0001075415 dhc:NewcrossingRoad30ReadingMAMember 2019-12-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10‑K10-K
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☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
For the fiscal year ended December 31, 2016 |
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1‑153191-15319
SENIOR HOUSING PROPERTIESDIVERSIFIED HEALTHCARE TRUST
(Exact Name of Registrant as Specified in itsIts Charter)
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Maryland | 04‑344527804-3445278 |
(State of Organization) | (IRS Employer Identification No.) |
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Two Newton Place, 255 Washington Street, Suite 300,
Newton, Massachusetts
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(Address of Principal Executive Offices) | (Zip Code) |
617‑796‑8350Two Newton Place, 255 Washington Street, Suite 300, Newton, MA02458-1634
(Address of Principal Executive Offices) (Zip Code)
617-796-8350
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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Title Of Each Class | Trading Symbol(s) | Name Of Each Exchange On Which Registered |
Common Shares of Beneficial Interest | DHC | The NASDAQNasdaq Stock Market LLC |
5.625% Senior Notes due 2042 | DHCNI | The NASDAQNasdaq Stock Market LLC |
6.25% Senior Notes due 2046 | DHCNL | The NASDAQNasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well‑knownwell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒x No ☐¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ ¨No ☒x
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 ☐¨
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)S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒x No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☒¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑acceleratednon-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer” andfiler,” “smaller reporting company” and “emerging growth company” in Rule 12b‑212b-2 of the Exchange Act. (Check One):
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Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-Accelerated filer | Non‑accelerated filer ☐
(Do not check if a
smaller reporting company)
| Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑212b-2 of the Exchange Act). Yes ☐ No ☒x
The aggregate market value of the voting common shares of beneficial interest, $.01 par value, or common shares, of the registrant held by non-affiliates was approximately $4.9$1.9 billion based on the $20.83$8.27 closing price per common share on the New YorkThe Nasdaq Stock ExchangeMarket LLC on June 30, 2016.28, 2019. For purposes of this calculation, an aggregate of 3,162,1662,916,659 common shares held directly by, or by affiliates of, the trustees and the executive officers of the registrant have been included in the number of common shares held by affiliates.
Number of the registrant’s common shares outstanding as of February 24, 2017: 237,544,479.26, 2020: 237,895,225.
References in this Annual Report on Form 10-K to the Company, SNH,DHC, we, us or our mean Diversified Healthcare Trust (formerly known as Senior Housing Properties TrustTrust) and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10‑K10-K is incorporated by reference to our definitive Proxy Statement for the 20172020 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2016.2019.
WARNING CONCERNING FORWARD LOOKING STATEMENTSWarning Concerning Forward-Looking Statements
THIS ANNUAL REPORT ON FORM 10‑K CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OFThis Annual Report on Form 10-K contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”and other securities laws. Also, whenever we use words such as “believe”, “EXPECT”“expect”, “ANTICIPATE”“anticipate”, “INTEND”“intend”, “PLAN”“plan”, “ESTIMATE” “estimate”, "WILL"“will”, "MAY" AND NEGATIVES OR DERIVATIVES OF THESE OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:“may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Forward-looking statements in this Annual Report on Form 10-K relate to various aspects of our business, including:
OUR POLICIES AND PLANS REGARDING INVESTMENTS, FINANCINGS AND DISPOSITIONS,Our ability to pay distributions to our shareholders and to sustain the amount of such distributions,
OUR ABILITY TO RETAIN OUR EXISTING TENANTS, ATTRACT NEW TENANTS AND MAINTAIN OR INCREASE CURRENT RENTAL RATES,The ability of Five Star Senior Living Inc., or Five Star, the manager of our managed senior living communities, to manage our senior living communities profitably and increase our returns from our managed senior living communities,
THE CREDIT QUALITIES OF OUR TENANTS,Whether the aging U.S. population and increasing life spans of seniors will increase the demand for senior living communities, wellness centers and other medical and healthcare related properties and healthcare services,
OUR ABILITY TO COMPETE FOR ACQUISITIONS AND TENANCIES EFFECTIVELY,Our ability to retain our existing tenants, attract new tenants and maintain or increase current rental rates,
OUR ACQUISITIONS AND SALES OF PROPERTIES,The credit qualities of our tenants,
OUR ABILITY TO PAY DISTRIBUTIONS TO OUR SHAREHOLDERS AND THE AMOUNT OF SUCH DISTRIBUTIONS,Our ability to compete for tenancies and acquisitions effectively,
OUR ABILITY TO RAISE DEBT OR EQUITY CAPITAL,Our ability to maintain and increase occupancy, revenues and net operating income, or NOI, at our properties,
THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY,Our acquisitions and sales of properties,
OUR ABILITY TO PAY INTEREST ON AND PRINCIPAL OF OUR DEBT,Our ability to raise debt or equity capital,
OUR ABILITY TO APPROPRIATELY BALANCE OUR USE OF DEBT AND EQUITY CAPITAL,Our ability to complete our target dispositions in accordance with our stated plan,
OUR CREDIT RATINGS,The future availability of borrowings under our revolving credit facility,
Our policies and plans regarding investments, financings and dispositions,
OUR EXPECTATION THAT WE BENEFIT FROM OUR OWNERSHIP OF THEOur ability to pay interest on and principal of our debt,
Our ability to appropriately balance our use of debt and equity capital,
Our credit ratings,
Our expectation that we benefit from our relationships with The RMR GROUP INC.Group Inc., ORor RMR INC.Inc.,
Our qualification for taxation as a real estate investment trust, or REIT, and
OUR EXPECTATION THAT WE BENEFIT FROM OUR OWNERSHIP OF AFFILIATES INSURANCE COMPANY, OR AIC, AND FROM OUR PARTICIPATION IN INSURANCE PROGRAMS ARRANGED BY AIC,Other matters.
Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. Risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, funds from operations attributable to common shareholders, or FFO attributable to common shareholders, normalized funds from operations attributable to common shareholders, or Normalized FFO attributable to common shareholders, NOI, cash flows, liquidity and prospects include, but are not limited to:
OUR QUALIFICATION FOR TAXATION AS A REAL ESTATE INVESTMENT TRUST, OR REIT,The impact of conditions in the economy and the capital markets on us and our tenants and managers,
OUR BELIEF THAT THE AGING U.S. POPULATION WILL INCREASE THE DEMAND FOR EXISTING SENIOR LIVING COMMUNITIES,Compliance with, and changes to, federal, state and local laws and regulations, accounting rules, tax laws and similar matters,
OUR BELIEF THAT FIVE STAR QUALITY CARE, INC., OR FIVE STAR, OUR FORMER SUBSIDIARY AND LARGEST TENANT AND THE MANAGER OF OUR MANAGED SENIOR LIVING COMMUNITIES, HAS ADEQUATE FINANCIAL RESOURCES AND LIQUIDITY AND THE ABILITY TO MEET ITS OBLIGATIONS TO US AND TO MANAGE OUR SENIOR LIVING COMMUNITIES SUCCESSFULLY, AND
OTHER MATTERS.
OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FUNDS FROM OPERATIONS, NORMALIZED FUNDS FROM OPERATIONS, NET OPERATING INCOME, OR NOI, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:Limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify for taxation as a REIT for U.S. federal income tax purposes,
THE IMPACT OF CHANGES AND CONDITIONS IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR TENANTS AND MANAGERS,Competition within the healthcare and real estate industries, particularly in those markets in which our properties are located,
THE IMPACT OF THE PATIENT PROTECTION AND AFFORDABLE CARE ACT, AS AMENDED BY THE HEALTH CARE AND EDUCATION RECONCILIATION ACT, OR COLLECTIVELY, THE ACA, INCLUDING CURRENT PROPOSALS TO REPEAL AND REPLACE THE ACA AND OTHER EXISTING OR PROPOSED LEGISLATION OR REGULATIONS ON US, ON OUR TENANTS AND MANAGERS AND ON THEIR ABILITY TO PAY OUR RENTS AND RETURNS,
ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR RELATED PARTIES, INCLUDING OUR MANAGING TRUSTEES, FIVE STAR, THEActual and potential conflicts of interest with our related parties, including our Managing Trustees, Five Star, The RMR GROUPGroup LLC, ORor RMR LLC, RMR INC.Inc. and others affiliated with them, and
Acts of terrorism, outbreaks of so called pandemics or other manmade or natural disasters beyond our control.
For example:
The conversion of our previously existing master leases with Five Star to management agreements pursuant to the restructuring of our business arrangements with Five Star was a significant change in our business arrangements with Five Star and may cause us to realize significantly different operating results from our senior living communities operated by Five Star, including increased variability in such results,
If Five Star fails to provide quality services at our senior living communities, the NOI generated by these communities may be adversely affected,
Five Star, the manager of our managed senior living communities, has experienced significant operating and financial challenges, resulting from a number of factors, some of which are beyond Five Star's control, and which challenges directly impact our operating results from our managed senior living communities, including, but not limited to:
Increases in Five Star’s labor costs or in costs Five Star pays for goods and services,
Competition within the senior living industry,
Seniors delaying or forgoing moving into senior living communities or purchasing healthcare services,
The impact of changes in the economy and the capital markets on Five Star and its residents and other customers,
Changes in Medicare or Medicaid policies and regulations or the possible future repeal, replacement or modification of these or other existing or proposed legislation or regulations,
Increases in compliance costs,
Continued efforts by third party payers to reduce healthcare costs,
Increases in tort and insurance liability costs, and
Five Star’s exposure to litigation and regulatory and government proceedings due to the nature of its business.
If Five Star’s other operations are not profitable or if it does not operate our managed senior living communities successfully, it could become insolvent,
We own a significant number of Five Star's common shares and we expect to own these shares for the foreseeable future. However, we may sell some or all of our Five Star common shares, or our ownership interest in Five Star may otherwise be diluted in the future,
On April 18, 2019, we lowered our regular quarterly distribution rate to $0.15 per common share ($0.60 per common share annually), AIC, D&R YONKERS LLC, SELECT INCOME REIT, OR SIR, AND OTHERS AFFILIATED WITH THEM,which was based on a target distribution payout ratio of approximately 80% of projected cash available for distribution after our sale of certain properties and the stabilization of our transitioned senior living communities. Our distribution rate may be set and reset from time to time by our Board of Trustees. Our Board of Trustees will consider many factors when setting or resetting our distribution rate, including our historical and projected net income, Normalized
COMPLIANCE WITH, AND CHANGES TO, FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, ACCOUNTING RULES, TAX LAWS AND SIMILAR MATTERS,
LIMITATIONS IMPOSED ON OUR BUSINESS AND OUR ABILITY TO SATISFY COMPLEX RULES IN ORDER FOR US TO QUALIFY FOR TAXATION AS A REIT FOR U.S. FEDERAL INCOME TAX PURPOSES,
COMPETITION WITHIN THE HEALTHCARE AND REAL ESTATE INDUSTRIES, AND
ACTS OF TERRORISM, OUTBREAKS OF SO CALLED PANDEMICS OR OTHER MANMADE OR NATURAL DISASTERS BEYOND OUR CONTROL.
FOR EXAMPLE:
FIVE STAR IS OUR LARGEST TENANT AND THE MANAGER OF OUR MANAGED SENIOR LIVING COMMUNITIES AND IT MAY EXPERIENCE FINANCIAL DIFFICULTIES AS A RESULT OF A NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO:
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◦ | CHANGES IN MEDICARE OR MEDICAID POLICIES, INCLUDING THOSE THAT MAY RESULT FROM THE ACA, INCLUDING CURRENT PROPOSALS TO REPEAL AND REPLACE THE ACA AND OTHER EXISTING OR PROPOSED LEGISLATION OR REGULATIONS, WHICH COULD RESULT IN REDUCED MEDICARE OR MEDICAID RATES OR A FAILURE OF SUCH RATES TO COVER FIVE STAR’S COSTS OR LIMIT THE SCOPE OR FUNDING OF EITHER OR BOTH PROGRAMS, |
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◦ | THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON FIVE STAR AND ITS RESIDENTS AND OTHER CUSTOMERS, |
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◦ | COMPETITION WITHIN THE SENIOR LIVING SERVICES BUSINESS, |
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◦ | INCREASES IN INSURANCE AND TORT LIABILITY AND OTHER COSTS, AND |
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◦ | INCREASES IN FIVE STAR’S LABOR COSTS OR IN COSTS FIVE STAR PAYS FOR GOODS AND SERVICES. |
IF FIVE STAR’S OPERATIONS CONTINUE TO BE UNPROFITABLE, IT MAY DEFAULT IN ITS RENT OBLIGATIONS TO US OR WE MAY REALIZE REDUCED INCOME FROM OUR MANAGED SENIOR LIVING COMMUNITIES,
IF FIVE STAR FAILS TO PROVIDE QUALITY SERVICES AT SENIOR LIVING COMMUNITIES THAT WE OWN, OUR INCOME FROM THESE COMMUNITIES MAY BE ADVERSELY AFFECTED,
OUR OTHER TENANTS MAY EXPERIENCE LOSSES AND DEFAULT IN THEIR RENT OBLIGATIONS TO US,FFO, our then current and expected needs and availability of cash to pay our obligations, distributions which we may be required to pay to maintain our qualification for taxation as a REIT and other factors deemed relevant by our Board of Trustees in its discretion. Further, our projected cash available for distribution may change and may vary from our expectations. Accordingly, future distributions to our shareholders may be increased or decreased and we cannot be sure as to the rate at which future distributions will be paid,
SOME OF OUR TENANTS MAY NOT RENEW EXPIRING LEASES, AND WE MAY BE UNABLE TO OBTAIN NEW TENANTS TO MAINTAIN OR INCREASE THE HISTORICAL OCCUPANCY RATES OF, OR RENTS FROM, OUR PROPERTIES,Our ability to make future distributions to our shareholders and to make payments of principal and interest on our indebtedness depends upon a number of factors, including our future earnings, the capital costs we incur to lease and operate our properties and our working capital requirements. We may be unable to pay our debt obligations or to maintain our current rate of distributions on our common shares and future distributions may be reduced or eliminated,
OUR ABILITY TO MAKE FUTURE DISTRIBUTIONS TO OUR SHAREHOLDERS AND TO MAKE PAYMENTS OF PRINCIPAL AND INTEREST ON OUR INDEBTEDNESS DEPENDS UPON A NUMBER OF FACTORS, INCLUDING OUR FUTURE EARNINGS, THE CAPITAL COSTS WE INCUR TO LEASE AND OPERATE OUR PROPERTIES AND OUR WORKING CAPITAL REQUIREMENTS. WE MAY BE UNABLE TO PAY OUR DEBT OBLIGATIONS OR TO MAINTAIN OUR CURRENT RATE OF DISTRIBUTIONS ON OUR COMMON SHARES AND FUTURE DISTRIBUTIONS MAY BE REDUCED OR ELIMINATED,We plan to selectively sell certain properties from time to time to fund future acquisitions and to strategically update, rebalance and reposition our investment portfolio, which we refer to as our capital recycling program. In addition, to reduce our leverage, we have sold properties and other assets and have identified additional properties to sell. We cannot be sure we will sell any of these properties or what the terms or timing of any such sales may be. In addition, in the case of our capital recycling program, we cannot be sure that we will acquire replacement properties that improve the quality of our portfolio or our ability to increase our distributions to shareholders, and, we may sell properties at prices that are less than expected and less than their carrying values and therefore incur losses,
OUR ABILITY TO GROW OUR BUSINESS AND INCREASE OUR DISTRIBUTIONS DEPENDS IN LARGE PART UPON OUR ABILITY TO BUY PROPERTIES AND ARRANGE FOR THEIR PROFITABLE OPERATION OR LEASE THEM FOR RENTS, LESS PROPERTY OPERATING EXPENSES, THAT EXCEED OUR CAPITAL COSTS. WE MAY BE UNABLE TO IDENTIFY PROPERTIES THAT WE WANT TO ACQUIRE OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES, ACQUISITION FINANCING, MANAGEMENT AGREEMENTS OR LEASE TERMS FOR NEW PROPERTIES,Contingencies in our acquisition and sale agreements may not be satisfied and our pending acquisitions and sales and any related management arrangements we expect to enter may not occur, may be delayed or the terms of such transactions or arrangements may change,
RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE BECAUSE OF CHANGING MARKET CONDITIONS OR OTHERWISE,The capital investments we are making at our senior living communities and our plan to invest additional capital into our senior living communities to better position them in their respective markets in order to increase our future returns may not be successful and may not achieve our expected results. Our senior living communities may not be competitive, despite these capital investments,
Our redevelopment projects may not be successful and may cost more or take longer to complete than we currently expect. In addition, we may not realize the returns we expect from these projects and we may incur losses from these projects,
CONTINGENCIES IN OUR ACQUISITION AND SALE AGREEMENTS MAY NOT BE SATISFIED AND OUR PENDING ACQUISITIONS AND SALES AND ANY RELATED LEASES OR MANAGEMENT ARRANGEMENTS WE MAY EXPECT TO ENTER INTO MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS OF SUCH TRANSACTIONS OR ARRANGEMENTS MAY CHANGE,We may spend more for capital expenditures than we currently expect,
WE MAY ENTER INTO ADDITIONAL LEASE OR MANAGEMENT ARRANGEMENTS WITH FIVE STAR FOR ADDITIONAL SENIOR LIVING COMMUNITIES THAT WE OWN OR MAY ACQUIRE IN THE FUTURE OR WE MAY ENTER INTO OTHER TRANSACTIONS WITH FIVE STAR. HOWEVER, WE CANNOT BE SURE THAT WE WILL ENTER INTO ANY ADDITIONAL LEASES, MANAGEMENT ARRANGEMENTS OR OTHER TRANSACTIONS WITH FIVE STAR,Our existing joint venture and any other joint ventures that we may enter may not be successful,
CONTINUED AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND OTHER CUSTOMARY CREDIT FACILITY CONDITIONS THAT WE MAY BE UNABLE TO SATISFY,Our tenants may experience losses and default on their rent obligations to us,
Some of our tenants may not renew expiring leases, and we may be unable to obtain new tenants to maintain or increase the historical occupancy rates of, or rents from, our properties,
ACTUAL COSTS UNDER OUR REVOLVING CREDIT FACILITY OR OTHER FLOATING RATE CREDIT FACILITIES WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF OTHER FEES AND EXPENSES ASSOCIATED WITH SUCH FACILITIES,Our ability to grow our business and maintain or increase our distributions to shareholders depends in large part upon our ability to buy properties and arrange for their profitable operation or lease them for rents, less their property operating expenses, that exceed our capital costs. We may be unable to identify properties that we want to acquire and we may fail to reach agreement with the sellers and complete the purchase of any properties we do want to acquire. In addition, any properties we may acquire may not provide us with rents or revenues less property operating costs that exceed our capital costs or achieve our expected returns. If our cash flows are reduced and our leverage increases, we may need to sell additional properties,
Rents that we can charge at our properties may decline upon renewals or expirations because of changing market conditions or otherwise,
THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY AND TERM LOANS MAY BE INCREASED TO UP TO $2.6 BILLION ON A COMBINED BASIS IN CERTAIN CIRCUMSTANCES. HOWEVER, INCREASING THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY AND TERM LOANS IS SUBJECT TO OUR OBTAINING ADDITIONAL COMMITMENTS FROM LENDERS, WHICH MAY NOT OCCUR,We expect to enter into additional management arrangements with Five Star for additional senior living communities that we own or may acquire in the future. However, we cannot be sure that we will enter into any additional management or other arrangements or transactions with Five Star,
WE HAVE THE OPTION TO EXTEND THE MATURITY DATE OF OUR REVOLVING CREDIT FACILITY UPON PAYMENT OF A FEE AND MEETING CERTAIN OTHER CONDITIONS. HOWEVER, THE APPLICABLE CONDITIONS MAY NOT BE MET,Continued availability of borrowings under our revolving credit facility is subject to our satisfying certain financial covenants and other credit facility conditions that we may be unable to satisfy,
THE PREMIUMS USED TO DETERMINE THE INTEREST RATE PAYABLE ON OUR REVOLVING CREDIT FACILITY AND TERM LOANS AND THE FACILITY FEE PAYABLE ON OUR REVOLVING CREDIT FACILITY ARE BASED ON OUR CREDIT RATINGS. FUTURE CHANGES IN OUR CREDIT RATINGS MAY CAUSE THE INTEREST AND FEES WE PAY TO INCREASE,
WE MAY BE UNABLE TO REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE,
FOR THE YEAR ENDED DECEMBERActual costs under our revolving credit facility or other floating rate debt will be higher than LIBOR plus a premium because of fees and expenses associated with such debt,
The maximum borrowing availability under our revolving credit facility and our $200.0 million term loan may be increased to up to $2.4 billion on a combined basis in certain circumstances. However, increasing the maximum borrowing availability under our revolving credit facility and this term loan is subject to our obtaining additional commitments from lenders, which may not occur,
We have the option to extend the maturity date of our revolving credit facility upon payment of a fee and meeting other conditions; however, the applicable conditions may not be met,
The premiums used to determine the interest rate payable on our revolving credit facility and term loans and the facility fee payable on our revolving credit facility are based on our credit ratings. Changes in our credit ratings may cause the interest and fees we pay to increase,
We may be unable to repay our debt obligations when they become due,
We intend to conduct our business activities in a manner that will afford us reasonable access to capital for investment and financing activities. However, we may not succeed in this regard and we may not have reasonable access to capital,
For the year ended December 31, 2016, APPROXIMATELY2019, approximately 97% OF OURof our NOI WAS GENERATED FROM PROPERTIES WHERE A MAJORITY OF THE REVENUES ARE DERIVED FROM OUR TENANTS’ AND RESIDENTS’ PRIVATE RESOURCES. THIS MAY IMPLY THAT WE WILL MAINTAIN OR INCREASE THE PERCENTAGE OF OURwas generated from properties where a majority of the revenues are derived from our tenants’ and residents’ private resources. This may imply that we will maintain or increase the percentage of our NOI GENERATED FROM PRIVATE RESOURCES AT OUR SENIOR LIVING COMMUNITIES. HOWEVER, OUR RESIDENTS AND PATIENTS MAY BECOME UNABLE TO FUND OUR CHARGES WITH PRIVATE RESOURCES IN THE FUTURE AND WE MAY BE REQUIRED OR MAY ELECT FOR BUSINESS REASONS TO ACCEPT OR PURSUE REVENUES FROM GOVERNMENT SOURCES, WHICH COULD RESULT IN AN INCREASED PART OF OURgenerated from private resources at our senior living communities. However, our residents and patients may become unable to fund our charges with private resources and we may be required or may elect for business reasons to accept or pursue revenues from government sources, which could result in an increased part of our NOI AND REVENUE BEING GENERATED FROM GOVERNMENT PAYMENTS AND OUR BECOMING MORE DEPENDENT ON GOVERNMENT PAYMENTS,and revenue being generated from government payments and our becoming more dependent on government payments,
Circumstances that adversely affect the ability of seniors or their families to pay for our tenants' and managers' services, such as economic downturns, weak housing market conditions, higher levels of unemployment among our residents' family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics generally could affect the profitability of our senior living communities,
CIRCUMSTANCES THAT ADVERSELY AFFECT THE ABILITY OF SENIORS OR THEIR FAMILIES TO PAY FOR OUR TENANTS' AND MANAGERS' SERVICES, SUCH AS ECONOMIC DOWNTURNS, SOFTNESS IN THE U.S. HOUSING MARKET, HIGHER LEVELS OF UNEMPLOYMENT AMONG RESIDENT FAMILY MEMBERS, LOWER LEVELS OF CONSUMER CONFIDENCE, STOCK MARKET VOLATILITY AND/OR CHANGES IN DEMOGRAPHICS GENERALLY COULD AFFECT THE PROFITABILITY OF OUR MANAGED SENIOR LIVING COMMUNITIES,As of December 31, 2019, we had estimated unspent leasing related obligations of $24.0 million. It is difficult to accurately estimate tenant space preparation costs. Our unspent leasing related obligations may cost more or less and may take longer to complete than we currently expect, and we may incur increasing amounts for these and similar purposes in the future,
Our senior living communities are subject to extensive government regulation, licensure and oversight. We sometimes experience deficiencies in the operation of our senior living communities and some of our communities may be prohibited from admitting new residents or our license to continue operations at a community may be revoked. Also, operating deficiencies or a license revocation at one or more of our senior living communities may have an adverse impact on our ability to obtain licenses for or attract residents to our other communities,
WE MAY NOT BE ABLE TO SELL PROPERTIES THAT WE MAY CLASSIFY AS HELD FOR SALE ON TERMS ACCEPTABLE TO US OR OTHERWISE,
WE BELIEVE THAT OUR RELATIONSHIPS WITH OUR RELATED PARTIES, INCLUDING FIVE STAR,We believe that our relationships with our related parties, including Five Star, RMR LLC, RMR INC.Inc., ABP TRUST, AIC, D&R YONKERS LLC, SIR AND OTHERS AFFILIATED WITH THEM MAY BENEFIT US AND PROVIDE US WITH COMPETITIVE ADVANTAGES IN OPERATING AND GROWING OUR BUSINESS. HOWEVER, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE,Trust and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize, and
OUR SENIOR LIVING COMMUNITIES ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, LICENSURE AND OVERSIGHT. WE SOMETIMES EXPERIENCE DEFICIENCIES IN THE OPERATION OF OUR SENIOR LIVING COMMUNITIES AND SOME OF OUR COMMUNITIES MAY BE PROHIBITED FROM ADMITTING NEW RESIDENTS OR OUR LICENSE TO CONTINUE OPERATIONS AT A COMMUNITY MAY BE REVOKED. ALSO, OPERATING DEFICIENCIES OR A LICENSE REVOCATION AT ONE OR MORE OF OUR SENIOR LIVING COMMUNITIES MAY HAVE AN ADVERSE IMPACT ON OUR ABILITY TO OBTAIN LICENSES FOR OR ATTRACT RESIDENTS TO OUR OTHER COMMUNITIES, AND
THE BUSINESS MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS BETWEEN US ANDThe business and property management agreements between us and RMR LLC HAVE CONTINUINGhave continuing 20 YEAR TERMS. HOWEVER, THOSE AGREEMENTS INCLUDE TERMS WHICH PERMIT EARLY TERMINATION IN CERTAIN CIRCUMSTANCES. ACCORDINGLY, WE CANNOT BE SURE THAT THESE AGREEMENTS WILL REMAIN IN EFFECT FOR CONTINUINGyear terms. However, those agreements permit early termination in certain circumstances. Accordingly, we cannot be sure that these agreements will remain in effect for continuing 20 YEAR TERMS OR FOR SHORTER TERMS.year terms.
Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as new legislation or regulations affecting our business or the businesses of our tenants or managers, changes in our tenants’ or managers’ revenues or costs, worsening or lack of improvement of Five Star's financial condition or changes in our other tenants’ financial conditions, deficiencies in operations by a tenant or manager of one or more of our senior living communities, changed Medicare or Medicaid rates, acts of terrorism, natural disasters or changes in capital markets or the economy generally.
CURRENTLY UNEXPECTED RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH ARE BEYOND OUR CONTROL, SUCH AS NEW LEGISLATION OR REGULATIONS AFFECTING OUR BUSINESS OR THE BUSINESSES OF OUR TENANTS OR MANAGERS, CHANGES IN OUR TENANTS’ OR MANAGERS’ REVENUES OR COSTS, CHANGES IN OUR TENANTS’ OR MANAGERS’ FINANCIAL CONDITIONS, DEFICIENCIES IN OPERATIONS BY THE TENANTS OR MANAGERS OF OUR SENIOR LIVING COMMUNITIES, CHANGED MEDICARE OR MEDICAID RATES, ACTS OF TERRORISM, NATURAL DISASTERS OR CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY.
THE INFORMATION CONTAINED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10‑K OR IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, OR SEC, INCLUDING UNDER THE CAPTION “RISK FACTORS”, OR INCORPORATED HEREIN OR THEREIN, IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES FROM OUR FORWARD LOOKING STATEMENTS. OUR OTHER FILINGS WITH THE SEC ARE AVAILABLE ON THE SEC’S WEBSITE AT WWW.SEC.GOV.
YOU SHOULD NOT PLACE UNDUE RELIANCE UPON OUR FORWARD LOOKING STATEMENTS.
EXCEPT AS REQUIRED BY LAW, WE DO NOT INTEND TO UPDATE OR CHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
STATEMENT CONCERNING LIMITED LIABILITYThe information contained elsewhere in this Annual Report on Form 10-K or in our other filings with the Securities and Exchange commission, or SEC, including under the caption “Risk Factors”, or incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements. Our other filings with the SEC are available on the SEC’s website at www.sec.gov.
THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING SENIOR HOUSING PROPERTIES TRUST, DATED SEPTEMBERYou should not place undue reliance upon our forward-looking statements.
Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.
Statement Concerning Limited Liability
The Amended and Restated Declaration of Trust establishing Diversified Healthcare Trust (formerly known as Senior Housing Properties Trust), dated September 20, 1999, AS AMENDED AND SUPPLEMENTED, AS FILED WITH THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SENIOR HOUSING PROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SENIOR HOUSING PROPERTIES TRUST. ALL PERSONS DEALING WITH SENIOR HOUSING PROPERTIES TRUST IN ANY WAY SHALL LOOK ONLY TO THE ASSETS OF SENIOR HOUSING PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.as amended and supplemented, as filed with the State Department of Assessments and Taxation of Maryland, provides that no trustee, officer, shareholder, employee or agent of Diversified Healthcare Trust shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, Diversified Healthcare Trust. All persons dealing with Diversified Healthcare Trust in any way shall look only to the assets of Diversified Healthcare Trust for the payment of any sum or the performance of any obligation.
SENIOR HOUSING PROPERTIESDIVERSIFIED HEALTHCARE TRUST
20162019FORM 10‑K10-K ANNUAL REPORT
Table of Contents
PARTI
Item 1. Business.
The Company
We are a real estate investment trust, or REIT, that was organized under the laws of the State of Maryland in 1998.1998 and which owns healthcare related properties including medical office and life science properties, senior living communities and other healthcare related properties throughout the United States. As of December 31, 2016,2019, we owned 433424 properties (459 buildings) located in 4239 states and Washington, D.C. On that date, the undepreciated carryinggross book value of our properties, net ofreal estate assets at cost plus certain acquisition costs, before depreciation and purchase price allocations and less impairment losses,write downs, was $7.7$8.4 billion. Our portfolio includes: 304 senior living communities, including independent living, assisted living, memory care and skilled nursing facilities, or SNFs, with 35,008 living units / beds, with an undepreciated carrying value of $4.5 billion; 119 properties (145 buildings) leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or MOBs, with 11.4 million square feet of space and an undepreciated carrying value of $3.1 billion; and 10 wellness centers with approximately 812,000 square feet of interior space plus outdoor developed facilities with an undepreciated carrying value of $180.0 million.
Our principal executive offices are located at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458‑1634,02458-1634, and our telephone number is (617) 796‑8350.796-8350.
We believe that the aging of the U.S. population will increase demand for existing independentmedical office and assistedlife science properties, senior living communities SNFs, MOBs,(including active adult rental communities), wellness centers and other medical and healthcare related properties. We plan to profit from this demand by acquiring additional properties and entering into leases and management arrangements with qualified tenants and managers which generate returns to us that exceed our operating and capital costs, including structuring leases that provide for or permit periodic rentalrent increases.
Our business plan contemplatesfocuses primarily on investments in medical office and life science properties, senior living communities MOBs(including active adult rental communities) and wellness centers.other healthcare related properties. Some properties may combine more than one type of service in a single building or campus. Our growth strategies are implemented and defined by our investment, and operating and financing policies.
We expect to selectively sell properties from time to time when we determine our continued ownership or ongoing required capital expenditures will not achieve desired returns or when we believe we can successfully pursue more desirable opportunities than retaining these properties. We also expect to use sales proceeds to acquire new properties that we believe will help us reduce the average age of our properties, increase our weighted average lease term, reduce our ongoing capital requirements and/or increase our distributions to shareholders. We refer to this as our capital recycling program.
Office Portfolio
Our portfolio of medical office and life science properties, or our Office Portfolio, consists of commercial properties constructed for use or operated as medical office space for physicians and other healthcare personnel, and other businesses in medical related fields, including clinics and life science or laboratory uses. Some of our medical office properties are occupied as administrative facilities for healthcare companies, such as hospitals and healthcare insurance companies.
Senior Living Communities
Independent Living Communities. Independent living communities provide high levels of privacy to residents and require residents to be capable of relatively high degrees of independence. Unlike an age restricted apartment property, anAn independent living community usually bundles several services as part of a regular monthly charge. For example, an independent living community may include one or two meals per day in a central dining room, daily or weekly maid service or a social director in the base charge. Additional services are generally available from staff employees on a fee for service basis. In some of our independent living communities, separate parts of the property are dedicated to assisted living and/or nursing services. We also own an active adult rental community, which we have classified as an independent living community.
Assisted Living Communities. Assisted living communities typically have one bedroom or studio units which include private bathrooms and efficiency kitchens. Services bundled within one charge usually include three meals per day in a central dining room, daily housekeeping, laundry, medical reminders and 24 hour availability of assistance with the activities of daily living, such as dressing and bathing. Professional nursing and healthcare services are usually available at the property on call or at regularly scheduled times. In some of our assisted living communities, separate parts of the property are dedicated to independent living and/or nursing services.
Skilled Nursing Facilities. Skilled nursing facilities, or SNFs, generally provide extensive nursing and healthcare services similar to those available in hospitals, without the high costs associated with operating theaters,rooms, emergency rooms or intensive care
units. A typical purpose built SNF includes mostly rooms with one or two beds, a separate bathroom and shared dining facilities. Licensed nursing professionals staff SNFs 24 hours per day.
MOBs
MOBs are office or commercial buildings constructed for use or operated as medical office space for physicians and other healthcare personnel, and other businesses in medical related fields, including clinics and laboratory uses. Some of our MOBs are occupied as back office facilities for healthcare companies, such as hospitals and healthcare insurance companies.
Wellness Centers
Wellness centers typically have gymnasiums, strength and cardiovascular equipment areas, tennis and racquet sports facilities, pools, spas and children’s centers. Professional sport training and therapist services are often available. Wellness centers often market themselves as clubs for which members may pay monthly fees plus additional fees for specific services.
Other Types of Real Estate
In the past, we have considered investing in real estate different from our existing property types including age restricted apartment buildings and some properties located outside the United States. For example, we recently acquired an age restricted active adult rental community, which we have classified as an independent living community, to diversify our portfolio of senior living communities. We may explore these or other alternative investments in the future.
Lease Terms
Our medical office and life science property leases include both “triple net” leases, as described below, and “net” and “modified gross” leases where we are responsible for operating and maintaining the properties and we charge the tenants for some or all of the property operating expenses. A small percentage of our medical office and life science property leases are “full service” leases where we receive fixed rent from the tenants and do not charge the tenants for any property operating expenses. The leases for some of our senior living communities and all of our wellness centers are so called “triple net” leases.
Triple net leases which generally require the tenants to pay rent and all property operating expenses, to indemnify us from liability which may arise by reason of our ownership of the properties, to maintain the properties at their expense, to remove and dispose of hazardous substances on the properties in compliance with applicable law and to maintain insurance on the properties for their and our benefit. In the event of any damage, or immaterial condemnation, of a leased property, the tenants are generally required to rebuild with insurance or condemnation proceeds or, if such proceeds are insufficient, other amounts made available by us, if any, but if other amounts are made available by us, the rent will be increased accordingly. In the event of any material or total condemnation of a leased property, generally the lease will terminate with respect to that leased property, in which event we will be entitled to the condemnation proceeds and the rent will be reduced accordingly. In the event of any material or total destruction of a leased property, in certain cases the applicable tenant may terminate the lease with respect to that leased property, in which event the tenant will be required to pay us any shortfall in the amount of proceeds we receive from insurance compared to the replacement cost of that leased property and the rent will be reduced accordingly.
Our MOB leases include both triple net leases, as described above, and so called “net” and “modified gross” leases where we are responsible for operating and maintaining the properties and we charge the tenants for some or all of the property operating expenses. A small percentage of our MOB leases are so called “full service” leases where we receive fixed rent from the tenants and do not charge the tenants for any property operating expenses.
Events of Default. Under our leases, events of default generally include:
failure of the tenant to pay rent or any other money when due;
failure of the tenant to provide periodic financial reports when due;
failure of the tenant to maintain required insurance coverages;
revocation of any material license necessary for the operation of our properties; or
failure of the tenant to perform other terms, covenants or conditions of the lease and the continuance thereof for a specified period after written notice.
Default Remedies. Upon the occurrence of any event of default under our leases, we generally may (subject to applicable law):
terminate the affected lease and accelerate the rent;
terminate the tenant’s rights to occupy and use the affected property, rent the property to another tenant and recover from the defaulting tenant the difference between the amount of rent which would have been due under the lease and the rent received pursuant to the reletting;
make any payment or perform any act required to be paid or performed by the tenant under its lease;
exercise our rights with respect to any collateral securing the lease; and
require the defaulting tenant to reimburse us for all payments made and all costs and expenses incurred in connection with our exercise of any of the foregoing remedies.
