UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2015

 

OR

 

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

 

Commission File Number 1-15319

 

SENIOR HOUSING PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

 

 

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

(Address of Principal Executive Offices) (Zip Code)

 

617-796-8350

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒    No   ☐

 

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   ☒    No   ☐

 

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 ☒		Accelerated filer ☐
Non—accelerated filer ☐		Smaller reporting company ☐
(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   ☐    No   ☒

 

Number of registrant’s common shares outstanding as of August   5 , 2015: 237,398,662 .  

 

 

 

---

 

 

SENIOR HOUSING PROPERTIES TRUST

FORM 10-Q

 

June 30, 2015

 

INDEX

 

 

References in this Quarterly Report on Form 10-Q to “SNH”, “we”, “us” or “our” include Senior Housing Properties Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

 

 

 

---

 

PART I.  Financial Information

 

Item 1.     Financial Statements.

 

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(unaudited)

 

 

		June 30,			December 31,
		2015			2014
ASSETS
Real estate properties:
Land		$	785,453		$	683,979
Buildings and improvements			6,606,768			5,554,632
			7,392,221			6,238,611
Less accumulated depreciation			(1,066,686)			(983,850)
			6,325,535			5,254,761
Cash and cash equivalents			52,231			27,594
Restricted cash			9,121			10,544
Deferred financing fees, net			27,691			30,549
Acquired real estate leases and other intangible assets, net			650,020			472,788
Other assets			283,428			172,033
Total assets		$	7,348,026		$	5,968,269
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility		$	615,000		$	80,000
Unsecured term loan			350,000			350,000
Senior unsecured notes, net of discount			1,744,339			1,743,628
Secured debt and capital leases			730,213			627,076
Accrued interest			21,258			20,046
Assumed real estate lease obligations, net			120,732			122,826
Other liabilities			200,263			72,286
Total liabilities			3,781,805			3,015,862
Commitments and contingencies
Shareholders’ equity:
Common shares of beneficial interest, $.01 par value: 300,000,000 shares authorized, 237,398,662 and 203,910,305 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively			2,374			2,039
Additional paid in capital			4,530,734			3,825,063
Cumulative net income			1,429,797			1,353,622
Cumulative other comprehensive income			6,146			3,329
Cumulative distributions			(2,402,830)			(2,231,646)
Total shareholders’ equity			3,566,221			2,952,407
Total liabilities and shareholders’ equity		$	7,348,026		$	5,968,269

 

See accompanying notes.

1

---

 

Table of Contents

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

 

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2015			2014			2015			2014
Revenues:
Rental income		$	155,546		$	127,669		$	301,329		$	239,724
Residents fees and services			91,856			79,039			174,649			158,481
Total revenues			247,402			206,708			475,978			398,205
Expenses:
Property operating expenses			93,592			79,786			179,386			157,590
Depreciation			62,511			46,703			116,218			85,058
General and administrative			11,674			9,577			22,248			17,866
Acquisition related costs			4,617			2,512			5,775			2,635
Total expenses			172,394			138,578			323,627			263,149
Operating income			75,008			68,130			152,351			135,056
Interest and other income			142			154			217			258
Interest expense			(37,907)			(34,112)			(73,848)			(63,012)
Loss on early extinguishment of debt			(39)			—			(1,448)			—
Income from continuing operations before income tax expense and equity in earnings of an investee			37,204			34,172			77,272			72,302
Income tax expense			(129)			(155)			(239)			(346)
Equity in earnings of an investee			23			118			95			21
Income from continuing operations			37,098			34,135			77,128			71,977
Discontinued operations:
(Loss) income from discontinued operations			(109)			741			(350)			2,041
Impairment of assets from discontinued operations			(602)			387			(602)			(334)
Income before gain on sale of properties			36,387			35,263			76,176			73,684
Gain on sale of properties			—			2,396			—			2,552
Net income		$	36,387		$	37,659		$	76,176		$	76,236
Other comprehensive income:
Change in net unrealized gain (loss) on investments			1,387			640			2,835			(1,280)
Share of comprehensive (loss) income of an investee			(64)			31			(19)			50
Other comprehensive income (loss)			1,323			671			2,816			(1,230)
Comprehensive income		$	37,710		$	38,330		$	78,992		$	75,006
Weighted average common shares outstanding (basic)			235,549			199,830			228,501			193,962
Weighted average common shares outstanding (diluted)			235,592			199,867			228,534			193,990
Per common share amounts (basic and diluted):
Income from continuing operations			0.16			0.18			0.34			0.38
(Loss) income from discontinued operations			(0.01)			0.01			(0.01)			0.01
Net income		$	0.15		$	0.19		$	0.33		$	0.39

 

See accompanying notes.

 

---

 

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

		Six Months Ended
		June 30,
		2015			2014
Cash flows from operating activities:
Net income		$	76,176		$	76,236
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation			116,218			85,058
Amortization of deferred financing fees and debt discounts and premiums			3,096			3,011
Straight line rental income			(8,699)			(3,938)
Amortization of acquired real estate leases and other intangible assets			(2,376)			153
Loss on early extinguishment of debt			1,448			—
Impairment of assets			602			334
Other non-cash adjustments			(510)			—
Gain on sale of properties			—			(2,552)
Gain on sale of investments			(71)			—
Equity in earnings of an investee			(95)			(21)
Change in assets and liabilities:
Restricted cash			1,423			1,555
Other assets			(2,803)			7,007
Accrued interest			1,212			4,562
Other liabilities			30,914			7,597
Cash provided by operating activities			216,535			179,002
Cash flows from investing activities:
Real estate acquisitions and deposits			(1,103,732)			(1,143,340)
Real estate improvements			(35,322)			(37,334)
Investment in Affiliates Insurance Company			—			(825)
Investment in Reit Management & Research Inc.			(16,528)			—
Proceeds from sale of properties			1,750			17,900
Proceeds from sale of investments			6,571			—
Cash used for investing activities			(1,147,261)			(1,163,599)
Cash flows from financing activities:
Proceeds from issuance of common shares, net			659,502			322,864
Proceeds from issuance of unsecured senior notes, net of discount			—			648,914
Proceeds from unsecured term loan			—			350,000
Proceeds from borrowings on revolving credit facility			1,210,000			90,000
Repayments of borrowings on revolving credit facility			(675,000)			(190,000)
Repayment of other debt			(66,431)			(42,201)
Loss on early extinguishment of debt settled in cash			(1,523)			—
Payment of deferred financing fees			—			(8,038)
Distributions to shareholders			(171,185)			(146,783)
Cash provided by financing activities			955,363			1,024,756
Increase in cash and cash equivalents			24,637			40,159
Cash and cash equivalents at beginning of period			27,594			39,233
Cash and cash equivalents at end of period		$	52,231		$	79,392
Supplemental cash flow information:
Interest paid		$	69,541		$	55,439
Income taxes paid			477			106
Non-cash investing activities:
Investment acquired by issuance of common shares			(44,461)			—
Acquisitions funded by assumed debt			(169,136)			(15,630)
Non-cash financing activities:
Assumption of mortgage notes payable			169,136			15,630
Issuance of common shares			46,503			1,511

