37,748		)	(1,807		)	(47,871		)	(87,426		)
Loss on early extinguishment of debt		—			—			(6,349		)	(6,349		)
Loss on lease terminations		(104		)	—			—			(104		)
Loss on sale of properties		—			(101		)	—			(101		)
Equity in earnings of an investee		—			—			236			236
Income (loss) before income tax expense		107,610			57,402			(73,474		)	91,538
Income tax expense		—			—			(290		)	(290		)
Net income (loss)		$	107,610		$	57,402		$	(73,764	)	$	91,248
Total assets		$	2,604,149		$	1,625,180		$	416,966		$	4,646,295

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

		For the Nine Months Ended September 30, 2011
		Short and Long Term Residential Care Communities			MOBs			All Other Operations			Consolidated
Rental income		$	172,686		$	115,887		$	13,266		$	301,839
Residents fees and services		11,575			—			—			11,575
Total revenues		184,261			115,887			13,266			313,414
Expenses:
Depreciation		52,112			27,164			2,844			82,120
Property operating expenses		9,212			32,676			—			41,888
General and administrative		—			—			19,513			19,513
Acquisition related costs		—			—			6,547			6,547
Impairment of assets		1,028			166			—			1,194
Total expenses		62,352			60,006			28,904			151,262
Operating income (loss)		121,909			55,881			(15,638		)	162,152
Interest and other income		—			—			870			870
Interest expense		(31,751		)	(686		)	(38,400		)	(70,837		)
Loss on early extinguishment of debt		—			—			(427		)	(427		)
Gain on sale of properties		21,236			79			—			21,315
Equity in earnings of an investee		—			—			111			111
Income (loss) before income tax expense		111,394			55,274			(53,484		)	113,184
Income tax expense		—			—			(365		)	(365		)
Net income (loss)		$	111,394		$	55,274		$	(53,849	)	$	112,819
Total assets		$	2,079,432		$	1,465,833		$	458,048		$	4,003,313

 

Note 10. Significant Tenant

 

Five Star is our former subsidiary.  Rental income from Five Star represented 39.6% of our annualized rental income and the properties Five Star leases from us represent 42.6% of our investments, at cost, as of September 30, 2012.  As of September 30, 2012, Five Star also manages a portfolio of 30 senior living communities for our account.  These properties leased and managed by Five Star are included in our short and long term residential care communities segment.  The following tables present summary financial information for Five Star for the three and nine months ended September 30, 2012 and 2011, as reported in its Quarterly Report on Form 10-Q for the quarterly period ending September 30, 2012.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

		For the Three Months Ended September 30,
		2012			2011
Operations
Total revenues		$	332,420		$	310,561
Operating income		5,316			4,080
Income from continuing operations		3,405			3,546
Net income (loss)		16,439			(528		)

 

		For the Nine Months Ended September 30,
		2012			2011
Total revenues		$	991,781		$	891,152
Operating income		15,317			17,948
Income from continuing operations		9,935			14,750
Net income		21,446			8,800

 

		2012			2011
Cash Flows
Cash provided by operating activities		$	43,235		$	45,957
Net cash (used in) provided by discontinued operations		(8,317		)	652
Cash provided by (used in) investing activities		1,912			(126,463		)
Cash (used in) provided by financing activities		(50,909		)	101,030
Change in cash and cash equivalents		(14,079		)	21,176
Cash and cash equivalents at beginning of period		28,374			20,770
Cash and cash equivalents at end of period		14,295			41,946

 

		As of September 30,
		2012			2011
Financial Position
Current assets		$	128,465		$	154,185
Non-current assets		435,041			394,894
Total indebtedness		71,431			132,995
Current liabilities		157,904			208,195
Non-current liabilities		102,875			113,116
Total shareholders’ equity		302,727			227,768

 

The summary financial information of Five Star is presented to comply with applicable accounting regulations of the Securities and Exchange Commission, or SEC.  References in these financial statements to the Quarterly Report on Form 10-Q for Five Star are included to show the source of the information only, and the other information in Five Star’s Quarterly Report on Form 10-Q is not incorporated by reference into these financial statements.  See Note 11 for further information regarding our leases with Five Star.

 

Note 11.  Related Person Transactions

 

We have no employees.  Personnel and various services we require to operate our business are provided to us by RMR.  We have two agreements with RMR to provide management and administrative services

 

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