For more information about our leases with Five Star Quality Care, Inc. or its subsidiaries, or Five Star, see Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Senior Living CommunityHousing Operating Portfolio Management Agreements
Because we are a REIT for U.S. federal income tax purposes, we generally may not operate our senior living communities. For certainmost of our senior living communities, we use thea taxable REIT subsidiary, or TRS, structure authorized by the REIT Investment Diversification and Empowerment Act. Under this structure, we lease certain of our communities to our TRSs and our TRSs enter into long term management agreements with third parties for the operation of such communities. These management agreements provide the manager with a management fee, which is a percentage of the gross revenues realized at the communities, plus reimbursement for the manager’s direct costs and expenses related to the communities, and until January 1, 2020, generally provideprovided the manager with an incentive fee equal to a percentage of the annual net operating income, or NOI, of the communities after we realize an annual minimum return equalreturn.
On April 1, 2019, we entered into a transaction agreement with Five Star, or the Transaction Agreement, to a percentagerestructure our business arrangements with Five Star, or the Restructuring Transaction. We completed the Restructuring Transaction effective January 1, 2020, as further described elsewhere in this Annual Report on Form 10-K, including in Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. Pursuant to the Restructuring Transaction, among other things, our invested capital. The currently effective management agreementspreviously existing master leases with Five Star for 166 of our senior living communities generallyand our previously existing management and pooling agreements for 78 of our senior living communities were terminated and replaced, or the Conversion, with new management agreements and a related omnibus agreement, or collectively, the New Management Agreements. Currently, all of these senior living communities are managed by Five Star pursuant to the New Management Agreements.
Pursuant to the New Management Agreements, Five Star will receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for its direct costs and expenses related to such communities, as well as an annual incentive fee equal to 15% of the amount by which the annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of all communities on a combined basis exceeds the target EBITDA for all communities on a combined basis for such calendar year, provided that in no event shall the incentive fee be greater than 1.5% of the gross revenues realized at all communities on a combined basis for such calendar year.
The New Management Agreements expire between December 31, 2030 and December 31, 2040. In general, we havein 2034, subject to Five Star’s right to extend for two consecutive five year terms if Five Star achieves certain performance targets for the combined managed communities portfolio, unless earlier terminated or timely notice of nonrenewal is delivered. The New Management Agreements also provide us with the right to terminate these management agreements upon certain manager events of default, including, without limitation, a change in controlthe New Management Agreement for any community that does not earn 90% of the manager,target EBITDA for such community for two consecutive calendar years or in any two of three consecutive calendar years, with the measurement period commencing January 1, 2021 (and the first termination not possible until the beginning of calendar year 2023); provided we may not in any calendar year terminate communities representing more than 20% of the combined revenues for all communities for the calendar year prior to such termination. Pursuant to a guaranty agreement dated as definedof January 1, 2020, or the Guaranty, made by Five Star in favor of our applicable subsidiaries, Five Star has guaranteed the management agreements,payment and our manager hasperformance of each of its applicable subsidiary’s obligations under the right to terminate these management agreements upon certain events of default applicable to us.New Management Agreements.
Although we have various rights as owner under the management agreements,New Management Agreements, we rely on the manager’s personnel, good faith, expertise, performance, technical resources, operating efficiencies, information systems, proprietary information and judgment to manage our managed senior living communities efficiently and effectively. We also rely on the manager to set resident fees and otherwise operate our managed senior living communities in compliance with the New Management Agreements.
Under the New Management Agreements, we assume the operational risks and fund the operations and capital and maintenance requirements for all those senior living communities that Five Star previously leased from us and now manages for our management agreements. account. As a result, we are required to maintain sufficient funding for these purposes. Further, any funding we maintain for these purposes will not be available for other business purposes, which may limit our ability to pursue other business opportunities and could limit the amount of distributions we can pay to our shareholders. As a result of the Restructuring Transaction and the New Management Agreements, the operating results of our senior living communities that were previously leased from us and operated by Five Star and are now managed by Five Star for our account are now included in our operating results, together with the operating results of our other senior living communities that are managed by Five Star for our account. This is a significant change in our historical arrangements with Five Star and may result in our realizing significantly different operating results from our senior living communities in the future, including increased variability.
For more information about these management agreements with Five Star and the related pooling agreements,New Management Agreements, see Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Our Investment and Operating Policies
Our investment objectives include increasing cash flowflows from operations from dependable and diverse sources in order to increase per sharemake distributions to our shareholders. To achieve these objectives, we seek to: maintain a strong capital base of shareholders’ equity; invest in highstrong credit quality properties with highstrong credit quality tenants and managers; use moderate debt leverage to fund additional investments which increase cash flow from operations because of positive spreads between our cost of investment capital and investment yields; structure investments which generate a minimum return and provide an opportunity to participate in operating growth at our properties; when market conditions permit, refinance debt with additional equity or long term debt; and pursue diversification so that our cash flow from operations comes from diverse properties and tenants.
Our Board of Trustees may change our investment and operating policies at any time without a vote of, or notice to, our shareholders.
Acquisition Policies.
Policies
Our present acquisition strategy is to acquire additional properties primarily for income and secondarily for appreciation potential. We may purchase individual properties or multiple properties in one portfolio. In implementing this acquisition strategy, we consider a range of factors relating to each proposed acquisition, including, but not limited to:
the use and size of the property;
the proposed acquisition price;
the location of the property;
the proposed acquisition price;
the existing or proposed lease or management terms;
the availability and reputation of an experienced and financially qualified lessee(s), manager(s)tenants, managers or guarantor(s);guarantors;
the historical and projected cash flows from the operations of the property;
the estimated replacement cost of the property;
the design, construction quality, physical condition and age of the property and expected capital expenditures or improvements that may be needed at the property;
the competitive market environment of the property;
the growth, tax and regulatory environments of the market in which the property is located;
the price segment and payment sources in which the property is operated;
the strategic fit of the property within our portfolio;
our weighted average long term cost of capital compared to projected returns we may realize by owning the property;
the level of permitted services and regulatory history of the property and its historical tenants and managers; and
the existence of alternative sources, uses or needs for capital.
An important part of our acquisition strategy is to identify and select, or create, qualified, experienced and financially stable tenants and managers.
Disposition Policies
In April 2019, we announced our plan to sell properties to reduce our leverage, with a focus on the sale of underperforming senior living communities and non-core assets. We do not believe that the sales of these properties represent a strategic shift in our business. As these planned asset sales are completed, we plan to begin to execute a capital recycling program to accretively grow our portfolio. Pursuant to this capital recycling program, we plan to selectively sell certain properties from time to time to fund future acquisitions and to strategically update, rebalance and reposition our investment portfolio, and to maintain leverage consistent with our investment grade rated peers with a goal of (1) improving the asset quality of our portfolio by reducing the average age, lengthening the weighted average term of our leases and increasing the likelihood of retaining our tenants and (2) increasing our distributions to shareholders.
Other Investments.than as described, we generally consider ourselves to be a long term owner of properties and are more interested in the long term earnings potential of our properties and stability of our portfolio than selling properties for short term gains. However, from time to time, we may consider the sale of all or a stake in one or more of our properties or other investments. We make disposition decisions based on a number of factors, including, but not limited to, the following:
our ability to lease or operate the affected property on terms acceptable to us or have the affected property managed with our realizing acceptable returns;
the manager’s or tenant's desire to acquire or operate the affected property;
the manager’s or tenant's desire to dispose of or cease operating the affected property;
the proposed sale price;
the remaining length of the lease relating to the property and its other terms;
our evaluation of future cash flows which may be achieved from the property;
the strategic fit of the property or investment within our portfolio;
the capital required to maintain the property;
the estimated value we may receive by selling the property;
our intended use of the proceeds we may realize from the sale of a property; and
the existence of alternative sources, uses or needs for capital.
Other Investments
We have no policies which specifically limit the percentage of our assets that may be invested in any individual property, in any one type of property, in properties leased to any one tenant or to an affiliated group of tenants or in properties operated by any one tenant or manager or by an affiliated group of tenants or managers or in securities of one or more other persons.
We own a significant number of common shares of Five Star and The RMR Group Inc. (Nasdaq: RMR), a Maryland corporation,we expect to own these shares for the foreseeable future. However, we may sell some or RMR Inc.all of our Five Star common shares, or our ownership interest in Five Star may otherwise be diluted in the future. We may also in the future acquire additional common shares of Five Star or RMR Inc. or securities of other entities, including entities engaged in real estate activities. We may invest in the securities of other entities for the purpose of exercising control, or otherwise, make loans to other persons or entities, engage in the sale of investments, offer securities in exchange for property or repurchase or reacquire our securities.
We prefer wholly owned investments in fee interests. However, circumstances may arise in which we may invest in leaseholds, joint ventures, mortgages and other real estate interests. We may invest or enter into real estate joint ventures if we conclude that by doing so we may benefit from the participation of co-venturers or that our opportunity to participate in the investment is contingent on the use of a joint venture structure. For example, in March 2017, we entered a joint venture with a sovereign investor for one of our life science properties located in Boston, Massachusetts. Further, we may acquire interests in joint ventures as part of an acquisition of properties or entities. We may invest in participating, convertible or other types of
mortgages if we conclude that by doing so, we may benefit from the cash flow or appreciation in the value of a property which is not available for purchase.
Mergers and Strategic Combinations.Combinations
In the past, we have considered the possibility of entering into mergers or strategic combinations with other companies and we may explore such possibilities in the future.
Disposition Policies.
We generally consider ourselves to be a long term owner of properties and are more interested in the long term earnings potential of our properties than selling properties for short term gains. However, from time to time, we consider the sale of one or more of our properties or other investments. We make disposition decisions based on a number of factors, including, but not limited to, the following:
our ability to lease or operate the affected property on terms acceptable to us or have the affected property managed with our realizing acceptable returns;
the tenant’s or manager’s desire to acquire or operate the affected property;
the tenant’s or manager’s desire to dispose of or cease operating the affected property;
the proposed sale price;
the remaining length of the lease relating to the property and its other terms;
our evaluation of future cash flows which may be achieved from the property;
the strategic fit of the property or investment within our portfolio;
the capital required to maintain the property
the estimated value we may receive by selling the property;
our intended use of the proceeds we may realize from the sale of the property; and
the existence of alternative sources, uses or needs for capital.
Our Board of Trustees may change our investment and operating policies at any time without a vote of, or notice to, our shareholders.
Our Financing Policies
There are no limitations in our organizational documents on the type or amount of indebtedness we may incur. Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements contain financial covenants which, among other things, restrict our ability to incur indebtedness and require us to maintain financial ratios and a minimum net worth. However, we may seek to amend these covenants or seek replacement financings with less restrictive covenants. In the future, we may decide to seek changes in the financial covenants which currently restrict our debt leverage based upon then current economic conditions, the relative availability and costs of debt versus equity capital and our need for capital to take advantage of acquisition opportunities or otherwise.
We may also seek additional capital through equity offerings, debt financings, retention of cash flows in excess of distributions to shareholders, sales of properties or a combination of these methods or other transactions. To the extent we obtain additional debt financing, we may do so on an unsecured basis or a secured basis. We may seek to obtain lines of credit or to issue securities senior to our common shares, including preferred shares or debt securities, some of which may be convertible into our common shares or be accompanied by warrants to purchase our common shares. We may also finance acquisitions by assuming debt, through an exchange of properties or through the issuance of equity or other securities. The proceeds from any of our financings may be used to pay distributions, to provide working capital, to refinance existing indebtedness or to finance acquisitions and expansions of existing or new properties.
We currently have a $1.0 billion unsecured revolving credit facility that we use for working capital and general business purposes and for funding acquisitions on an interim basis until we are able to refinance them with equity or long term debt. In some instances, we may assume outstanding mortgage debtsdebt in connection with our acquisition of properties or place new mortgages on properties we own. For more information regarding our financing sources and activities, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-LiquidityOperations—Liquidity and Capital Resources-OurResources—Our Investment and Financing Liquidity and Resources” in Part II, Item 7 of this Annual Report on Form 10‑K.
10-K.
Generally, we intend to manage our leverage in a way that may allow us to maintain “investment grade” ratings from nationally recognized statistical rating organizations; however, we cannot be sure that we will be able to maintain our investment grade ratings.
Our Board of Trustees may change our financing policies at any time without a vote of, or notice to, our shareholders.
Our Manager
RMR Inc. is a holding company and substantially all of its business is conducted by its majority owned subsidiary, The RMR Group LLC, a Maryland limited liability company, or RMR LLC. Barry PortnoyThe Chair of our Board of Trustees and Adam Portnoy,one of our Managing Trustees, areAdam D. Portnoy, as the sole trustee of ABP Trust, is the controlling shareholders, directors and officersshareholder of RMR Inc. and is a managing director, president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. Jennifer B. Clark, our other Managing Trustee and our Secretary, also serves as a managing director and as executive vice president, general counsel and secretary of RMR Inc., an officer of ABP Trust and an officer and employee of RMR LLC. Our day to day operations are conducted by RMR LLC. RMR LLC originates and presents investment and divestment opportunities to our Board of Trustees and provides management and administrative services to us. RMR LLC has a principal place of business at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts, 02458‑1634,02458-1634, and its telephone number is (617) 796‑8390.796-8390. RMR LLC or its subsidiaries also acts as the manager to GovernmentService Properties Trust (formerly known as Hospitality Properties Trust), or SVC, Industrial Logistics Properties Trust, or ILPT, Office Properties Income Trust, or GOV, Hospitality PropertiesOPI, and Tremont Mortgage Trust, or HPT,TRMT, and Select Income REIT, or SIR, and provides
management and other services to other private and public companies, including Five Star, TravelCenters of America LLC,Inc., or TA, and Sonesta International Hotels Corporation, or Sonesta. As of the date of this Annual Report on Form 10‑K,10-K, the executive officers of RMR LLC are: Adam Portnoy, President and Chief Executive Officer; Barry Portnoy, Chairman; David M. Blackman, Executive Vice President; Jennifer B. Clark, Executive Vice President, General Counsel and Secretary; David J. Hegarty,Matthew P. Jordan, Executive Vice President; Mark L. Kleifges, Executive Vice President; Bruce J. Mackey Jr., Executive Vice President;President, Chief Financial Officer and Treasurer; John G. Murray, Executive Vice President; Thomasand Jonathan M. O’Brien, Executive Vice President; and John C. Popeo,Pertchik, Executive Vice President. David J. Hegarty is ourOur President and Chief Operating Officer. Our executive officersOfficer, Jennifer F. Francis, and our Chief Financial Officer and Treasurer, Richard W. Siedel, Jr., are Senior Vice Presidents of
RMR LLC. Mr. Siedel and other officers of RMR LLC also serve as officers of other companies to which RMR LLC or its subsidiaries provides management services.
Employees
We have no employees. Services which would otherwise be provided to us by employees are provided by RMR LLC and by our Managing Trustees and officers. As of February 1, 2017,December 31, 2019, RMR LLC had over 450more than 600 full time employees in its headquarters and regional offices located throughout the United States.
Government Regulation and Reimbursement
The senior living and healthcare industries are subject to extensive, frequently changing federal, state and local laws and regulations. Although most of these laws and regulations affect the manner in which our tenants and managers operate our properties, some of them also impact us and the values of our properties. Some of the laws that impact or may impact us or our tenants or managers include: state and local licensure laws; laws protecting consumers against deceptive practices; laws relating to the operation of our properties and how our tenants and managers conduct their operations, such as health and safety, fire and privacy laws; federal and state laws affecting assisted living communities that participate in Medicaid and federal and state laws affecting SNFs, clinics and other healthcare facilities that participate in both Medicaid and Medicare that mandate allowable costs, pricing, reimbursement procedures and limitations, quality of services and care, food service and physical plants; resident rights laws (including abuse and neglect laws) and fraud laws; anti-kickback and physician referral laws; the Americans with Disabilities Act and similar state and local laws; and safety and health standards set by the federal Occupational Safety and Health Administration, or OSHA. Medicaid funding is available in some, but not all, states for assisted living services. State licensure standards for assisted living communities, SNFs, clinics and other healthcare facilities typically address facility policies, staffing, quality of services and care, resident rights, fire safety and physical plant matters, and related matters. We are unable to predict the future course of federal, state and local legislation or regulation. Changes in the regulatory framework could have a material adverse effect on the ability of our tenants to pay us rent, the profitability of our managed senior living communities and the values of our properties.
State and local health and social service agencies and other regulatory authorities regulate and license many senior living communities. State health authorities regulate and license clinics and other healthcare facilities. In most states in which we own properties, we and our tenants and managers are prohibited from providing certain services without first obtaining appropriate licenses. In addition, most states require a certificate of need, or CON, before an entity may open a SNF or expand services at an existing community. According to the National Conference of State Legislatures, some states also limit the number of assisted living facilities by requiring CONs. In addition, some states (such as California and Texas) that have eliminated CON laws have retained other means of limiting development of SNFs, including moratoria, licensing laws and limitations upon participation in the state Medicaid program. Senior living communities and certain other healthcare facilities must also comply with applicable state and local building, zoning, fire and food service codes before licensing or Medicare and Medicaid certification are granted. These laws and regulatory requirements could affect our ability and that of our tenants and managers to expand into new markets or to expand communities in existing markets.
In addition, government authorities have been subjecting healthcare facilities such as those that we own to increasing numbers of inspections, surveys, investigations, audits and other potential enforcement actions. We and our tenants and managers expend considerable resources to respond to such actions. Unannounced inspections or surveys may occur annually or biannually, or even more regularly, such as following a regulatory body’sbody's receipt of a complaint about a facility. From time to time in the ordinary course of business, we and our tenants and managers receive deficiency reports from state regulatory bodies resulting from those inspections and surveys. We and our tenants and managers seek to resolve most inspection deficiencies through a plan of corrective action relating to the affected facility’sfacility's operations. If we or our tenants or managers fail to comply with any applicable legal requirements, or are unable to cure deficiencies, certain sanctions may be imposed and, if imposed, may adversely affect the ability of our tenants to pay their rent to us, the profitability of our managed senior living communities and the values of our properties. In addition, government agencies typically have the authority to take or seek further action against a licensed or certified facility, including the ability to impose civil money penalties or fines; suspend, modify, or revoke a license or Medicare or Medicaid participation; suspend or deny admissions of residents; deny payments in full or in part; institute state oversight, temporary management or receivership; and impose criminal penalties. Loss, suspension or modification of a license or certification or the
imposition of other sanctions or penalties could adversely affect the values of our properties, the ability of our tenants to pay their rents and the profitability of our managed senior living communities.
The Centers for Medicare and Medicaid Services, or CMS, of the United StatesU.S. Department of Health and Human Services, or HHS, has increased its oversight of state survey agencies in recent years, focusing its enforcement efforts on SNFs and chains of SNF operators with findings of substandard care or repeat and continuing deficiencies and violations. CMS has also sought to provide consumers with additional information relating to SNFs. Moreover, state Attorneys General typically enforce consumer
protection laws relating to senior living services, clinics and other healthcare facilities. In addition, state Medicaid fraud control agencies may investigate and prosecute assisted living communities and SNFs, clinics and other healthcare facilities under fraud and patient abuse and neglect laws.
Current state laws and regulations allow enforcement officials to make determinations as to whether the care provided by or on behalf of our tenants or by our managers at our facilities exceeds the level of care for which a particular facility is licensed. A finding that a community is delivering care beyond the scope of its license can result in closure of the community and the immediate discharge and transfer of residents, which could adversely affect the ability of that tenant to pay rent to us, the profitability of our managed senior living communities and the values of our properties. Furthermore, some states and the federal government allow certain citations of one facility to impact other facilities owned or operated by the same entity or a related entity, including facilities in other states. Revocation of a license or certification at one facility could therefore impact our or a tenant’stenant's or manager’smanager's ability to obtain new licenses or certifications or to maintain or renew existing licenses at other facilities, which could adversely affect the ability of that tenant to pay rent to us, the profitability of that manager, the profitability and values of our properties and trigger defaults under our tenants’tenants' leases and managers’managers' management agreements and our or our tenants’tenants' or managers’managers' credit arrangements, or adversely affect our or our tenants’tenants' or managers’managers' ability to obtain financing in the future. In addition, an adverse finding by state officials could serve as the basis for lawsuits by private plaintiffs and lead to investigations under federal and state laws, which could result in civil and/or criminal penalties against the facility as well as a related entity.
For the year ended December 31, 2016,2019, approximately 97% of our net operating income, or NOI was generated from properties where a majority of the revenues are derived from our tenants' and residents' private resources, and the remaining 3% of our NOI was generated from properties where a majority of the revenue is dependent upon Medicare and Medicaid programs. Our tenants and managers operate facilities in many states and they and we participate in federal and state healthcare payment programs, including the federal Medicare and state Medicaid benefit programs for services in SNFs and other similar facilities and state Medicaid programs for services in assisted living communities. In light of the current and projected federal budget deficit and challenging state fiscal conditions, there have been numerous recent legislative and regulatory actions or proposed actions with respect to federal Medicare rates and state Medicaid rates and federal payments to states for Medicaid programs, each of which, or in any combination, could have a material adverse effect on the ability of our tenants to pay us rent, the profitability of our managed senior living communities and the values of our properties. Examples include:
The Patient ProtectionCMS's maintenance and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act, or collectively, the ACA, which was adoptedenforcement of Conditions of Participation that healthcare organizations must meet in March 2010, has resulted in changes to insurance, payment systems and healthcare delivery systems. The ACA is intended to expand access to health insurance coverage and reduce the growth of healthcare expenditures while simultaneously maintaining or improving the quality of healthcare. Some of the provisions of the ACA took effect immediately, whereas others took effect or will take effect at later dates.
The ACA established an Independent Payment Advisory Board to submit legislative proposals to Congress and take other actions with a goal of reducing Medicare spending growth and includes various other provisions affecting Medicare and Medicaid providers, including enforcement reforms and increased funding for Medicare and Medicaid program integrity control initiatives.
In June 2012, the U.S. Supreme Court upheld two major provisions of the ACA—the individual mandate, which requires most Americans to maintain health insurance or to pay a penalty, and, as modified by the Supreme Court, the Medicaid expansion, which requires states to expand their Medicaid programs by 2014 to cover all individuals under the age of 65 with incomes not exceeding 133% of the federal poverty level. In upholding the Medicaid expansion, the U.S. Supreme Court held that it violated the U.S. Constitution as drafted but remedied the violation by modifying the expansion to preclude the Secretary of HHS from withholding existing federal Medicaid funds from states that fail to comply with the Medicaid expansion, instead allowing the Secretary only to deny new Medicaid expansion funding. Under the ACA, the federal government will pay for 100% of a state’s Medicaid expansion costs for the first three years (2014-2016) and gradually reduce its subsidy to 90% for 2020 and future years. Based on the ruling, states may choose notorder to participate in the Medicare and Medicaid expansion program without riskingprograms. These standards are designed to improve the lossquality of existing federal Medicaid funding. Ascare and protect the health and safety of January 1, 2017, 31 states plusbeneficiaries. In September 2016, CMS released a final rule to comprehensively update the District of Columbia had elected to expand Medicaid eligibility as provided under the ACA, and 19 states had elected not to broaden Medicaid eligibility as of
requirements for long term care facilities that date; those states choosing not to participate in Medicare and Medicaid. These requirements will increase the cost of operations for long term care facilities that participate in Medicare and Medicaid, expansion are forgoing the federal funds that would otherwise be available for that purpose. We are unable to predict the impact of these or other recent legislative and regulatory actions or proposed actions with respect to state Medicaid rates and payments to states for Medicaid programs on us.
In June 2015, the U.S. Supreme Court decided that income tax credits under the ACA are available to individuals who purchase health insurance on an exchange created by the federal government,such as SNFs. CMS estimated in the same way such credits are available to individuals who purchase health insurance on an exchange created by a state. Such subsidies provide certain eligible taxpayersfinal rule that the cost of complying with the ability to purchase or maintain health insurance.
To the extent the ACA is repealed and replaced underall of the new Trump Administrationrequirements per facility would be approximately $62,900 in the first year, and the 115th Congress, additional regulatory risks may arise. Depending upon what aspectsapproximately $55,000 each year thereafter. However, we believe new requirements often cost considerably more than CMS estimates.
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• | In July 2019, CMS announced two rules - one final and one proposed - to further update requirements that long term care facilities that participate in Medicare and Medicaid must meet. Specifically, the final rule repeals the prohibition on the use of pre-dispute, binding arbitration agreements by long term care facilities. The final rule also imposes certain safeguards intended to increase the transparency of arbitration agreements used by long term care facilities, as well as the related arbitration process, including requiring that a facility not require any resident or his or her representative to sign an arbitration agreement as a condition of admission to the facility. Under the proposed rule, CMS proposes to further reform the requirements for long term care facilities by eliminating or reducing certain requirements deemed unnecessary, obsolete, or excessively burdensome. Notably, CMS put forward proposals to modify certain requirements related to grievance policies, infection control staffing, and compliance program requirements, among other changes. We cannot estimate the type or magnitude of the potential Medicare and Medicaid policy changes, but they may be material to and adversely affect our future results of operations. |
Medicare's reimbursement of the ACA are repealed and whether and how they are replaced, our future financial results could be adversely and materially affected.
Medicare reimburses SNFs under the SNF Prospective Payment System, or SNF PPS, which provides a fixed payment for each day of care provided to a Medicare beneficiary. The SNF PPS requirespayments cover substantially all Medicare Part A services the beneficiary receives. The SNF PPS historically required SNFs to assign each resident to a care group depending on that resident’sresident's medical characteristic and service needs. These care groups areneed, known as Resource Utilization Groups, or RUGs.
On July 31, 2018, CMS finalized its proposal to replace the RUG model, with a revised case-mix methodology called the Patient-Driven Payment Model, or PDPM, which became effective October 1, 2019. The SNF PPS payments cover substantially all Medicare Part A servicesPDPM focuses on clinically relevant factors, rather than volume-based payment, by using ICD-10 diagnosis codes and other patient
characteristics as the beneficiary receives. Capital costs are part of the SNF PPS ratebasis for patient classification. Therapy reimbursement will be linked to patient diagnoses with higher reimbursements being provided to higher-acuity patients. As a result, initial patient assessments, including obtaining full clinical documentation from hospitals and are not community specific. Many states have similar Medicaid PPSs.accurately applying ICD-10 coding to reflect a patient’s full clinical status, will become increasingly important factors in reimbursement. CMS implemented the SNF PPS pursuantestimates that paperwork simplification related to the Balanced Budget Act of 1997 and updates SNF PPS payments for each year by a market basket update to account for inflation. Beginning in federal fiscal year 2012, the ACA reduced the annual adjustment for inflation under the SNF PPS by a productivity adjustment based on national economic productivity statistics. We are unable to predict the impact of these reductions of the SNF PPS rates.
Effective October 2010, CMS adopted rules that implemented a new SNF PPS case mix classification system known as RUG-IV. Following the implementation of RUG-IV, Medicare billing increased nationally, partially because of the unexpectedly large proportion of patients grouped in the highest paying RUG therapy categories. CMS did not intend for the implementation of RUG-IV to increase Medicare billing, however, and in 2011, CMS adopted a final rule designed to recalibrate the Medicare SNF PPS. The rule resulted in a reduction in aggregate Medicare paymentspatient assessments will reduce reporting burdens for SNFs by approximately 11.1%, or $3.87$2.0 billion over 10 years. With regard to Medicaid, in federal fiscal year 2012. In subsequent years,an update to PDPM guidance issued on April 4, 2019, CMS slightly increasedwill permit states to continue reimbursement based on the Medicarestate’s previous Medicaid SNF payment system, rather than requiring conversion to PDPM by October 1, 2020.
On July 30, 2019, CMS issued the latest SNF PPS rates and estimated that those rates wouldfinal rule, which CMS estimates will increase Medicare payments to SNFs by an aggregate of approximately 1.8%$851.0 million for federal fiscal year 2013, 1.3% for2020, or 2.4%, compared to federal fiscal year 2014, 2.0% for federal fiscal year 2015 and 1.2% for federal fiscal year 2016.2019. In July 2016,addition, CMS issued a final rule updating Medicare payments to SNFs for federal fiscal year 2017, which CMS estimated would increase payments to SNFs by an aggregate of 2.4%, or approximately $920 million, compared to payments in federal fiscal year 2016. Duehas finalized changes to the previous reductiondefinition of Medicare payment rates of approximately 11.1%group therapy performed in a SNF setting in order to align the definition with other post-acute settings. Previously, a group had been defined as having exactly four patients. Under the new definition, a group may have between two and six patients doing the same or similar activities. Further, CMS finalized two new quality measures related to data exchange between SNFs and other providers for federal fiscal year 2012 discussed above, however, Medicare payment rates will be lower for federal fiscal year 2017 than they wereinclusion in federal fiscal year 2011. The Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, discussed below, limits the market basket increase for SNFs to 1.0% in federal fiscal year 2018. It is unclear whether these adjustments in Medicare rates will compensate for the increased costs our tenants and managers may incur for services to residents whose services are paid for by Medicare.SNF Quality Reporting Program.
In addition, theThe Middle Class Tax Relief and Job Creation Act of 2012, which was enacted in February 2012, incrementally reduced the SNF reimbursement rate for Medicare bad debt from 100% to 65% by federal fiscal year 2015 for beneficiaries dually eligible for Medicare and Medicaid. Because nearly 90%a majority of SNF bad debt has historically been related to dual eligible beneficiaries, this rule has a substantial negative effect on SNFs. The same law also reduced the SNF Medicare bad debt reimbursement rate for Medicare beneficiaries not eligible for Medicaid from 70% to 65% in federal fiscal year 2013 and going forward.
TheIn addition to the annual changes described above, the Budget Control Act of 2011 and the Bipartisan Budget Act of 2013 allow for automatic reductions in federal government is also seeking to slow the growthspending by means of a process called sequestration, which reduces Medicare payment rates by 2.0% through 2023. In subsequent years, Congress approved additional extensions of Medicare sequestration, through 2029. Medicaid is exempt from the automatic reductions, as are certain Medicare benefits. We are unable to predict the long term financial impact of the automatic payment cuts.
Our tenants' and Medicaid payments to SNFs in several ways, including pursuantmanagers' Medicare Part B outpatient therapy revenue rates are tied to the DeficitMedicare Physician Fee Schedule, or MPFS, which has been subject to separate limitations on rate growth:
In 2006, Medicare payments for outpatient therapies became subject to payment limits. The Deficient Reduction Act of 2005, or the DRA. In 2006, the government implemented limits on Medicare payments for outpatient therapies but, pursuant to the DRA, created an exception process under which beneficiaries could request an exemptionexception from the cap and be granted the amount of services deemed medically necessary by Medicare. In April 2014, the Protecting Access to Medicare Act of 2014, or PAMA, extended the Medicare outpatient therapy cap exception process through March 2015.2015, postponing the implementation of firm limits on Medicare payments for outpatient therapies. In April 2015, Congress passed the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, which extended the outpatient therapy cap exceptions process from March 2015 through December 2017, further postponing the implementation of strict limits on Medicare payments for outpatient therapies.
The increased “look-back” period for prohibited asset transfers disqualifies individuals from Medicaid SNF benefits from three to five years. The period of Medicaid ineligibility begins on the date of the prohibited transfer or the date an individual has entered the SNF and would otherwise be eligible for Medicaid coverage, whichever occurs later, rather than on the date of the prohibited transfer, effectively extending the Medicaid penalty period. This increased “look-back” period therefore requires our tenants and managers to collect charges directly from their residents and their transferees.
Our tenants’ and managers’ Medicare Part B outpatient therapy revenue rates are tied to the Medicare Physician Fee Schedule, or MPFS. Although the MPFS had previously been scheduled to be reduced by more than 25% in 2013, MPFS rates remained fixed at the 2012 level throughout 2013 and increased 0.5% for the period beginning in January 2014. In April 2014, PAMA extended the 0.5% increase to the MPFS rates through December 2014 and provided no increase in the MPFS rates in the period between January 2015 and March 2015. MACRA, discussed above, also2018 permanently repealed the Sustainable Growth Rate, or SGR, formula for calculating updates to MPFS rates, which would have led to a 21.2% rate reductioncaps, effective April 2015, and replaced the SGR formula with a different reimbursement methodology, which is discussed in more detail below.January 1, 2018.
In addition to the reimbursement and rate changes discussed above, payments to SNFs will be increasingly determined by the quality of care provided. In October 2016, CMS issued a final rule to implement the Merit-Based Incentive Payment System, or MIPS, and Advanced Alternative Payment Models, or APMs, which together CMS calls the Quality Payment Program. These reforms were mandated under MACRA and replace the SGRSustainable Growth Rate methodology for calculating updates to the MPFS. Starting in 2019, providers may be subject to either MIPS payment adjustments or APM incentive payments. MIPS is a new Medicare program that combines certain parts of existingconsolidates the various CMS incentive and quality and incentive programs into a single program that addresses quality, resource use, clinical practice activitiesreporting mechanism. Providers will receive either incentive payments or reimbursement cuts based on their compliance with MIPS requirements and meaningful usetheir performance against a mean and median threshold of electronic health records.all MIPS eligible providers. APMs are innovative models approved by CMS for paying healthcare providers for services provided to Medicare beneficiaries whichthat draw on existing programs, such as the bundled payment and shared savings models. Our tenants’ and managers’ Medicare Part B outpatient therapy revenue rates are tied to the MPFS and may be affected by these regulatory changes.
PAMA established a SNF Value-Based Purchasing Program, which is intended to increase quality of care and reduce preventable hospitalizations. Under this program, HHS will assess SNFs based on hospital readmissions and make these assessments available to the public by October 2017. As part of PAMA implementation, in the SNF PPS final rule for fiscal year 2016,Effective January 1, 2019, CMS adopted a 30 day all-cause, all-condition hospital readmission measure for SNFs, which was replaced with an all-condition, risk-adjusted potentially preventable hospital readmission rate measure in the SNF PPS final rule for fiscal year 2017. Under PAMA, beginning in federal fiscal year 2019, Medicare payment rates will be partially based on SNFs’ performance scores on this measure. To fund the program, CMS will reduce Medicare payments to all SNFs by 2.0% through a withhold mechanism starting in October 2018 and then redistribute between 50% and 70% of the withheld payments as incentive payments to those SNFs with the highest rankings on this measure.
We and some of our tenants and managers are subject to the Improving Medicare Post-Acute Care Transformation Act of 2014, or the IMPACT Act, which requires certain post-acute care providers, including SNFs, to begin collecting and reporting various types of data. Specifically, under the SNF Quality Reporting Program, HHS required SNFs to begin reporting certain quality measures and resource use measures in a standardized and interoperable format as of October 2016 and to begin reporting certain patient assessment data in such a format by October 2018. Beginning in federal fiscal year 2018, SNFs that fail to comply with theeliminated functional status reporting requirements by the established times will be subjectdue to a 2.0% reduction in their Medicare payment rates for that fiscal year. The IMPACT Act also requires the Secretary of HHS and the Medicare Payment Advisory Commission to submit reports to Congress recommending a future Medicare PPS for post-acute care providers and analyzing both its effects on the reported metrics and its financial effect on post-acute care providers.
The Budget Control Act of 2011 and the Bipartisan Budget Act of 2013 allow2018's elimination of statutory caps on outpatient therapy, discussed above. The final rule also introduced a new modifier to identify services performed by physical and occupational therapy assistants in advance of payment reductions under the Bipartisan Budget Act of 2018. However, these reductions will not become effective until January 1, 2022. CMS also expanded the definition of MIPS-eligible clinicians to include physical and occupational therapists.
It is unclear whether these adjustments in Medicare rates will compensate for automatic reductions in federal spendingthe increased costs our tenants and managers may incur for services to residents whose services are paid for by means of a process called sequestration, which reduces Medicare paymentMedicare. Current and future programmatic changes to Medicaid eligibility and rates by 2.0% through 2023. In 2014 and 2015, Congress approved two additional one year extensions of Medicare sequestration, through 2025. Medicaid is exempt from the automatic reductions, as are certain Medicare benefits. We are unable to predict the long term financialmay also impact of the automatic payment cuts.
us:
The DRA and the ACA also include provisions that encourage states to provide long term care services in home and community based settings rather than in SNFs or other inpatient facilities, including increased federal Medicaid spending for some states through the use of several programs. One such program, the Community First Choice
Option, or the CFC Option, grants states that choose to participate in the program a 6% increase in federal matching payments for related medical assistance expenditures. AsAccording to CMS, as of March 2016,May 2017, eight states had obtained a State Plan Amendment to participate in thecurrently approved CFC Option.programs. We are unable to predict the effect of the implementation of the CFC Option and other similar programs on the ability of our tenants to pay rent to us, the profitability of our managed senior living communities and the values of our properties.