 

See accompanying notes.

 

 

---

 

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, 2014, 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.

 

Note 2.  Recent Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . This update amends the criteria for reporting discontinued operations to, among other things, raise the threshold for disposals to qualify as discontinued operations. This update will reduce the number of any future property dispositions we make to be presented as discontinued operations in our condensed consolidated financial statements. We adopted this update on January 1, 2015.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation .  Among other things, this update changes how an entity determines the primary beneficiary of a variable interest entity.  This update is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted.  The implementation of this update is not expected to cause any significant changes to our condensed consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs , which requires debt issuance costs to be presented in the balance sheets as a direct deduction from the associated debt liability. This update is effective for interim and annual reporting periods beginning after December 15, 2015 and requires retrospective application.  The implementation of this update is not expected to cause any material changes to our condensed consolidated financial statements other than the reclassification of debt issuance costs from assets to liabilities on our condensed consolidated balance sheets. When adopted, deferred financing costs of $24,223 and $26,339 as of June 30, 2015 and December 31, 2014, respectively, will be reclassified from assets to the related debt obligations on our condensed consolidated balance sheets.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers , which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This ASU 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 this ASU specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. In July 2015, the FASB approved a one year deferral of the effective date for this ASU to interim and annual reporting periods beginning after December 15, 2017.  We are continuing to evaluate this guidance; however, we do not expect its adoption to have a material impact on our condensed consolidated financial statements, as

---

 

a substantial portion of our revenue consists of rental income from leasing arrangements, which are specifically excluded from this ASU.

 

Note 3.  Real Estate Properties

 

At June 30, 2015, we owned 428 properties (452 buildings) located in 43 states and Washington, D.C. We have accounted, or expect to account for, the following acquisitions as business combinations unless otherwise noted.

 

Triple Net Leased Senior Living Community Acquisitions:

 

As previously disclosed, in May 2015, we acquired 37 senior living communities with 3,352 living units for an aggregate contractual purchase price of approximately $762,611, excluding additional consideration of $1,391 related to allocated debt issuance costs . Eighteen of the 37 acquired communities are triple net leased senior living communities with 2,119 living units. We acquired these 18 communities for an allocated purchase price of approximately $454,026, including the assumption of approximately $44,395 of mortgage debt with a weighted average annual interest rate of 5.07%, and excluding closing costs. As of the date acquired, the weighted average amortization period for capitalized lease origination values was 11.8 years. These 18 communities are leased to seven senior living operators. The remaining 19 senior living communities are managed as described below.

 

The closing of one additional triple net leased senior living community, under the same purchase agreement for the 37 senior living communities described above, with 87 living units was delayed. The acquisition of this community is subject to various conditions; accordingly, we can provide no assurance that we will acquire this community, that the acquisition will not be delayed further or that the terms will not change.

 

Triple Net Leased Senior Living Community Acquisitions since January 1, 2015:

 

								Cash Paid
				Number				plus												Acquired									Premium
				of		Units /		Assumed						Buildings and						Real Estate			Other			Assumed			on Assumed
Date		Location		Properties		Beds		Debt  (1)			Land			Improvements			FF&E			Leases			Liabilities			Debt			Debt
May-15		11 States		18		2,119		$	454,026		$	29,395		$	369,445		$	20,889		$	53,513		$	(18,091)		$	(44,395)		$	(1,125)
				18		2,119		$	454,026		$	29,395		$	369,445		$	20,889		$	53,513		$	(18,091)		$	(44,395)		$	(1,125)

---

 

In July 2015, we entered into an agreement to acquire one senior living community with 84 living units for approximately $18,250, excluding closing costs. We intend to lease this community to a third party senior living operator. The acquisition of this community is subject to various conditions; accordingly, we can provide no assurance that we will acquire this community, that the acquisition will not be delayed further or that the terms will not change or that we will enter the expected lease for this community.

 

---

 

Managed Senior Living Community Acquisitions:

 

As part of the transaction described above, in which we acquired 37 senior living communities in May 2015, we acquired 19 managed senior living communities with 1,233 living units for an allocated purchase price of approximately $309,976, including the assumption of approximately $94,786 of mortgage debt with a weighted average annual interest rate of 4.12%, and excluding closing costs. These 19 communities were acquired using taxable REIT subsidiary, or TRS, structures. Pursuant to pre-existing management agreements, we paid fees of $975 and terminated the pre-existing management agreements for 14 of the 19 communities, with 838 living units, and we entered into management agreements with Five Star Quality Care, Inc.  or its subsidiaries, or Five Star, to manage these communities. The remaining five communities, with 395 living units, continue to be managed by the pre-existing third party senior living operator. We funded the acquisition of these 37 senior living communities using cash on hand, borrowings under our revolving credit facility and the assumption of mortgage debt described above.

 

Also in May 2015, we acquired one senior living community with 40 private pay independent living units for a contractual purchase price of approximately $9,750, excluding closing costs. Pursuant to the purchase agreement, $1,000 of the purchase price has been withheld until the seller satisfies various conditions. We anticipate these conditions will be satisfied and therefore have recorded the withheld $1,000 as a liability as of June 30, 2015. This liability is included in other liabilities in our condensed consolidated balance sheets. This senior living community is adjacent to another community that we own which is managed by Five Star. The operations of this community and the community already owned are conducted as a single integrated community under the same management agreement.