The ACA extended and expanded eligibility for a program to award competitive grants to states for demonstration projects to provide home and community based long term care services to qualified individuals relocated from SNFs, providing certain increased federal medical assistance for each qualifying beneficiary. States are also permitted to include home and community based services as optional services under their Medicaid state plans, and states opting to do so may establish more stringent needs based criteria for SNF services than for home and community based services. The ACA also expanded the services that states may provide and limited their ability to set caps on enrollment, waiting lists or geographic limitations on home and community based services. These changes under the ACA may result in reduced payments for services, or the failure of Medicare, Medicaid or insurance payment rates to cover increasing costs.
In January 2018, CMS maintains and enforces Conditions of Participationissued a letter to State Medicaid Directors announcing that healthcare organizations must meetCMS would support state efforts to test incentives that make participation in orderwork or other community engagement a requirement for continued Medicaid eligibility for non-elderly, non-pregnant adults. States would be required to participate in the Medicare andhave exemptions for individuals who are classified as “disabled” for Medicaid programs. These standards are designed to improve quality of care and protect the health and safety of beneficiaries. In September 2016, CMS released a final rule to comprehensively update the requirements for long term care facilitieseligibility purposes, as well those with acute medical conditions or medical frailty that participate in Medicare and Medicaid. These requirements will increase the cost of operations for long term care facilities that participate in Medicare and Medicaid, such as SNFs. CMS estimated in the final rule that the cost ofwould prevent them from complying with allthe work requirement. As of December 2019, previously approved work requirements implemented in Arkansas, Kentucky and New Hampshire had been suspended by federal courts. Arkansas’s work requirements were later struck down by a federal appeals court panel and Kentucky’s governor rescinded the newstate’s work requirement waiver. Arizona, Indiana, Michigan, Ohio, South Carolina, Utah and Wisconsin have received CMS approval but have not yet implemented or have suspended implementation of work requirements. In addition, Alabama, Georgia, Idaho, Mississippi, Montana, Nebraska, Oklahoma, South Dakota, Tennessee and Virginia have submitted requests to modify their respective state Medicaid plans to include work requirements. The implementation of work requirements per facility would be approximately $62,900 inmay reduce the first year, and approximately $55,000 each year thereafter. However, we believe new requirements often cost considerably more than CMS estimates.
availability of Medicaid coverage within our patient population.
Some of the states in which our tenants and managers operate have not raised Medicaid rates by amounts sufficient to offset increasing costs or have frozen or reduced such rates. In June 2011, Congress ended certain temporary increases in federal payments to states for Medicaid programs that had been in effect since 2008. Some states are expanding their use of managed care, partly to control Medicaid program costs. Medicaid spending grew an estimated 11.6% in 2014 and 9.7% in 2015, and is projected to grow 3.7% in 2016 and 2017, primarily due to increased enrollment as some states chose to expand Medicaid coverage under the ACA. From 2018 through 2025, Medicaid spending is expected to grow by an average annual rate of 5.9%, mainly driven by increased spending per beneficiary due to aging of the population and more gradual growth in enrollment. Under the ACA, the federal government will paypaid for 100% of a state’sstate's Medicaid expansion costs from 2014 to 2016 and gradually reducereduced its subsidy to 90% for 2020 and future years. We expect that the reduction of the federal subsidy, combined with the anticipated slow recovery of state revenues, may result in increases in state budget deficits, particularly in those states that are not participating in Medicaid expansion. As a result, certain states may continue to reduce Medicaid payments to healthcare service providers including some of our tenants and us, as a part of an effort to balance their budgets.
In November 2019, CMS proposed new reporting requirements for state supplemental payments to Medicaid providers and limitations on approvals to state plan amendments for payments for services at long term care facilities, including SNFs. The finalization of the proposal could impact the availability of supplemental Medicaid payments to SNFs.
In addition to the programmatic and reimbursement changes discussed above, payments to SNFs will be increasingly determined by the quality of care provided.
We and some of our tenants and managers are subject to the Improving Medicare Post-Acute Care Transformation Act of 2014, or the IMPACT Act, which requires certain post-acute care providers, including SNFs, to begin collecting and reporting various types of data. Specifically, under the SNF Quality Reporting Program, HHS required SNFs to begin reporting certain quality measures and resource use measures in a standardized and interoperable format as of
October 2016 and to begin reporting certain patient assessment data in such a format by October 2018. Since federal fiscal year 2018, SNFs that fail to comply with the reporting requirements by the established times will be subject to a 2.0% reduction in their Medicare payment rates for that fiscal year. Beginning in October 2018, HHS made this data publicly available.
PAMA established a SNF Value-Based Purchasing Program, under which HHS will assess SNFs based on hospital readmissions and make these assessments available to the public. In the SNF PPS final rule for fiscal year 2016, CMS adopted a 30 day all-cause, all-condition hospital readmission measure for SNFs, which was replaced with an all-condition, risk-adjusted potentially preventable hospital readmission rate measure in the SNF PPS final rule for fiscal year 2017. Beginning in federal fiscal year 2019, Medicare payment rates are partially based on SNFs' performance scores on this measure. The 2020 federal fiscal year update adopted two new quality measures to assess whether certain health information is provided by the SNF at the time of transfer or discharge. The update also adopted several standardized patient assessment data elements. To fund the program, CMS will reduce Medicare payments to all SNFs by 2.0% through a withhold mechanism starting in October 2018 and then redistribute approximately 60% of the withheld payments as incentive payments to those SNFs with the highest rankings on this measure. CMS estimates that the federal fiscal year 2020 changes to the SNF VBP program will decrease payments to SNFs by an aggregate of approximately $213.6 million, compared to federal fiscal year 2019.
The ACA has resulted in changes to insurance, payment systems and healthcare delivery systems. The ACA was intended to expand access to health insurance coverage, including expansion of access to Medicaid coverage, and reduce the growth of healthcare expenditures while simultaneously maintaining or improving the quality of healthcare. The ACA also encouraged the development and testing of bundled payment for services models, the development of Medicare value-based purchasing plans as well as several initiatives to encourage states to develop and expand home and community based services under Medicaid. Some of the provisions of the ACA took effect immediately, whereas others took effect or will take effect at later dates. Recently, the ACA has been subject to significant reform, repeal and revision efforts by the executive and legislative branches of the federal government and subject to changes resulting from lawsuits filed with the judicial branch of the federal government. It is unclear what the result of any of these legislative, executive and regulatory reform efforts may be or the effect they may have on us, if any. Examples include:
In June 2017, HHS solicited suggestions for changes that could be made within the existing ACA legal framework to improve health insurance markets and meet the Trump Administration's reform goals. HHS sought comments from interested parties to inform its ongoing efforts to create a more patient-centered healthcare system that adheres to the key principles of affordability, accessibility, quality, innovation and empowerment.
On October 12, 2017, President Trump signed an executive order that modified certain aspects of the ACA. Specifically, the executive order directed federal agencies to reduce limits on association health plans and temporary insurance plans, allowing more widespread offerings of plans that do not adhere to all of the ACA's mandates, and to permit workers to use funds from tax advantaged accounts to pay for their own coverage. On October 2, 2018, the U.S. Department of Labor, the U.S. Internal Revenue Service, or the IRS, and CMS issued regulations to permit insurers to sell short-term plans that provide coverage for up to 12 months; previous Obama Administration guidance had limited such plans to 90 days. Short term plans are often less expensive than plans that meet the requirements of the ACA; however, short-term plans are also exempt from the ACA's essential health benefits and other consumer protection requirements. In addition, on October 22, 2018, CMS announced that future Section 1332 of the ACA state health insurance innovation waivers may include short term or association health plans as having coverage comparable to ACA plans.
On October 12, 2017, the Trump Administration also announced that it would stop paying what are known as cost sharing reduction subsidies to issuers of qualified health plans under the ACA. As a result, in 2018 payors generally increased premiums for plans offered on exchanges in order to make up for termination of federal cost sharing reduction subsidies.
In 2018, the ACA was also subject to lawsuits that sought to invalidate some or all of its provisions. In February 2018, a lawsuit brought in federal district court in Texas by 18 attorneys general and two governors argued that, following the legislative repeal of the ACA mandate's tax penalties pursuant to the 2017 tax reform legislation, which set the penalty to $0, the entire ACA should be enjoined as invalid. On December 14, 2018, the district court found that the ACA, following the mandate repeal, was unconstitutional. Following the ruling, additional state attorneys general intervened as defendants in the case and on December 30th the court granted the intervenor defendants' request for a stay pending appeal.
In January 2019, the Department of Justice, or the DOJ, and the intervenor defendants appealed the district court's 2018 decision to the Fifth Circuit Court of Appeals. On December 18, 2019, a three-judge panel of the Fifth Circuit Court of Appeals held in a 2-1 opinion that the ACA's individual mandate was unconstitutional, but, rather than determining whether the remainder of the ACA is valid, the Fifth Circuit Court of Appeals remanded the case for additional analysis on severability.
If the ACA is repealed, replaced or modified, additional regulatory risks may arise and our future financial results could be adversely and materially affected. We are unable to predict the impact of these or other recent legislative, regulatory or judicial actions or proposed actions with respect to state Medicaid rates, the availability of Medicaid and private insurer coverage and payments to states for Medicaid programs on us.
We are unable to predict the impact of these or other recent legislative and regulatory actions or proposed actions with respect to state Medicaid rates and federal Medicare rates and federal payments to states for Medicaid programs discussed above on us and those of our tenants and managers that derive a portion of their revenues from Medicare, Medicaid and other government programs. The changes implemented or to be implemented as a result of such actions could result in the failure of Medicare, Medicaid or private payment reimbursement rates to cover increasing costs, in a reduction in payments or other circumstances.
Regulatory Reform. In the fall of 2019, the Trump Administration, including HHS, updated its “Unified Agenda of Regulatory and Deregulatory Actions,” which lists the scope and anticipated timing of pending and future regulations. In releasing the agenda, the Administration highlighted its “ongoing progress toward the goals of more effective and less burdensome regulation,” which appears to be consistent with Executive Order 13771's mandate to eliminate two economically significant regulations for every one added. It is unclear how these regulatory reform efforts will impact our tenants' and managers' operations. Some of the regulatory updates described above may in the future be repealed, replaced or modified as a result of these regulatory reform efforts. For instance, in the latest update, HHS and CMS stated their intent to propose changes to the current Conditions of Participation or Conditions for Coverage that healthcare organizations must meet in order to begin and continue participating in the Medicare and Medicaid programs. This may include additional changes to the Conditions of Participation for long term care facilities that participate in Medicare and Medicaid, such as our SNFs. We are unable to predict the impact on us of these or other regulatory reform efforts. While these efforts could ultimately decrease regulatory burden for our operations in the long-term, they may increase regulatory uncertainty in the near-term.
Other Matters.Federal and state efforts to target false claims, fraud and abuse and violations of anti-kickback, physician referral and privacy laws by providers under Medicare, Medicaid and other public and private programs have increased in recent years, as have civil monetary penalties, treble damages, repayment requirements and criminal sanctions for noncompliance. The federal False Claims Act, as amended and expanded by the Fraud Enforcement and Recovery Act of 2009 and the ACA, provides significant civil monetary penalties and treble damages for false claims and authorizes individuals to bring claims on behalf of the federal government for false claims. The federal Civil Monetary Penalties Law authorizes the Secretary of HHS to impose substantial civil penalties, treble damages and program exclusions administratively for false claims or violations of the federal anti-kickback statute. In addition, the ACA increased penalties under federal sentencing guidelines between 20% and 50% for healthcare fraud offenses involving more than $1$1.0 million.
Government authorities are devoting increasing attention and resources to the prevention, detection and prosecution of healthcare fraud and abuse. CMS contractors are also expanding the retroactive audits of Medicare claims submitted by SNFs and other providers, and recouping alleged overpayments for services determined by auditors not to have been medically necessary or not to meet Medicare coverage criteria as billed. State Medicaid programs and other third party payers are conducting similar
medical necessity and compliance audits. The ACA facilitates the Department of Justice’s, or the DOJ’s,DOJ's ability to investigate allegations of wrongdoing or fraud at SNFs, in part because of increased cooperation and data sharing among CMS, the Office of the Inspector General, the DOJ and the states. In March 2016, the DOJ also announced the launch of 10 regional intergovernmental task forces across the country to identify and take enforcement action against SNFs that provide substandard care to residents. In 2019, the DOJ announced two settlements with SNF facilities and their affiliates for $2.0 million and $10.0 million, as well as a $44.0 million judgment, relating to allegedly unnecessary rehabilitation therapy services or upcoding. In addition, the ACA requires all states to terminate the Medicaid participation of any provider that has been terminated under Medicare or any Medicaid state plan. We and our tenants and managers expend significant resources to comply with these laws and regulations.
Federal and state laws designed to protect the confidentiality and security of individually identifiable information apply to us, our tenants and our managers. Under the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, we, our tenantsmanagers and our managerstenants that are covered entities or business associates within the meaning of HIPAA must comply with rules adopted by HHS governing the privacy, security, use and disclosure of individually identifiable information, including financial information and protected health information, or PHI, and also with security rules for electronic PHI. There may be both civil monetary penalties
and criminal sanctions for noncompliance with such federal laws. In January 2013, HHS released the HIPAA Omnibus Rule, or the Omnibus Rule, which went into effect in March 2013 and required compliance with most provisions by September 2013. Pursuant to theThe Omnibus Rule covered entities were required to make certain modifications to any business associate agreements that they have in place with their business associates. Further, the Omnibus Rule modified various requirements, including the standard for providing breach notices, which was previously to perform an analysis of the harm of any disclosure to a more objective analysis relating to whether any PHI was actually acquired or viewed as a result of the breach. In addition to HIPAA, many states have enacted their own security and privacy laws relating to individually identifiable information. In some states, these laws are more stringent than HIPAA, and we, our tenants and our managers must comply with both the applicable federal and state standards. HIPAA enforcement efforts have increased considerably over the past few years, with HHS, through its Office for Civil Rights, entering into several multi-million dollar HIPAA settlements in 20162019 alone. Finally, the Office for Civil Rights and other regulatory bodies have become increasingly focused on cybersecurity risks, including the emerging threat of ransomware and similar cyber attacks. The increasing sophistication of cybersecurity threats presents challenges to the entire healthcare industry.
We require our tenants and managers to comply with all laws that regulate the operation of our senior living communities. Although we do not believe that the costs to comply with these laws will have a material adverse effect on us, those costs may adversely affect the profitability of our managed senior living communities and the ability of our tenants to pay their rent to us. If we, our managers, or any of our tenants or managers were subject to an action alleging violations of such laws or to any adverse determination concerning any of our or our tenants’tenants' or managers’managers' licenses or eligibility for Medicare or Medicaid reimbursement or any substantial penalties, repayments or sanctions, these actions could materially and adversely affect the ability of our tenants to pay rent to us, the profitability of our managed senior living communities and the values of our properties. If our managers or any of our tenants or managers becomes unable to operate our properties, or if any of our tenants becomes unable to pay its rent because it has violated government regulations or payment laws, we may experience difficulty in finding a substitute tenant or managermanagers or selling the affected property at a price that provides us with a desirable return, and the value of the affected property may decline materially.
Federal, state and local agencies regulate our MOBmedical office and life science property tenants that provide healthcare services. Many states require medical clinics, ambulatory surgery centers, clinical laboratories and other outpatient healthcare facilities to be licensed and inspected for compliance with licensure regulations concerning professional staffing, services, patient rights and physical plant requirements, among other matters. Our tenants must comply with the Americans with Disabilities Act and similar state and local laws to the extent that such facilities are “public accommodations” as defined in those statutes. The obligation to comply with the Americans with Disabilities Act and similar laws is an ongoing obligation, and our tenants expend significant resources to comply with such laws.
Healthcare providers and suppliers, including physicians and other licensed medical practitioners, that receive federal or state reimbursement under Medicare, Medicaid or other federal or state programs must comply with the requirements for their participation in those programs. Our tenants that are healthcare providers or suppliers are subject to reimbursement rates that are increasingly subject to cost control pressures and may be reduced or may not be increased sufficiently to cover their increasing costs, including our rents.
The U.S. Food and Drug Administration, or the FDA, and other federal, state and local authorities extensively regulate our biotechnology laboratory tenants that develop, manufacture, market or distribute new drugs, biologicals or medical devices for human use. The FDA and such other authorities regulate the clinical development, testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, advertising and promotion of those products. Before a new pharmaceutical product or medical device may be marketed and distributed in the United States, the FDA must approve it as safe and effective for human use. Preclinical and clinical studies and documentation in connection with FDA approval of new pharmaceuticals or medical devices involve significant time, expense and risks of failure. Once a product is approved, the FDA maintains oversight of the product and its developer and can withdraw its approval, recall products or suspend their production, impose or seek to impose civil or criminal penalties on the developer or take other actions for the developer’sdeveloper's failure to comply with regulatory requirements, including anti-fraud, false claims, anti-kickback or physician referral laws. Other concerns affecting our biotechnology laboratory
tenants include the potential for subsequent discovery of safety concerns and related litigation, ensuring that the product qualifies for reimbursement under Medicare, Medicaid or other federal or state programs, cost control initiatives of payment programs, the potential for litigation over the validity or infringement of intellectual property rights related to the product, the eventual expiration of relevant patents and the need to raise additional capital. The cost of compliance with these regulations and the risks described in this paragraph, among others, could adversely affect the ability of our biotechnology laboratory tenants to pay rent to us. In addition, to the extent the new Trump Administration and the 115th Congress alterif these laws and regulations are altered, additional regulatory risks may arise. Depending upon what aspects of the laws and regulations are altered, the ability of our biotechnology laboratory tenants to pay rent to us could be adversely and materially affected.
Competition
Investing in medical office and life science properties, senior living communities MOBs and wellness centers is a highly competitive business. We compete against other REITs, numerous financial institutions, individuals and other public and private companies who are actively engaged in this business. Also, we compete for tenants and residents and for investments based on a number of factors including location, rents, rates, financings offered, underwriting criteria and reputation. Our ability to successfully compete is also impacted by economic and population trends, availability of acceptable investment opportunities, our ability to negotiate beneficial investment terms, availability and cost of capital and new and existing laws and regulations. Some of our competitors are dominant in selected geographic or property markets, including in markets we operate. Some of our competitors may have greater financial and other resources than we have. We believe the geographicquality and diversity of our investments, the experience and abilities of our management, the quality of our assets and the financial strength and operator qualifications of many of our tenants and the experience and capabilities of our managers may afford us some competitive advantages and allow us to operate our business successfully despite the competitive nature of our business.
Our tenants and managers compete on a local and regional basis with operators of facilities that provide comparable services. Operators compete for residents and patients based on quality of care, reputation, physical appearance of properties, services offered, family preferences, physicians, staff, price and location. We and our tenants and managers also face competition from other healthcare facilities for qualified personnel, such as physicians and other healthcare providers that provide comparable facilities and services.
For additional information on competition and the risks associated with our business, please see “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10‑K.10-K.
Environmental Matters
Ownership of real estate is subject to risks associated with environmental hazards. Under various laws, owners as well as tenants and operators of real estate may be required to investigate and clean up or remove hazardous substances present at or migrating from properties they own, lease or operate and may be held liable for property damage or personal injuries that result from hazardous substances. These laws also expose us to the possibility that we may become liable to reimburse governmentsgovernment agencies or third parties for damagescosts and costsdamages they incur in connection with hazardous substances. In addition, these laws also impose various requirements regarding the operation and maintenance of properties and recordkeeping and reporting requirements relating to environmental matters that require us or the tenants or managers of our properties to incur costs to comply with.
We reviewed environmental conditions surveys of the properties we own prior to their purchase. Based upon those surveys, other studies we may have since reviewed and our understanding of the operations of these properties by our tenants and managers, we do not believe that there are environmental conditions at any of our properties that have had or will have a material adverse effect on us. However, we cannot be sure that environmental conditions are not present at our properties or that potential costs we may be required to incur in the future related to any such conditionsremediate contamination will not have a material adverse effect on our business or financial condition andor results of operations.
When major weather or climate-related events, such as hurricanes, floods or wildfires, occur near our properties, we, our tenants or our managers may relocate the residents at our senior living properties to alternative locations for their safety and we, our tenants or our managers may close or limit the operations of the impacted senior living community or office property until the event has ended and the property is then ready for operation. We or the tenants or managers of our properties may incur significant costs and losses as a result of these activities, both in terms of operating, preparing and repairing our properties in anticipation of, during and after a severe weather or climate-related event and in terms of potential lost business due to the interruption in operating our properties. Our insurance and our tenants' and managers' insurance may not adequately compensate us or them for these costs and losses.
Concerns about climate change have resulted in various treaties, laws and regulations that are intended to limit carbon emissions and address other environmental concerns. These and other laws may cause energy or other costs at our properties to increase. We do not expect the direct impact of these increases to be material to our results of operations, because the increased costs either would be the responsibility of our tenants directly or in the longer term, passed through and paid by tenants of our leased properties and residents at our managed senior living communities. Although we do not believe it is likely in the foreseeable future, laws enacted to mitigate climate change may make some of our buildings obsolete or cause us to make material investments in our properties, which could materially and adversely affect our financial condition or the financial condition of our tenants or managers and their ability to pay rent or returns to us. For more information regarding climate change and other environmental matters and their possible adverse impact on us, see “Risk Factors—Risks Related to Our Business—Ownership of real estate is subject to environmental risks,” “Risk Factors—Risks Related to Our Business—Ownership of real estate is subject to risks from
adverse weather and climate events” and “Management's Discussion and Analysis of Financial Condition and Results of Operations—Impact of Climate Change”.
Insurance
We or our tenants are generally responsible for the costs of insurance coverage for our properties and the operations conducted on them, including for casualty, liability, fire, and extended coverage and rental or business interruption loss insurance.losses. Either we purchase the insurance ourselves and, except in the case of our managed senior living communities, our tenants are required to reimburse us, or the tenants buy the insurance directly and are required to list us as an insured party. We participatepreviously participated with RMR LLC and other companies to which RMR LLC provides management services in a combined property insurance program through Affiliates Insurance Company, or AIC,AIC. The policies under that program expired on June 30, 2019 and with respectwe and the other companies to which AIC is an insurer or reinsurer of certain coverage amounts. We also participate with RMR Inc. and other companies managed by RMR LLC in a partial joint program for directors and officers liabilityprovides management services elected not to renew the AIC property insurance as well as purchasing suchprogram; we instead have purchased standalone property insurance for our own account.coverage with unrelated third party insurance providers. For more information, see “Management’s“Management's Discussion and Analysis of Financial Condition and Results of Operations-RelatedOperations—Related Person Transactions” and Note 7 to our Consolidated Financial Statements included in in Part II,IV, Item 715 of this Annual Report on Form 10-K.
Internet Website
Our internet website address is www.snhreit.com.www.dhcreit.com. Copies of our governance guidelines, our code of business conduct and ethics, or our Code of Conduct, and the charters of our audit, compensation and nominating and governance committees are posted
on our website and also may be obtained free of charge by writing to our Secretary, Senior Housing PropertiesDiversified Healthcare Trust, Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458‑1634 or at our website.02458-1634. We also have a policy outlining procedures for handling concerns or complaints about accounting, internal accounting controls or auditing matters and a governance hotline accessible on our website that shareholders can use to report concerns or complaints about accounting, internal accounting controls or auditing matters or violations or possible violations of our Code of Conduct. We make available, free of charge, onthrough the "Investors" section of our website, our Annual Reports on Form 10‑K,10-K, Quarterly Reports on Form 10‑Q,10-Q, Current Reports on Form 8‑K8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to, the Securities and Exchange Commission, or SEC. Our Board of Trustees provides a process for security holdersAny material we file with or furnish to the SEC is also maintained on the SEC website, www.sec.gov. Securityholders may send communications to our Board of Trustees or individual Trustees. Information aboutTrustees by writing to the processparty for sending communications to our Board of Trustees can be found on our website.whom the communication is intended at c/o Secretary, Diversified Healthcare Trust, Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634 or by email at secretary@dhcreit.com. Our website address is included several times in this Annual Report on Form 10‑K10-K as a textual reference only and theonly. The information inon or accessible through our website is not incorporated by reference into this Annual Report on Form 10‑K.10-K or other documents we file with, or furnish to, the SEC. We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Those disclosures will be included on our website in the “Investors” section. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.
Segment ReportingInformation
As of December 31, 2016,2019, we have fourhad two reporting segments: Office Portfolio and senior housing operating segments, of which threeportfolio, or SHOP. Non-aggregated assets are separate reporting segments. We aggregate ourclassified as “non-segment” and include corporate assets and liabilities, certain triple net leased senior living communities our managed senior living communities and our MOBs into three reporting segments, based on their similar operating and economic characteristics. The first reporting segment includes triple net leased senior living communities that provide short term and long term residential care and other services for residents. Properties in this segment include leased independent living communities, assisted living communities and SNFs. We earn rental income revenues from the tenants that lease and operate our leased communities. The second reporting segment includesto third party managed senior living communities managed for our account by third party managers that provide short termoperators other than Five Star and long term residential care and other services for residents. Properties in this segment include independent living communities and assisted living communities. We earn fees and services revenues from the residents of our managed senior living communities. The third reporting segment includes MOBs. We earn rental income revenues from the tenants that lease our MOBs. Our fourth segment includes all of our other operations, including certain properties that offer wellness fitness and spa services to members, which we do not consider to be sufficiently material to constitute a separate reporting segment.centers. For further information, see “Management’s“Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K and our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
MATERIAL UNITED STATESFEDERAL INCOME TAX CONSIDERATIONS
The following summary of material United States federal income tax considerations is based on existing law, and is limited to investors who own our shares as investment assets rather than as inventory or as property used in a trade or business. The summary does not discuss all of the particular tax considerations that might be relevant to you if you are subject to special rules under federal income tax law, for example if you are:
a bank, insurance company or other financial institution;
a regulated investment company or REIT;
a subchapter S corporation;
a broker, dealer or trader in securities or foreign currency;currencies;
a person who marks-to-market our shares for U.S. federal income tax purposes;
a U.S. shareholder (as defined below) that has a functional currency other than the U.S. dollar;
a person who acquires or owns our shares in connection with employment or other performance of services;
a person subject to alternative minimum tax;
a person who acquires or owns our shares as part of a straddle, hedging transaction, constructive sale transaction, constructive ownership transaction or conversion transaction, or as part of a “synthetic security” or other integrated financial transaction;
a person who owns 10% or more (by vote or value, directly or constructively under the United States Internal Revenue Code of 1986, as amended, or the IRC)IRC) of any class of our shares;
a U.S. expatriate;
a non-U.S. shareholder (as defined below) whose investment in our shares is effectively connected with the conduct of a trade or business in the United States;
a nonresident alien individual present in the United States for 183 days or more during an applicable taxable year;
a “qualified shareholder” (as defined in Section 897(k)(3)(A) of the IRC);
a “qualified foreign pension fund” (as defined in Section 897(l)(2) of the IRC) or any entity wholly owned by one or more qualified foreign pension funds;
a person subject to special tax accounting rules as a result of their use of applicable financial statements (within the meaning of Section 451(b)(3) of the IRC); or
except as specifically described in the following summary, a trust, estate, tax-exempt entity or foreign person.
The sections of the IRC that govern the federal income tax qualification and treatment of a REIT and its shareholders are complex. This presentation is a summary of applicable IRC provisions, related rules and regulations, and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect. Future legislative, judicial or administrative actions or decisions could also affect the accuracy of statements made in this summary. We have not received a ruling from the U.S. Internal Revenue Service, or the IRS with respect to any matter described in this summary,and we cannot assure yoube sure that the IRS or a court will agree with all of the statements made in this summary. The IRS could, for example, take a different position from that described in this summary with respect to our acquisitions, operations, valuations, restructurings or other matters, which, if a court agreed, could result in significant tax liabilities for applicable parties. In addition, this summary is not exhaustive of all possible tax considerations, and does not discuss any estate, gift, state, local or foreign tax considerations. For all these reasons, we urge you and any holder of or prospective acquiror of our shares to consult with a tax advisor about the federal income tax and other tax consequences of the acquisition, ownership and disposition of our shares. Our intentions and beliefs described in this summary are based upon our understanding of applicable laws and regulations that are in effect as of the date of this Annual Report on Form 10-K. If new laws or regulations are enacted which impact us directly or indirectly, we may change our intentions or beliefs.
Your federal income tax consequences generally will differ depending on whether or not you are a “U.S. shareholder.” For purposes of this summary, a “U.S. shareholder” is a beneficial owner of our shares that is:
an individual who is a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws;
an entity treated as a corporation for federal income tax purposes that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
an estate the income of which is subject to federal income taxation regardless of its source; or
a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or, to the extent provided in Treasury regulations, a trust in existence on August 20, 1996 that has elected to be treated as a domestic trust;
whose status as a U.S. shareholder is not overridden by an applicable tax treaty. Conversely, a “non-U.S. shareholder” is a beneficial owner of our shares that is notan entity (or other thanarrangement) treated as a partnership orfor federal income tax purposes and is not a U.S. shareholder.
If any entity (or other arrangement) treated as a partnership for federal income tax purposes holds our shares, the tax treatment of a partner in the partnership generally will depend upon the tax status of the partner and the activities of the partnership. Any entity or(or other arrangementarrangement) treated as a partnership for federal income tax purposes that is a holder of our shares and the partners in such a partnership (as determined for federal income tax purposes) are urged to consult their own tax advisors about the federal income tax consequences and other tax consequences of the acquisition, ownership and disposition of our shares.
Taxation as a REIT
We have elected to be taxed as a REIT under Sections 856 through 860 of the IRC, commencing with our 1999 taxable year. Our REIT election, assuming continuing compliance with the then applicable qualification tests, has continued and will continue in effect for subsequent taxable years. Although no assurance canwe cannot be given,sure, we believe that from and after our 1999 taxable year we have been organized and have operated, and will continue to be organized and to operate, in a manner that qualified us and will continue to qualify us to be taxed as a REIT under the IRC.
As a REIT, we generally are not subject to federal income tax on our net income distributed as dividends to our shareholders. Distributions to our shareholders generally are included in theirour shareholders' income as dividends to the extent of our available current or accumulated earnings and profits. Our dividends are not generally entitled to the preferential tax rates on qualified dividend income, but a portion of our dividends may be treated as capital gain dividends or as qualified dividend income, all as explained below. In addition, for taxable years beginning before 2026 and pursuant to the deduction-without-outlay mechanism of Section 199A of the IRC, our noncorporate U.S. shareholders are generally eligible for lower effective tax rates on our dividends that are not treated as capital gain dividends or as qualified dividend income. No portion of any of our dividends is generally eligible for the dividends received deduction for corporate shareholders. Distributions in excess of our current or accumulated earnings and profits generally are treated for federal income tax purposes as returns of capital to the extent of a recipient shareholder’sshareholder's basis in our shares, and will reduce this basis. Our current or accumulated earnings and profits are generally allocated first to distributions made on our preferred shares, of which there are none outstanding at this time,andthereafter to distributions made on our common shares. For all these purposes, our distributions include cash distributions, any in kind distributions of property that we might make, and deemed or constructive distributions resulting from capital market activities (such as some redemptions), as described below.
Our counsel, Sullivan & Worcester LLP, has provided to us anis of the opinion that we have been organized and have qualified for taxation as a REIT under the IRC for our 1999 through 20162019 taxable years, and that our current and anticipated investments and plan of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT under the IRC. Our counsel’scounsel's opinions are conditioned upon the assumption that our leases, our declaration of trust,and all other legal documents to which we have been or are a party have been and will be complied with by all parties to those documents, upon the accuracy and completeness of the factual matters described in this Annual Report on Form 10-K and upon representations made by us to our counsel as to certain factual matters relating to our organization and operations and our expected manner of operation. If this assumption or a description or representation is inaccurate or incomplete, our counsel’scounsel's opinions may be adversely affected and may not be relied upon. The opinions of our counsel are based upon the law as it exists today, but the law may change in the future, possibly with retroactive effect. Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given byneither Sullivan & Worcester LLP or usnor we can be sure that we will qualify as or be taxed as a REIT for any particular year. Any opinion of Sullivan & Worcester LLP as to our qualification or taxation as a REIT will be expressed as of the date issued. Our counsel will have no obligation to advise us or our shareholders of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in the applicable law. Also, the opinions of our counsel are not binding on either the IRS or a court, and either could take a position different from that expressed by our counsel.
Our continued qualification and taxation as a REIT will depend upon our compliance on a continuing basis with various qualification tests imposed under the IRC and summarized below. While we believe that we have satisfied and will satisfy these tests, our counsel does not review compliance with these tests on a continuing basis. If we fail to qualify for taxation as a REIT in any year, we will be subject to federal income taxation as if we were a corporation taxed under subchapter C of the IRC, or a C corporation, and our shareholders will be taxed like shareholders of regular C corporations, meaning that federal income tax generally will be
applied at both the corporate and shareholder levels. In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our shareholders could be reduced or eliminated.
If we continue to qualify for taxation as a REIT and meet the tests described below, we generally will not pay federal income tax on amounts we distribute to our shareholders. However, even if we continue to qualify for taxation as a REIT, we may still be subject to federal tax in the following circumstances, as described below:
We will be taxed at regular corporate income tax rates on any undistributed “real estate investment trust taxable income,” determined by including our undistributed ordinary income and net capital gains, if any.
We may be subject to the corporate alternative minimum tax on our items of tax preference.
If we have net income from the disposition of “foreclosure property,” as described in Section 856(e) of the IRC, that is held primarily for sale to customers in the ordinary course of a trade or business or from other nonqualifying income from foreclosure property, we will be subject to tax on this income at the highest regular corporate income tax rate.
If we have net income from “prohibited transactions” -— that is, dispositions at a gain of inventory or property held primarily for sale to customers in the ordinary course of a trade or business other than dispositions of foreclosure property and other than dispositions excepted by statutory safe harbors -— we will be subject to tax on this income at a 100% rate.
If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, due to reasonable cause and not due to willful neglect, but nonetheless maintain our qualification for taxation as a REIT because of specified cure provisions, we will be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% gross income test or the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitability for the taxable year.
If we fail to satisfy any of the REIT asset tests described below (other than a de minimis failure of the 5% or 10% asset tests) due to reasonable cause and not due to willful neglect, but nonetheless maintain our qualification for taxation as a REIT because of specified cure provisions, we will be subject to a tax equal to the greater of $50,000 or the highest regular corporate income tax rate multiplied by the net income generated by the nonqualifying assets that caused us to fail the test.
If we fail to satisfy any provision of the IRC that would result in our failure to qualify for taxation as a REIT (other than violations of the REIT gross income tests or violations of the REIT asset tests described below), due to reasonable cause and not due to willful neglect, we may retain our qualification for taxation as a REIT but will be subject to a penalty of $50,000 for each failure.
If we fail to distribute for any calendar year at least the sum of 85% of our REIT ordinary income for that year, 95% of our REIT capital gain net income for that year and any undistributed taxable income from prior periods, we will be subject to a 4% nondeductible excise tax on the excess of the required distribution over the amounts actually distributed.
If we acquire a REIT asset where our adjusted tax basis in the asset is determined by reference to the adjusted tax basis of the asset in the hands of a C corporation, under specified circumstances we may be subject to federal income taxation on all or part of the built-in gain (calculated as of the date the property ceased being owned by the C corporation) on such asset. We generally have not sold and do not expect to sell assets if doing so would result in the imposition of a material built-in gains tax liability; but if and when we do sell assets that may have associated built-in gains tax exposure, then we expect to make appropriate provision for the associated tax liabilities on our financial statements.
If we acquire a corporation in a transaction where we succeed to its tax attributes, to preserve our qualification for taxation as a REIT we must generally distribute all of the C corporation earnings and profits inherited in that acquisition, if any, no later than the end of our taxable year in which the acquisition occurs. However, if we fail to do so, relief provisions would allow us to maintain our qualification for taxation as a REIT provided we distribute any subsequently discovered C corporation earnings and profits and pay an interest charge in respect of the period of delayed distribution.
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• | Our subsidiaries that are C corporations, includingourTRSs, generally will be required to pay federal corporate income tax on their earnings, and a 100% tax may be imposed on any transaction between us and one of our TRSs that does not reflect arm's length terms. |
As discussed below, we have acquired C corporationsare invested in connection with our acquisition of real estate. Our investigations of these C corporations indicated that they did not have undistributed earnings and profitsestate through a subsidiary that we inherited butbelieve qualifies for taxation as a REIT. If it is determined that this entity failed to timely distribute. However, upon reviewqualify for taxation as a REIT, we may fail one or audit,more of the IRS may disagree.
Our subsidiariesREIT asset tests. In such case, we expect that are C corporations, including our TRSs, generally willwe would be requiredable to pay federalavail ourselves of the relief provisions described below, but would be subject to a tax equal to the greater of $50,000 or the highest regular corporate income tax on their earnings, and a 100% tax may be imposed on any transaction between us and one of our TRSs that does not reflect arm’s length terms.rate multiplied by the net income we earned from this subsidiary.
If we fail to qualify for taxation as a REIT in any year, then we will be subject to federal income tax in the same manner as a regular C corporation. Further, as a regular C corporation, distributions to our shareholders will not be deductible by us, nor will distributions be required under the IRC. Also, to the extent of our current and accumulated earnings and profits, all distributions to our shareholders will generally be taxable as ordinary dividends potentially eligible for the preferential tax rates discussed below under the heading “-Taxation“—Taxation of Taxable U.S. Shareholders” and, subject to limitations in the IRC, will be potentially eligible for the dividends received deduction for corporate shareholders. Finally, we will generally be disqualified from taxation as a REIT for the four taxable years following the taxable year in which the termination of our REIT status is effective. Our failure to qualify for taxation as a REIT for even one year could result in us reducing or eliminating distributions to our shareholders, or in us incurring substantial indebtedness or liquidating substantial investments in order to pay the resulting corporate-level income taxes. Relief provisions under the IRC may allow us to continue to qualify for taxation as a REIT even if we fail to comply with various REIT requirements, all as discussed in more detail below. However, it is impossible to state whether in any particular circumstance we would be entitled to the benefit of these relief provisions.
REIT Qualification Requirements
General Requirements.Section 856(a) of the IRC defines a REIT as a corporation, trust or association:
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(1) | that is managed by one or more trustees or directors; |
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(2) | the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; |
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(3) | that would be taxable, but for Sections 856 through 859 of the IRC, as a domestic C corporation; |
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(4) | that is not a financial institution or an insurance company subject to special provisions of the IRC; |
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(5) | the beneficial ownership of which is held by 100 or more persons; |
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(6) | that is not “closely held,” meaning that during the last half of each taxable year, not more than 50% in value of the outstanding shares are owned, directly or indirectly, by five or fewer “individuals” (as defined in the IRC to include specified tax-exempt entities); and |
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(7) | that meets other tests regarding the nature of its income and assets and the amount of its distributions, all as described below. |
Section 856(b) of the IRC provides that conditions (1) through (4) must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. WeAlthough we cannot be sure, we believe that we have met conditions (1) through (7) during each of the requisite periods ending on or before the close of our most recently completed taxable year, and that we will continue to meet these conditions in our current and future taxable years. There can, however, be no assurance in this regard.
To help comply with condition (6), our declaration of trust restricts transfers of our shares that would otherwise result in concentrated ownership positions. These restrictions, however, do not ensure that we have previously satisfied, and may not ensure that we will in all cases be able to continue to satisfy, the share ownership requirements described in condition (6). If we comply with applicable Treasury regulations to ascertain the ownership of our outstanding shares and do not know, or by exercising reasonable diligence would not have known, that we failed condition (6), then we will be treated as having met condition (6). Accordingly, we have complied and will continue to comply with these regulations, including by requesting annually from record holders of significant percentages of our shares information regarding the ownership of our shares. Under our declaration of trust, our shareholders are required to respond to these requests for information. A shareholder that fails or refuses to comply with the request is required by Treasury regulations to submit a statement with its federal income tax return disclosing its actual ownership of our shares and other information.
For purposes of condition (6), an “individual” generally includes a natural person, a supplemental unemployment compensation benefit plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes, but does not include a qualified pension plan or profit-sharing trust. As a result, REIT shares owned by an entity that is not an “individual” are considered to be owned by the direct and indirect owners of the entity that are individuals (as so defined), rather than to be owned by the entity itself. Similarly, REIT shares held by a qualified pension plan or profit-sharing trust are treated as held directly by the individual beneficiaries in proportion to their actuarial interests in such plan or trust. Consequently, five or fewer such trusts could own more than 50% of the interests in an entity without jeopardizing that entity’sentity's qualification for taxation as a REIT.
The IRC provides that we will not automatically fail to qualify for taxation as a REIT if we do not meet conditions (1) through (6), provided we can establish that such failure was due to reasonable cause and not due to willful neglect. Each such excused failure will result in the imposition of a $50,000 penalty instead of REIT disqualification. This relief provision may apply to a failure of the applicable conditions even if the failure first occurred in a year prior to the taxable year in which the failure was discovered.
Our Wholly Owned Subsidiaries and Our Investments Through Partnerships. Except in respect of a TRS as discussed below, Section 856(i) of the IRC provides that any corporation, 100% of whose stock is held by a REIT and its disregarded subsidiaries, is a qualified REIT subsidiary and shall not be treated as a separate corporation for U.S. federal income tax purposes.
The assets, liabilities and items of income, deduction and credit of a qualified REIT subsidiary are treated as the REIT’s.REIT's. We believe that each of our direct and indirect wholly owned subsidiaries, other than the TRSs discussed below (and entities owned in whole or in part by the TRSs), will be either a qualified REIT subsidiary within the meaning of Section 856(i)(2) of the IRC or a noncorporate entity that for federal income tax purposes is not treated as separate from its owner under Treasury regulations issued under Section 7701 of the IRC, each such disregarded entity referred to as a QRS. Thus, in applying all of the REIT qualification requirements described in this summary, all assets, liabilities and items of income, deduction and credit of our QRSs are treated as ours, and our investment in the stock and other securities of such QRSs will be disregarded.
We have invested and may in the future invest in real estate through one or more entities that are treated as partnerships for federal income tax purposes. In the case of a REIT that is a partner in a partnership, Treasury regulations under the IRC provide that, for purposes of the REIT qualification requirements regarding income and assets described below, the REIT is generally deemed to own its proportionate share, based on respective capital interests, of the income and assets of the partnership (except that for purposes of the 10% value test, described below, the REIT’sREIT's proportionate share of the partnership’spartnership's assets is based on its proportionate interest in the equity and specified debt securities issued by the partnership). In addition, for these purposes, the character of the assets and items of gross income of the partnership generally remains the same in the hands of the REIT. In contrast, for purposes of the distribution requirementrequirements discussed below, we wouldmust take into account as a partner our share of the partnership’spartnership's income as determined under the general federal income tax rules governing partners and partnerships under Sections 701 through 777Subchapter K of the IRC.
Subsidiary REITs.We indirectly own real estate through a subsidiary that we believe has qualified and will remain qualified for taxation as a REIT under the IRC, and we may in the future invest in real estate through one or more other subsidiary entities that are intended to qualify for taxation as REITs. AnyWhen a subsidiary qualifies for taxation as a REIT will generally be subjectseparate and apart from its REIT parent, the subsidiary's shares are qualifying real estate assets for purposes of the REIT parent's 75% asset test described below. However, failure of the subsidiary to separately satisfy the various REIT qualification requirements and other limitations described in this summary or that are otherwise applicable to us. If one of our subsidiary REITs were to fail(and failure to qualify for taxation as a REIT, thenthe applicable relief provisions) would generally result in (a) the subsidiary REIT would becomebeing subject to regular U.S. corporate income tax, as described above, and (b) ourthe REIT parent's ownership of shares in the subsidiary REIT would cease(i) ceasing to be a qualifying real estate assetassets for purposes of the 75% asset test, and would become(ii) becoming subject to the 5% asset test, the 10% vote test and the 10% value test generally applicable to oura REIT's ownership in corporations other than REITs and TRSs, and (iii) thereby jeopardizing the REIT parent's own REIT qualification and taxation on account of the subsidiary's failure cascading up to the REIT parent, all as described under “-Asset“—Asset Tests” below. If a subsidiary REIT were to fail to qualify for taxation as a REIT, it is possible that we would not meet the 5% asset test, the 10% vote test or the 10% value test
We joined with respect to our interest in the subsidiary REIT in which eventfiling a protective TRS election, effective for the first quarter of 2017, and we would failhave reaffirmed this protective election with this subsidiary every January thereafter, and we may continue to qualify for taxation asdo so unless and until our ownership of this subsidiary falls below 10%. Pursuant to this protective TRS election, we believe that if our subsidiary is not a REIT unless we could utilize applicable relief provisions.for some reason, then it would instead be considered one of our TRSs, and as such its value would fit within our REIT gross asset tests described below. We expect to make similar protective TRS elections with respect to any other subsidiary REIT that we form or acquire. We do not expect protective TRS elections to impact our compliance with the 75% and 95% gross income tests described below, because we do not expect our gains and dividends from a subsidiary REITs and may implement other protective arrangements intendedREIT's shares to avoidjeopardize compliance with these tests even if for some reason the subsidiary is not a cascadingREIT.
Taxable REIT failure if any of our subsidiary REITs were not to qualify for taxation asSubsidiaries. As a REIT, but there can be no assurance that such protective elections and other arrangements will be effective to avoid the resulting adverse consequences to us.
Taxable REIT Subsidiaries. Wewe are permitted to own any or all of the securities of a TRS, provided that no more than 25% (20% beginning with our 2018 taxable year)20% of the total value of our assets, at the close of each quarter, is comprised of our investments in the stock or other securities of our TRSs. Very generally, a TRS is a subsidiary corporation other than a REIT in which a REIT directly or indirectly holds stock and that has made a joint election with its parentaffiliated REIT to be treated as a TRS. Our ownership of stock and other securities in our TRSs is exempt from the 5% asset test, the 10% vote test and the 10% value test discussed below.Among other requirements, a TRS of ours must:
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(1) | not directly or indirectly operate or manage a lodging facility or a health care facility; and |
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(2) | not directly or indirectly provide to any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated, except that in limited circumstances a subfranchise, sublicense or similar right can be granted to an independent contractor to operate or manage a lodging facility or a health care facility. |
In addition, any corporation (other than a REIT) in which a TRS directly or indirectly owns more than 35% of the voting power or value of the outstanding securities of such corporation willis automatically be treated as a TRS. Subject to the discussion below, we believe that we and each of our TRSs have complied with, and will continue to comply with, the requirements for TRS status at all times during which we intend for the subsidiary’ssubsidiary's TRS election to be in effect, and we believe that the same will be true for any TRS that we later form or acquire.
We acquired in the second quarter of 2015, andcontinue to own, an ownership position in RMR Inc., that is in excess of 10% of RMR Inc.’s outstanding securities by vote or value. Accordingly, we elected to treat RMR Inc. as a TRS effective as of June 5, 2015. RMR Inc., through its principal subsidiary, RMR LLC, has provided and continues to provide business and property management and other services to us and to other public and private companies, including other public REITs. Among these clients were and are operators of lodging facilities, operators of health care facilities, and owners of such facilities. Our counsel, Sullivan & Worcester LLP, has provided to us an opinion that the activities proscribed to TRSs under Section 856(l)(3) of the IRC
relating to operating or managing lodging facilities or health care facilities should include only regular onsite services or day-to-day operational activities at or for lodging facilities or health care facilities. To the best of our knowledge, neither RMR Inc. nor RMR LLC has been or is involved in proscribed activities at or for lodging facilities or health care facilities. Thus, we do not believe that Section 856(l)(3) of the IRC precluded or precludes RMR Inc. from being treated as our TRS. In addition, because we acquired a significant portion of our investment in RMR Inc. in exchange for our common shares of beneficial interest, $.01 par value, or our common shares, that were newly issued, our counsel, Sullivan & Worcester LLP, is of the opinion that our investment in RMR Inc. should have qualified as a “temporary investment of new capital” under Section 856(c)(5)(B) of the IRC to the extent related to such issuance of our common shares. To the extent our investment in RMR Inc. so qualified, it constituted a “real estate asset” under Section 856(c) of the IRC and did not constitute a security subject to the REIT asset test limitations discussed below for a one year period that ended in June 2016. If the IRS or a court determines, contrary to the opinion of our counsel, that RMR Inc. was or is precluded from being treated as our TRS, then our ownership position in RMR Inc. in excess of 10% of RMR Inc.’s outstanding securities by vote or value, except to the extent and for the period that such ownership qualified as a “temporary investment of new capital,” would have been and would be in violation of the applicable REIT asset tests described below. Under those circumstances, however, we expect that we would qualify for the REIT asset tests’ relief provision described below, and thereby would preserve our qualification for taxation as a REIT. If the relief provision below were to apply to us, we would be subject to tax at the highest regular corporate tax rate on the net income generated by our investment in RMR Inc. in excess of a 10% ownership position in that company.
In addition, we have elected to treat as a TRS a particular corporate subsidiary of Five Star with whom we do not have a rental relationship. This intended TRS manages and operates independent living facilities for us, and in the future may operate additional independent living facilities for us. In that role, the intended TRS provides amenities and services to our tenants, the independent living residents; for the duration of our ownership of these independent living facilities, there have not been, and are not expected to be, assisted living or skilled nursing residents at these facilities, and neither we nor the intended TRS have provided or expect to provide health care services at these facilities or elsewhere. Although the law is unclear on this point, and in fact a close read of the statute and legislative history might suggest otherwise, IRS private letter rulings conclude and imply that the management and operation of independent living facilities do not constitute operating or managing a health care facility such that TRS status is precluded, provided that there are no assisted living or skilled nursing residents in the facilities and provided further that neither the REIT nor the intended TRS provide health care services. Although IRS private letter rulings do not generally constitute binding precedent, they do represent the reasoned, considered judgment of the IRS and thus provide insight into how the IRS applies and interprets the federal income tax laws. Based on these IRS private letter rulings, our counsel, Sullivan & Worcester LLP, has opined that it is more likely than not that our intended TRS that manages and operates pure independent living facilities will qualify as a TRS, provided that there are no assisted living or skilled nursing residents in the subject facilities and provided further that neither we nor the intended TRS provide health care services.
Our TRSs are taxed as C corporations that are separate from us. As regular C corporations, TRSs may generally utilize net operating losses and other tax attribute carry-forwards to reduce or otherwise eliminate federal income tax liability in a given taxable year. Net operating losses and other carry-forwards are subject to limitations, including limitations imposed under Section 382 of the IRC following an “ownership change” (as defined in applicable Treasury regulations). As a result, there can be no assurance that our TRSs will be able to utilize, in full or in part, any net operating losses or other carry-forwards that they have generated or may generate in the future.
As discussed below, TRSs can perform services for our tenants without disqualifying the rents we receive from those tenants under the 75% gross income test or the 95% gross income test discussed below. Moreover, because our TRSs are taxed as C corporations that are separate from us, their assets, liabilities and items of income, deduction and credit generally are not imputed to us for purposes of the REIT qualification requirements described in this summary. Therefore, our TRSs may generally undertake third-party management and developmentconduct activities and activities not relatedthat would be treated as prohibited transactions or would give rise to real estate. Finally,nonqualified income if conducted by us directly. Additionally, while a REIT is generally limited in its ability to earn qualifying rental income from a TRS, a REIT can earn qualifying rental income from the lease of a qualified health care property to a TRS if an eligible independent contractor operates the facility, as discussed more fully below. As regular C corporations, TRSs may generally utilize net operating losses and other tax attribute carryforwards to reduce or otherwise eliminate federal income tax liability in a given taxable year. Net operating losses and other carryforwards are subject to limitations, however, including limitations imposed under Section 382 of the IRC following an “ownership change” (as defined in applicable Treasury regulations) and a limitation providing that carryforwards of net operating losses arising in taxable years beginning after 2017 generally cannot offset more than 80% of the current year's taxable income. Moreover, net operating losses arising in taxable years beginning after 2017 may not be carried back, but may be carried forward indefinitely. As a result, we cannot be sure that our TRSs will be able to utilize, in full or in part, any net operating losses or other carryforwards that they have generated or may generate in the future.
Restrictions and sanctions such as deduction limitations and excise taxes, are imposed on TRSs and their affiliated REITs to ensure that the TRSs will be subject to an appropriate level of federal income taxation. For example, a TRS may not deduct interest paid in any year to an affiliated REIT to the extent that the interest payments exceed, generally, 50% of the TRS’s adjusted taxable income for that year. However, the TRS may carry forward the disallowed interest expense to a succeeding year, and deduct the interest in that later year subject to that year’s 50% adjusted taxable income limitation. In addition, if a TRS pays interest, rent or other amounts to its affiliated REIT in an amount that exceeds what an unrelated third party would have paid in an arm’sarm's length transaction, then the REIT generally will be subject to an excise tax equal to 100% of the excessive portion of the payment. Further, if in comparison to an arm’sarm's length transaction, a third-partythird party tenant has overpaid rent to the REIT in exchange for underpaying the TRSfor services rendered, and if the REIT has not adequately compensated the TRS for services provided
to or on behalf of the third-partythird party tenant, then the REIT may be subject to an excise tax equal to 100% of the undercompensation to the TRS. A safe harbor exception to this excise tax applies if the TRS has been compensated at a rate at least equal to 150% of its direct cost in furnishing or rendering the service. Finally, beginning with our 2016 taxable year, the 100% excise tax also applies to the underpricing of services provided by a TRS to its affiliated REIT in contexts where the services are unrelated to services for REIT tenants. There canWe cannot be no assurancesure that arrangements involving our TRSs will not result in the imposition of one or more of these deduction limitationsrestrictions or excise taxes,sanctions, but we do not believe that we or our TRSs are or will be subject to these impositions.
Income Tests. There areWe must satisfy two gross income requirements fortests annually to maintain our qualification for taxation as a REIT under the IRC:
AtREIT. First, at least 75% of our gross income for each taxable year (excluding: (a) gross income from sales or other dispositions of property subject to the 100% tax on prohibited transactions; (b) any income arising from “clearly identified” hedging transactions that we enter into to manage interest rate or price changes or currency fluctuations with respect to borrowings we incur to acquire or carry real estate assets; (c) any income arising from “clearly identified” hedging transactions that we enter into primarily to manage risk of currency fluctuations relating to any item that qualifies under the 75% gross income test or the 95% gross income test (or any property that generates such income or gain); (d) beginning with our 2016 taxable year, any income from “clearly identified” hedging transactions that we enter into to manage risk associated with extant, qualified hedges of liabilities or propertiesthat have been extinguished or disposed; (e) real estate foreign exchange gain (as defined in Section 856(n)(2) of the IRC); and (f) income from the repurchase or discharge of indebtedness) must be derived from investments relating to real property, including “rents from real property” as defined underwithin the meaning of Section 856856(d) of the IRC, interest and gain from mortgages on real property or on interests in real property, income and gain from foreclosure property, gain from the sale or other disposition of real property (including specified ancillary personal property treated as real property under the IRC), or dividends on and gain from the sale or disposition of shares in other REITs (but excluding in all cases any gains subject to the 100% tax on prohibited transactions). When we receive new capital in exchange for our shares or in a public offering of our five-year or longer debt instruments, income attributable to the temporary investment of this new capital in stock or a debt instrument, if received or accrued within one year of our receipt of the new capital, is generally also qualifying income under the 75% gross income test.
At Second, at least 95% of our gross income for each taxable year (excluding: (a) grossmust consist of income from sales or other dispositionsthat is qualifying income for purposes of property subject to the 100% tax on prohibited transactions; (b) any income arising from “clearly identified” hedging transactions that we enter into to manage interest rate or price changes or currency fluctuations with respect to borrowings we incur to acquire or carry real estate assets; (c) any income arising from “clearly identified” hedging transactions that we enter into primarily to manage risk of currency fluctuations relating to any item that qualifies under the 75% gross income test,
other types of interest and dividends, gain from the sale or the 95% grossdisposition of stock or securities, or any combination of these. Gross income test (or anyfrom our sale of property that generateswe hold primarily for sale to customers in the ordinary course of business, income and gain from specified “hedging transactions” that are clearly and timely identified as such, income or gain); (d) beginning with our 2016 taxable year, any income from “clearly identified” hedging transactions that we enter into to manage risk associated with extant, qualified hedges of liabilities or properties that have been extinguished or disposed; (e) passive foreign exchange gain (as defined in Section 856(n)(3) of the IRC); and (f) income from the repurchase or discharge of indebtedness) must be derivedindebtedness is excluded from a combination of items of real property income that satisfyboth the 75%numerator and the denominator in both gross income test described above, dividends, interest, ortests. In addition, specified foreign currency gains from the sale or disposition of stock, securities or real property (but excluding in all cases any gains subject to the 100% tax on prohibited transactions).
Although we will use our best efforts to ensure that the income generated by our investments will be of a type that satisfies both the 75% and 95%excluded from gross income tests, there can be no assurance in this regard.for purposes of one or both of the gross income tests.
In order to qualify as “rents from real property” underwithin the meaning of Section 856856(d) of the IRC, several requirements must be met:
The amount of rent received generally must not be based on the income or profits of any person, but may be based on a fixed percentage or percentages of receipts or sales.
Rents generally do not qualify if the REIT owns 10% or more by vote or value of stock of the tenant (or 10% or more of the interests in the assets or net profits of the tenant, if the tenant is not a corporation), whether directly or after application of attribution rules. We generally do not intend to lease property to any party if rents from that property would not qualify as “rents from real property,” but application of the 10% ownership rule is dependent upon complex attribution rules and circumstances that may be beyond our control. In this regard, prior to the termination of our leases with Five Star, we already ownowned close to, but less than, 10% of the outstanding common shares of Five Star, and Five Star has undertaken to limit its redemptions of outstanding common shares so that we do not come to own 10% or more of its outstanding common shares.Star. Our declaration of trust generally disallows transfers or purported acquisitions, directly or by attribution, of our shares to the extent necessary to maintain our qualification for taxation as a REIT under the IRC. Nevertheless, there canwe cannot be no assurancesure that these restrictions will be effective to prevent our qualification for taxation as a REIT from being jeopardized under the 10% affiliated tenant rule. Furthermore, there canwe cannot be no assurancesure that we will be able to monitor and
enforce these restrictions, nor will our shareholders necessarily be aware of ownership of our shares attributed to them under the IRC’sIRC's attribution rules.
There is a limited exception to the above prohibition on earning “rents from real property” from a 10% affiliated tenant where the tenant is a TRS. If at least 90% of the leased space of a property is leased to tenants other than TRSs and 10% affiliated tenants, and if the TRS’sTRS's rent to the REIT for space at that property is substantially comparable to the rents paid by nonaffiliated tenants for comparable space at the property, then otherwise qualifying rents paid by the TRS to the REIT will not be disqualified on account of the rule prohibiting 10% affiliated tenants.
There is an additional exception to the above prohibition on earning “rents from real property” from a 10% affiliated tenant. For this additional exception to apply, a real property interest in a “qualified health care property” must be leased by the REIT to its TRS, and the facility must be operated on behalf of the TRS by a person who is an “eligible independent contractor,” all as described in Sections 856(d)(8)-(9) and 856(e)(6)(D) of the IRC. As described below, we believe our leases with our TRSs have satisfied and will continue to satisfy these requirements.
In order for rents to qualify, we generally must not manage the property or furnish or render services to the tenants of the property, except through an independent contractor from whom we derive no income or through one of our TRSs. There is an exception to this rule permitting a REIT to perform customary tenant services of the sort that a tax-exempt organization could perform without being considered in receipt of “unrelated business taxable income,” or UBTI, under Section 512(b)(3) of the IRC. In addition, a de minimis amount of noncustomary services provided to tenants will not disqualify income as “rents from real property” as long as the value of the impermissible tenant services does not exceed 1% of the gross income from the property.
If rent attributable to personal property leased in connection with a lease of real property is 15% or less of the total rent received under the lease, then the rent attributable to personal property qualifies as “rents from real property.” None of the rent attributable to personal property received under a lease will qualify if this 15% threshold is exceeded. The portion of rental income treated as attributable to personal property is determined according to the ratio of the fair market valueof the personal property to the total fair market value of the real and personal property that is rented.
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• | In order for rents to qualify, a REIT generally must not manage the property or furnish or render services to the tenants of the property, except through an independent contractor from whom it derives no income or through one of its TRSs. There is an exception to this rule permitting a REIT to perform customary management and tenant services of the sort that a tax-exempt organization could perform without being considered in receipt of “unrelated business taxable income” as defined in Section 512(b)(3) of the IRC, or UBTI. In addition, a de minimis amount of noncustomary services provided to tenants will not disqualify income as “rents from real property” as long as the value of the impermissible tenant services does not exceed 1% of the gross income from the property. |
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• | If rent attributable to personal property leased in connection with a lease of real property is 15% or less of the total rent received under the lease, then the rent attributable to personal property will qualify as “rents from real property”; if this 15% threshold is exceeded, then the rent attributable to personal property will not so qualify. The portion of rental income treated as attributable to personal property is determined according to the ratio of the fair market valueof the personal property to the total fair market value of the real and personal property that is rented. |
In addition, “rents from real property” includes both charges we receive for services customarily rendered in connection with the rental of comparable real property in the same geographicalgeographic area, even if the charges are separately stated, as well as charges we receive for services provided by our TRSs when the charges are not separately stated. Whether separately stated charges received by a REIT for services that are not geographically customary and provided by a TRS are included in “rents from real property” has not been addressed clearly by the IRS in published authorities; however, our counsel, Sullivan & Worcester LLP, is of the opinion that, although the matter is not free from doubt, “rents from real property” also includes charges we receive for services provided by our TRSs when the charges are separately stated, even if the services are not geographically customary. Accordingly, we believe that our revenues from TRS-provided services,
whether the charges are separately stated or not, qualify as “rents from real property” because the services satisfy the geographically customary standard, because the services have been provided by a TRS, or for both reasons.
We believe that all or substantially all of our rents and related service charges have qualified and will continue to qualify as “rents from real property” for purposes of Section 856 of the IRC.
Absent the “foreclosure property” rules of Section 856(e) of the IRC, subject to the considerations in the following paragraph.
As discussed above, we currently own independent living facilities that we purchased to be managed and operated by a TRS; the TRS provides amenities and services, butREIT's receipt of active, nonrental gross income from a property would not health care services, to the facilities’ residents, who are our tenants. We may from time to time in the future acquire additional properties to be managed and operated in this manner. Our counsel, Sullivan & Worcester LLP, has opined that it is more likely than not that our intended TRS that manages and operates independent living facilities will qualify as a TRS, provided that there are no assisted living or skilled nursing residents in the subject facilities and provided further that neither we nor the intended TRS provide health care services. Accordingly, we expect that the rents we receive from these facilities’ independent living residents will qualify as “rents from real property” because services and amenities to them are provided through a TRS. If the IRS should assert, contrary to its current private letter ruling practice, that our intended TRS does not in fact so qualify, and if a court should agree, then the rental income we receive from the independent living facility residents who are our tenants would be nonqualifying income for purposes ofunder the 75% and 95% gross income tests, possibly jeopardizing our compliancetests. But as foreclosure property, the active, nonrental gross income from the property would so qualify. Foreclosure property is generally any real property, including interests in real property, and any personal property incident to such real property:
that is acquired by a REIT as a result of the REIT having bid on such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default or when default was imminent on a lease of such property or on indebtedness that such property secured;
for which any related loan acquired by the REIT was acquired at a time when the default was not imminent or anticipated; and
for which the REIT makes a proper election to treat the property as foreclosure property.
Any gain that a REIT recognizes on the sale of foreclosure property held as inventory or primarily for sale to customers, plus any income it receives from foreclosure property that would not otherwise qualify under the 75% gross income test in the absence of foreclosure property treatment, reduced by expenses directly connected with the 95% grossproduction of those items of income, test. Under those circumstances, however, we expect that we would qualify for the gross income tests’ relief provision described below, and thereby would preserve our qualification for taxation as a REIT. If the relief provision below were to apply to us, we would be subject to income tax at the highest regular corporate income tax rate under the foreclosure property income tax rules of Section 857(b)(4) of the IRC. Thus, if a 100% rateREIT should lease foreclosure property in exchange for rent that qualifies as “rents from real property” as described above, then that rental income is not subject to the foreclosure property income tax.
Property generally ceases to be foreclosure property at the end of the third taxable year following the taxable year in which the REIT acquired the property, or longer if an extension is obtained from the IRS. However, this grace period terminates and foreclosure property ceases to be foreclosure property on the amount byfirst day:
on which we failed the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitabilitylease is entered into for the taxable
year; however, in a typical taxable year, we have little or no nonqualifyingproperty that, by its terms, will give rise to income from other sources and thus would expect to owe little tax in such circumstances.
In order tothat does not qualify as mortgage interest on real property for purposes of the 75% gross income test interest must derive(disregarding income from foreclosure property), or any nonqualified income under the 75% gross income test is received or accrued by the REIT, directly or indirectly, pursuant to a mortgage loan secured by real property (or interests in real property) with a fair market value at the time the loan is made (reduced bylease entered into on or after such day;
on which any senior liensconstruction takes place on the property) at least equal to the amountproperty, other than completion of such loan. If the amounta building or any other improvement where more than 10% of the loan exceedsconstruction was completed before default became imminent and other than specifically exempted forms of maintenance or deferred maintenance; or
which is more than 90 days after the fair market value ofday on which the realREIT acquired the property (as so reduced by senior liens),and the interest will be treated as interest on a mortgage loanproperty is used in a ratio equal totrade or business which is conducted by the ratio ofREIT, other than through an independent contractor from whom the fair market value of the real property (as so reduced by senior liens) to the total amount of the mortgage loan.REIT itself does not derive or receive any income or a TRS.
Other than sales of foreclosure property, any gain that we realize on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of a trade or business, together known as dealer gains, may be treated as income from a prohibited transaction that is subject to a penalty tax at a 100% rate. The 100% tax does not apply to gains from the sale of property that is held through a TRS, although such income will be subject to tax in the hands of the TRS at regular corporate income tax rates; we may therefore utilize our TRSs in transactions in which we might otherwise recognize dealer gains. Whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances surrounding theeach particular transaction. Sections 857(b)(6)(C) and (E) of the IRC provide safe harbors pursuant to which limited sales of real property held for at least two years and meeting specified additional requirements will not be treated as prohibited transactions. However, compliance with the safe harbors is not always achievable in practice. There canWe attempt to structure our activities to avoid transactions that are prohibited transactions, or otherwise conduct such activities through TRSs; but, we cannot be no assurance as tosure whether or not the IRS might successfully assert that one or more of our dispositions is subject to the 100% penalty tax. Dealer gainsGains subject to the 100% penalty tax are excluded from the 75% and 95% gross income tests, whereas real property gains that are not dealer gains or that are exempted from the 100% penalty tax on account of the safe harbors are considered qualifying gross income for purposes of the 75% and 95% gross income tests.
We believe that any gain from dispositions of assets that we have made, or that we might make in the future, including through any partnerships, will generally qualify as income that satisfies the 75% and 95% gross income tests, to the extent that such assets qualify as real property, and will not be dealer gains or subject to the 100% penalty tax,tax. This is because our general intent has been and is to:
(a) own our assets for investment with a view to long-term income production and capital appreciation;
(b) engage in the business of developing, owning, leasing and managing our existing properties and acquiring, developing, owning, leasing and managing new properties; and
(c) make occasional dispositions of our assets consistent with our long-term investment objectives.
If we fail to satisfy one or both of the 75% gross income test or the 95% gross income test in any taxable year, we may nevertheless qualify for taxation as a REIT for that year if we satisfy the following requirements:
(a) our failure to meet the test is due to reasonable cause and not due to willful neglect; and
(b) after we identify the failure, we file a schedule describing each item of our gross income included in the 75% gross income test or the 95% gross income test for that taxable year.
Even if this relief provision does apply, a 100% tax is imposed upon the greater of the amount by which we failed the 75% gross income test or the amount by which we failed the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitability for the taxable year. This relief provision may apply to a failure of the applicable income tests even if the failure first occurred in a year prior to the taxable year in which the failure was discovered.
Based on the discussion above, we believe that we have satisfied, and will continue to satisfy, the 75% and 95% gross income tests outlined above on a continuing basis beginning with our first taxable year as a REIT.
Asset Tests.Tests. At the close of each calendar quarter of each taxable year, we must also satisfy the following asset percentage tests in order to qualify for taxation as a REIT for federal income tax purposes:
At least 75% of the value of our total assets must consist of “real estate assets,” defined as real property (including interests in real property and interests in mortgages on real property or on interests in real property), ancillary personal property to the extent that rents attributable to such personal property are treated as rents from real property in accordance with the rules described above, (beginning with our 2016 taxable year), cash and cash items, shares in other REITs, debt instruments issued by “publicly offered REITs” as defined in Section 562(c)(2) of the IRC, (beginning with our 2016 taxable year), government securities and temporary investments of new capital (that is,
any stock or debt instrument that we hold that is attributable to any amount received by us (a) in exchange for our stock or (b) in a public offering of our five-year or longer debt instruments, but in each case only for the one yearone-year period commencing with our receipt of the new capital).
Not more than 25% of the value of our total assets may be represented by securities other than those securities that count favorably toward the preceding 75% asset test.
Of the investments included in the preceding 25% asset class, the value of any one non-REIT issuer’sissuer's securities that we own may not exceed 5% of the value of our total assets. In addition, we may not own more than 10% of the vote or value of any one non-REIT issuer’sissuer's outstanding securities, unless the securities are “straight debt” securities or otherwise excepted as discussed below. Our stock and other securities in a TRS are exempted from these 5% and 10% asset tests.
Not more than 25% (20% beginning with our 2018 taxable year)20% of the value of our total assets may be represented by stock or other securities of our TRSs.
Beginning with our 2016 taxable year, notNot more than 25% of the value of our total assets may be represented by “nonqualified publicly offered REIT debt instruments” as defined in Section 856(c)(5)(L)(ii) of the IRC.
Our counsel, Sullivan & Worcester LLP, is of the opinion that, although the matter is not free from doubt, our investments in the equity or debt of a TRS of ours, to the extent that and during the period in which theyqualify as temporary investments of new capital, will be treated as real estate assets, and not as securities, for purposes of the above REIT asset tests.
If we own a mortgage loan secured by real property (or interests in real property) with a fair market value at the time the loan is made (reduced by any senior liens on the property) at least equal to the amount of such loan, the mortgage loan will generally be treated as a real estate asset for purposes of the 75% asset test above. But if the loan is undersecured when made, then the portion adequately secured by real property (or interests in real property) will generally be treated as a real estate asset for purposes of the 75% asset test above and the remaining portion will generally be treated as a separate security that must satisfy applicable asset tests.
The above REIT asset tests must be satisfied at the close of each calendar quarter of each taxable year as a REIT. After a REIT meets the asset tests at the close of any quarter, it will not lose its qualification for taxation as a REIT in any subsequent quarter solely because of fluctuations in the values of its assets. This grandfathering rule may be of limited benefit to a REIT such as us that makes periodic acquisitions of both qualifying and nonqualifying REIT assets. When a failure to satisfy the above asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets withinthirtydays after the close of that quarter.
In addition, if we fail the 5% asset test, the 10% vote test or the 10% value test at the close of any quarter and we do not cure such failure within thirtydays after the close of that quarter, that failure will nevertheless be excused if (a) the failure is de minimis and (b) within six months after the last day of the quarter in which we identify the failure, we either dispose of the assets
causing the failure or otherwise satisfy the 5% asset test, the 10% vote test and the 10% value test. For purposes of this relief provision, the failure will be de minimis if the value of the assets causing the failure does not exceed $10,000,000. If our failure is not de minimis, or if any of the other REIT asset tests have been violated, we may nevertheless qualify for taxation as a REIT if (a) we provide the IRS with a description of each asset causing the failure, (b) the failure was due to reasonable cause and not willful neglect, (c) we pay a tax equal to the greater of (1) $50,000 or (2) the highest regular corporate income tax rate imposed on the net income generated by the assets causing the failure during the period of the failure, and (d) within six months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy all of the REIT asset tests. These relief provisions may apply to a failure of the applicable asset tests even if the failure first occurred in a year prior to the taxable year in which the failure was discovered.
The IRC also provides an excepted securities safe harbor to the 10% value test that includes among other items (a) “straight debt” securities, (b) specified rental agreements in which payment is to be made in subsequent years, (c) any obligation to pay “rents from real property,” (d) securities issued by governmental entities that are not dependent in whole or in part on the profits of or payments from a nongovernmental entity, and (e) any security issued by another REIT. In addition, any debt instrument issued by an entity classified as a partnership for federal income tax purposes, and not otherwise excepted from the definition of a security for purposes of the above safe harbor, will not be treated as a security for purposes of the 10% value test if at least 75% of the partnership’spartnership's gross income, excluding income from prohibited transactions, is qualifying income for purposes of the 75% gross income test.
We have maintained and will continue to maintain records of the value of our assets to document our compliance with the above asset tests and intend to take actions as may be required to cure any failure to satisfy the tests within thirty days after the close of any quarter or within the six month periods described above.
Based on the discussion above, we believe that we have satisfied, and will continue to satisfy, the REIT asset tests outlined above on a continuing basis beginning with our first taxable year as a REIT.