 

Managed Senior Living Community Acquisitions since January 1, 2015:

 

								Cash Paid
				Number				plus												Acquired									Discount
				of		Units /		Assumed						Buildings and						Real Estate			Other			Assumed			on Assumed
Date		Location		Properties		Beds		Debt  (1)			Land			Improvements			FF&E			Leases			Liabilities			Debt			Debt
May-15		5 States		19		1,233		$	309,976		$	12,135		$	211,756		$	12,209		$	73,044		$	—		$	(94,786)		$	832
May-15		GA		— (2)		40			8,750			975			8,775			—			—			(1,000)			—			—
				19		1,273		$	318,726		$	13,110		$	220,531		$	12,209		$	73,044		$	(1,000)		$	(94,786)		$	832

---

 

MOB Acquisitions:

 

In January 2015, we acquired 23 properties (23 buildings) leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or MOBs, for an aggregate contractual purchase price of $539,000, net of credits received of $7,377 related to debt issuance costs and outstanding tenant improvement allowances and excluding closing costs. These MOBs include approximately 2,170,000 leasable square feet. We funded this acquisition using cash on hand, borrowings under our revolving credit facility and the assumption of $29,955 of mortgage debt with a weighted average annual interest rate of 4.73%. As of the date acquired, the weighted average amortization periods for capitalized above market lease values, lease origination values and capitalized below market lease values were 9.8 years, 9.5 years and 11.1 years, respectively. These 23 properties were purchased from Select Income REIT, or SIR, in connection with

---

 

the acquisition by SIR of Cole Corporate Income Trust, Inc., or CCIT. See Note 10 for further information regarding this transaction.

 

MOB Acquisitions since January 1, 2015:

 

 

								Cash Paid												Acquired
				Number				plus									Acquired			Real Estate						Premium
				of		Square		Assumed						Buildings and			Real Estate			Lease			Assumed			on Assumed
Date		Location		Properties		Feet (000’s)		Debt  (1)			Land			Improvements			Leases			Obligations			Debt			Debt
Jan-15		12 States		23		2,170		$	531,623		$	58,294		$	392,205		$	85,496		$	(3,298)		$	(29,955)		$	(1,074)
				23		2,170		$	531,623		$	58,294		$	392,205		$	85,496		$	(3,298)		$	(29,955)		$	(1,074)

 

---

 

Impairment:

 

We periodically evaluate our properties for impairments. Impairment indicators may include declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life, and legislative, market or industry changes that could permanently reduce the value of a property. If indicators of impairment are present, we evaluate the carrying value of the affected property by comparing it to the expected future undiscounted net cash flows to be generated from that property. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value.

 

Discontinued Operations and Properties Held for Sale:

 

As of June 30, 2015, we had three senior living communities with 192 living units categorized as properties held for sale.  These three properties are included in other assets in our condensed consolidated balance sheets and have a net book value (after impairment) of approximately $1,280 at June 30, 2015. We classify all properties as held for sale in our condensed consolidated balance sheets that meet the applicable criteria for that treatment as set forth in the Property, Plant and Equipment Topic of the FASB Accounting Standards Codification , or the Codification.

 

Results of operations for properties sold or held for sale are included in discontinued operations in our condensed consolidated statements of operations once the criteria for discontinued operations in the Presentation of Financial Statements Topic of the Codification are met. The senior living properties which we are or were offering for sale as of the applicable periods do not meet the criteria for discontinued operations as they are included within combination leases with other properties that we expect to continue leasing. During 2015, we had one MOB (four buildings) classified in discontinued operations. We sold this MOB in April 2015 as described below. During 2014, we had four MOBs (seven buildings) classified in discontinued operations, three of which (three buildings) were sold in 2014. Summarized income statement information for these MOBs that met the criteria for inclusion in discontinued operations is as follows:

 

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2015			2014			2015			2014
Rental income		$	24		$	1,432		$	56		$	3,726
Property operating expenses			(133)			(691)			(406)			(1,685)
(Loss) income from discontinued operations		$	(109)		$	741		$	(350)		$	2,041

 

---

 

Dispositions:

 

In February 2015, we sold one vacant senior living community for a sale price of $250, excluding closing costs.

 

In the second quarter of 2015, we recorded an impairment charge of $602 to adjust the remaining held for sale MOB (four buildings) to its aggregate estimated net sale price. We sold this MOB in April 2015 for a sale price of $1,500, excluding closing costs.

 

In July 2015, we sold one of the three senior living communities we categorized as held for sale at June 30, 2015 for a sale price of $155, excluding closing costs. In August 2015, we sold a second of the three senior living communities we categorized as held for sale at June 30, 2015 for a sale price of $850, excluding closing costs.

 

Note 4.  Unrealized Gain / Loss on Investments

 

As of June 30, 2015, we owned 4,235,000 common shares of Five Star which are carried at fair market value in other assets on our condensed consolidated balance sheets. Cumulative other comprehensive income shown in our condensed consolidated balance sheets includes the net unrealized gain or loss on investments determined as the net difference between the value at quoted market prices of our Five Star shares as of June 30, 2015 ( $4.80 per share) and our weighted average costs at the time we acquired these shares, as adjusted to reflect any share splits or combinations ( $3.36 per share).

 

We previously owned 250,000 common shares of Equity Commonwealth (formerly known as CommonWealth REIT), or EQC. We sold all 250,000 of our EQC common shares in May 2015 for net proceeds of $6,571 . We recognized a gain on the sale of these shares in the amount of $71 during the second quarter of 2015, which is included in interest and other income in our condensed consolidated statements of comprehensive income.