Our Relationships with Five Star. As of December 31, 2016,Prior to January 1, 2020, we owned approximately 9%a significant percentage (but less than 10%) of the outstanding common shares of Five Star. Our leases with Five Star, Five Star’s charter, and other agreements collectively contain restrictions upon the ownership of Five Star common shares and require Five Star to refrain from taking any actions that may result in any affiliation with us that would jeopardize our qualification for taxation as a REIT under the IRC. Accordingly, commencingCommencing with our 2002 taxable year and through and including our 2019 taxable year, we expect that the rental income we have received and will receive from Five Star and its subsidiaries has been and will beconstituted “rents from real property” under Section 856(d) of the IRC, and therefore qualifying income under the 75% and 95% gross income tests described above. In addition, as described above,From and after January 1, 2020, we have come to own (directly and indirectly through one of our TRSs) just under 35% of the outstanding common shares of Five Star. We have not elected to treat Five Star as a TRS and it is not otherwise an automatic TRS because no TRS of ours owns more than 35% of Five Star. This structure for our Five Star ownership permits our continued engagement of a particular corporate subsidiary of Five Star with whom we do not have a rental relationship, andto manage health care facilities leased to our counsel, Sullivan & Worcester LLP, has opined that it is more likely than not that this intended TRS will so qualify. Finally,TRSs, as described below we have engaged as an intended eligible independent contractor another corporate subsidiary of Five Star with whom we do not have a rental relationship.in greater detail.
Our Relationship with Our Taxable REIT Subsidiaries. In addition We currently own properties that we purchased to be leased to our TRSs or which are being leased to our TRSs as a result of modifications to, or expirations of, a prior lease, all as agreed to by applicable parties. For example, in connection with past lease defaults and expirations, we have terminated occupancy of some of our health care properties by the TRS described above that managesdefaulting or expiring tenants and operates independent living facilitiesimmediately leased these properties to our TRSs and entered into new third party management agreements for us, we also have wholly owned TRSs that lease properties from us.these properties. We may from time to time in the future acquirelease additional health care properties to be leased in this manner. In addition, in response to a lease default or expiration, we may choose to lease a reclaimed qualified health care property to a TRS.our TRSs.
In lease transactions involving our TRSs, our general intent is thatfor the rents paid to us by the TRS to qualify as “rents from real property” under the REIT gross income tests summarized above. In order for this to be the case, the manager operating the leased property on behalf of the applicable TRS must be an “eligible independent contractor” within the meaning of Section 856(d)(9)(A) of the IRC, and the properties leased to the TRS must be “qualified health care properties” within the meaning of Section 856(e)(6)(D) of the IRC. Qualified health care properties are defined as health care facilities and other properties necessary or incidental to the use of a health care facility.
For these purposes, a contractor qualifies as an “eligible independent contractor” if it is less than 35% affiliated with the REIT and, at the time the contractor enters into the agreement with the TRS to operate the qualified health care property, that contractor or any person related to that contractor is actively engaged in the trade or business of operating qualified health care properties for persons unrelated to the TRS or its affiliated REIT. For these purposes, an otherwise eligible independent contractor is not disqualified from that status on account of (a) the TRS bearing the expenses of the operation of the qualified health care property, (b) the TRS receiving the revenues from the operation of the qualified health care property, net of expenses for that operation and fees payable to the eligible independent contractor, or (c) the REIT receiving income from the eligible independent contractor pursuant to a preexisting or otherwise grandfathered lease of another property.
We have engaged as an intended eligible independent contractor a particular corporate subsidiary of Five Star with whom we do not have a rental relationship.Star. This contractor and its affiliates at Five Star are actively engaged in the trade or business of operating qualified health care properties for their own accounts, including pursuant to management contracts among themselves and including properties that we do not lease to them;themselves; however, this contractor and its affiliates have few if any management contracts for qualified health care properties forwith third parties other than us and our TRSs. Based on a plain reading of the statute as well as applicable legislative history, our counsel, Sullivan & Worcester LLP, has opined that this intended eligible independent contractor should in fact so qualify. If the IRS or a court determines that this opinion is incorrect, then the rental income we receive from our TRSs in respect of properties managed by this particular contractor would be nonqualifying income for purposes of the 75% and 95% gross income tests, possibly jeopardizing our compliance with one or both of these gross income tests. Under those circumstances, however, we expect we would qualify for the gross income tests’tests' relief provision described above, and thereby would preserve our qualification for taxation as a REIT. If the relief provision were to apply to us, we would be subject to tax at a 100% rate upon the greater of the amount by which we failed the 75% gross income test or the amount by which we failed the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitability for the taxable year; even though we have little or no nonqualifying income from other sources in a typical taxable year, imposition of this 100% tax in this circumstance could be material because to date substantially allmost of the properties leased to our TRSs are managed for the TRSs by this contractor.
As explained above, we will be subject to a 100% tax if the IRS successfully asserts thaton the rents paid to us by any of our TRSs if the IRS successfully asserts that those rents exceed an arm’sarm's length rental rate. Although there is no clear precedent to distinguish for federal income tax purposes among leases, management contracts, partnerships, financings, and other contractual arrangements, we believe that our leases
and our TRSs’TRSs' management agreements will be respected for purposes of the requirements of the IRC discussed above. Accordingly, we expect that the rental income from our current and future TRSs will qualify as “rents from real property,” and that the 100% tax on excessive rents from a TRS will not apply.
Annual Distribution Requirements.Requirements. In order to qualify for taxation as a REIT under the IRC, we are required to make annual distributions other than capital gain dividends to our shareholders in an amount at least equal to the excess of:
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(1) | the sum of 90% of our “real estate investment trust taxable income” and 90% of our net income after tax, if any, from property received in foreclosure, over |
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(2) | the amount by which our noncash income (e.g., imputed rental income or income from transactions inadvertently failing to qualify as like-kind exchanges) exceeds 5% of our “real estate investment trust taxable income.” |
For these purposes, our “real estate investment trust taxable income” is as defined under Section 857 of the IRC and is computed without regard to the dividends paid deduction and our net capital gain and will generally be reduced by specified corporate-level income taxes that we pay (e.g., taxes on built-in gains or foreclosure property income).
For our 2014 and prior taxable years, a distributionThe IRC generally limits the deductibility of ours that was not pro rata within a class of our beneficial interests entitlednet interest expense paid or accrued on debt properly allocable to a distribution,trade or which was not consistent with the rightsbusiness to distributions among our classes30% of beneficial interests, would have been a preferential distribution that would not have been taken into consideration for purposes“adjusted taxable income,” subject to specified exceptions. Any deduction in excess of the distribution requirements,limitation is carried forward and accordinglymay be used in a subsequent year, subject to that year's 30% limitation. Provided a taxpayer makes an election (which is irrevocable), the payment30% limitation does not apply to a trade or business involving real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage, within the meaning of Section 469(c)(7)(C) of the IRC. While legislative history and proposed Treasury regulations indicate that a preferential distribution would have affected our ability to meet the distribution requirements. Taking into account our distribution policies, including any dividend reinvestment plan we adopted, we do not believe that we made any preferential distributions in 2014real property trade or prior taxable years. From and after our 2015 taxable year, the preferential distribution rule has not applied to us becausebusiness includes a trade or business conducted by a corporation or a REIT, we have been and expectnot yet made an election to remainbe treated as a “publicly offered REIT” (as defined in Section 562(c)(2) of the IRC) that is required to file annual and periodic reports with the SEC under the Exchange Act.real property trade or business.
Distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our federal income tax return for the earlier taxable year and if paid on or before the first regular distribution payment after that declaration. If a dividend is declared in October, November or December to shareholders of record during one of those months and is paid during the following January, then for federal income tax purposes such dividend will be treated as having been both paid and received on December 31 of the prior taxable year.year to the extent of any undistributed earnings and profits.
The 90% distribution requirements may be waived by the IRS if a REIT establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax discussed below. To the extent that we do not distribute all of our net capital gain and all of our “real estate investment trust taxable income,” as adjusted, we will be subject to federal income tax at regular corporate income tax rates on undistributed amounts. Even if we fully distribute our net capital gain and all of our “real estate investment trust taxable income,” we may be subject to the corporate alternative minimum tax on our items of tax preference. In addition, we will be subject to a 4% nondeductible excise tax to the extent we fail within a calendar year to make required distributions to our shareholders of 85% of our ordinary income and 95% of our capital gain net income plus the excess, if any, of the “grossed up required distribution” for the preceding calendar year over the amount treated as distributed for that preceding calendar year. For this purpose, the term “grossed up required distribution” for any calendar year is the sum of our taxable income for the calendar year without regard to
the deduction for dividends paid and all amounts from earlier years that are not treated as having been distributed under the provision. We will be treated as having sufficient earnings and profits to treat as a dividend any distribution by us up to the amount required to be distributed in order to avoid imposition of the 4% excise tax.
If we do not have enough cash or other liquid assets to meet the 90% distribution requirements, or if we so choose, we may find it necessary or desirable to arrange for new debt or equity financing to provide funds for required distributions in order to maintain our qualification for taxation as a REIT. We cannot be sure that financing would be available for these purposes on favorable terms, or at all.
We may be able to rectify a failure to pay sufficient dividends for any year by paying “deficiency dividends” to shareholders in a later year. These deficiency dividends may be included in our deduction for dividends paid for the earlier year, but an interest charge would be imposed upon us for the delay in distribution. While the payment of a deficiency dividend will apply to a prior year for purposes of our REIT distribution requirements and our dividends paid deduction, it will be treated as an additional distribution to the shareholders receiving it in the year such dividend is paid.
In addition to the other distribution requirements above, to preserve our qualification for taxation as a REIT we are required to timely distribute all C corporation earnings and profits that we inherit from acquired corporations, as described below.
Acquisitionsof C Corporations
Wehave engaged in andmay in the future engage in transactions where we acquire all of the outstanding stock of a C corporation. Upon these acquisitions, except to the extent wehave made or domake an applicable TRS election, each of our acquired entities and their various wholly-owned corporate and noncorporate subsidiaries generally became orwill become our QRSs. Thus, after such acquisitions, all assets, liabilities and items of income, deduction and credit of the acquired and then disregarded entities have been and will be treated as ours for purposes of the various REIT qualification tests described above. In addition, we generally have been andwill be treated as the successor to the acquired and(and then disregarded entities’disregarded) entities' federal income tax attributes, such as those entities’entities' (a) adjusted tax bases in their assets and their depreciation schedules; and (b) earnings and profits for federal income tax purposes, if any. The carryover of these attributes creates REIT implications such as built-in gains tax exposure and additional distribution requirements, as described below. However, when wemake an election under Section 338(g) of the IRC with respect to corporations that we acquire, as we have done from time to time in the past, we generally have not and will not be subject to such attribute carryovers in respect of attributes existing prior to such election.
Built-in Gains from C Corporations.Notwithstanding our qualification and taxation as a REIT, under specified circumstances we may be subject to corporate income taxation if we acquire a REIT asset where our adjusted tax basis in the asset is determined by reference to the adjusted tax basis of the asset as owned by a C corporation. For instance, we may be subject to federal income taxation on all or part of the built-in gain (calculated as ofthat was present on the last date the property ceased beingan asset was owned by thea C corporation) oncorporation, if we succeed to a carryover tax basis in that asset directly or indirectly from such an assetC corporation and if we sell the asset during a prescribedthe five year period beginning on the day the asset was acquired. The prescribed period has ranged from as much as 10 years to as few as five years, and is currently five years.ceased being owned by such C corporation. To the extent of our income and gains in a taxable year that are subject to the built-in gains tax, net of any taxes paid on such income and gains with respect to that taxable year, our taxable dividends paid in the following year will be potentially eligible for taxation to noncorporate U.S. shareholders at the preferential tax rates for “qualified dividends” as described below under the heading “-Taxation“—Taxation of Taxable U.S. Shareholders”. We generally have not sold and do not expect to sell assets if doing so would result in the imposition of a material built-in gains tax liability; but if and when we do sell assets that may have associated built-in gains tax exposure, then we expect to make appropriate provision for the associated tax liabilities on our financial statements.
Earnings and Profits. Following a corporate acquisition, we must generally distribute all of the C corporation earnings and profits inherited in that transaction, if any, no later than the end of our taxable year in which the transaction occurs, in order to preserve our qualification for taxation as a REIT. However, if we fail to do so, relief provisions would allow us to maintain our qualification for taxation as a REIT provided we distribute any subsequently discovered C corporation earnings and profits and pay an interest charge in respect of the period of delayed distribution. C corporation earnings and profits that we inherit are, in general, specially allocated under a priority rule to the earliest possible distributions following the event causing the inheritance, and only then is the balance of our earnings and profits for the taxable year allocated among our distributions to the extent not already treated as a distribution of C corporation earnings and profits under the priority rule. The distribution of these C corporation earnings and profits is potentially eligible for taxation to noncorporate U.S. shareholders at the preferential tax rates for “qualified dividends” as described below under the heading “-Taxation“—Taxation of Taxable U.S. Shareholders”.
Depreciation and Federal Income Tax Treatment of Leases
Our initial tax bases in our assets will generally be our acquisition cost. We will generally depreciate our depreciable real property on a straight-line basis over forty years and our personal property over the applicable shorter periods. These depreciation schedules, and our initial tax bases, may vary for properties that we acquire through tax-free or carryover basis acquisitions, or that are the subject of cost segregation analyses.
We are entitled to depreciation deductions from our facilities only if we are treated for federal income tax purposes as the owner of the facilities. This means that the leases of theour facilities must be classified for U.S. federal income tax purposes as true leases, rather than as sales or financing arrangements, and we believe this to be the case.
Distributions to our Shareholders
General. As described above, we expect to make distributions to our shareholders from time to time. These distributions may include cash distributions, in kind distributions of property (such as our pro rata distribution that we paid on January 1, 2020, to our shareholders of record as of December 13, 2019, of the right to receive an aggregate number of Five Star common shares that equaled approximately 51% of Five Star's outstanding common shares, or the FVE Distribution), and deemed or constructive distributions resulting from capital market
activities. The U.S. federal income tax treatment of our distributions will vary based on the status of the recipient shareholder as more fully described below under “-Taxationthe headings “—Taxation of Taxable U.S. Shareholders,” “-Taxation“—Taxation of Tax-Exempt U.S. Shareholders,” and “-Taxation“—Taxation of Non-U.S. Shareholders.”
ASection 302 of the IRC treats a redemption of our shares for cash only will be treated as a distribution under Section 302301 of the IRC, and hence taxable as a dividend to the extent of our available current or accumulated earnings and profits, unless the redemption satisfies one of the tests set forth in Section 302(b) of the IRC enabling the redemption to be treated as a sale or exchange of the shares. The redemption for cash only will be treated as a sale or exchange if it (a) is “substantially disproportionate” with respect to the surrendering shareholder’sshareholder's ownership in us, (b) results in a “complete termination” of the surrendering shareholder’sshareholder's entire share interest in us, or (c) is “not essentially equivalent to a dividend” with respect to the surrendering shareholder, all within the meaning of Section 302(b) of the IRC. In determining whether any of these tests have been met, a shareholder must generally take into account shares considered to be owned by such shareholder by reason of constructive ownership rules set forth in the IRC, as well as shares actually owned by such shareholder. In addition, if a redemption is treated as a distribution under the preceding tests, then a shareholder’sshareholder's tax basis in the redeemed shares generally will be transferred to the shareholder’sshareholder's remaining shares in us, if any, and if such shareholder owns no other shares in us, such basis generally may be transferred to a related person or may be lost entirely. Because the determination as to whether a shareholder will satisfy any of the tests of Section 302(b) of the IRC depends upon the facts and circumstances at the time that our shares are redeemed, we urge you to consult your own tax advisor to determine yourthe particular tax treatment of any redemption.
FVE Distribution. The FVE Distribution is treated as a 2020 distribution by us to our common shareholders in the amount of the fair market value of the Five Star common shares that a shareholder ultimately received (including any fractional shares deemed to have been received, as described in the next sentence). Any cash received by a shareholder in lieu of a fractional Five Star common share is treated as if such fractional Five Star common share had been (i) received by such shareholder and then (ii) sold for the amount of cash received. Because we expect the value of our total 2020 distributions to exceed our 2020 current and accumulated earnings and profits, we expect that a portion of each distribution in 2020 (including the FVE Distribution) will be taxable to each of our common shareholders as a dividend and a portion will be treated as a return of capital that reduces such shareholder's adjusted tax basis in our common shares. A shareholder's tax basis in the Five Star common shares received equals the fair market value of such shares on the issuance date, and the holding period for such Five Star common shares began the day after the issuance date.
Because of the factual nature of value determinations, Sullivan & Worcester LLP is unable to render an opinion on the fair market value of the Five Star common shares received by our common shareholders. Nevertheless, we believe that the fair market value of the Five Star common shares may be properly determined for federal income tax purposes as the closing price of the Five Star common shares in the public market on December 31, 2019 (the last trading day before issuance), or $3.71 per share. Accordingly, we will perform all federal income tax reporting, including statements supplied to shareholders and to the IRS, on the basis of this price.
For additional considerations applicable to a shareholder that received the FVE Distribution, see the information set forth below under the headings "—Taxation of Taxable U.S. Shareholders," "—Taxation of Tax-Exempt U.S. Shareholders," and "—Taxation of Non-U.S. Shareholders."
Taxation ofTaxableU.S. Shareholders
For noncorporate U.S. shareholders, to the extent that their total adjusted income does not exceed applicable thresholds, the maximum federal income tax rate for long-term capital gains and most corporate dividends is generally 15%. For those noncorporate U.S. shareholders whose total adjusted income exceeds the applicable thresholds, the maximum federal income tax rate for long-term capital gains and most corporate dividends is generally 20%. However, because we are not generally subject to federal income tax on the portion of our “real estate investment trust taxable income” distributed to our shareholders, dividends on our shares generally are not eligible for suchthese preferential tax rates, except that any distribution of C corporation earnings and profits and taxed built-in gain items will potentially be eligible for these preferential tax rates. As a result, our ordinary dividends are generally aretaxed at the higher federal income tax rates applicable to ordinary income.income (subject to the lower effective tax rates applicable to qualified REIT dividends via the deduction-without-outlay mechanism of Section 199A of the IRC, which is generally available to our noncorporate U.S. shareholders for taxable years before 2026). To summarize, the preferential federal income tax rates for long-term capital gains and for qualified dividends generally apply to:
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(1) | long-term capital gains, if any, recognized on the disposition of our shares; |
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(2) | our distributions designated as long-term capital gain dividends (except to the extent attributable to real estate depreciation recapture, in which case the distributions are subject to a maximum 25% federal income tax rate); |
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(3) | our dividends attributable to dividend income, if any, received by us from C corporations such as TRSs; |
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(4) | our dividends attributable to earnings and profits that we inherit from C corporations; and |
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(5) | our dividends to the extent attributable to income upon which we have paid federal corporate income tax (such as taxes on foreclosure property income or on built-in gains), net of the corporate income taxes thereon. |
As long as we qualify for taxation as a REIT, a distribution to our U.S. shareholders that we do not designate as a capital gain dividend generally will be treated as an ordinary income dividend to the extent of our available current or accumulated earnings and profits.profits (subject to the lower effective tax rates applicable to qualified REIT dividends via the deduction-without-outlay mechanism of Section 199A of the IRC, which is available to our noncorporate U.S. shareholders for taxable years before 2026). Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends generally will be taxed as long-term capital gains, as discussed below, to the extent they do not exceed our actual net capital gain for the taxable year. However, corporate shareholders may be required to treat up to 20% of any capital gain dividend as ordinary income under Section 291 of the IRC.
In addition, we may elect to retain net capital gain income and treat it as constructively distributed. In that case:
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(1) | we will be taxed at regular corporate capital gains tax rates on retained amounts; |
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(2) | each of our U.S. shareholdershareholders will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated as a capital gain dividend; |
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(3) | each of our U.S. shareholdershareholders will receive a credit or refund for its designated proportionate share of the tax that we pay; |
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(4) | each of our U.S. shareholdershareholders will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over the U.S. shareholder’sshareholder's proportionate share of the tax that we pay; and |
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(5) | both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes. |
If we elect to retain our net capital gains in this fashion, we will notify our U.S. shareholders of the relevant tax information within sixtydays after the close of the affected taxable year.
If for any taxable year we designate capital gain dividends for our shareholders, then a portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all outstanding classes of our shares. We will similarly designate the portion of any capital gain dividend
that is to be taxed to noncorporate U.S. shareholders at preferential maximum rates (including any qualified dividend income and any capital gains attributable to real estate depreciation recapture that are subject to a maximum 25% federal income tax rate) so that the designations will be proportionate among all outstanding classes of our shares.
Distributions in excess of our current or accumulated earnings and profits will not be taxable to a U.S. shareholder to the extent that they do not exceed the shareholder’sshareholder's adjusted tax basis in our shares, but will reduce the shareholder’sshareholder's basis in such shares. To the extent that these excess distributions exceed a U.S. shareholder’sshareholder's adjusted basis in such shares, they will be included in income as capital gain, with long-term gain generally taxed to noncorporate U.S. shareholders at preferential maximum rates. No U.S. shareholder may include on its federal income tax return any of our net operating losses or any of our capital losses. In addition, no portion of any of our dividends is eligible for the dividends received deduction for corporate shareholders.
If a dividend is declared in October, November or December to shareholders of record during one of those months and is paid during the following January, then for federal income tax purposes the dividend will be treated as having been both paid and received on December 31 of the prior taxable year. Also, items that are treated differently for regular and alternative minimum tax purposes are to be allocated between a REIT and its shareholders under Treasury regulations which are to be prescribed. It is possible that these Treasury regulations will permit or require tax preference items to be allocated to our shareholders with respect to any accelerated depreciation or other tax preference items that we claim. We may choose to allocate applicable tax preference items to our shareholders, even in the absence of such regulations.
A U.S. shareholder will generally recognize gain or loss equal to the difference between the amount realized and the shareholder’sshareholder's adjusted basis in our shares that are sold or exchanged. This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the shareholder’sshareholder's holding period in our shares exceeds one year. In addition, any loss upon a sale or exchange of our shares held for six months or less will generally be treated as a long-term capital loss to the extent of any long-term capital gain dividends we paid on such shares during the holding period.
U.S. shareholders who are individuals, estates or trusts are generally required to pay a 3.8% Medicare tax on their net investment income (including dividends on our shares (without regard to any deduction allowed by Section 199A of the IRC) and gains from the sale or other disposition of our shares), or in the case of estates and trusts on their net investment income that is not distributed, in each case to the extent that their total adjusted income exceeds applicable thresholds. U.S. shareholders are urged to consult their tax advisors regarding the application of the 3.8% Medicare tax.
If a U.S. shareholder recognizes a loss upon a disposition of our shares in an amount that exceeds a prescribed threshold, it is possible that the provisions of Treasury regulations involving “reportable transactions” could apply, with a resulting requirement to separately disclose the loss-generating transaction to the IRS. These Treasury regulations are written quite broadly, and apply to many routine and simple transactions. A reportable transaction currently includes, among other things, a sale or exchange of our shares resulting in a tax loss in excess of (a) $10$10.0 million in any single year or $20$20.0 million in a prescribed combination of taxable years in the case of our shares held by a C corporation or by a partnership with only C corporation partners or (b) $2$2.0 million in any single year or $4$4.0 million in a prescribed combination of taxable years in the case of our shares held by any other partnership or an S corporation, trust or individual, including losses that flow through pass through entities to individuals. A taxpayer discloses a reportable transaction by filing IRS Form 8886 with its federal income tax return and, in the first year of filing, a copy of Form 8886 must be sent to the IRS’sIRS's Office of Tax Shelter Analysis. The annual maximum penalty for failing to disclose a reportable transaction is generally $10,000 in the case of a natural person and $50,000 in any other case.
Noncorporate U.S. shareholders who borrow funds to finance their acquisition of our shares could be limited in the amount of deductions allowed for the interest paid on the indebtedness incurred. Under Section 163(d) of the IRC, interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment is generally deductible only to the extent of the investor’sinvestor's net investment income. A U.S. shareholder’sshareholder's net investment income will include ordinary income dividend distributions received from us and, only if an appropriate election is made by the shareholder, capital gain dividend distributions and qualified dividends received from us; however, distributions treated as a nontaxable return of the shareholder’sshareholder's basis will not enter into the computation of net investment income.
Taxation of Tax‑ExemptTax-Exempt U.S. Shareholders
The rules governing the federal income taxation of tax-exempt entities are complex, and the following discussion is intended only as a summary of material considerations of an investment in our shares relevant to such investors. If you are a tax-exempt shareholder, we urge you to consult your own tax advisor to determine the impact of federal, state, local and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your acquisition of or investment in our shares.
Our distributions made to shareholders that are tax-exempt pension plans, individual retirement accounts or other qualifying tax-exempt entities should not constitute UBTI, provided that the shareholder has not financed its acquisition of our shares with “acquisition indebtedness” within the meaning of the IRC, that the shares are not otherwise used in an unrelated trade or business of the tax-exempt entity, and that, consistent with our present intent, we do not hold a residual interest in a real estate
mortgage investment conduit. Special UBTI rules under Section 856(h)(3) of the IRC may apply to a trust described in Section 401(a) of the IRC if it owns more than 10% by value of a class of our shares.
conduit or otherwise hold mortgage assets or conduct mortgage securitization activities that generate “excess inclusion” income.
Taxation of Non‑U.S.Non-U.S. Shareholders
The rules governing the U.S. federal income taxation of non-U.S. shareholders are complex, and the following discussion is intended only as a summary of material considerations of an investment in our shares relevant to such investors. If you are a non-U.S. shareholder, we urge you to consult your own tax advisor to determine the impact of U.S. federal, state, local and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your acquisition of or investment in our shares.
We expect that a non-U.S. shareholder’sshareholder's receipt of (a) distributions from us, and (b) proceeds from the sale of our shares, will not be treated as income effectively connected with a U.S. trade or business and a non-U.S. shareholder will therefore not be subject to the often higher federal tax and withholding rates, branch profits taxes and increased reporting and filing requirements that apply to income effectively connected with a U.S. trade or business. This expectation and a number of the determinations below are predicated on our shares being listed on a U.S. national securities exchange, such as The NASDAQNasdaq Stock Market LLC, or Nasdaq. Although there can be no assurance in this regard, we expect that eachEach class of our shares has been and will remain listed on a U.S. national securities exchange; however, we cannot be sure that our shares will continue to be so listed in future taxable years or that any class of our shares that we may issue in the future will be so listed.
Distributions.Distributions. A distribution by us to a non-U.S. shareholder that is not designated as a capital gain dividend will be treated as an ordinary income dividend to the extent that it is made out of our current or accumulated earnings and profits. A distribution of this type will generally be subject to U.S. federal income tax and withholding at the rate of 30%, or at a lower rate if the non-U.S. shareholder has in the manner prescribed by the IRS demonstrated to the applicable withholding agent its entitlement to benefits under a tax treaty. Because we cannot determine our current and accumulated earnings and profits until the end of the taxable year, withholding at the statutory rate of 30% or applicable lower treaty rate will generally be imposed on the gross amount of any distribution to a non-U.S. shareholder that we make and do not designate as a capital gain dividend. Notwithstanding this potential withholding on distributions in excess of our current and accumulated earnings and profits, these excess portions of distributions are a nontaxable return of capital to the extent that they do not exceed the non-U.S. shareholder’sshareholder's adjusted basis in our shares, and the nontaxable return of capital will reduce the adjusted basis in these shares. To the extent that distributions in excess of our current and accumulated earnings and profits exceed the non-U.S. shareholder’sshareholder's adjusted basis in our shares, the distributions will give rise to U.S. federal income tax liability only in the unlikely event that the non-U.S. shareholder would otherwise be subject to tax on any gain from the sale or exchange of these shares, as discussed below under “-Dispositionsthe heading “—Dispositions of Our Shares.” A non-U.S. shareholder may seek a refund from the IRS of amounts withheld on distributions to it in excess of such shareholder's allocable share of our current and accumulated earnings and profits.
For so long as a class of our shares is listed on a U.S. national securities exchange, capital gain dividends that we declare and pay to a non-U.S. shareholder on those shares, as well as dividends to a non-U.S. shareholder on those shares attributable to our sale or exchange of “United States real property interests” within the meaning of Section 897 of the IRC, or USRPIs, will not be subject to withholding as though those amounts were effectively connected with a U.S. trade or business, and non-U.S. shareholders will not be required to file U.S. federal income tax returns or pay branch profits tax in respect of these dividends. Instead, these dividends will generally be treated as ordinary dividends and subject to withholding in the manner described above.
Tax treaties may reduce the withholding obligations on our distributions. Under some treaties, however, rates below 30% that are applicable to ordinary income dividends from U.S. corporations may not apply to ordinary income dividends from a REIT or may apply only if the REIT meets specified additional conditions. A non-U.S. shareholder must generally use an applicable IRS Form W-8, or substantially similar form, to claim tax treaty benefits. If the amount of tax withheld with respect to a distribution to a non-U.S. shareholder exceeds the shareholder’sshareholder's U.S. federal income tax liability with respect to the distribution, the non-U.S. shareholder may file for a refund of the excess from the IRS. Treasury regulations also provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, our distributions to a non-U.S. shareholder that is an entity should be treated as paid to the entity or to those owning an interest in that entity, and whether the entity or its owners are entitled to benefits under the tax treaty.
If, contrary to our expectation, a class of our shares was not listed on a U.S. national securities exchange and we made a distribution on those shares that was attributable to gain from the sale or exchange of a USRPI, then a non-U.S. shareholder holding those shares would be taxed as if the distribution was gain effectively connected with a trade or business in the United States conducted by the non-U.S.non-U.S. shareholder. In addition, the applicable withholding agent would be required to withhold from a distribution to such a non-U.S.non-U.S. shareholder, and remit to the IRS, up to 35%21% of the maximum amount of any distribution that was or could have been designated as a capital gain dividend. The non-U.S. shareholder also would generally be subject to the
same treatment as a U.S. shareholder with respect to the distribution (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of a nonresident alien individual), would be subject to fulsome U.S. federal income tax return reporting requirements, and, in the case of a corporate non-U.S. shareholder, may owe the up to 30% branch profits tax under Section 884 of the IRC (or lower applicable tax treaty rate) in respect of these amounts.
A special “wash sale” rule under Section 897(h)(5) of the IRC may apply to a non-U.S. shareholder that owns more than 10% of a class of our shares.
Dispositions of Our Shares. Shares. If as expected our shares are not USRPIs, then a non-U.S. shareholder’sshareholder's gain on the sale of these shares generally will not be subject to U.S. federal income taxation or withholding. We expect that our shares will not be USRPIs because one or both of the following exemptions will be available at all times.
First, for so long as a class of our shares is listed on a U.S. national securities exchange, a non-U.S. shareholder’sshareholder's gain on the sale of those shares will not be subject to U.S. federal income taxation as a sale of a USRPI. Second, our shares will not constitute USRPIs if we are a “domestically controlledcontrolled” REIT.” A domestically controlled We will be a “domestically controlled” REIT if less than 50% of the value of our shares (including any future class of shares that we may issue) is a REIT in whichheld, directly or indirectly, by non-U.S. shareholders at all times during the preceding five-year period less than 50%five years, after applying specified presumptions regarding the ownership of our shares as described in Section 897(h)(4)(E) of the fair market value of its outstanding shares was directly or indirectly held by foreign persons. From and after December 18, 2015, a person who at all relevant times holds less than 5% of a REIT’s shares that are “regularly traded” on a domestic “established securities market” is deemed to be a U.S. person in making the determination of whether a REIT is domestically controlled, unless the REIT has actual knowledgeIRC. For these purposes, we believe that the person is not a U.S. person. Otherstatutory ownership presumptions apply in making the determination with respect to other classes of REIT shareholders. Asvalidate our status as a result of applicable presumptions, we expect to be able to demonstrate from and after December 18, 2015 that we are less than 50% foreign owned. For periods prior to December 18, 2015,“domestically controlled” REIT. Accordingly, we believe that we were less than 50% foreign owned, but that may not be possible to demonstrate unlessare and until a pending technical correction clarifies the statute on this point. Accordingly, we cannot be sure that we have been or will remain a domestically controlled REIT, particularly if that determination includes the period before December 18, 2015, when the presumptions described above may not apply unless and until the pending technical correction is passed.“domestically controlled” REIT.
If, contrary to our expectation, a gain on the sale of our shares is subject to U.S. federal income taxation (for example, because neither of the above exemptions were then available, i.e., that class of our shares were not then listed on a U.S. national securities exchange and we were not a domestically controlled“domestically controlled” REIT), then (a) a non-U.S. shareholder would generally be subject to the same treatment as a U.S. shareholder with respect to its gain (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals), (b) the non-U.S. shareholder would also be subject to fulsome U.S. federal income tax return reporting requirements, and (c) a purchaser of that class of our shares from the non-U.S. shareholder may be required to withhold 15% of the purchase price paid to the non-U.S. shareholder and to remit the withheld amount to the IRS.
Information Reporting, Backup Withholding, and Foreign Account Withholding
Information reporting, backup withholding, and foreign account withholding may apply to distributions or proceeds paid to our shareholders under the circumstances discussed below. If a shareholder is subject to backup or other U.S. federal income tax withholding, then the applicable withholding agent will be required to withhold the appropriate amount with respect to a deemed or constructive distribution or a distribution in kind even though there is insufficient cash from which to satisfy the withholding obligation. To satisfy this withholding obligation, the applicable withholding agent may collect the amount of U.S. federal income tax required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of the property that the shareholder would otherwise receive or own, and the shareholder may bear brokerage or other costs for this withholding procedure.
The backup withholding rate is currently 28%. Amounts withheld under backup withholding are generally not an additional tax and may be refunded by the IRS or credited against the shareholder’sshareholder's federal income tax liability.liability, provided that such shareholder timely files for a refund or credit with the IRS. A U.S. shareholder may be subject to backup withholding when it receives distributions on our shares or proceeds upon the sale, exchange, redemption, retirement or other disposition of our shares, unless the U.S. shareholder properly executes, or has previously properly executed, under penalties of perjury an IRS Form W-9 or substantially similar form that:
provides the U.S. shareholder’sshareholder's correct taxpayer identification number;
certifies that the U.S. shareholder is exempt from backup withholding because (a) it comes within an enumerated exempt category, (b) it has not been notified by the IRS that it is subject to backup withholding, or (c) it has been notified by the IRS that it is no longer subject to backup withholding; and
certifies that it is a U.S. citizen or other U.S. person.
If the U.S. shareholder has not provided and does not provide its correct taxpayer identification number and appropriate certifications on an IRS Form W-9 or substantially similar form, it may be subject to penalties imposed by the IRS, and the applicable withholding agent may have to withhold a portion of any distributions or proceeds paid to such U.S. shareholder. Unless the U.S. shareholder has established on a properly executed IRS Form W-9 or substantially similar form that it comes within an enumerated exempt category, distributions or proceeds on our shares paid to it during the calendar year, and the amount of tax withheld, if any, will be reported to it and to the IRS.
Distributions on our shares to a non-U.S. shareholder during each calendar year and the amount of tax withheld, if any, will generally be reported to the non-U.S. shareholder and to the IRS. This information reporting requirement applies regardless of whether the non-U.S. shareholder is subject to withholding on distributions on our shares or whether the withholding was reduced or eliminated by an applicable tax treaty. Also, distributions paid to a non-U.S. shareholder on our shares will generally be subject to backup withholding, unless the non-U.S. shareholder properly certifies to the applicable withholding agent its non-U.S. shareholder status on an applicable IRS Form W-8 or substantially similar form. Information reporting and backup withholding will not apply to proceeds a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares, if the non-U.S. shareholder properly certifies to the applicable withholding agent its non-U.S. shareholder status on an applicable IRS Form W-8 or substantially similar form. Even without having executed an applicable IRS Form W-8 or substantially similar form, however, in some cases information reporting and backup withholding will not apply to proceeds that a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares if the non-U.S. shareholder receives those proceeds through a broker’sbroker's foreign office.
Non-U.S. financial institutions and other non-U.S. entities are subject to diligence and reporting requirements for purposes of identifying accounts and investments held directly or indirectly by U.S. persons. The failure to comply with these additional information reporting, certification and other requirements could result in a 30% U.S. withholding tax on applicable payments to non-U.S. persons.persons, notwithstanding any otherwise applicable provisions of an income tax treaty. In particular, a payee that is a foreign financial institution that is subject to the diligence and reporting requirements described above must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by “specified United States persons” or “United States owned foreign entities” (each as defined in the IRC)IRC and administrative guidance thereunder), annually report information about such accounts, and withhold 30% on applicable payments to noncompliant foreign financial institutions and account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States with respect to these requirements may be subject to different rules. The foregoing withholding regime generally applies to payments of dividends on our shares, and is expected to generally apply to other “withholdable payments” (including payments of gross proceeds from a sale, exchange, redemption, retirement or other disposition of our shares) made after December 31, 2018.shares. In general, to avoid withholding, any non-U.S. intermediary through which a shareholder owns
our shares must establish its compliance with the foregoing regime, and a non-U.S. shareholder must provide specified documentation (usually an applicable IRS Form W-8) containing information about its identity, its status, and if required, its direct and indirect U.S. owners. Non-U.S. shareholders and shareholders who hold our shares through a non-U.S. intermediary are encouraged to consult their own tax advisors regarding foreign account tax compliance.