 

Note 5.  Indebtedness

 

Our principal debt obligations at June 30, 2015 were: (1) outstanding borrowings under our $750,000 revolving credit facility; (2)  six public issuances of senior unsecured notes, including: (a)  $250,000 principal amount at an annual interest rate of 4.30% due 2016, (b)  $400,000 principal amount at an annual interest rate of 3.25% due 2019, (c)  $200,000 principal amount at an annual interest rate of 6.75% due 2020, (d)  $300,000 principal amount at an annual interest rate of 6.75% due 2021, (e)  $250,000 principal amount at an annual interest rate of 4.75% due 2024 and (f)  $350,000 principal amount at an annual interest rate of 5.625% due 2042; (3) our $350,000 principal amount term loan; and (4)  $714,374 aggregate principal amount of mortgages secured by 56 of our properties ( 57 buildings) with maturity dates from 2016 to 2043.  The 56 mortgaged properties (57 buildings) had a carrying value before depreciation of $1,128,624 at June 30, 2015.  We also had two properties subject to capital leases totaling $1 2,468 at June 30, 2015; these two properties had a carrying value before depreciation of $35,239 at June 30, 2015. The capital leases expire in 2026.

 

We have a $750,000 unsecured revolving credit facility that is available for general business purposes, including acquisitions.  The maturity date of our revolving credit facility is January 15, 2018 and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to further extend the stated maturity date by an additional one year to January 15, 2019.  The revolving credit facility agreement provides that we can borrow, repay and reborrow funds available under the revolving credit facility agreement until maturity, and no principal repayment is due until maturity.  The revolving credit facility agreement includes a feature under which maximum borrowings under the facility may be increased to up to $1,500,000 in certain circumstances. The interest rate paid on borrowings under the revolving credit facility agreement is LIBOR plus a premium of 130 basis points, and the facility fee is 30 basis points per annum on the total amount of lending commitments.  Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings.  As of June 30, 2015, the annual interest rate payable on borrowings under our revolving credit facility was 1.45% , and the weighted average annual interest rates for borrowings

---

 

under o ur revolving credit facility were   1.47% and 1.48% for the three and six months ended June 30, 2015, respectively. The weighted average annual interest rate for borrowings under our revolving credit facility was 1.42% for both the three and six months ended June 30, 2014. As of June 30, 2015, we had $615,000 outstanding and $135,000 available for borrowing by us, and as of August 5, 2015, we had $585,000 outstanding and $165,000 available for borrowing by us under our revolving credit facility.

 

In 2014, we entered into a term loan agreement pursuant to which we obtained a $350,000 unsecured term loan. Our term loan matures on January 15, 2020, and is prepayable without penalty at any time.  In addition, our term loan includes a feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances. Our term loan bears interest at a rate of LIBOR plus a premium of 140 basis points that is subject to adjustment based upon changes to our credit ratings. As of June 30, 2015, the annual interest rate payable on amounts outstanding under our term loan was 1.58% .  The weighted average annual interest rate for amounts outstanding under our term loan was 1.60% for both the three and six months ended June 30, 2015. The weighted average annual interest rate for amounts outstanding under our term loan was 1.55% for the period from May 30, 2014 (the day we entered into the term loan agreement) to June 30, 2014.

 

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

 

Our public debt indenture and its related supplements and our credit facility and term loan agreements contain a number of financial and other covenants, including covenants that restrict our ability to incur indebtedness or to make distributions under certain circumstances and require us to maintain financial ratios. We believe we were in compliance with the terms and conditions of our public debt indenture and its supplements and our credit facility and term loan agreements at June 30, 2015.

 

In December 2014, we entered an agreement to acquire the 38 senior living communities discussed in Note 3 above. Simultaneous with entering this agreement, we received a bridge loan commitment for $700,000 . In February 2015, we terminated the bridge loan commitment and we recognized a loss of $1,409 on early extinguishment of debt in the first quarter of 2015 in connection with that termination. As discussed in Note 3 above, we acquired 37 of these 38 senior living communities in May 2015 and financed the acquisition using cash on hand, borrowings under our revolving credit facility and the assumption of approximately $139,181 of mortgage debt with a weighted average annual interest rate of 4.43% . These mortgages have maturity dates from October 2018 through July 2019. We determined the fair value of the assumed mortgage notes using a market approach based upon Level 3 inputs (significant other unobservable inputs) in the fair value hierarchy.

 

In connection with two of the 23 MOBs we acquired in January 2015, discussed in Note 3 above, we assumed $29,955 of mortgage debt, which we recorded at their aggregate fair value of $31,029 .  These two assumed mortgage notes have a contractual weighted average annual interest rate of 4.73% and mature in July 2016 and October 2022.  We determined the fair value of the assumed mortgage notes using a market approach based upon Level 3 inputs (significant other unobservable inputs) in the fair value hierarchy.

 

In February 2015, we repaid at maturity a mortgage note that encumbered one of our properties that had a principal balance of $29,227 and an annual interest rate of 6.02 %.

 

In April 2015, we prepaid a mortgage note that encumbered one of our properties that had a principal balance of $6,274 and an annual interest rate of 5.81 %.

 

---

 

In May 2015, we prepaid four mortgage notes encumbering four properties with an aggregate principal balance of $15,077 and a weighted average annual interest rate of 5.70% .  

 

In June 2015, we repaid at maturity a mortgage note encumbering one property with a principal balance of $4,867 and an annual interest rate of 5.65% . Also in June 2015, we prepaid a mortgage note encumbering one property with a principal balance of $4,351 and an annual   interest rate of 5.81% .    

 

Note 6.  Shareholders’ Equity

 

In February 2015, we issued 31,050,000 common shares in a public offering, raising net proceeds of approximately $659,502   after underwriting discounts and expenses. We used the net proceeds from this offering to repay borrowings outstanding under our revolving credit facility and for general business purposes.

 

On February 24, 2015, we paid a distribution to common shareholders of $0.39 per share, or approximately $79,530 , that was declared on January 12, 2015 and was payable to shareholders of record on January 23, 2015.

 

On May 21, 2015, we paid a distribution to common shareholders of $0.39 per share, or approximately $91,655 , that was declared on April 13, 2015 and was payable to shareholders of record on April 24, 2015.

 

On July 13, 2015, we declared a distribution payable to common shareholders of record on July 24, 2015, of $0.39 per share, or approximately $ 92,585 . We expect to pay this distribution on or about August 20, 2015 using cash on hand and borrowings under our revolving credit facility.