Other Tax Considerations
Our tax treatment and that of our shareholders may be modified by legislative, judicial or administrative actions at any time, which actions may behave retroactive in effect. The rules dealing with federal income taxation are constantly under review by the U.S. Congress, the IRS and the U.S. Department of the Treasury, and statutory changes, new regulations, revisions to existing regulations and revised interpretations of established concepts are issued frequently. Likewise, the rules regarding taxes other than U.S. federal income taxes may also be modified. No prediction can be made as to the likelihood of passage of new tax legislation or other provisions, or the direct or indirect effect on us and our shareholders. Revisions to tax laws and interpretations of these laws could adversely affect our ability to qualify and be taxed as a REIT, as well as the tax or other consequences of an investment in our shares. We and our shareholders may also be subject to taxation by state, local or other jurisdictions, including those in which we or our shareholders transact business or reside. These tax consequences may not be comparable to the U.S. federal income tax consequences discussed above.
ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
General Fiduciary Obligations
Fiduciaries of a pension, profit-sharing or other employee benefit plan subject to Title I of theThe Employee Retirement Income Security Act of 1974, as amended, or ERISA, the IRC and similar provisions to those described below under applicable foreign or state law, individually and collectively, impose certain duties on persons who are fiduciaries of any employee benefit plan subject to Title I of ERISA, or an ERISA Plan, or an individual retirement account or annuity, or an IRA, a Roth IRA, a tax-favored account (such as an Archer MSA, Coverdell education savings account or health savings account), a Keogh plan or other qualified retirement plan not subject to Title I of ERISA, each a Non-ERISA Plan. Under ERISA and the IRC, any person who exercises any discretionary authority or control over the administration of, or the management or disposition of the assets of, an ERISA Plan or Non-ERISA Plan, or who renders investment advice for a fee or other compensation to an ERISA Plan or Non-ERISA Plan, is generally considered to be a fiduciary of the ERISA Plan or Non-ERISA Plan.
Fiduciaries of an ERISA Plan must consider whether:
their investment in our shares or other securities satisfies the diversification requirements of ERISA;
the investment is prudent in light of possible limitations on the marketability of our shares;
they have authority to acquire our shares or other securities under the applicable governing instrument and Title I of ERISA; and
the investment is otherwise consistent with their fiduciary responsibilities.
Trustees and other fiduciariesFiduciaries of an ERISA planPlan may incur personal liability for any loss suffered by the planERISA Plan on account of a violation of their fiduciary responsibilities. In addition, these fiduciaries may be subject to a civil penalty of up to 20% of any amount recovered by the planERISA Plan on account of a violation. Fiduciaries of any individual retirement account or annuity, or IRA, Roth IRA, tax-favored account (such as an Archer MSA, Coverdell education savings account or health savings account), Keogh plan or other qualified retirement plan not subject to Title I of ERISA, or non-ERISA plans,Non-ERISA Plan should consider that the planNon-ERISA Plan may only make investments that are authorized by the appropriate governing instrument.instrument and applicable law.
Fiduciaries considering an investment in our securities should consult their own legal advisors if they have any concern as to whether the investment is consistent with the foregoing criteria or is otherwise appropriate. The sale of our securities to an ERISA Plan or non-ERISA planNon-ERISA Plan is in no respect a representation by us or any underwriter of the securities that the investment meets all relevant legal requirements with respect to investments by plansthe arrangements generally or any particular plan,arrangement, or that the investment is appropriate for plansarrangements generally or any particular plan.
arrangement.
Prohibited Transactions
Fiduciaries of ERISA plansPlans and persons making the investment decision for a non-ERISA planNon-ERISA Plans should consider the application of the prohibited transaction provisions of ERISA and the IRC in making their investment decision. Sales and other transactions between an ERISA Plan or non-ERISA plan,a Non-ERISA Plan and disqualified persons related to it,or parties in interest, as applicable, are prohibited transactions.transactions and result in adverse consequences absent an exemption. The particular facts concerning the sponsorship, operations and other investments of an ERISA planPlan or non-ERISA planNon-ERISA Plan may cause a wide range of
other persons to be treated as disqualified persons or parties in interest with respect to it. A non-exempt prohibited transaction, in addition to imposing potential personal liability upon fiduciaries of ERISA plans,Plan fiduciaries, may also result in the imposition of an excise tax under the IRC or a penalty under ERISA upon the disqualified person or party in interest with respect to the plan.interest. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA, Roth IRA or other tax-favored account is maintained or(or his beneficiary,beneficiary), the IRA, Roth IRA or other tax-favored account may lose its tax-exempt status and its assets may be deemed to have been distributed to the individual in a taxable distribution on account of the non-exempt prohibited transaction, but no excise tax will be imposed. Fiduciaries considering an investment in our securities should consult their own legal advisors as to whether the ownership of our securities involves a non-exempt prohibited transaction.
“Plan Assets” Considerations
The U.S. Department of Labor has issued a regulation defining “plan assets.” The regulation, as subsequently modified by ERISA, generally provides that when an ERISA Plan or non-ERISA plana Non-ERISA Plan otherwise subject to Title I of ERISA and/or Section 4975 of the IRC acquires a security that is an equity interest in an entity and that security is neither a “publicly offered security” nor a security issued by an investment company registered under the Investment Company Act of 1940, as amended, the assets of the ERISA plan’sPlan or non-ERISA plan’s assetsNon-ERISA Plan include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established
either that the entity is an operating company or that equity participation in the entity by benefit plan investors is not significant. We are not an investment company registered under the Investment Company Act of 1940, as amended.
Each class of our equity (that is, our common shares and any other class of equity that we may issue) must be analyzed separately to ascertain whether it is a publicly offered security. The regulation defines a publicly offered security as a security that is “widely held,” “freely transferable” and either part of a class of securities registered under the Exchange Act,or sold under an effective registration statement under the Securities Act of 1933, as amended, or the Securities Act, provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred. Each class of our outstanding shares has been registered under the Exchange Act within the necessary time frame to satisfy the foregoing condition.
The regulation provides that a security is “widely held” only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. However, a security will not fail to be “widely held” because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer’sissuer's control. WeAlthough we cannot be sure, we believe our common shares have been and will remain widely held, and we expect the same to be true of any future class of equity that we may issue, but we can give no assurances in this regard.issue.
The regulation provides that whether a security is “freely transferable” is a factual question to be determined on the basis of all relevant facts and circumstances. The regulation further provides that, where a security is part of an offering in which the minimum investment is $10,000 or less, some restrictions on transfer ordinarily will not, alone or in combination, affect a finding that these securities are freely transferable. The restrictions on transfer enumerated in the regulation as not affecting that finding include:
any restriction on or prohibition against any transfer or assignment that would result in a termination or reclassification for federal or state tax purposes, or would otherwise violate any state or federal law or court order;
any requirement that advance notice of a transfer or assignment be given to the issuer and any requirement that either the transferor or transferee, or both, execute documentation setting forth representations as to compliance with any restrictions on transfer that are among those enumerated in the regulation as not affecting free transferability, including those described in the preceding clause of this sentence;
any administrative procedure that establishes an effective date, or an event prior to which a transfer or assignment will not be effective; and
any limitation or restriction on transfer or assignment that is not imposed by the issuer or a person acting on behalf of the issuer.
We believe that the restrictions imposed under our declaration of truston the transfer of shares do not result in the failure of our shares to be “freely transferable.” Furthermore, we believe that there exist no other facts or circumstances limiting the transferability of our shares that are not included among those enumerated as not affecting their free transferability under the regulation, and we do not expect or intend to impose in the future, or to permit any person to impose on our behalf, any limitations or restrictions on transfer that would not be among the enumerated permissible limitations or restrictions.
Assuming that each class of our shares will be “widely held” and that no other facts and circumstances exist that restrict
transferability of these shares, our counsel, Sullivan & Worcester LLP, is of the opinion that our shares will not fail to be “freely transferable” for purposes of the regulation due to the restrictions on transfer of our shares underin our declaration of trust and that under the regulation each class of our currently outstanding shares is publicly offered and our assets will not be deemed to be “plan assets” of any ERISA planPlan or non-ERISA planNon-ERISA Plan that acquires our shares in a public offering. This opinion is conditioned upon certain assumptions and representations, as discussed above in “Material United States Federal Income Tax Considerations-TaxationConsiderations—Taxation as a REIT.”
Item 1A. Risk Factors.
Our business is subject to a number of risks and uncertainties. Investors and prospective investors should carefully consider the risks described below, together with all of the other information in this Annual Report on Form 10-K. The risks described below may not be the only risks we face but are risks we believe may be material at this time. Additional risks that we do not yet know of, or that we currently think are immaterial, also may also impair our business operations or financial results. If any of the events or circumstances described below occurs, our business, financial condition, or results of operations or ability to make or sustain distributions to our shareholders and the market pricevalue of our securities could decline.be adversely affected. Investors and prospective investors
should consider the following risks, and the information contained under the heading “Warning Concerning Forward LookingForward-Looking Statements” and the risks described elsewhere in this Annual Report on Form 10-K before deciding whether to invest in our securities.
Risks Related to Our Tenants andManagersBusiness
Financial and other difficulties atFollowing the completion of the Restructuring Transaction, the results of operations for our senior living communities that Five Star could adversely affect us.manages for us will be directly reflected and included in our operating results and will represent a significant part of our consolidated operating results and a substantial majority of the operating results of our senior housing operating portfolio.
OurAs of January 1, 2020, we and Five Star completed the Restructuring Transaction, pursuant to which, among other things, our previously existing master leases and management and pooling agreements with Five Star accountedwere terminated and replaced with the New Management Agreements for approximately 31.5%all of our total annualized rental income assenior living communities operated by Five Star. Unlike a lease structure, the operating results of December 31, 2016the managed communities are directly reflected and approximately 19.2%included in our operating results. As a result, our results of operations will be directly impacted by the operating results of our total revenuessenior living communities that Five Star manages. If Five Star does not manage our senior living communities profitably and in accordance with our expectations, our results of operations, financial condition and prospects, and the value of our senior living communities, may be materially adversely affected.
We are dependent on Five Star for the year ended December 31, 2016.operation of most of our senior living communities.
The senior living communities that Five Star also operated approximately 48.7%manages for us represent most of our properties, at cost (less impairments), as of December 31, 2016.senior living communities. Five Star has not been consistently profitable since it becamemanages our senior living communities pursuant to the New Management Agreements. As a public company in 2001. Although Five Star has access to a $100.0 million secured revolving credit facility that matures in 2020, subject to extensionsresult, the success of our senior living communities will depend upon Five Star's payment of extensionability to efficiently and effectively operate them. Our ability to terminate the New Management Agreements is limited to the termination rights provided under such agreements or as may otherwise be recognized under law. As a result, we may be limited in our ability to replace Five Star as a manager if we determine it is in our best interests to do so, and we may be required to pay Five Star a significant termination fee if we terminate the New Management Agreements. In addition, if Five Star were to cease managing our senior living communities, we may not be able to obtain a replacement manager as qualified as Five Star or at all and we may incur significant expenses in connection with any replacement manager, including transitioning operational costs, capital expenditures to renovate our senior living communities to the replacement manager's practices and standards and declines in residents fees and meeting other conditions, it currently has limitedservices revenue. Although we have various rights as owner under the New Management Agreements, we rely on the manager’s personnel, good faith, expertise, performance, technical resources, operating efficiencies, information systems, proprietary information and substantial lease obligationsjudgment to manage our managed senior living communities efficiently and effectively. We also rely on the manager to set resident fees and otherwise operate our managed senior living communities in compliance with the New Management Agreements.
We assume the operational risks and fund the operations and capital and maintenance requirements for all of our senior living communities that Five Star manages, which may require us to fund significant amounts and require us to maintain sufficient funding for those managed senior living communities.
Under the New Management Agreements, we assume the operational risks and fund the operations and capital and maintenance requirements for all those senior living communities that Five Star previously leased from us and others.now manages for us. As a result, we are required to maintain sufficient funding for these purposes. We cannot be sure that we will be able to maintain sufficient funding for these purposes. Further, any funding we do maintain for these purposes will not be available for other business purposes, which may limit our ability to pursue other business opportunities and could limit the amount of distributions we can pay to our shareholders.
Five Star’s business is subject to a number of risks, including the following:
Five Star has high operating leverage; therefore, a small percentage decline in Five Star’s revenues or increase in its expenses could have a material adverse impact on Five Star’s operating results.
Circumstances that adversely affect the ability of seniors or their families to pay for Five Star’s services, such as economic downturns, softness in the U.S. housing market, higher levels of unemployment among resident family members, lower levels of consumer confidence, stock market volatility and/or changes in demographics, could cause Five Star’s occupancy rates, revenues and results of operations to decline.
U.S. housing market conditions and theThe current trend for seniors to delay moving to senior living communities until they require greater care could have a material adverse effect on Five Star’s business, financial condition and results of operations.
The failure of Medicare and Medicaid ratesor to match Five Star’s costs would reduce Five Star’s income and may cause Five Star to continue to experience losses.
Private third party payers’, such as insurance companies’, continued efforts to reduce healthcare costs could adversely affect Five Star.
Provisions of the ACA, or the repeal or replacement of the ACA, could reduce Five Star’s income and increase its costs.
Increases in labor costs may have a material adverse effect on Five Star.
Five Star’s business is subject to extensive regulation, which increases its costs and may cause Five Star to experience losses.
The nature of Five Star’s business exposes it to litigation and regulatory and government proceedings; Five Star has been, is currently, and expects in the future to be involved in claims, lawsuits and regulatory and government audits, investigations and proceedings arising in the ordinary course of its business, some of which may involve material amounts.
Five Star’s strategy to continue to grow its business through acquisitions and by entering into additional long term lease and management arrangements for senior living communities where residents’ private resources account for all or a large majority of revenues, may not succeed and may cause Five Star to continue to experience losses.
If Five Star’s operations continue to be unprofitable, it may default in its rent obligations to us or we may realize reduced income from our managed senior living communities, and, if Five Star fails to provide quality services at the senior living communities we own, our income from these communities may be adversely affected. Furthermore, if we were required to replace Five Star as our majority tenant and manager, we could experience significant disruptions in operations at our applicable senior living communities, which could reduce our income and cash flow from, and the value of, those communities.
U.S. housing market conditions and the current trend for seniors to delayforgo moving to senior living communities until they require greater carealtogether could have a material adverse effect on our business, financial condition and results of operations.
Downturns or stagnation in the U.S. housing market could adversely affect the ability, or perceived ability, of seniors to afford our tenants’ and managers’ entrance fees and resident fees as prospective residents frequently use the proceeds from the sale of their homes to cover the cost of such fees. If seniors have a difficult time selling their homes, their ability to relocate to our leased and managed senior living communities or finance their stays at our leased and managed senior living communities with private resources could be adversely affected. Also, seniorsSeniors have been increasingly delaying their moves to senior living communities, including to our leased and managed senior living communities, until they require greater care.care, and they have been increasingly forgoing moving to senior living communities altogether. Further, rehabilitation therapy and other services are increasingly being provided to seniors on an outpatient basis or in seniors’seniors' personal residences in response to market demand and government regulation, which may increase the trend for seniors to delay moving to senior living communities. Such delays may cause decreases in occupancy rates and increases in resident turnover rates at our senior living communities. Moreover, older aged persons may have greater care needs and require higher acuity services, which may increase our tenants’managers' and managers’tenants' cost of business, expose our tenantsmanagers and managerstenants to additional liability or result in lost business and shorter stays at our leased and managed senior living communities if our tenantsmanagers and managerstenants are not able to provide the requisite care services or fail to adequately provide
those services. If such volatile U.S. housing market conditions and senior living movingThese trends continue for a protracted period,may negatively impact the occupancy rates, revenues and cash flows at our leased and managed senior living communities and our tenants' results of operations couldoperations. Further, if any of our managers or tenants is unable to offset lost revenues from these trends by providing and growing other revenue sources, such as new or increased service offerings to seniors, our senior living communities may be negatively impacted.unprofitable and we may receive lower returns and rent and the value of our senior living communities may decline.
Increases in labor costs at our managed senior living communities may have a material adverse effect on us.
Wages and employee benefits associated with the operations of our managed senior living communities represent a significant part of our managed senior living communities’communities' operating expenses. The U.S. labor market has been experiencing an extended period of low unemployment. Further, there has been recent legislation enacted and proposed legislation to increase the minimum wage in certain jurisdictions. This, in turn, has put upward pressure on wages. Our managers compete with other senior living community operators, among others, to attract and retain qualified personnel responsible for the day to day operations of our managed senior living communities. The market for qualified nurses, therapists and other healthcare professionals is highly competitive, and periodic or geographic area shortages of such healthcare professionals may require our managers to increase the wages and benefits they offer to their employees in order to attract and retain such personnel or to utilize temporary personnel at an increased cost. Moreover, the low level of unemployment in the United States currently may result in our managers being unable to fully staff its senior living communities or having to pay overtime to adequately staff its senior living communities. In addition, employee benefit costs, including health insurance and workers’workers' compensation insurance costs, have materially increased in recent years and, as noted above, we cannot predict the future impact of the ACA, or the repeal or replacement of the ACA, on the cost of employee health insurance. Although Five Star determines its employee health insurance and workers’ compensation self insurance reserves with guidance from third party professionals, its reserves may nonetheless be inadequate. Increasing employee health insurance and workers’ compensation insuranceyears.
We have been experiencing increasing labor costs and increasing self insurance reserves for labor related insurance may materially and adversely affect our earnings fromat our managed senior living communities.
We cannot be sure that labor costs at our managed senior living communities will not continue to increase or that any increases will eventually be recovered by corresponding increases in the rates charged to residents or otherwise. Any significant failure by our managers to prudently control labor costs or to pass any increases on to residents through rate increases could have a material adverse effect on our business, financial condition and results of operations. Five Star, like most senor living operators, often experiences staffing turnover, which may increase in the current competitive labor market and the competitive environment in the senior living industry. Heightened levels of staffing turnover for Five Star, particularly for key and skilled positions, such as management, its regional and executive directors and other skilled and qualified personnel who provide services with respect to our senior living communities that Five Star manages for us may disrupt operations, limit or slow Five Star's ability to execute its business strategies, decrease our revenues and increase our costs at our managed senior living communities, which may have a material adverse effect on our business, financial condition, results of operations and prospects.
If we, our managers and our tenants fail to identify and successfully act upon changes and trends in the healthcare industry and seniors' needs and preferences, our business, financial condition, results of operations and prospects will be adversely impacted.
The healthcare industry is a dynamic industry. The needs and preferences of seniors have generally changed over the past several years, including preferences to reside in their homes longer or permanently, as well as changes in services and offerings, including delivery of home healthcare services and for service offerings that address their desire to maintain active lifestyles. If we, our managers and our tenants fail to identify and successfully act upon and address changes and trends in the healthcare industry and seniors' needs and preferences, our business, financial condition, results of operations and prospects will be adversely impacted.
Federal, state and local employment related laws and regulations could increase theour cost of doing business at our managed senior living communities,and our managers' failuremanagers may fail to comply with such laws and regulations could have a material adverse effect on our business, financial condition and results of operations.regulations.
The operations at our managed senior living communities are subject to a variety of federal, state and local employment related laws and regulations, including, but not limited to, the U.S. Fair Labor Standards Act, which governs such matters as minimum wages, the Family and Medical Leave Act, overtime pay, compensable time, recordkeeping and other working conditions, and a variety of similar laws that govern these and other employment related matters. Because labor represents a significant portion of our managed senior living communities’communities' operating expenses, compliance with these evolving laws and regulations could substantially increase the cost of doing business at our managed senior living communities, while failure to do so could subject
our managers to significant back pay awards, fines and lawsuits. Our managers' failure to comply with federal, state and local employment related laws and regulations could have a material adverse effect on our business, financial condition and results of operations.
The nature of our tenants’managers' and managers’tenants' business exposes us and them to litigation and regulatory and government proceedings.
Our tenantsmanagers and managerstenants have been, are currently, and expect in the future to be involved in claims, lawsuits and regulatory and government audits, investigations and proceedings arising in the ordinary course of their and our business, some of which may involve material amounts.amounts, and we may also be involved in such claims, lawsuits and regulatory and government audits, investigations and proceedings at our managed communities. The defense and resolution of such claims, lawsuits and other proceedings may require our managers and tenants and managersor us to incur significant expenses. In several well publicized instances, private litigation by residents of senior living communities for alleged abuses has resulted in large damage awards against senior living companies. Some lawyers and law firms specialize in bringing litigation against senior living community operators. As a result of this litigation and potential litigation, the cost of our tenants’ and managers’ liability insurance continues to increase. Medical liability insurance reform has at times been a topic of political debate, and some states have enacted legislation to limit future liability awards. However, such reforms have not generally been adopted, and we expect our tenants’ and managers’that insurance costs may continue to increase. Further, although Five Star determines its self insurance reserves with guidance from third party professionals, its reserves may nonetheless be inadequate. Insurance costs related to our managed senior living communities are, and the costs, claims, lawsuits and regulatory and government audits, investigations and proceedings related to our managed senior living communities may be, included as operating expenses of those communities, which reduce our returns from those communities. Increasing liability insurance costs and increasingthe need to increase self insurance reserves could have a material adverse effect on our tenants’ and managers’ business,our managers' and tenants' businesses, financial condition and results of operations.
Depressed U.S. housing market conditions may reduce the willingness or ability of seniors to relocate to our senior living communities.
Downturns or stagnation in the U.S. housing market could adversely affect the ability, or perceived ability, of seniors to afford our managers' and tenants' entrance fees and resident fees as prospective residents frequently use the proceeds from the sale of their homes to cover the cost of such fees. If seniors have a difficult time selling their homes, their ability to relocate to our managed and leased senior living communities or finance their stays at our managed and leased senior living communities with private resources could be adversely affected. If U.S. housing market conditions reduce seniors' willingness or ability to relocate to our managed and leased senior living communities, the occupancy rates, revenues and cash flows at our managed and leased senior living communities and our results of operations which could cause them to become unable to pay rents due to usbe negatively impacted.
Our managers or generate and pay minimum and other returns to us.
The failure by us or our tenants or managersmay fail to comply with laws relating to the operation of our leasedmanaged and managedleased senior living communities may adversely impact our tenants’ ability to pay us rent, the profitability of our managed senior living communities and the values of our properties.communities.
We and our tenantsmanagers and managerstenants are subject to, or impacted by, extensive and frequently changing federal, state and local laws and regulations, including: licensure laws; laws protecting consumers against deceptive practices; laws relating to the operation of our properties and how our tenantsmanagers and managerstenants conduct their operations, such as with respect to health and safety, fire and privacy matters; laws affecting communities that participate in Medicaid; laws affecting SNFs, clinics and other healthcare facilities that participate in both Medicare and Medicaid which mandate allowable costs, pricing, reimbursement procedures and limitations, quality of services and care, food service and physical plants; resident rights laws (including abuse and neglect laws) and fraud laws; anti-kickback and physician referral laws; the Americans with Disabilities Act and similar laws; and safety and health standards established by OSHA. We and our tenantsmanagers and managerstenants are also required to comply with federal and state laws governing the privacy, security, use and disclosure of individually identifiable information, including financial information and protected health information. Under HIPAA, we and our tenantsmanagers and managerstenants are required to comply with the HIPAA privacy rule, security standards and standards for electronic healthcare transactions. State laws also govern the privacy of individual health information, and these laws are, in some jurisdictions, more stringent than HIPAA.
We and our tenantsmanagers and managerstenants expend significant resources to maintain compliance with these laws and regulations. However, if we or our tenantsmanagers or managerstenants are alleged to fail, or do fail, to comply with applicable legal requirements, we or they may have to expend significant resources to respond to such allegations, and if we or they are unable to cure deficiencies, certain sanctions may be imposed which may adversely affect the ability of our tenants to pay us rent, the profitability of our managed senior living communities and our ability to obtain, renew or maintain licenses at those communities and the values of our properties. Changes in applicable regulatory frameworks could also have similar adverse effects.
The operationsfailure of some of our communities are dependent upon payments from the Medicare and Medicaid programs.rates to match our costs will reduce our income or create losses.
For the year ended December 31, 2016, approximately 97%Some of our NOI was generated from properties where a majority of the revenue is derived from private resources, and the remaining 3% of our NOI was generated from properties where a majority of the revenue was derivedmanaged senior living communities, especially those with skilled nursing units, may receive significant revenues from Medicare and Medicaid reimbursements. Operations at most ofMedicaid. Although we have made efforts to increasingly transition our business away from government payer sources, such as Medicare and Medicaid, dependent properties currently produce sufficient cash flow to paythese programs still comprise part of our allocated rents or our minimum returns, but operations at certainbusiness and their direct
impact will likely increase as a result of the Conversion (as defined above in "Business—Senior Housing Operating Portfolio Managements" in Part I, Item 1 of this Annual Report on Form 10-K). Payments under Medicare and Medicaid are set by government policy, laws and regulations. The rates and amounts of these properties do not. Even at properties where less than a majority of the NOI comes from Medicare or Medicaid payments a reduction in such payments could materially adversely affect profits of, or result in lossesare subject to our tenants or managers. With the background of the currentperiodic adjustment. Current and projected federal budget deficit and otherdeficits, federal spending priorities and continued challenging state fiscal conditions there have beenresulted in numerous recent legislative and regulatory actions or proposed actions with respect to federal Medicare and state Medicaid ratespayments, insurance and federal payments to states for Medicaid programs.healthcare delivery. For further information regarding such programs,these matters and developments, see elsewhere in this Annual Report on Form 10-K, including under the caption “Business—Government Regulation and Reimbursement” in Part 1,I, Item 1 of this Annual Report on Form 10-K, and under10-K. These matters could result in the caption “Management’s Discussion and Analysisfailure of Financial Condition and Results of Operations—Impact of Government Reimbursement” in Part II, Item 7 of this
Annual Report on Form 10-K. If and to the extent Medicare or Medicaid payment rates are reduced from current levels,to cover our costs of providing required services to residents, or if rate increases are less than increases in operating costs, such changesreductions in payments to us or other circumstances that could have a material adverse effect on the abilityour business, results of operations and financial condition. Further, certain tenants of our tenantsproperties receive some of their revenues from government paying sources. If they were to pay us rent, the profitability of our managed senior living communities and the values of our properties. In addition, the revenues that we or our tenants receive from Medicare and Medicaid may be subject to statutory and regulatory changes, retroactive rate adjustments, recovery of program overpayments or set offs, administrative rulings and policy interpretations, and payment delays, any of which could have a material adverse effect on the ability of our tenants to pay us rent, the profitability of our managed senior living communities and the values of our properties.
Provisions of the ACA and proposals to repeal and replace the ACA could adversely affect us or our tenants and managers.
The ACA contains insurance changes, payment changes and healthcare delivery systems changes that have affected, and will continue to affect, us, our tenants and managers. Examples ofexperience these and other information regarding such programs, are provided below as well as under the caption “Business-Government Regulation and Reimbursement” in Part 1, Item 1 of this Annual Report on Form 10-K and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Impact of Government Reimbursement” in Part II, Item 7 of this Annual Report on Form 10-K.
Provisions of the ACA include multiple reductions to the annual market basket updates for inflation that may result in SNF Medicare payment rates being less than for the preceding fiscal year. We are unable to predict how potential Medicare rate reductions under the ACA will affect our tenants’ and our managers’ future financial results of operations; however, the effect may be adverse and material and hence adverse and material to our future financial condition and results of operations.
The ACA also established an Independent Payment Advisory Board to submit legislative proposals to Congress and take other actions with a goal of reducing Medicare spending growth. When and if such spending reductions take effect, they may be adverse and material to our tenants’pressures, their ability to pay rent to us may be adversely impacted.
Private third party payers continue to try to reduce healthcare costs.
Private third party payers such as insurance companies continue their efforts to control healthcare costs through direct contracts with healthcare providers, increased utilization review practices and greater enrollment in managed care programs and preferred provider organizations. These third party payers increasingly demand discounted fee structures and the profitabilityassumption by healthcare providers of all or a portion of the financial risk. These efforts to limit the amount of payments we receive for healthcare services could adversely affect us. Reimbursement payments under third party payer programs may not remain at levels comparable to present levels or be sufficient to cover the costs allocable to patients participating in such programs. Future changes in, or renegotiations of, the reimbursement rates or methods of third party payers, or the implementation of other measures to reduce payments for our services could result in a substantial reduction in our NOI with respect to our managed senior living communities. At the same time, as a result of competitive pressures, our managers' ability to maintain operating margins at our managed senior living communities and the valuesthrough price increases to private pay residents may be limited. Further certain tenants of our properties. The ACA includes other changes that may affect us, our tenantsproperties face similar payment and our managers, such as enforcement reformspricing pressures and Medicare and Medicaid program integrity control initiatives, new compliance, ethics and public disclosure requirements, initiatives to encourage the development of home and community based long term care services rather than institutional services under Medicaid, value based purchasing plans and a Medicare post acute care pilot program to develop and evaluate making a bundled payment for services, including hospital, physician and SNF services, provided during an episode of care.
Changes implemented under the ACA resulting in reduced payments for services or the failure of Medicare, Medicaid or insurance payment rates to cover increasing costs could adversely and materially affect thetheir ability of our tenants to pay rent to us may be adversely impacted as a result.
If Five Star faces financial and other difficulties again in the profitabilityfuture, we may be adversely affected.
In the fourth quarter of certain2018, Five Star announced that the conditions in the senior living industry, its recurring operating losses, the expected continued industry challenges and the risk that it may not be able to obtain sufficient funding, gave rise to a substantial doubt about its ability to continue as a going concern. In response, in April 2019, we and Five Star entered into the Transaction Agreement, and Five Star has since then determined that a substantial doubt no longer existed about its ability to continue as a going concern. The Restructuring Transaction significantly reduced Five Star's operating leverage and cash and other working capital needs for the senior living communities it operates because under the New Management Arrangements, unlike the prior lease arrangements, we, not Five Star, fund the operations and capital requirements of our managedthe senior living communities, and Five Star is no longer obligated to pay us rent. Despite these changes, we cannot be sure that Five Star will not face financial and other difficulties in the valuesfuture. Although Five Star will be relieved of the obligation to fund the operations and capital for our properties.
senior living communities, Five Star owns its own senior living communities and it may purchase additional senior living communities or enter into lease arrangements to operate additional senior living communities in the future. Further, Five Star will still have to fund its other business expenses and commitments. In addition, Five Star could elect to grow or develop its business beyond its management arrangements with us in the extent the ACAfuture. If Five Star is repealed or changed under the new Trump Administration, additional risks and regulatory uncertaintynot profitable, our business may arise. Depending upon what aspects of the ACA are repealed and whether and how they are replaced, our future financial results could be materially adversely and materially affected.
Termination of assisted living resident agreements and resident attrition could adversely affect revenues and earnings at our leasedmanaged and managedleased senior living communities.
State regulations governing assisted living communities typically require a written resident agreement with each resident. Most of these regulations also require that each resident have the right to terminate these assisted living resident agreements for any reason on reasonable notice. Consistent with these regulations, most of our tenants’tenants' and managers’managers' resident agreements allow residents to terminate their agreements on 30 days’days' notice. Thus, our tenantsmanagers and managerstenants may be unable to contract with assisted living residents to stay for longer periods of time, unlike typical apartment leasing arrangements that involve lease agreements with terms of up to a year or longer. If a large number of residents elected to terminate their resident agreements at or around the same time, revenues and earnings at our leasedmanaged and managedleased senior living communities could be materially and adversely affected. In addition, the advanced ages of residents at our leasedmanaged and managedleased senior living communities make resident turnover rates difficult to predict.
Provisions of the ACA and efforts to repeal, replace or modify the ACA could adversely affect us or our managers and tenants.
The ACA contains insurance changes, payment changes and healthcare delivery systems changes that have affected, and will continue to affect, us, our managers and tenants. Changes implemented under the ACA caused or may cause in the future reduced payments for services, as enforcement reforms and Medicare and Medicaid program integrity control initiatives, new compliance, ethics and public disclosure requirements, initiatives to encourage the development of home and community based long term care services rather than institutional services under Medicaid, value based purchasing plans and a Medicare post-acute care pilot program to develop and evaluate making a bundled payment for services, including hospital, physician and SNF services, provided during an episode of care. Since enactment in 2011, the ACA has been the subject of partial or complete repeal through legislation, administrative action and judicial opinions. Information regarding the ACA is provided under the caption “Business—Government Regulation and Reimbursement” in Part I, Item 1 of this Annual Report on Form 10-K and under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations—Impact of Government Reimbursement” in Part II, Item 7 of this Annual Report on Form 10-K.
We are unable to predict how potential Medicare rate reductions under the ACA will affect our managers' and tenants' future financial results of operations; however, the effect may be adverse and material and hence adverse and material to our future financial condition and results of operations. If some or all of the ACA is repealed, replaced or modified, additional risks and regulatory uncertainty may arise. Depending upon what aspects of the ACA are repealed, replaced or modified, our future financial results could be adversely and materially affected.
We may not succeed in selling any properties we identify for sale, the proceeds we may receive for any such sales may be less than we expect and we may incur losses with respect to these sales.
Risks Relatedunderperforming senior living communities and non-core assets. Although we have sold or agreed to sell a significant number of properties in furtherance of this plan, we cannot be sure that we will be able to find attractive sales opportunities for additional properties or that any sale will be completed in a timely manner, if at all. Our Businessability to sell these or any of our other properties, and the prices we receive upon a sale, may be affected by many factors, and we may be unable to execute our strategy. In particular, these factors could arise from weakness in or the lack of an established market for properties, changes in the financial condition or prospects of prospective purchasers and the tenants of the properties, the terms of the leases with tenants at the properties, the characteristics, quality and prospects of the properties, and the availability of financing to potential purchasers on reasonable terms, the number of prospective purchasers, the number of competing properties in the market, unfavorable local, national or international economic conditions, industry trends and changes in laws, regulations or fiscal policies of jurisdictions in which the properties are located. We may not succeed in selling properties that we have identified, or in the future identify, for sale, the terms of any such sales may not meet our expectations, prospective buyers may fail to perform their obligations under the terms of agreements for the sale of our properties, requiring us to find new buyers for such properties, and we may incur losses in connection with these potential sales. In addition, we may elect to change the amount or mix of properties we may seek to sell or to otherwise change or abandon the plan. If we are unable to realize proceeds from the sale of properties sufficient to allow us to reduce our leverage to a level we believe appropriate or which ratings agencies and possible financing sources believe appropriate, our credit ratings may be further lowered, we may reduce our acquisition activity, we may reduce the amount we invest in our properties or pay for expenses and we may reduce the amount of distributions we pay to our shareholders.
REIT distribution requirements and limitations on our ability to access reasonably priced capital may adversely impact our ability to carry out our business plan.
To retainmaintain our qualification for taxation as a REIT under the IRC, we are required to distribute at least 90% of our annual satisfy distribution requirements imposed by the IRC. See "Material United States Federal Income Tax Considerations—REIT taxable income (excluding capital gains).Qualification Requirements—Annual Distribution Requirements." Accordingly, we may not be able to retain sufficient cash to fund our operations, repay our debts, invest in our properties or fund our acquisitions or development or redevelopment efforts. Our business strategies therefore depend, in part, upon our ability to raise additional capital at reasonable costs. The volatility in the availability of capital to businesses on a global basis in most debt and equity markets generally may limit our ability to raise reasonably priced capital. We may also be also unable to raise reasonably priced capital because of reasons related to our business, market perceptions of our prospects, the terms of our indebtedness, the extent of our leverage, or for reasons beyond our control, such as market conditions. Because the earnings we are permitted to retain are limited by the rules governing REIT qualification and taxation, if we are unable to raise reasonably priced capital, we may not be able to carry out our business plan.
Increasing
Changes in market interest rates, including changes that may result from the expected phase out of LIBOR, may adversely affect us.
Since the most recent U.S. economic recession, the Board of Governors of the U.S. Federal Reserve System, or the U.S. Federal Reserve, has taken actions thatwhich have resulted in low interest rates prevailing in the marketplace for a historically long period of time. In December 2016, theThe U.S. Federal Reserve raised its benchmark intereststeadily increased the targeted federal funds rate by a quarter of a percentage point,over the last several years, but recently took action to decrease the federal funds rate and market interest rates rose after the recent U.S. presidential election in anticipation of possible increased government spending and inflation. Market interest rates may continue to increase,make adjustments in the near future. In addition, as noted in Part II, Item 7A of this Annual Report on Form 10-K, LIBOR is expected to be phased out in 2021. The interest rates under our revolving credit facility and term loans are based on LIBOR and future debt we may incur may also be based on LIBOR. We currently expect that the determination of interest under our revolving credit facility and term loan agreements would be based on the alternative rates provided under those agreements or would be revised to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we cannot be sure that, if LIBOR is phased out or transitioned, the changes to the determination of interest under our revolving credit facility and term loan agreements would approximate the current calculation in accordance with LIBOR. An alternative interest rate index that may replace LIBOR may result in our paying increased interest. Interest rate increases may materially and negatively affect us in several ways, including:
Investors may consider whether to buy or sell our common shares based upon the distribution rate on our common shares relative to the then prevailing market interest rates. If market interest rates go up, investors may expect a higher distribution rate than we are able to pay, which may increase our cost of capital, or they may sell our common shares and seek alternatealternative investments with athat offer higher distribution rate.rates. Sales of our common shares may cause a decline in the market pricevalue of our common shares.
Amounts outstanding under our revolving credit facility and term loans require interest to be paid at variable interest rates. When interest rates increase, our interest costs will increase, which could adversely affect our cash flow, our ability to pay principal and interest on our debt, our cost of refinancing our debt when it becomes due and our ability to make or sustain the rate of distributions to our shareholders. Additionally, if we choose to hedge our interest rate risk, we cannot be sure that the hedge will be effective or that our hedging counterparty will meet its obligations to us.
Property values are often determined, in part, based upon a capitalization of rental income formula. When market interest rates increase, property investors often demand higher capitalization rates and that causes property values to decline. Increases in interest rates could lower the value of our properties and cause the market pricevalue of our common sharessecurities to decline.
Amounts outstanding under our revolving credit facility and term loans require interest to be paid at floating interest rates. When interest rates increase, our interest costs will increase, which could adversely affect our cash flows, our ability to pay principal and interest on our debt, our cost of refinancing our fixed rate debts when they become due and our ability to make or sustain distributions to our shareholders. Additionally, if we choose to hedge our interest rate risk, we cannot be sure that the hedge will be effective or that our hedging counterparty will meet its obligations to us.
Low market interest rates, particularly if they remain over a sustained period, may increase our use of debt capital to fund property acquisitions, lower capitalization rates for property purchases and increased competition for property purchases, which may reduce our ability to acquire new properties.
We are limited in our ability to operate or manage our properties and are thus dependent on our tenantsmanagers and managers.tenants.
Because federal income tax laws restrict REITs and their subsidiaries from operating or managing health carehealthcare facilities, we do not operate or manage our senior living communities. Instead, we lease nearly all of our senior living communities to operating companies or to our subsidiaries that qualify as TRSs under the IRC. We have retained a third party managersmanager to operatemanage our senior living communities that are leased to our subsidiaries. Our income from our properties may be adversely affected if our tenantsmanagers or managerstenants fail to provide quality services and amenities to residents or if they fail to maintain quality services. While we monitor the performance of our tenantsmanagers and managerstenants and apply asset management strategies and discipline, we have limited recourse under our leases and management agreements if we believe that our tenantsmanagers or managerstenants are not performing adequately. Any failure by our tenantsmanagers or managerstenants to fully perform the duties agreed to in our leases and management agreements could adversely affect our results of operations. In addition, our tenantsmanagers and managerstenants operate, and in some cases own or have invested in, properties that compete with our properties, which may result in conflicts of interest, and fees paid to our managers are often set as a percentage of gross revenues rather than profits.interest. As a result, our tenantsmanagers and managerstenants have made, and may in the future make, decisions regarding competing properties or our properties’properties' operations that may not be in our best interests.
our returns.
Our properties and their operations are subject to extensive regulations.
Various government authorities mandate certain physical characteristics of senior housing properties, clinics, other healthcare communities and biotechnology laboratories. Changes in laws and regulations relating to these matters may require significant expenditures. Our leases, other than our MOBmedical office and life science property leases, and our management agreements generally require our tenants or managers to maintain our properties in compliance with applicable laws and regulations, and we
expend resources to monitor their compliance. However, our tenants or managers may neglect maintenance of our properties if they suffer financial distress. Under some of our leases, we have agreed to fund capital expenditures in return for rent increases and, minimum returns due to us, with respect to our managed senior living communities, increasethe target EBITDA that Five Star must generate in order to earn incentive fees increases by a defined percentage of the amount of capital expenditures we fund at those communities.in excess of target amounts. Our available financial resources or those of our tenants or managers may be insufficient to fund the expenditures required to operate our properties in accordance with applicable laws and regulations. If we fund these expenditures, our tenants’tenants' financial resources may be insufficient to satisfy their increased rental payments to us or our managed senior living communities may fail to generate profits sufficient to fundprovide us with our minimum returns.expected returns on our capital investments at those managed senior living communities.
Licensing, Medicare and Medicaid laws also require our managers and tenants who operate senior living communities, clinics and other healthcare communities to comply with extensive standards governing their operations. In addition, certain laws prohibit fraud by senior living operators, and other healthcare communities, including civil and criminal laws that prohibit false claims in Medicare, Medicaid and other programs and that regulate patient referrals. In recent years, the federal and state governments have devoted increasing resources to monitoring the quality of care at senior living communities and to anti‑fraudanti-fraud investigations in healthcare operations generally. The ACA also facilitates the DOJ’sDOJ's ability to investigate allegations of wrongdoing or fraud at SNFs. When violations of anti‑fraud,anti-fraud, false claims, anti-kickback or physician referral laws are identified, federal or state authorities may impose civil monetary damages, treble damages, repayment requirements and criminal sanctions. Healthcare communities may also be subject to license revocation or conditional licensure and exclusion from Medicare and Medicaid participation or conditional participation. When quality of care deficiencies or improper billing are identified, various laws may authorize civil money penalties or fines; the suspension, modification or revocation of a license or Medicare/Medicaid participation; the suspension or denial of admissions of residents; the denial of payments in full or in part; the implementation of state oversight, temporary management or receivership; and the imposition of criminal penalties. We, our tenants and our managers receive notices of potential sanctions from time to time, and government authorities impose such sanctions from time to time on our communities which our tenantsmanagers and managerstenants operate. If our tenantsmanagers or managerstenants are unable to cure deficiencies which have been identified or which are identified in the future, these sanctions may be imposed, and if imposed, may adversely affect our tenants’tenants' ability to pay rents to us, our returns and our ability to identify substitute tenantsmanagers or managers.tenants. Federal and state requirements for change in control of healthcare communities, including, as applicable, approvals of the proposed operator for licensure, CONs, and Medicare and Medicaid participation, may also limit or delay our ability to find substitute tenantsmanagers or managers.tenants. If any of our tenantsmanagers or managerstenants becomes unable to operate our properties, or if any of our tenants becomes unable to pay its rent or generate and pay our minimumsufficient returns for us because it has violated government regulations or payment laws, such incidents may trigger a default or termination right under their leases and management agreements with us and our or our tenants’managers' or managers’tenants' credit agreements, and we may experience difficulty in finding a substitute tenant or managermanagers or selling the affected property for a fair and commercially reasonable price, and the value of an affected property may decline materially.
Various laws administered by the FDA and other agencies regulate the operations of our tenants that operate biotechnology laboratories that develop, manufacture, market or distribute pharmaceuticals or medical devices. Once a product is approved, the FDA maintains oversight of the product and its developer and can withdraw its approval, recall products or suspend their production, impose or seek to impose civil or criminal penalties on the developer or take other actions for the developer’sdeveloper's failure to comply with regulatory requirements, including anti‑fraud,anti-fraud, false claims, anti-kickback or physician referral laws. Other concerns affecting our biotechnology laboratory tenants include the potential for subsequent discovery of safety concerns and related litigation, ensuring that the product qualifies for reimbursement under Medicare, Medicaid or other federal or state programs, cost control initiatives of payment programs, the potential for litigation over the validity or infringement of intellectual property rights related to the product, the eventual expiration of relevant patents and the need to raise additional capital. The cost of compliance with these regulations and the risks described in this paragraph, among others, could adversely affect the ability of our biotechnology laboratory tenants to pay rent to us.
We may be unable to grow our business by acquisitions of additional properties.
Part of ourOur business plan involvesplans involve the acquisition of additional properties. Our ability to make profitable acquisitions is subject to risks, including, but not limited to, risks associated with:
competition from other investors, including publicly traded and private REITs, numerous financial institutions, individuals, foreign investors and other public and private companies;
capital;
contingencies in our acquisition agreements; and
the availability and terms of financing.
Additionally, we
We might encounter unanticipated difficulties and expenditures relating to anyour acquired properties. For example:
we do not believe that it is possible to understand fully understand a property before it is owned and operated for an extendeda reasonable period of time, and, notwithstanding pre-acquisition due diligence, we could acquire a property that contains undisclosed defects in design or construction;
the market in which an acquired property is located may experience unexpected changes that adversely affect the property’sproperty's value;
the occupancy of and rents from properties that we acquire may decline during our ownership, and rents or returns that are in effect or expected at the time a property is acquired may decline thereafter;ownership;
property operating costs for our acquired properties may be higher than anticipated, and our acquired properties may not yield expected returns; and
we may acquire properties subject to unknown liabilities and without any recourse, or with limited recourse, such as liability for the cleanup of undisclosed environmental contamination or for claims by residents, tenants, vendors or other persons related to actions taken by former owners of properties; and
acquired properties might require significant management attention that would otherwise be devoted to our ongoing business.the properties.
For these reasons, among others, we might not realize the anticipated benefits of our acquisitions, and our business plan to acquire additional properties may not succeed andor may cause us to experience losses.
We and our tenantsmanagers and managerstenants face significant competition.
We face significant competition for acquisition opportunities from other investors, including publicly traded and private REITs, numerous financial institutions, individuals, foreign investors and other public and private companies. Because of competition, we may be unable to acquire, or may pay a significantly increased purchase price for, a desired property, which would reduce our expected returns from that property. Some of our competitors may have greater financial and other resources than us. Further, during prior periods of economic recession, some investors have focused on healthcare real estate investments because of a belief that these types of investments may be less affected by general economic circumstances than most other investments. Low historical market interest rates and increased leverage utilized by financial and other buyers have caused purchase prices for healthcare real estate investments to increase, therefore decreasing rates of returns. Such conditions have resulted in increased competition for investments, fewer available investment opportunities and lower spreads over the cost of capital. If such conditions continue for a protracted period, our ability to grow our business and improve our financial results may be materially and adversely affected.
We face also face competition for tenants at our properties, particularly at our MOBs.medical office and life science properties. Some competing properties may be newer, better located or more attractive to tenants. Competing properties may have lower rates of occupancy than our properties, which may result in competing owners offering available space at lower rents than we offer at our properties. Development activities may increase the supply of properties of the type we own in the leasing markets in which we own properties which mayand increase the competition we face. These competitive pressuresCompetition may affect our abilitymake it difficult for us to attract and retain tenants and may reduce the rents we are able to charge.
Further, our tenantsmanagers and managerstenants compete with numerous other senior living community operators, as well as companies that provide senior living services, such as home healthcare companies and other real estate based service providers. Some of our tenants’managers' and managers’tenants' existing competitors are larger and have greater financial resources than they do and some of their competitors are not for profit entities which have endowment income and may not face the same financial pressures that they do. We cannot be sure that our tenantsmanagers and managerstenants will be able to attract a sufficient number of residents to our leasedmanaged and managedleased senior living communities at rates that will generate acceptable returns or that they will be able to attract employees and keep wages and other employee benefits, insurance costs and other operating expenses at levels which will allow them to compete successfully and operate our senior living communities profitably.
Competition from newly developed senior living communities may adversely affect the profitability of our senior living communities.
In recent years, a significant number of new senior living communities have been developed and we expect thiscontinue to be developed. Although there are indications that the rate of newly started developments may be slowing, the increased development activity to continue in the future. Thissupply of senior living communities that has resulted from recent development activity has increased competitive pressures on our tenantsmanagers and managers,tenants, particularly in thecertain geographic markets where this development activity has been most focused, including Arizona, Georgiawe own senior living communities, and Texas.we expect these competitive challenges to continue for at least the next few years. These competitive pressureschallenges may prevent our tenantsmanagers and managerstenants from maintaining
or improving occupancy and rates at our senior living communities, which may increase the risk of default under our leases, and management agreements, reduce the rents and returns we may collectreceive and earn from our managed and leased senior living communities and adversely affect the profitability of our managed senior living communities, and may cause the value of our properties to decline.
We may be unable to lease our properties when our leases expire, and we may experience declining rents or incur significant costs to renew our leases or to lease our properties to new tenants.expire.
Although we typically will seek to renew our leases with current tenants when they expire, we cannot be sure that we will be successful in doing so. If our tenants do not renew their leases, we may be unable to locateobtain new tenants to maintain or increase the historical occupancy rates of, or rents from, our properties.
We may experience declining rents or incur significant costs to renew our leases with current tenants or to lease our properties to new tenants.
When we renew our leases with current tenants or lease to new tenants, we may experience rent decreases, and we may have to spend substantial amounts for leasing commissions, tenant improvements or other tenant inducements. Moreover, many of our MOBmedical office and life science properties have been specially designed for the particular businessbusinesses of our tenants; if the current leases for such properties are terminated or are not renewed, we may be required to renovate such properties at substantial costs, decrease the rents we charge or provide other concessions in order to lease such properties to new tenants.
Current office space utilization trends may adversely impact our business.
There is a general trend in office real estate for companies to decrease the space they occupy per employee. This increase in office utilization rates may result in our MOBmedical office and life science property tenants renewing their leases for less area than they currently occupy, which could increase the vacancy and decrease rental income at our MOBs.medical office and life science properties. The need to reconfigure leased office space to increase utilization also may require us to spend increased amounts for tenant improvements.
Current government policies regarding interest rates and trade policies may cause a recession.
The U.S. Federal Reserve policy regarding the timing and amount of future increases in interest rates, changing U.S. and other countries’ trade policies and declining foreign economic conditions and markets may hinder the growth of the U.S. economy. It is unclear whether the U.S. economy will be able to withstand these market challenges and global uncertainty and achieve meaningful and sustained growth. Economic weakness in the U.S. economy generally or a new U.S. recession would likely adversely affect our financial condition and that of our tenants and managers, could impact the ability of our tenants and managers to renew our leases or management agreements or pay rents or returns to us, and may cause the value of our properties to decline.
Ownership of real estate is subject to environmental risks and climate change risks.liabilities.
Ownership of real estate is subject to risks associated with environmental hazards. WeUnder various laws, owners as well as tenants and operators of real estate may be liable for environmental hazardsrequired to investigate and clean up or remove hazardous substances present at or migrating from our properties including those created by prior ownersthey own, lease or occupants, existing tenants or managers, abutters or other persons. Various federaloperate and state laws impose liabilities upon property owners, including us, for environmental damages arising at, or migrating from, owned properties, and we cannot be sure that we will notmay be held liable for property damage or personal injuries that result from hazardous substances. These laws also expose us to the costs of environmental investigation and clean up at, or near, our properties. As an owner or previous owner of properties,possibility that we also may bebecome liable to pay damages to government agencies or third parties for costs and damages they incur arising from environmental hazards at, or migrating from, our properties.in connection with hazardous substances. The costs and damages that may arise from environmental hazards may be substantial and are often difficult to projectassess and estimate for numerous reasons, including uncertainty about the extent of contamination, alternative treatment methods that may be substantial.
We believe someapplied, the location of our properties may contain asbestos. We believe any asbestos on our properties is contained in accordance with applicablethe property which subjects it to differing local laws and regulations and we have no current planstheir interpretations, as well as the time it may take to remove it. If we removedremediate contamination. In addition, these laws also impose various requirements regarding the asbestosoperation and maintenance of properties and recordkeeping and reporting requirements relating to environmental matters that require us or demolished the affectedmanagers or tenants of our properties certain environmental regulations govern the manner in which the asbestos must be handled and removed, and we couldto incur costs to comply with.
We may incur substantial liabilities and costs complying with such regulations.for environmental matters.
Some observers believe severeOwnership of real estate is subject to risks from adverse weather activities in different parts of the country over the last few years is evidence of globaland climate change. Such severeevents.
Severe weather that may result from climate change may have an adverse effect on individualcertain properties we own. Further,Flooding caused by rising sea levels and severe weather events, including hurricanes, tornadoes and widespread fires, may have an adverse effect on properties we own and result in significant losses to us and interruption of our business. When major weather or climate-related events, such as hurricanes, floods and wildfires, occur near our properties, we, our tenants or our managers may relocate the political debateresidents at our senior living properties to alternative locations for their safety and we, our tenants or our managers may close or limit the operations of the impacted senior living community or medical office or life science property until the event has ended and the property is then ready for operation. We or the managers or tenants of our properties may incur significant costs and losses as a result of these activities, both in terms of operating, preparing and repairing our properties in anticipation of, during and after a severe weather or climate-related event and in terms of potential lost business due to the interruption in operating our properties. Our insurance and our managers' and tenants' insurance may not adequately compensate us or them for these costs and losses.
Also, concerns about climate change hashave resulted in various treaties, laws and regulations that are intended to limit carbon emissions.emissions and address other environmental concerns. These or futureand other laws may cause energy or other costs at our properties to increase. Laws enacted to mitigate climate change may make some of our buildings obsolete or requirecause us to make material
investments in our properties which could
materially and adversely affect our financial condition or the financial condition of our managers or tenants and resultstheir ability to pay rent to, or generate sufficient returns for, us and cause the value of operations. For more information regardingour securities to decline. In addition, concerns about climate change matters and their possible adverse impact on us, please see “Management’s Discussion and Analysisincreasing storm intensities may increase the cost of Financial Condition and Results of Operations-Impact of Climate Change” in Part II, Item 7 of this Annual Report on Form 10-K.our insurance for our properties or potentially render it unavailable to obtain.
Real estate ownership creates risks and liabilities.
In addition to the risks related to environmental hazards and climate change,discussed above, our business is subject to other risks associated with real estate ownership, including:
the illiquid nature of real estate markets, which limits our ability to sell our assets rapidly to respond to changing market conditions;
the subjectivity of real estate valuations and changes in such valuations over time;
current and future adverse national real estate trends, including increasing vacancy rates, declining rental rates and general deterioration of market conditions;
costs that may be incurred relating to property maintenance and repair, and the need to make expenditures due to changes in government regulations; and
litigationliabilities and litigations arising from injuries on our properties or otherwise incidental to the ownership of our business.properties.
We have debt and we may incur additional debt.
As of December 31, 2016,2019, our consolidated indebtedness was $3.7$3.5 billion, our consolidated indebtednessnet debt to total gross assets ratio was 43.4%42.5% and we had $673.0$462.5 million available for borrowing under our $1.0 billion revolving credit facility. OurThe agreements governing our $1.0 billion revolving credit facility and our $200.0 million term loan include a feature under which the maximum aggregate borrowing availability may be increased to up to $1.5$2.0 billion our $350.0 million term loan may be increased to up to $700.0 million and our $200.0 million term loan may be increased to up to $400.0 million, in each case under certain circumstances.respectively.
We are subject to numerous risks associated with our debt, including the risk that our cash flows could be insufficient for us to make required payments on our debt. There are no limits in our organizational documents on the amount of debt we may incur, and we may incur substantial debt.
Our debt obligations could have important consequences to our securityholders. Our incurring excessive debt could limit our ability to obtain financing for working capital, capital expenditures, acquisitions, construction projects, refinancing, lease obligations or other purposes and jeopardize our ability to maintain investment grade ratings. These obligations may also increase our vulnerability to adverse economic, market and industry conditions, limit our flexibility in planning for, or reacting to, changes in our business, and place us at a disadvantage in relation to competitors that have lower debt levels. As a result, we are subjectOur incurrence of debt could also increase the costs to numerous risks associated withus of incurring additional debt, financing, including the risk that our cash flow could be insufficient to meet required payments on our debt or to enable us to sustain our rate of distribution to our shareholders. In addition, amounts outstanding under our revolving credit facility and term loans require interest to be paid at variable interest rates. When interest rates increase so will our interest costs, which could adversely affect our cash flow, our ability to pay principal and interest on our debt and our cost of refinancing our debt when it becomes due. For further information regarding our exposure to risks associated with market changes infloating interest rates please see elsewhereor expose us to potential events of default (if not cured or waived) under covenants contained in this Annual Report on Form 10-K, including Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.” Additionally, if we choose to hedge our interest rate risk, we cannot be suredebt instruments that the hedge will be effective or that any hedging counterparty will meet its obligations to us. Any or all of the above events and factors could have ana material adverse effect on our results of operations andbusiness, financial condition and jeopardizeoperating results. Excessive debt could reduce the available cash flow to fund, or limit our ability to obtain financing for, working capital, capital expenditures, acquisitions, construction projects, refinancing, lease obligations or other purposes and hinder our ability to maintain investment grade ratings.ratings from nationally recognized credit rating agencies or to make or sustain distributions to our shareholders. Following our announcement of the Restructuring Transaction, in April 2019, Standards and Poor's Global, or S&P, downgraded our issuer credit rating to BB+ and reaffirmed the ratings on our senior notes at BBB-, and in May 2019, Moody's Investors Service downgraded our unsecured credit rating to Ba1. The interest rate premiums on our revolving credit facility and our $200.0 million term loan were not changed by these changes to our ratings, but if our ratings further decline, our interest rates would likely increase.
If we default under any of our debt obligations, we may be in default under the agreements governing other debt obligations of ours which have cross default provisions, including our revolving credit facility and term loansloan agreements and our senior unsecured notes indentures and their supplements. In such case, our lenders may demand immediate payment of any outstanding indebtedness and we could be forced to liquidate our assets for less than the values we would receive in a more orderly process.
We may fail to comply with the terms of our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements, which could adversely affect our business and may prevent our making distributions to our shareholders.
Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements contain terms limiting our ability to incur additional debt. These terms, or our failure or inability to meet them, could adversely affect our business and may prevent us from making distributions to our shareholders.
Our revolving credit facility and our term loan agreements include various conditions, to our borrowing, financial and other covenants including covenants requiring us to maintain certain minimum debt service coverage and leverage ratios, and events of default. Our senior unsecured notes indentures and their supplements also impose customary restrictions on us, including requiring us to comply with certain debt to asset ratios and debt service coverage ratios if we want to incur additional debt and requiring us to maintain at least a specified ratio of total unencumbered assets to debt. We may not be able to satisfy all of these conditions or may default on some of these covenants for various reasons, including for reasons beyond our control. For example, our revolving credit facility
and term loan agreements and our senior unsecured notes indentures and their supplements require us to maintain certain debt service ratios. Our ability to comply with such covenants will depend upon the net rental income and returns we receive from our properties. If the occupancy at our properties declines or if our rents or returns decline, we may be unable to borrow under our revolving credit facility. Complying with these covenants may limit our ability to take actions that may be beneficial to us and our shareholders. Further, ifsecurityholders.
If we are
unable to borrow under our revolving credit facility, we may be unable to meet our obligations or grow our business by acquiring additional properties.
If we default under our revolving credit facility or term loan agreements, our lenders may demand immediate payment of any amounts outstanding and may elect not to fund future borrowings under our revolving credit facility or term loans.borrowings. During the continuance of any event of default under our revolving credit facility or term loan agreements, we may be limited or in some cases prohibited from making distributions to our shareholders. Any such default under our revolving credit facility or term loan agreements that results in acceleration of our obligations to repay outstanding indebtedness or in our no longer being permitted to borrow under our revolving credit facility would likely have serious and adverse consequences to us and would likely cause the market pricevalue of our common sharessecurities to decline.
In the future, we may obtain additional debt financing, and the covenants and conditions which apply to any such additional indebtednessdebt may be more restrictive than the covenants and conditions that are contained in our revolving credit facility andor term loan agreements or our senior unsecured notes indentures and their supplements.
RMR LLC and Five Star rely on information technology networks and related systems in their operations, and any material failure, inadequacy, interruption or security failure of that technology or those networks and systems could materially and adversely affect us.
TheRMR LLC and Five Star rely on information technology networks and systems, including the Internet and cloud-based infrastructures, commercially available software and their internally developed applications, to process, transmit, store and safeguard information and to manage or support a variety of their business processes (including managing our building systems), including financial transactions and maintenance of records, which may include personal identifying information of employees, residents and tenants and lease data. If either of RMR LLC or Five Star experiences material security or other failures, inadequacies or interruptions of its information technology, it could incur material costs and losses and our operations could be disrupted as a result. Further, third party vendors could experience similar events with respect to their information technology and systems that impact the products and services they provide to RMR LLC, Five Star or us. RMR LLC and Five Star rely on commercially available systems, software, tools and monitoring, as well as their internally developed applications and internal procedures and personnel, to provide security for processing, transmitting, storing and safeguarding confidential resident, tenant, customer and vendor information, such as personally identifiable information related systemsto their employees and others, including in Five Star's case, residents, and information regarding their and our financial accounts. Each of RMR LLC and Five Star are essentialtakes various actions, and incurs significant costs, to their ability to perform our day to day operations (including managing our building systems),maintain and protect the operation and security of its information technology and systems, including the data maintained in those systems. However, it is possible that these measures will not prevent the systems' improper functioning or a compromise in security, such as in the caseevent of a cyberattack or the improper disclosure of personally identifiable information.
Security breaches, computer viruses, attacks by hackers, online fraud schemes and similar breaches can create significant system disruptions, shutdowns, fraudulent transfer of assets or unauthorized disclosure of confidential information. The cybersecurity risks to RMR LLC, Five Star, us and to operate our managed senior living communities,third party vendors are heightened by, among other things, the evolving nature of the threats faced, advances in computer capabilities, new discoveries in the casefield of Five Star. As a result, we face risks associated with security breaches, whether through cyber attackscryptography and new and increasingly sophisticated methods used to perpetrate illegal or cyber intrusions over the Internet, malware, computer viruses, attachments to emails, persons who access RMR LLC’s or Five Star’s systems from inside or outside thefraudulent activities against RMR LLC or Five Star, organizationsincluding cyberattacks, email or wire fraud and other significant disruptions of theirattacks exploiting security vulnerabilities in RMR LLC's, Five Star's or other third parties' information technology networks and related systems. Asystems or operations. Any failure to maintain the security, breach or other significant disruption involvingproper function and availability of RMR LLC’sLLC's or Five Star’sStar's information technology networks and related systems, could disruptor certain third party vendors' failure to similarly protect their information technology and systems that are relevant to RMR LLC's, Five Star's or our operations, and/or those ofto safeguard RMR LLC's, Five Star's or our managed senior living communities;business processes, assets and information could result in the unauthorized accessfinancial losses, interrupt RMR LLC's or Five Star's operations, damage RMR LLC's or Five Star's reputation, cause RMR LLC or Five Star to be in default of material contracts and the destruction, loss, theft, misappropriationsubject RMR LLC or releaseFive Star to liability claims or regulatory penalties, any of proprietary, personally identifiable, protected health, confidential, sensitive or otherwise valuable information, which others could use to compete against us or which could expose us to damage claims by third parties for disruptive, destructive or otherwise harmful purposes and outcomes; require significant management attention and resources to remedy any damages that result; subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or damage our business relationships or reputation generally. Any or all of the foregoing could materially and adversely affect us.
Although RMR LLCour business and Five Star take various actions to maintain the security and integrityvalue of their information technology networks and related systems, and have implemented various measures to manage the risk of a security breach or disruption, we cannot be sure that their security efforts and measures will be effective or that any attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed to not be detected and, in fact, may not be detected. Accordingly, RMR LLC and Five Star may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures. It is therefore not possible for this risk to be entirely mitigated.our securities.
Real estate construction and redevelopment creates risks.
PartOur business plans involve the development of our business plan involvesnew properties or the possible development or redevelopment of some of our existing properties as the existing leases or management agreements expire, or as our tenants’managers' or managers’tenants' needs evolve.change or to pursue any other opportunities that we believe are desirable. The development and redevelopment of new and existing buildings involves significant risks in addition to those involved in the ownership and operation of leased properties, including the risks that financing may not be available on favorable terms for development projects and construction may not be completed on schedule or within budget, resulting in increased debt service expense and construction costs and delays in leasing such properties and generating cash flow.flows. Development activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land
use, building, occupancy, and other required government permits and authorizations. Once completed, any new properties may perform below anticipated financial results. The occurrence of one or more of the foregoingthese circumstances in connection with our development or redevelopment activities could have an adverse effect on our financial condition, and results of operations. In addition, development activities, regardlessoperations and the value of whether or not they are ultimately successful, typically require a substantial amount of management’s time and attention which could take management’s time away from our other day to day operations.securities.
Insurance on our properties may not adequately cover allour losses, and uninsured losses could materially and adversely affect us.the cost of obtaining such insurance may continue to increase.
We or our tenants are generally responsible for the costs of insurance coverage for our properties and the operations conducted on them, including for casualty, liability, malpractice at managed properties, fire, and extended coverage and rental or business interruption loss insurance. EitherRecently, the costs of insurance have increased significantly, and these increased costs have had an adverse effect on us and our managers and tenants. Increased insurance costs may adversely affect our managers' ability to operate our properties profitably and provide us with desirable returns and our tenants' ability to pay us rent or result in downward pressure on rents we purchase the insurance ourselves
and, except in the case of our managed senior living communities, our tenants are required to reimburse us,can charge under new or the tenants buy the insurance directly and are required to list us as an insured party.renewed leases. In the future, we may acquire additional properties for which we are responsible for the costs of insurance. Depending upon the location of the property, lossesLosses of a catastrophic nature, such as those caused by hurricanes, flooding, tsunamis, volcanic eruptions and earthquakes, among other things, or losses from terrorism, may be covered by insurance policies with limitations such as large deductibles or co‑paymentsco-payments that we or a responsible tenant may not be able to pay. Insurance proceeds may not be adequate to restore an affected property to its condition prior to a loss or to compensate us for our losses, including the loss of future revenues from an affected property,property. Similarly, our other insurance, including our general liability insurance, may not provide adequate insurance to cover our losses. In addition, we do not have any insurance to limit losses that we may incur as a result of known or unknown environmental conditions. Further, we cannot be sure that certain types of risks that are currently insurable will continue to be insurable on an economically feasible basis, and we may discontinue, or agree to our managers' and tenants' discontinuing, certain insurance coverage on some or all of our properties in the future if the cost of premiums for any of these policies exceeds the value of the coverage. If we determine that an uninsured loss or a loss in excess of insured limits occurs and if we are not able to recover amounts from our applicable managers and tenants from certain losses, we may have to incur uninsured costs to mitigate such losses or lose all or a portion of the capital invested in a property, as well as the anticipated future revenue from the property. We might also remain obligated for any financial obligations related to the property, even if the property is irreparably damaged. In addition, future changes in the insurance industry's risk assessment approach and pricing structure could be materiallyfurther increase the cost of insuring our properties or decrease the scope of insurance coverage, either of which could have an adverse effect on our financial condition, results of operations, liquidity and adversely affected.ability to pay distributions to our shareholders.
Our use of joint ventures may limit our flexibility with jointly owned investments.
We are party to a joint venture with a sovereign investor for one of our life science properties located in Boston, Massachusetts, and we may in the future acquire, develop or recapitalize properties in joint ventures with other persons or entities when circumstances warrant the use of these structures.entities. Our participation in these joint ventures is subject to risks, including the following:
we may share approval rights over major decisions affecting the ownership or operation of the joint venture and any property owned by the joint venture;
we may be required to contribute additional capital if our partners fail to fund their share of any required capital contributions;
our joint venture partners may have economic or other business interests or goals that are inconsistent with our business interests or goals and that could affect our ability to lease or release the property, operate the property or maintain our qualification for taxation as a REIT;
our joint venture partners may be subject to different laws or regulations than us, or may be structured differently than us for tax purposes, which could create conflicts of interest and/or affect our ability to maintain our qualification for taxation as a REIT;
our ability to sell the interest on advantageous terms when we so desire may be limited or restricted under the terms of the applicable joint venture agreements; and
disagreements with our joint venture partners could result in litigation or arbitration that could be expensive and distracting to management and could delay important decisions.
Any of the foregoing risks could have a material adverse effect on our business, financial condition and results of operations.
Bankruptcy law may adversely impact us.
The occurrence of a tenant bankruptcy could reduce the rent we receive from such tenant's lease. If a tenant becomes bankrupt, federal law may prohibit us from evicting such tenant based solely upon its bankruptcy. In addition, a bankrupt tenant may be authorized to reject and terminate its lease with us. Any claims against a bankrupt tenant for unpaid future rent would be subject to statutory limitations that may be substantially less than the contractually specified rent we are owed under the lease, and any claim we have for unpaid past rent may not be paid in full. Further, if a manager files for bankruptcy, we may experience delays in enforcing our rights, may be limited in our ability to replace the manager and may incur substantial costs in protecting our investment and re-leasing or finding a replacement manager for the property.
We may incur significant costs complying with the Americans with Disabilities Act and similar laws.
Under the Americans with Disabilities Act and certain similar state statutes, places of public accommodation and many commercial properties must meet specified requirements related to access and use by disabled persons. In addition, our properties are subject to various laws and regulations relating to fire, safety and other regulations. We may be required to make substantial capital expenditures at our properties to comply with these laws. In addition, non-compliance could result in the imposition of fines or an award of damages to private litigants. These expenditures may have an adverse impact on our financial results and the market price of our common shares.
Our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or our internal control over financial reporting.
The design and effectiveness of our disclosure controls and procedures and our internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While our management will continue to review the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, there can be nowe cannot guarantee that our disclosure controls and procedures and internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weaknesses, in our disclosure controls and procedures or internal control over financial reporting could result in misstatements of our results of operations or our financial statements or could otherwise materially and adversely affect our business, reputation, results of operations, financial condition or liquidity.
Changes in lease accountingWe and our managers and tenants may fail to comply with laws governing the privacy and security of personal information, including relating to health.
We and our managers and tenants are required to comply with federal and state laws governing the privacy, security, use and disclosure of personally identifiable information and protected health information. Under HIPAA and the HITECH Act, as updated by the Omnibus Rule, we and our managers and tenants are required to comply with the HIPAA privacy rule, security standards and standards for electronic healthcare transactions. State laws also govern protected health information, and rules regarding state privacy rights may be more stringent than HIPAA. Other federal and state laws govern the privacy of other personally identifiable information. If we or our managers or tenants fail to comply with applicable federal or state standards, we or they could be subject to civil sanctions and criminal penalties, and our and our managers' and tenants' reputations could be adversely impacted, which could materially and adversely affect us.our and their business, financial condition and results of operations and our tenants' ability to pay us rent.
The Financial Accounting Standards Board,A severe cold and flu season, epidemics or FASB, has adoptedany other widespread illnesses could adversely affect the occupancy of our senior living communities.
Our revenues and our managers' and tenants' revenues with respect to our senior living communities are dependent on occupancy. If a severe cold and flu season, an epidemic or any other widespread illnesses occurred in locations where our senior living communities are located, our and our applicable managers' and tenants' revenues from those communities would likely be significantly and negatively impacted. During such occasions, we and our managers and tenants may experience a decline in occupancy due to residents leaving our communities and, we, our managers or our tenants may be required, or we, our managers or our tenants may otherwise determine that it would be prudent, to quarantine some or all of the senior living community and not to permit new accounting rules, to be effective for fiscal years ending after December 2018, which will require companies to capitalize all leasesresidents during that time. Further, depending on their balance sheets by recognizing a lessee’s rights and obligations. When the final rules are effective, many companies that account for certain leases on an “off balance sheet”
basis willthe occurrence, we, our managers or our tenants may be required to account for such leases “on balance sheet.” This change will remove manyincur costs to identify, contain and remedy the impacts of those occurrences at those senior living communities. As a result, these occurrences could significantly and adversely affect our and our managers' and tenants' results of operations and adversely affect the differences in the way companies account for owned property and leased property, and could have a material effect on various aspectsability of our tenants’ businesses, includingapplicable tenants to pay us rent.
If our managers and tenants do not achieve and maintain high quality care, payments through pay for performance and value based purchasing programs may be reduced, and the appearanceoverall attractiveness of their creditour senior living communities to potential residents could decrease as more quality and other factors they considerdata becomes publicly available.
CMS is moving towards pay for performance programs, such as value based payment, as an alternative to fee for service reimbursement. In October 2016, CMS issued a final rule to implement the Quality Payment Program. Starting in deciding whether2019, providers may be subject to owneither MIPS payment adjustments or lease properties. WhenAPM incentive payments. Under PAMA, beginning in federal fiscal year 2019, Medicare payment rates are now partially based on SNFs' performance scores on a hospital readmissions measure as part of CMS's new SNF Value Based Purchasing Program. Moreover, under the rulesIMPACT Act, SNFs are effective, or as the effective date approaches, the rules could cause companies that lease properties to prefer shorter lease terms in an effort to reduce the leasing liability required to report certain quality measures, resource use measures and certain patient assessment data in a standardized and interoperable format. SNFs that fail to comply with the reporting requirements are subject to a 2.0% reduction in their Medicare payment rates. Beginning in October 2018, HHS made SNF reported data publicly available on its Nursing Home Compare website. We cannot predict the impact of these quality driven payment reforms, but they may be recorded on their balance sheets. The new rules may also make lease renewal options less attractive because under certain circumstances,material to and adversely affect our and our managers' and tenants' future results of operations. In addition, we cannot predict the rules will require a tenantimpact of more quality data becoming publicly available, but if we and our managers and tenants of our senior living communities do not achieve and maintain high quality of care, the overall attractiveness of our communities to assume that a renewal right will be exercised and accrue a liability relating to the longer lease term.potential residents could decrease.
Risks Related to Our Relationships with RMRInc., RMR LLC andFive Star
We may not realize the expected benefits of our acquisition of an interest in RMR Inc.