 

We issued 2,345,000 of our common shares in June 2015 in connection with our acquisition of an interest in Reit Management & Research Inc., or RMR Inc., as described in Note 10. RMR Inc. is the parent company of RMR LLC, our manager.

 

During the six months ended June 30, 2015, we issued 81,557 of our common shares to RMR LLC as part of the business management fee payable by us under our business management agreement. See Note 10 for further information regarding and recent amendments to this agreement.

 

Note 7.  Fair Value of Assets and Liabilities

 

The following table presents certain of our assets and liabilities that are measured at fair value on a recurring and non-recurring basis at June 30, 2015 categorized by the level of inputs used in the valuation of each asset or liability.

 

 

					Quoted Prices in			Significant			Significant
					Active Markets for			Other			Unobservable
					Identical Assets			Observable Inputs			Inputs
Description		Total			(Level 1)			(Level 2)			(Level 3)
Assets held for sale (1)		$	1,280		$	—		$	—		$	1,280
Investments in available for sale securities (2)		$	20,328		$	20,328		$	—		$	—
Additional purchase consideration (3)		$	1,000		$	—		$	—		$	1,000

 

---

 

We estimate the fair values of our senior unsecured notes using an average of the bid and ask price of our outstanding six issuances of senior notes (Level 2 inputs) on or about June 30, 2015.  The fair values of these senior note obligations exceed their aggregate book values of $1,744,339 by $47,126 because these notes were trading at premiums to their face amounts.

 

We estimate the fair values of our secured debt by using discounted cash flow analyses and currently prevailing market terms as of the measurement date (Level 3 inputs). The fair value of our secured debt exceeds its book value of $714,37 4 by $56,791 because current market interest rates are lower than the market interest rates at the time we assumed the secured debt. Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

 

In addition to the assets and liabilities described in the above table and our senior unsecured notes and secured debt, our additional financial instruments include rents receivable, cash and cash equivalents, restricted cash , investment in RMR Inc. and other unsecured debt. The fair values of these additional financial instruments approximate their carrying values at June 30, 2015 based upon their liquidity, short term maturity, variable rate pricing or our estimate of fair value using discounted cash flow analyses and prevailing interest rates.

 

Note 8.  Segment Reporting

 

We have four operating segments, of which three are separately reportable operating segments: (i) triple net senior living communities that we lease to operators who provide short term and long term residential care and dining services for residents, (ii) managed senior living communities that provide short term and long term residential care and dining services for residents and (iii) MOBs. Our triple net and managed senior living communities include independent living communities, assisted living communities and skilled nursing facilities, or SNFs. Properties in the MOB segment include medical office, clinic and biotech laboratory buildings. The “All Other” category in the following table includes amounts

---

 

related to corporate business activities and the operating results of certain properties that offer fitness, wellness and spa services to members.

 

 

		For the Three Months Ended June 30, 2015
		Triple Net
		Leased			Managed
		Senior Living			Senior Living						All Other
		Communities			Communities			MOBs			Operations			Consolidated
Revenues:
Rental income		$	61,347		$	—		$	89,591		$	4,608		$	155,546
Residents fees and services			—			91,856			—			—			91,856
Total revenues			61,347			91,856			89,591			4,608			247,402
Expenses:
Property operating expenses			—			69,792			23,800			—			93,592
Depreciation			17,058			13,649			30,856			948			62,511
General and administrative			—			—			—			11,674			11,674
Acquisition related costs			—			—			—			4,617			4,617
Total expenses			17,058			83,441			54,656			17,239			172,394
Operating income (loss)			44,289			8,415			34,935			(12,631)			75,008
Interest and other income			—			—			—			142			142
Interest expense			(6,270)			(2,561)			(1,758)			(27,318)			(37,907)
Loss on early extinguishment of debt			(6)			(33)			—			—			(39)
Income (loss) before income tax expense and equity in earnings of an investee			38,013			5,821			33,177			(39,807)			37,204
Income tax expense			—			—			—			(129)			(129)
Equity in earnings of an investee			—			—			—			23			23
Income (loss) from continuing operations			38,013			5,821			33,177			(39,913)			37,098
Discontinued operations:
Loss from discontinued operations			—			—			(109)			—			(109)
Impairment of assets from discontinued operations			—			—			(602)			—			(602)
Net income (loss)		$	38,013		$	5,821		$	32,466		$	(39,913)		$	36,387
Total assets		$	2,231,685		$	1,298,982		$	3,412,125		$	405,234		$	7,348,026

 

---

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

---

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

---

 

 

 

 

 

Note 9. Significant Tenant

 

Five Star is our former subsidiary.  Rental income from Five Star represented 30.8% of our rental income for the six months ended June 30, 2015, and the properties Five Star leases from us represented 28.9% of our investments, at cost, as of June 30, 2015.  As of June 30, 2015, Five Star also managed 60 senior living communities for our account.   See Note 10 for further information relating to our leases and management arrangements with Five Star.

 

Note 10. Related Person Transactions

 

We have relationships and historical and continuing transactions with Five Star, RMR LLC, its parent, RMR Inc., and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also trustees, directors or officers of us, RMR Inc. or RMR LLC.  For further information about these and other such relationships and certain other related person transactions, please refer to our  

---

 

Annual Report and our Current Report on Form 8-K filed with the Securities and Exchange Commission, or SEC, on June 8, 2015.

 

Five Star : 

 

Five Star was previously our 100% owned subsidiary until it was spun out to our shareholders as a special distribution in 2001. As of June 30, 2015, we owned 4,235,000 of Five Star’s common shares, representing approximately 8.6% of Five Star’s outstanding common shares, and we are Five Star’s largest shareholder.

 

As of June 30, 2015, we leased 180 senior living communities to Five Star.  We recognized total rental income from Five Star of $47,753 and $47,618 for the three months ended June 30, 2015 and 2014, respectively, and $95,443 and $95,124 for the six months ended June 30, 2015 and 2014, respectively.  As of July 2015 and 2014, we received estimated percentage rent payments from Five Star of $2,824 and $2,819 for the first six months ended June 30, 2015 and 2014, respectively. We determine actual percentage rent due under our Five Star leases annually and recognize any resulting amount as rental income at year end when all contingencies are met.  During the six months ended June 30, 2015 and 2014, pursuant to the terms of our leases with Five Star, we purchased $9,392 and $17,423 , respectively, of improvements made to properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $757 and $1,394 , respectively.  As of June 30, 2015 and December 31, 2014, our rents receivable from Five Star were $15,918 and $17,310 , respectively, and those amounts are included in other assets in our condensed consolidated balance sheets.

 

In February 2015, we and Five Star sold a vacant senior living community that was leased to Five Star for a sale price of $250; and, as a result of this sale, Five Star’s annual minimum rent payable to us decreased by $23 in accordance with the terms of the applicable lease. In July 2015, we and Five Star sold a senior living community that was leased to Five Star for a sale price of $155; and, as a result of this sale, Five Star’s annual minimum rent payable to us decreased by $16 in accordance with the terms of the applicable lease.   In August 2015, we and Five Star sold a senior living community that was leased to Five Star for $850;   and, as a result of this sale, Five Star’s annual minimum rent payable to us decreased by $85 in accordance with the terms of the applicable lease.

 

As of June 30, 2015, Five Star managed 60 senior living communities for our account; as of June 30, 2014, Five Star managed 44 senior living communities for our account.  Pursuant to our management agreements with Five Star, we incurred management fees of $2,699 and $2,433 for the three months ended June 30, 2015 and 2014, respectively, and $5,222 and $4,857 for the six months ended June 30, 2015 and 2014, respectively, with respect to the communities Five Star manages.  These amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income.

 

In connection with our acquisition of 37 senior living communities in May 2015 described in Note 3, we terminated the pre-existing management agreements for 14 of these communities, with 838 living units, and entered into 14 separate management agreements with Five Star for it to manage these communities for our account.  The economic terms of these management agreements are substantially similar to our other management agreements with Five Star for senior living communities including assisted living units.

 

In May 2015, we acquired one senior living community with 40 private pay independent living units for a contractual purchase price of approximately $9,750 , excluding closing costs, using a TRS structure.   This senior living community is adjacent to another community that we own which is managed by Five Star.  The operations of t his community and the community already owned are conducted as a single integrated community under the same management agreement.

 

Pursuant to the sublease agreement between one of our TRSs and D&R Yonkers LLC, D&R Yonkers LLC incurred rent expense of $752 and $730 for the three months ended June 30, 2015 and 2014, respectively, and $1,504 and $1,460 in rent for the six months ended June 30, 2015 and 2014, respectively. D&R Yonkers LLC is owned by our officers in

---

 

order to accommodate certain state licensing requirements. Five Star manages the senior living community to which the sublease agreement relates.

 

Acquisition of Interest in our Manager:

 

On June 5, 2015, we and three other real estate investment trusts, or REITs, to which RMR LLC provides management services – Government Properties Income Trust, or GOV, Hospitality Properties Trust, or HPT, and SIR, and collectively with GOV and HPT, the Other REITs – participated in a transaction, or the Up-C Transaction, by which we and the Other REITs each acquired an interest in RMR Inc.

 

The Up-C Transaction was completed pursuant to a transaction agreement by and among us, our manager, RMR LLC, its then sole member, Reit Management & Research Trust, or RMR Trust, and RMR Inc. and similar transaction agreements that each Other REIT entered into with RMR LLC, RMR Trust and RMR Inc.  RMR Trust is owned by our Managing Trustees, Barry and Adam Portnoy.  Pursuant to these transactions agreements: we contributed to RMR Inc. 2,345,000 of our common shares, valued at the volume weighted average trading prices during the 20 days prior to the acquisition, and $13,967 in cash; GOV contributed to RMR Inc. 700,000 of its common shares and $3,917 in cash; HPT contributed to RMR Inc. 1,490,000 of its common shares and $12,622 in cash; SIR contributed to RMR Inc. 880,000 of its common shares and $15,880 in cash; RMR Trust contributed to RMR Inc. $11,520 in cash, which RMR Inc. contributed to RMR LLC; RMR LLC issued 1,000,000 of its class B membership units to RMR Inc.; RMR Inc. issued 5,272,787 shares of its class A common stock to us, 1,541,201 shares of its class A common stock to GOV, 5,019,121 shares of its class A common stock to HPT, 3,166,891 shares of its class A common stock to SIR and 1,000,000 shares of its class B-1 common stock and 15,000,000 shares of its class B-2 common stock to RMR Trust; RMR Trust delivered 15,000,000 of the 30,000,000 class A membership units of RMR LLC which RMR Trust then owned to RMR Inc.; and RMR Inc. delivered to RMR Trust our common shares, the common shares of the Other REITs and the cash which had been contributed by us   and the Other REITs to RMR Inc.

 

The class A common stock and class B-1 common stock of RMR Inc. share ratably as a single class in dividends and other distributions of RMR Inc. when and if declared by the board of directors of RMR Inc. and have the same rights in a liquidation of RMR Inc.  The class B-1 common stock of RMR Inc. is convertible into class A common stock of RMR Inc. on a 1 :1 basis.  The class A common stock of RMR Inc. has one vote per share.  The class B-1 common stock of RMR Inc. has 10 votes per share.  The class B-2 common stock of RMR Inc. has no economic interest in RMR Inc., but has 10 votes per share and is paired with the class A membership units of RMR LLC owned by RMR Trust.  The class A membership units of RMR LLC owned by RMR Trust are required to be redeemed by RMR LLC upon request by RMR Trust for class A common stock of RMR Inc. on a 1 :1 basis, or, if RMR Inc. elects, cash.  Under the governing documents of RMR Inc., upon the redemption of a class A membership unit of RMR LLC, the class B-2 common stock of RMR Inc. “paired” with an equal number of class A membership units are cancelled for no additional consideration.

 

As part of the Up-C Transaction and concurrently with entering the transaction agreements, on June 5, 2015:

 

 

 

 

As a result of the Up-C Transaction: RMR LLC became a subsidiary of RMR Inc.; RMR Inc. became the managing member of RMR LLC; through our ownership of class A common stock of RMR Inc., we currently have an indirect 17.0% economic interest in RMR LLC; through their ownership of class A common stock of RMR Inc., GOV, HPT and SIR currently have an indirect 5.0% ,   16.2% and 10.2% economic interest in RMR LLC, respectively; and RMR Trust through its ownership of 1,000,000 shares of class B-1 common stock of RMR Inc., 15,000,000 shares of class B-2 common stock of RMR Inc. and 15,000,000 class A membership units of RMR LLC currently directly and indirectly has a 51.6% economic interest in RMR LLC and controls 91.4% of the voting power of outstanding capital stock of RMR Inc.

 

Pursuant to the transaction agreements, we and each Other REIT agreed to distribute half of the shares of class A common stock of RMR Inc. received in the Up-C Transaction to our respective shareholders as a special distribution, and RMR Inc. agreed to facilitate this distribution by filing a registration statement with the SEC to register the shares of class A common stock of RMR Inc. to be distributed and by seeking a listing of those shares on a national stock exchange upon the registration statement being declared effective by the SEC. The distribution of class A common stock of RMR Inc. that we and the Other REITs have agreed to make to our and the Other REITs’ shareholders will be made only after a registration statement, including a prospectus, is declared effective by the SEC.

 

Amendment and Restatement of Management Agreements with RMR LLC:  

 

As part of the Up-C Transaction, on June 5, 2015, we and RMR LLC entered into the amended business management agreement, which amended and restated our pre-existing business management agreement with RMR LLC, and the amended property management agreement, which amended and restated our pre-existing property management agreement with RMR LLC.  Our amended business management agreement and amended property management agreement are referred to together in this Note as our amended management agreements.  Our amended management agreements were effective as of June 5, 2015.

 

Our amended management agreements have terms that end on December 31, 2035, and automatically extend on December 31st of each year for an additional year, so that the terms of the agreements thereafter end on the 20th anniversary of the date of the extension.  We have the right to terminate each amended management agreement: (i) at any time on 60 days’ written notice for convenience, (ii) immediately upon written notice for cause, as defined therein, (iii) on 60 days’ written notice given within 60 days after the end of any calendar year for a performance reason, as defined therein, and (iv) by written notice during the 12 months following a change of control of RMR LLC, as defined therein.  RMR LLC has the right to terminate the amended management agreements for good reason, as defined therein.

 

If we terminate one or both of our amended management agreements for convenience, or if RMR LLC terminates one or both of our amended management agreements for good reason, we have agreed to pay RMR LLC a termination fee in an amount equal to the sum of the present values of the monthly future fees, as defined therein, for the terminated amended management agreement(s) for the remaining term.  If we terminate one or both of our amended management agreements for a performance reason, as defined therein, we have agreed to pay RMR LLC the termination fee calculated as described above, but assuming a remaining term of 10 years.  We are not required to pay any termination fee if we terminate our amended management agreements for cause or as a result of a change of control of RMR LLC.

---

 

 

Accounting for Investment in RMR Inc.:

 

On June, 5, 2015, we acquired 5,272,787 shares of class A common stock, or 33.0% , of RMR Inc. We have concluded, for accounting purposes, that the consideration paid for the investment in RMR Inc.’s class A common shares represented a discount to the fair value of these shares. The value of our comm on shares issued to RMR Inc. is valued differently for accounting purposes than as stated in the respective transaction agreements.  The transaction agreements calculate the value of our common shares using a 20 day volume weighted average trading price, or $60,739 .  For accounting purposes, the common shares are valued at the closing price of those shares on the date of the transaction, or $58,428 . We account for this investment under the cost method of accounting and have recorded this investment at a fair value of $136,278 as of June 5, 2015 using Level 3 inputs as defined in the fair value hierarchy under GAAP. As a result, we have recorded other liabilities of $77,850 . Our investment is included in other assets in our condensed consolidated balance sheet and the carrying value of our investment is $138,839 , including transaction costs, as of June 30, 2015. The other liabilities are being amortized on a straight line basis over the 20 year life of the business and property management agreements with RMR LLC as an allocated reduction to business management fees and property management fees, which are included in general and administrative and property operating expenses, respectively, in our condensed consolidated statements of comprehensive income.  Amortization of this other liabilit y , included in general and administrative expense and property operating expenses for the three months ended June 30, 2015, totaled $191 and $51 , respectively.

 

 

RMR LLC Management Fees and Reimbursements:    

 

Pursuant to our business management agreement with RMR LLC, the business management fees we recognized were   $9,144 and $7,733 for the three months ended June 30, 2015 and 2014, respectively, and $18,014 and $14,415 for the six months ended June 30, 2015 and 2014, respectively. The business management fees we recognized for the 2015 and 2014 periods are included in general and administrative expenses in our condensed consolidated financial statements.  In accordance with the terms of our pre-existing business management agreement, we issued 68,983 and 62,060 of our common shares to RMR LLC for the six months ended June 30, 2015 and 2014, respectively, as payment for portions of the base business management fees we recognized for those periods.  Our amended business management agreement requires that 100% of the management fee due to RMR LLC be paid by us in cash.

 

Pursuant to our property management agreement with RMR LLC, the property management fees, including construction supervision fees, we recognized were $2,532 and $2,079 for the three months ended June 30, 2015 and 2014, respectively, and $4,969 and $3,718 for the six months ended June 30, 2015 and 2014, respectively.  These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements and are comprised of fees we recognized under both our pre-existing property management agreement and our amended property management agreement.

 

Pursuant to our previous and amended management agreements with RMR LLC, we are responsible for paying all of the property level operating costs, which costs are generally incorporated into rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. The total of those property management related reimbursements paid to RMR LLC for the three months ended June 30, 2015 and 2014 were $1,494 and $1,497 , respectively, and $3,235 and $2,915 for the six months ended June 30, 2015 and 2014, respectively, and these amounts are included in property operating expenses in our condensed consolidated financial statements for these periods. In addition, we have historically awarded share grants to certain RMR LLC employees under our equity compensation plan and we accrue estimated amounts for such share grants based upon historical practices throughout the year. The amounts accrued for share grants to RMR LLC employees were $507 and $359 for the three months ended June 30, 2015 and 2014, respectively, and $908 and $834 for the six months ended June 30, 2015 and 2014, respectively, and these amounts are included in our general and administrative expenses for these periods.

---

 

 

Leases with RMR LLC:  

 

Pursuant to our lease agreements with RMR LLC, we earned rental income from RMR LLC for leased office space of approximately $102 for the six months ended June 30, 2015. Of the $102, which was recognized entirely in the second quarter of 2015, $51 relates to retroactive rental income from the first three months of 2015.

 

SIR:    

 

On January 29, 2015, we acquired from SIR, entities owning 23 MOBs that SIR acquired when its subsidiary merged with CCIT. Our purchase price for these 23 MOBs was approximately $539,000 , excluding closing costs and working capital adjustments and including the assumption of approximately $29,955 of mortgage debt.  These 23 MOBs contain approximately 2,170,000 leasable square feet and are located in 12 states. In April 2015, SIR paid to us $8,993 to settle certain working capital activity for the 23 MOBs as of the acquisition date.

 

AIC:    

 

As of June 30, 2015, our investment in Affiliates Insurance Company, or AIC, an Indiana insurance company, had a carrying value of $6,903 , which amount is included in other assets on our condensed consolidated balance sheet.  We recognized income of $23 and $118 related to our investment in AIC for the three months ended June 30, 2015 and 2014, respectively, and income of $95 and $21 for the six months ended June 30, 2015 and 2014, respectively. Our other comprehensive income includes unrealized (losses) gains on securities available for sale which are owned by AIC of ($64) and $22 for the three months ended June 30, 2015 and 2014, respectively, and ($19) and $41 for the six months ended June 30, 2015 and 2014, respectively.

 

In June 2015, we and the other shareholders of AIC renewed our participation in an insurance program arranged by AIC.  In connection with that renewal, we purchased a three year combined property insurance policy providing $500,000 of coverage annually with the premium to be paid annually, a one year property insurance policy providing $1,000,000 of coverage for one very large property we own and a one year combined policy providing terrorism coverage of $200,000 for our properties.  We currently expect to pay aggregate annual premiums, including taxes and fees, of approximately $4,222 in connection with these policies for the policy year ending June 30, 2016, and this amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program. 

 

Note 11.  Income Taxes

 

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We do, however, lease certain managed senior living communities to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated federal corporate income tax return and are subject to federal and state income taxes.  Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state income taxes we incur despite our REIT status.  During the three and six months ended June 30, 2015, we recognized income tax expense of $129 and $239 , respectively.  During the three and six months ended June 30, 2014, we recognized income tax expense of $1 55   and $ 346 , respectively.

 

Note 12. Per Common Share Amounts

 

We calculate basic earnings per common share by dividing allocable net income by the weighted average number of common shares outstanding during the period. We calculate diluted earnings per common share by using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive

---

 

common shares, including contingently issuable common shares under the then existing terms of our business management agreement with RMR LLC as further described in Note 10, if any, and the related impact on earnings, are considered when calculating diluted earnings per share. The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands):

 

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Weighted average common shares for basic earnings per share			235,549			199,830			228,501			193,962
Effect of dilutive securities: unvested share awards			43			37			33			28
Weighted average common shares for diluted earnings per share			235,592			199,867			228,534			193,990

 

 

 

Note 13.  Pro Forma Information

 

In January 2015, we acquired 23 properties for an aggregate contractual purchase price of $539,000 , excluding closing costs and working capital adjustments and including the assumption of $29,955 of mortgage debt with a weighted average annual interest rate of 4.73% . We recognized rental income and property operating expenses from this acquisition of $17,208 and $2,591 , respectively, for the six months ended June 30, 2015. In February 2015, we sold 31,050,000 of our common shares in a public offering raising net proceeds of approximately $659,502 after underwriting discounts and expenses.

 

In May 2015, we acquired 37 senior living communities for an aggregate contractual purchase price of $762,611 , excluding closing costs, and including the assumption of $139,181 of mortgage debt with a weighted average annual interest rate of 4.43% .   Eighteen of the 37 communities are triple net leased, and we recognized rental income from these communities of $5,644 for the six months ended June 30, 2015. We recognized residents fees and services and property operating expenses for the remaining 19 managed senior living communities of $8,828 and $6,156 , respectively, for the six months ended June 30, 2015.

 

During 2014, we purchased two senior living communities and two MOBs ( three buildings) for $1,204,393 , excluding closing costs. We also assumed $15,630 of mortgage debt at a weighted average annual interest rate of 6.28% related to one of our 2014 acquisitions. In April 2014, we issued 15,525,000 common shares in a public offering, raising net proceeds of approximately $322,807 after underwriting discounts and expenses.  Also in April 2014, we sold $400,000 of 3.25% senior unsecured notes due 2019 and $250,000 of 4.75% senior unsecured notes due 2024, raising net proceeds of approximately $644,889 after underwriting discounts and expenses. In May 2014, we entered into a $350,000 term loan agreement, which bears interest at a rate of LIBOR plus a premium of 140 basis points.

 

The following table presents our pro forma results of operations for the six months ended June 30, 2015 and 2014 as if the 2015 acquisition and financing activities described in the three preceding paragraphs had occurred on January 1, 2014, and the 2014 acquisition and financing activities described in the three paragraphs above had occurred on January 1, 2013.  This pro forma data is not necessarily indicative of what our actual results of operations would have been for the periods presented, nor does it represent the results of operations for any future period. Differences could result from numerous factors, including future changes in our portfolio of investments, changes in interest rates, changes in our

---

 

capital structure, changes in property level operating expenses, changes in property level revenues, including rents expected to be received from our existing leases or leases we may enter into during and after 2015, and for other reasons.

 

 

		Six Months Ended
		June 30,			June 30,
		2015			2014
Total revenues		$	508,448		$	505,044
Net income		$	77,822		$	66,987
Net income per share		$	0.33		$	0.29