On June 5, 2015, we participated in a transaction with RMR Inc., RMR LLC, ABP Trust and three other REITs to which RMR LLC provides management services in which, among other things, we acquired 5,272,787 shares of RMR Inc.’s Class A common stock, ABP Trust acquired 2,345,000 of our common shares and we amended our management agreements with RMR LLC and extended them for continuing 20 year terms, or the Up-C Transaction. In December 2015, we distributed 2,635,379 of the shares of RMR Inc.’s Class A common stock that we received in the Up-C Transaction pro rata to our shareholders. We believe the Up-C Transaction provided several benefits to us, including an attractive investment in the equity securities of RMR Inc., the further alignment of the interests of RMR LLC, Adam Portnoy and Barry Portnoy with our interests and greater transparency for us and our shareholders into the compensation practices and financial and operating results of RMR LLC. However, our investment in RMR Inc. is subject to various risks, including the highly competitive nature of RMR LLC’s business and the limited public market for RMR Inc.’s securities, among others, which may result in us losing some or all of our investment in RMR Inc. or otherwise not realizing the benefits we expect from the Up-C Transaction. For further information on the Up-C Transaction, see Note 7 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
We are dependent upon RMRLLCto manage our business and implement our growth strategy.strategy and Five Star to manage our senior living communities.
We have no employees. Personnel and services that we require are provided to us by RMR LLC pursuant to our management agreements with RMR LLC. Our ability to achieve our business objectives depends on RMR LLC and its ability to effectively manage our properties, to appropriately identify and complete our acquisitions and dispositions and to execute our growth strategy. Accordingly, our business is dependent upon RMR LLC’sLLC's business contacts, its ability to successfully hire, train, supervise and manage its personnel and its ability to maintain its operating systems. If we lose the services provided by RMR LLC or its key personnel, our business and growth prospects may decline. We may be unable to duplicate the quality and depth of management available to us by becoming internally managed or by hiring another manager. Also, inIn the event RMR LLC is unwilling or unable to continue to provide management services to us, our cost of obtaining substitute services may be greater than the fees we pay RMR LLC under our management agreements, and as a result our expenses may increase.
Each In addition, we depend on Five Star to manage our senior living communities. See “—Risks Related to our Business—We are dependent on Five Star for the operation of most of our executive officers is also an officer of RMR LLC. Because our executive officers have duties to senior living communities."
RMR LLC as well ashas broad discretion in operating our day to us, we do not have their undivided attention. They face conflicts in allocating their time and resources between us and RMR LLC and other companies to which it provides services.day business.
Our management structure and agreements and relationships with RMR LLC and RMR LLC’s and its controlling shareholders’ relationships with others may create conflicts of interest, or the appearance of such conflicts, and may restrict our investment activities.
manager, RMR LLC, is authorized to follow broad operating and investment guidelines and, therefore, has discretion in determiningidentifying the properties that will be appropriate investments for us, as well as our individual operating and investment decisions. Our Board of Trustees periodically reviews our operating and investment guidelines and our operating activities and investments but it does not review or approve each decision made by RMR LLC on our behalf. In addition, in conducting periodic reviews, our Board of Trustees relies primarily on information provided to it by RMR LLC. RMR LLC may exercise its discretion in a manner that results in investment returns that are substantially below expectations or that results in losses.
Our management structure and agreements and relationships with RMR LLC and RMR LLC's and its controlling shareholder's relationships with others may create conflicts of interest, or the perception of such conflicts, and may restrict our investment activities.
RMR LLC is a subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, controlAdam D. Portnoy, as the sole trustee of ABP Trust, is the controlling shareholder of RMR Inc., which and is a managing director and the managing memberpresident and chief executive officer of RMR Inc. and controlsan officer and employee of RMR LLC.
RMR LLC or its subsidiary also acts as the manager for threefour other Nasdaq listed REITs: GOV,OPI, which primarily owns office properties that are majority leased to single tenants and high credit quality tenants, including government tenants; HPT,ILPT, which owns industrial and logistics properties; SVC, which owns a diverse portfolio of hotels and travel centers;net lease service and SIR,necessity based retail properties; and TRMT, which primarily ownsoriginates and invests in net leased, single tenant properties.first mortgage loans secured by middle market and transitional commercial real estate. RMR LLC also provides services to other publicly and privately owned companies, including: Five Star, our largest tenant and the manager of our managed senior living communities;communities and of which we own 33.9% of its outstanding common shares as of January 1, 2020; TA, which operates and franchises travel centers, convenience storestruck repair facilities and restaurants; and Sonesta, which operates, manages and franchises hotels, resorts and cruise ships. These multiple responsibilitiesboats. A subsidiary of RMR LLC is an investment adviser to the RMR Real Estate Income Fund, or RIF, a closed end investment company listed on the NYSE American, which invests in securities of real estate companies that are not managed by RMR LLC. Mr. Portnoy
serves as chair of the board of trustees or board of directors, as applicable, of OPI, ILPT, SVC, Five Star and relationships could create competition forTA and as managing director, managing trustee, director or trustee, as applicable, of the companies managed by RMR LLC or its subsidiaries.
Jennifer F. Francis, our President and Chief Operating Officer, Richard W. Siedel, Jr., our Chief Financial Officer and Treasurer, and Jennifer B. Clark, our Secretary and one of our Managing Trustees, are also officers and employees of RMR LLC. Mr. Siedel is also the chief financial officer and treasurer of ILPT. Mses. Francis and Clark and Mr. Siedel have duties to RMR LLC, and Mr. Siedel has duties to ILPT, as well as to us, and we do not have their undivided attention. They and other RMR LLC personnel may have conflicts in allocating their time and effortsresources between us and RMR LLC and other companies to which RMR LLC or its subsidiaries provide services. Our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR LLC or its subsidiaries provide management services.
In addition, we may in the future enter into additional transactions with RMR LLC, its affiliates, or entities managed by it or its subsidiaries. In addition to his investments in RMR Inc. and RMR LLC, Adam Portnoy holds equity investments in other companies to which RMR LLC or its subsidiaries provide management services and Barrysome of these companies have significant cross ownership interests, including, for example: as of December 31, 2019, Adam Portnoy beneficially owned, in aggregate, 1.1% of our outstanding common shares, 35.3% of outstanding Five Star common shares (6.3% as of January 1, 2020) (including through ABP Trust), 1.2% of ILPT's outstanding common shares, 1.5% of OPI's outstanding common shares, 2.3% of RIF's outstanding common shares, 1.1% of SVC's outstanding common shares, 4.0% of TA's outstanding common shares (including through RMR LLC) and 19.5% of TRMT's outstanding common shares (including through Tremont Realty Advisors LLC); and we owned 8.2% of outstanding Five Star common shares (33.9% as of January 1, 2020). Our executive officers may also own equity investments in other companies to which RMR LLC or its subsidiaries provide management services. These multiple responsibilities, relationships and cross ownerships could give rise to conflicts of interest or the appearanceperception of such conflicts of interest.
As a result of these relationships, our management agreements were not negotiated on an arm’s length basis between unrelated parties, and therefore the terms, including the fees payableinterest with respect to matters involving us, RMR Inc., RMR LLC, may not be as favorableour Managing Trustees, the other companies to us as they would have been if they were negotiated on an arm’s length basis between unrelated parties. Our property management fees are calculated based on rents we receive and construction supervision fees for construction at our properties overseen and managed bywhich RMR LLC or its subsidiaries provide management services and their related parties. Conflicts of interest or the perception of conflicts of interest could have a material adverse impact on our basereputation, business management fee is calculated based uponand the lower of the historical costsmarket price of our real estate investments and our market capitalization. These fee arrangements could incentivize RMR LLC to pursue acquisitions, capital transactions, tenancies and construction projects or to avoid disposing of our assets in order to increase or maintain its management fees. If we do not effectively manage our investment, disposition, and capital transactions and leasing, constructioncommon shares and other property management activities,securities and we may paybe subject to increased management fees without proportional benefits to us.risk of litigation as a result.
In our management agreements with RMR LLC, we acknowledge that RMR LLC may engage in other activities or businesses and act as the manager to any other person or entity (including other REITs) even though such person or entity has investment policies and objectives similar to our policies and objectives and we are not entitled to preferential treatment in receiving information, recommendations and other services from RMR LLC. Accordingly, we may lose investment opportunities to, and may compete for tenants with, other businesses managed by RMR LLC.
Adam Portnoy is a managing director, president, chief executive officer and controlling shareholder (through ABP Trust)LLC or its subsidiaries. We cannot be sure that our Code of RMR Inc. and an officer of RMR LLC and Barry Portnoy is a managing director, officer and controlling shareholder (through ABP Trust) of RMR Inc. and an officer of RMR LLC. Adam Portnoy and Barry Portnoy (through ABP Trust) also own class A membership units of RMR LLC. All of the members ofConduct or our Board of Trustees, including our Independent Trustees, are members of onegovernance guidelines, or more boards of trusteesother procedural protections we adopt will be sufficient to enable us to identify, adequately address or directors of other companies to which RMR LLC provides management services. Our executive officers are also officers of RMR LLC. In addition to their investments in RMR Inc. and RMR LLC, our Managing Trustees hold equity investments in other companies to which RMR LLC provides management services and some of these companies have significant cross ownership interests, including, for example: our Managing Trustees own, directlymitigate actual or indirectly, in aggregate 1.3% of our outstanding common shares, 36.7% of Five Star’s outstanding common shares, 1.4% of HPT’s outstanding common shares, 2.5% of GOV’s outstanding common shares and 1.9% of SIR’s outstanding common shares; we own 8.5% of Five Star’s outstanding common shares; GOV owns 27.9% of SIR’s outstanding common shares; and HPT owns 8.7% of TA’s outstanding common shares. Our executive officers may also own equity investments in other companies to which RMR LLC provides management services. Such equity ownership or positions could create, or appear to create,alleged conflicts of interest with respect to matters involving us, the other companies to which RMR LLC provides management services and their related parties. Conflicts of interest or the appearance of conflicts of interest could have a material adverse impact onensure that our reputation, business and the market price of our common shares and other securities and we may be subject to increased risk of litigation as a result.
The Up-C Transaction and the agreements entered into as part of the Up-C Transaction are amongtransactions with related persons which increases the risk of allegations of conflicts of interest, and such allegations may impair our abilityare made on terms that are at least as favorable to realize the benefits we expect from the Up-C Transaction.us as those that would have been obtained with an unrelated person.
Because of the various relationships among us, GOV, RMR Inc., RMR LLC and the other REITs to which RMR LLC provides management services, the Up-C Transaction and the agreements entered into as part of the Up-C Transaction, including the amendment and extension of ourOur management agreements for continuing 20 year terms, are among related persons. The Up-C Transaction and the terms thereof were negotiated and reviewed by a Joint Special Committee comprised solely of our Independent Trustees and the independent trustees of the other REITs to which RMR LLC provides management services, or the Joint Special Committee, and were separately approved and adopted by an Independent Trustee of ours who did not serve as an independent trustee of any of the other REITs, by a Special Committee of our Board of Trustees, comprised solely of our Independent Trustees, or our Special Committee, and by our Board of Trustees. Morgan Stanley & Co. LLC acted as financial advisor to the Joint Special Committee and Centerview Partners LLC acted as financial advisor to our Special Committee. Nonetheless, because of these various relationships, the Up-C Transaction was not negotiated on an arm’sarm's length basis amongand their fee and expense structure may not create proper incentives for RMR LLC, which may increase the risk of an investment in our common shares.
As a result of our relationships with RMR LLC and its current and former controlling shareholder(s), our management agreements were not negotiated on an arm's length basis between unrelated third parties, and therefore, while such agreements were negotiated with the use of a special committee and disinterested Trustees, the terms, including the fees payable to RMR LLC, may not be on terms as favorable to us or the other REITs to which RMR LLC provides management services as itthey would have been if it wasthey were negotiated on an arm’sarm's length basis amongbetween unrelated parties. As a resultOur property management fees are calculated based on rents we receive and construction supervision fees for construction at our properties overseen and managed by RMR LLC, and our base business management fee is calculated based upon the lower of these relationships,the historical costs of our real estate investments and our market capitalization. We pay RMR LLC substantial base management fees regardless of our financial results. These fee arrangements could incentivize RMR LLC to pursue acquisitions, capital transactions, tenancies and construction projects or to avoid disposing of our assets in order to increase or maintain its management fees and might reduce RMR LLC's incentive to devote its time and effort to seeking investments that provide attractive returns for us. If we do not effectively manage our investment, disposition and capital transactions and leasing, construction and other property management activities, we may be subjectpay increased management fees without proportional benefits to increased risk thatus. In addition, we are obligated under our shareholdersmanagement agreements to reimburse RMR LLC for employment and related expenses of RMR LLC's employees assigned to work exclusively or the shareholderspartly at our properties, our share of the wages, benefits and other REITsrelated costs of RMR LLC's centralized accounting personnel and our share of RMR LLC's costs for providing our internal audit function. We are also required to whichpay for third party costs incurred with respect to us. Our obligation to reimburse RMR LLC provides management services may challenge the Up-C Transaction and the agreements entered into as partfor certain of the Up-C Transaction. Any such challenge could result in substantialits costs and a diversionto pay third party costs may reduce RMR LLC's incentive to efficiently manage those costs, which may increase our management’s attention, could have a material adverse effect on our reputation, business and growth and could adversely affect our ability to realize the benefits we expect from the Up-C Transaction, whether or not the allegations have merit or are substantiated.costs.
The termination of our management agreements may require us to pay a substantial termination fee, including in the case of a termination for unsatisfactory performance, which may limit our ability to end our relationship with RMR LLC.
The terms of our management agreements with RMR LLC automatically extend on December 31st of each year so that such terms thereafter end on the 20th anniversary of the date of the extension. We have the right to terminate these agreements: (1) at any time on 60 days’days' written notice for convenience, (2) immediately upon written notice for cause, as defined in the agreements, (3) on written notice given within 60 days after the end of any applicable calendar year for a performance reason, as defined in the agreements, and (4) by written notice during the 12 months following a manager change of control, as defined in the agreements. However, if we terminate a management agreement for convenience, or if RMR LLC terminates a management agreement with us for good reason, as defined in such agreement, we are obligated 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 in the applicable agreement, payable to RMR LLC for the thenterm that was remaining term,before such termination, which, depending on the time of termination, would be between 19 and 20 years. Additionally, if we terminate a management agreement for a performance reason, as defined in the agreement, we are obligated to pay RMR LLC the termination fee calculated as described above, but assuming a remaining term of 10 years. These provisions substantially increase the cost to us of terminating the management agreements without cause, which may limit our ability to end our relationship with RMR LLC as our manager. The payment of the termination fee could have a material adverse effect on our financial condition, including our ability to pay dividends to our shareholders.
Our management arrangements with RMR LLC may discourage a change of control of us.
Our management agreements with RMR LLC have continuing 20 year terms that renew annually. As noted in the preceding risk factor, if we terminate either of these management agreements other than for cause or upon a change of control of our manager, we are obligated to pay RMR LLC a substantial termination fee. For these reasons, our management agreements with RMR LLC may discourage a change of control of us, including a change of control which might result in payment of a premium for our common shares.
Our business dealings with Five Star comprise a significant part of our business and operations and they may create conflicts of interest or the perception of such conflicts of interest.
Five Star was originally organized as our subsidiary. We distributed substantially all of our Five Star common shares to our shareholders on December 31, 2001. RMR LLC provides management services to both us and Five Star. Adam Portnoy, the Chair of our Board and one of our Managing Trustees, as the sole trustee of ABP Trust, is a significant stockholder of Five Star, beneficially owning 6.3% of outstanding Five Star common shares as of January 1, 2020. Five Star manages most of our senior living communities. In addition, Mr. Portnoy is the chair of Five Star's board of directors and one of its managing directors and our other Managing Trustee, Jennifer B. Clark, is Five Star's other managing director and secretary.
The historical and continuing relationships which we, RMR LLC and Adam Portnoy have with Five Star could create, or appear to create, conflicts of interest with respect to matters involving us, the other companies to which RMR LLC or its subsidiaries provide management services and their related parties. As a result of these relationships, our agreements with Five Star were not negotiated on an arm's length basis between unrelated parties, and therefore may not be as favorable to us as they would have been if they were negotiated on an arm's length basis between unrelated parties. Conflicts of interest or the perception of conflicts of interest could have a material adverse impact on our reputation, business and the market price of our common shares and other securities and we may be subject to increased risk of litigation as a result.
We may not realize the benefits we expect from our investment in Five Star common shares.
Pursuant to the Transaction Agreement, we received additional Five Star common shares as of January 1, 2020, that increased our percentage ownership of Five Star common shares to 33.9%, up from our previous percentage ownership of 8.2%. We paid $75.0 million to Five Star for those additional shares by assuming certain of Five Star's working capital liabilities. Our investment in Five Star is subject to various risks, including, among others, the highly competitive nature of the senior living industry; medical advances and healthcare services that allow some potential residents to defer the time when they require the special services available at senior living communities that Five Star manages; low unemployment in the United States combined with a competitive labor market within the senior living industry that are increasing our and Five Star's employment costs, including labor costs that Five Star incurs and which we are not obligated to fund or reimburse; significant regulatory requirements imposed on Five Star's business; and other factors. Many of these factors are beyond our and Five Star's control. As a result, we may not realize the benefits we expect from our investment in Five Star common shares, and we could incur losses from our investment.
We may be required to pay a substantial termination fee to Five Star if Five Star terminates the New Management Agreements due to our default.
Under the New Management Agreements, if Five Star terminates such management agreements due to certain defaults by us, we are required to pay Five Star a termination fee equal to the present value of the base management fees that we would have paid to Five Star and the allocated incentive fee for the applicable communities, if any, between the date of termination and the scheduled initial expiration date of such management agreements (but not for a period exceeding 10 years), with such amounts determined based on the average base management and incentive fees for the applicable communities for each of the three calendar years ended prior to the date of termination. Further, the payment of the termination fee could have a material adverse effect on our financial condition, including our ability to pay distributions to our shareholders.
We are party to transactions with related parties that may increase the risk of allegations of conflicts of interest, and such allegations may impair our ability to realize the benefits we expect from these transactions.
We are party to transactions with related parties, including with entities controlled by Adam Portnoy or to which RMR LLC or its subsidiaries provide management services. Our agreements with related parties or in respect of transactions among related parties may not be on terms as favorable to us as they would have been if they had been negotiated among unrelated parties. We are subject to the risk that our shareholders or the shareholders of Five Star, RMR Inc. or other related parties may challenge any such related party transactions and the agreements entered into as part of them. If such a challenge were to be successful, we might not realize the benefits expected from the transactions being challenged. Moreover, any such challenge could result in substantial costs and a diversion of our management's attention, could have a material adverse effect on our reputation, business and growth and could adversely affect our ability to realize the benefits expected from the transactions, whether or not the allegations have merit or are substantiated.
We may be at an increased risk for dissident shareholder activities due to perceived conflicts of interest arising from our management structure.structure and relationships.
InCompanies with business dealings with related persons and entities may more often be the past, in particular following periodstarget of volatility in the overall market or declines in the market price of a company’s securities, shareholder litigation, dissident shareholder trustee nominations, and dissident shareholder proposals have often been instituted against companiesand shareholder litigation alleging conflicts of interest in their business dealings with affiliated and related persons and entities.dealings. Our relationships with RMR Inc., RMR LLC, Five Star, AIC, the other businesses and entitiescompanies to which RMR LLC providesor its subsidiaries provide management services, Adam Portnoy and Barry Portnoy and other related persons of RMR LLC may precipitate such activities. Certain proxy advisory firms which have significant influence over the voting by shareholders of public companies have, in the past, recommended, and in the future may recommend, that shareholders withhold votes for the election of our incumbent Trustees, and vote against our say on pay vote or other management proposals.proposals or vote for shareholder proposals that we oppose. These recommendations mayby proxy advisory firms have affected the outcomes of past Board of Trustees elections and votes on our say on pay, and similar recommendations in the future would likely affect the outcome of ourfuture Board of Trustees elections and impactvotes on our governance,say on pay, which may increase shareholder activism and litigation. These activities, if instituted against us, could result in substantial costs and diversion of our management’smanagement's attention and could have a material adverse impact on our reputation and business.
Our business dealings with Five Star may create conflicts of interest or the appearance of such conflicts of interest.
Five Star was originally organized as our subsidiary. We distributed substantially all of our Five Star common shares to our shareholders on December 31, 2001. RMR LLC provides management services to both us and Five Star. Adam Portnoy and Barry Portnoy, our Managing Trustees, are Five Star’s largest stockholders, owning, directly or indirectly, in aggregate 36.7% of Five Star’s outstanding common shares. Barry Portnoy serves as a managing director of Five Star. Five Star is our largest tenant and, as of December 31, 2016, Five Star leased 185 senior living communities from us and also managed 68 of our senior living communities.
The historical and continuing relationships which we, RMR LLC and our Managing Trustees have with Five Star could create, or appear to create, conflicts of interest with respect to matters involving us, the other companies to which RMR LLC provides management services and their related parties. As a result of these relationships, our agreements with Five Star were not negotiated on an arm’s length basis between unrelated parties, and therefore the terms may not be as favorable to us as they would have been if they were negotiated on an arm’s length basis between unrelated parties. Conflicts of interest or the appearance of conflicts of interest could have a material adverse impact on our reputation, business and the market price of our common shares and other securities and we may be subject to increased risk of litigation as a result.
We may experience losses from our business dealings with AIC.
We, ABP Trust, Five Star and four other companies to which RMR LLC provides management services each own 14.3% of AIC, and we have invested approximately $6.0 million in AIC. We and those other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC and we periodically consider the possibilities for expanding our relationship with AIC to other types of insurance. Our principal reason for investing in AIC and for purchasing insurance in these programs is to seek to improve our financial results by obtaining improved insurance coverages at lower costs than may be otherwise available to us or by participating in any profits which we may realize as an owner of AIC. While we believe we have in the past benefitted from these arrangements, these beneficial financial results may not occur in the future, and we may need to invest additional capital in order to continue to pursue these results. AIC’s business involves the risks typical of an insurance business, including the risk that it may not operate profitably. Accordingly, financial benefits from our business dealings with AIC may not be achieved in the future, and we may experience losses from these dealings.
Risks Related to Our Organization and Structure
Ownership limitations and certain provisions in our declaration of trust, bylaws and contracts,agreements, as well as certain provisions of Maryland law, may deter, delay or prevent a change in our control or unsolicited acquisition proposals.
Our declaration of trust prohibits any shareholder other than RMR LLC and its affiliates (as defined under Maryland law) and certain persons who have been exempted by our Board of Trustees from owning, directly and by attribution, more than 9.8% of the number or value of shares (whichever is more restrictive) of any class or series of our outstanding shares of beneficial interest, including our common shares. This provision of our declaration of trust is intended to, among other purposes, assist with our REIT compliance under the IRC and otherwise promote our orderly governance. However, this provision may also inhibit acquisitions of a significant stake in us and may deter, delay or prevent a change in control of us or unsolicited acquisition proposals that a shareholder may consider favorable. Additionally, provisions contained in our declaration of trust and bylaws or under Maryland law may have a similar impact, including, for example, provisions relating to:
the authoritydivision of our BoardTrustees into three classes, with the term of Trustees to make various elections under Maryland’s Unsolicited Takeover Act and other provisions of Maryland lawone class expiring each year, which maycould delay or otherwise prevent a change of control of us;
limitations on shareholder voting rights and standards for the election of trustees and other provisions which require larger majorities for approval ofwith respect to certain actions whichthat are not approved by our Trustees than for actions which are approved by ourBoard of Trustees;
the authority of our Board of Trustees, and not our shareholders, to adopt, amend or repeal our bylaws and to fill vacancies on our Board of Trustees;
shareholder voting standards which require a supermajority for approval of certain actions;
the fact that only our Board of Trustees, or, if there are no Trustees, our officers, may call shareholder meetings and that shareholders are not entitled to act without a meeting;
required qualifications for an individual to serve as a Trustee and a requirement that certain of our Trustees be “Managing Trustees” and other Trustees be “Independent Trustees,” as defined in our governing documents;
limitations on the ability of our shareholders to propose nominees for election as trusteesTrustees and propose other business to be considered at a meeting of our shareholders;
limitations on the ability of our shareholders to remove our Trustees; and
the authority of our Board of Trustees to create and issue new classes or series of shares (including shares with voting rights and other rights and privileges that may deter a change in control) and issue additional common shares.shares;
In addition, our shareholders agreement with respect to AIC providesrestrictions on business combinations between us and an interested shareholder that AIC and the other shareholders of AIC may have rights to acquire our interests in AIC in the event that anyone acquires more than 9.8% of our shares or we experience some other change in control.
Our ownership interest in AIC may prevent shareholders from accumulating a large stake in us, from nominating or serving as Trustees, or from taking actions to otherwise control our business.
As an owner of AIC, we are licensed and approved as an insurance holding company; and any shareholder who owns or controls 10% or more of our securities or anyone who wishes to solicit proxies for election of, or to serve as, one of our Trustees or for another proposal of business not first been approved by our Board of Trustees may be required(including a majority of Trustees not related to receive pre-clearance from the concerned insurance regulators. These pre-approval procedures may discourage or prevent investors from purchasinginterested shareholder); and
the authority of our securities, from nominating personsBoard of Trustees, without shareholder approval, to serve as our Trustees or from taking other actions. implement certain takeover defenses.
Our rights and the rights of our shareholders to take action against our Trustees and officers are limited.
Our declaration of trust limits the liability of our Trustees and officers to us and our shareholders for money damages to the maximum extent permitted under Maryland law. Under current Maryland law, our Trustees and officers will not have any liability to us and our shareholders for money damages other than liability resulting from:
actual receipt of an improper benefit or profit in money, property or services; or
active and deliberate dishonesty by the Trustee or officer that was established by a final judgment as being material to the cause of action adjudicated.
Our declaration of trust and indemnification agreements require us to indemnify, any present or former trustee or officer, to the maximum extent permitted by Maryland law, any present or former Trustee or officer who is made or threatened to be made a party to a proceeding by reason of his or her service in thosethese and certain other capacities. In addition, we may be obligated to pay or reimburse the expenses incurred by our present and former Trustees and officers without requiring a preliminary determination of their ultimate entitlement to indemnification. As a result, we and our shareholders may have more limited rights against our present and former Trustees and officers than might otherwise exist absent the provisions in our declaration of trust and indemnification agreements or that might exist with other companies, which could limit our shareholders' recourse in the event of actions not in their best interest.
Disputes with Five Star or RMR LLC and shareholderShareholder litigation against us or our Trustees, and officers, employees, managers or other agents may be referred to bindingmandatory arbitration proceedings.proceedings, which follow different procedures than in-court litigation and may be more restrictive to shareholders asserting claims than in-court litigation.
Our contracts with Five Star and RMR LLC provideshareholders agree, by virtue of becoming shareholders, that any dispute arising under those contractsthey are bound by our governing documents, including the arbitration provisions of our bylaws, as they may be referredamended from time to binding arbitration proceedings. Similarly, ourtime. Our bylaws provide that certain disputesactions by one or more of our shareholders against us or againstany of our Trustees, and officers, employees, managers or other agents, other than disputes, or any portion thereof, regarding the meaning, interpretation or validity of any provision of our declaration of trust or bylaws, maywill be referred to mandatory, binding and final arbitration proceedings.proceedings if we, or any other party to such dispute, including any of our Trustees, officers, employees, managers or other agents, unilaterally so demands. As a result, we and our shareholders would not be able to pursue litigation in courtsstate or federal court against Five Star, RMR LLCus or our Trustees, officers, employees, managers or other agents, including, for example, claims alleging violations of federal securities laws or breach of fiduciary duties or similar director or officer duties under Maryland law, if we or any of our Trustees, officers, employees, managers or other parties against whom the claim is made unilaterally demands the matter be resolved by arbitration. Instead, our shareholders would be required to pursue such claims through binding and officers for disputes referredfinal arbitration.
Our bylaws provide that such arbitration proceedings would be conducted in accordance with the procedures of the Commercial Arbitration Rules of the American Arbitration Association, as modified in our bylaws. These procedures may provide materially more limited rights to our shareholders than litigation in a federal or state court. For example, arbitration in accordance with our bylaws.these procedures does not include the opportunity for a jury trial, document discovery is limited, arbitration hearings generally are not open to the public, there are no witness depositions in advance of arbitration hearings and arbitrators may have different qualifications or experiences than judges. In addition, the ability to collect attorneys’ fees or other damagesalthough our bylaws' arbitration provisions contemplate that arbitration may be limitedbrought in a representative capacity or on behalf of a class of our shareholders, the rules governing such representation or class arbitration may be different from, and less favorable to shareholders than, the rules governing representative or class action litigation in courts. Our bylaws also generally provide that each party to such an arbitration is required to bear its own costs in the arbitration, proceedings, whichincluding attorneys' fees, and that the arbitrators may not render an award that includes shifting of such costs or, in a derivative or class proceeding, award any portion of our award to any shareholder or such shareholder's attorneys. The arbitration provisions of our bylaws may discourage our shareholders from bringing, and attorneys from agreeing to represent partiesour shareholders wishing to commence suchbring, litigation against us or our Trustees, officers, employees, managers or other agents. Our agreements with Five Star and RMR LLC have similar arbitration provisions to those in our bylaws.
We believe that the arbitration provisions in our bylaws are enforceable under both state and federal law, including with respect to federal securities laws claims. We are a proceeding. Maryland real estate investment trust and Maryland courts have upheld the enforceability of arbitration bylaws. In addition, the United States Supreme Court has repeatedly upheld agreements to arbitrate other federal statutory claims, including those that implicate important federal policies. However, some academics, legal practitioners and others are of the view that charter or bylaw provisions mandating arbitration are not enforceable with respect to federal securities laws claims. It is possible that the arbitration provisions of our bylaws may ultimately be determined to be unenforceable.
By agreeing to the arbitration provisions of our bylaws, shareholders will not be deemed to have waived compliance by us with federal securities laws and the rules and regulations thereunder.
Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’shareholders' ability to obtain a favorable judicial forum for disputes with us or our Trustees, officers, manager, agentsemployees, managers or employees.agents.
Our bylaws currently provide that, unless the dispute has been referred to binding arbitration, the Circuit Court for Baltimore City, Maryland will be the sole and exclusive forum for: (1) any derivative action or proceeding brought on our behalf; (2) any action asserting a claim for breach of a fiduciary duty owed by any Trustee, officer, manager, agent or employee of ours to us or our shareholders; (3) any action asserting a claim against us or any Trustee, officer, manager, agent or employee of ours arising pursuant to Maryland law, our declaration of trust or bylaws brought by or on behalf of a shareholder;shareholder, either on his, her or its own behalf, on our behalf or on behalf of any series or class of shares of beneficial interest of ours or by shareholders against us or any Trustee, officer, manager, agent or employee of ours, including any disputes, claims or controversies relating to the meaning, interpretation, effect, validity, performance or enforcement of our declaration of trust or bylaws; or (4) any action asserting a claim against us or any Trustee, officer, manager, agent or employee of ours that is governed by the internal affairs doctrine. Our bylaws currently also provide that the Circuit Court for Baltimore City, Maryland will be the sole and exclusive forum for any dispute, or portion thereof, regarding the meaning, interpretation or validity of any provision of our declaration of trust or bylaws. The exclusive forum provision of our bylaws does not apply to any action for which the Circuit Court for Baltimore City, Maryland does not have jurisdiction or to a dispute that has been referred to binding arbitration in accordance with our bylaws. The exclusive forum provision of our bylaws does not establish exclusive jurisdiction in the Circuit Court for Baltimore City, Maryland for claims that arise under the Securities Act, the Exchange Act or other federal securities laws if there is exclusive or concurrent jurisdiction in the federal courts. Any person or entity purchasing or otherwise acquiring or holding any interest in our shares of beneficial interest shall be deemed to have notice of and to have consented to these provisions of our bylaws, as they may be amended from time to time. These choiceThe arbitration and exclusive forum provisions of forum provisionsour bylaws may limit a shareholder’sshareholder's ability to bring a claim in a judicial forum that the shareholder believes is favorable for disputes with us or our Trustees, officers, manager,employees, managers or agents, or employees, which may discourage lawsuits against us and our Trustees, officers, manageremployees, managers or agents.
We may change our operational, financing and investment policies without shareholder approval and we may become more highly leveraged, which may increase our risk of default under our debt obligations.
Our Board of Trustees determines our operational, financing and investment policies and may amend or revise our policies, including our policies with respect to our intention to qualifyremain qualified for taxation as a REIT, acquisitions, dispositions, growth, operations, indebtedness, capitalization and distributions, or approve transactions that deviate from these policies, without a vote of, or notice to, our shareholders. Policy changes could adversely affect the market price of our common shares and our ability to make distributions to our shareholders. Further, our organizational documents do not limit the amount or percentage of indebtedness,
funded or otherwise, that we may incur. Our Board of Trustees may alter or eliminate our current policy on borrowing at any time without shareholder approval. If this policy changes, we could become more highly leveraged, which could result in an increase in our debt service costs. Higher leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations and liquidity risk.
Risks Related to Our Taxation
The loss of our statusOur failure to remain qualified for taxation as a REIT for U.S. federal income tax purposesunder the IRC could have significant adverse consequences.
As a REIT, we generally do not pay federal or most state income taxes.taxes as long as we distribute all of our REIT taxable income and meet other qualifications set forth in the IRC. However, actual qualification for taxation as a REIT under the IRC depends on our satisfying complex statutory requirements, for which there are only limited judicial and administrative interpretations. We believe that we have been organized and have operated, and will continue to be organized and to operate, in a manner that qualified and will continue to qualify us to be taxed as a REIT under the IRC. However, we cannot be certainsure that the IRS, upon review or audit, the IRS will agree with this conclusion. Furthermore, there is no guaranteewe cannot be sure that the federal government, or any state or other taxation authority, will continue to afford favorable income tax treatment to REITs and their shareholders.
Maintaining our qualification for taxation as a REIT under the IRC will require us to continue to satisfy tests concerning, among other things, the nature of our assets, the sources of our income and the amounts we distribute to our shareholders. In order to meet these requirements, it may be necessary for us to sell or forgo attractive investments.
If we cease to qualify for taxation as a REIT under the IRC, then our ability to raise capital might be adversely affected, we will be in breach under our revolving credit facility and term loan agreements, we may be subject to material amounts of federal and state income taxes, our cash available for distribution to our shareholders could be reduced, and the valuemarket price of our common shares likely wouldcould decline. In addition, if we lose or revoke our qualification for taxation as a REIT under the IRC for a taxable year, we will generally be prevented from requalifying for taxation as a REIT for the next four taxable years.
Distributions to shareholders generally will not qualify for reduced tax rates.rates applicable to “qualified dividends.”
Dividends payable by U.S. corporations to noncorporate shareholders, such as individuals, trusts and estates, are generally eligible for reduced federal income tax rates.rates applicable to “qualified dividends.” Distributions paid by REITs however, generally are not eligibletreated as “qualified dividends” under the IRC and the reduced rates applicable to such dividends do not generally apply. However, for these reduced rates. The moretax years beginning before 2026, REIT dividends paid to noncorporate shareholders are generally taxed at an effective tax rate lower than applicable ordinary income tax rates due to the availability of a deduction under the IRC for specified forms of income from passthrough entities. More favorable rates forwill nevertheless continue to apply to regular corporate “qualified” dividends, which may cause some investors to perceive that an investment in a REIT is less attractive than an investment in a non-REIT entity that pays dividends, thereby reducing the demand and market price of our common shares.
REIT distribution requirements could adversely affect us and our ability to execute our business plan.shareholders.
We generally must distribute annually at least 90% of our REIT taxable income, subject to specified adjustments and excluding any net capital gain, in order to maintain our qualification for federal corporate income tax not to apply to earnings that we distribute.taxation as a REIT under the IRC. To the extent that we satisfy this distribution requirement, federal corporate income tax will not apply to the earnings that we distribute, but if we distribute less than 100% of our REIT taxable income, then we will be subject to federal corporate income tax on our undistributed taxable income. We intend to make distributions to our shareholders to comply with the REIT requirements of the IRC. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our shareholders in a calendar year is less than a minimum amount specified under federal tax laws.
From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with U.S. generally accepted accounting principles, or GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. If we do not have other funds available in these situations, among other things, we could be required tomay borrow funds on unfavorable terms, sell investments at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions in order to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year.
These alternatives could increase our costs or reduce our shareholders’shareholders' equity. Thus, compliance with the REIT distribution requirements may hinder our ability to grow, which could adversely affectcause the valuemarket price of our shares.
common shares to decline.
Even if we qualify and remain qualified for taxation as a REIT under the IRC, we may face other tax liabilities that reduce our cash flow.
Even if we qualify and remain qualified for taxation as a REIT under the IRC, we may be subject to federal, state and local taxes on our income and assets, including taxes on any undistributed income, excise taxes, state or local income, property and transfer taxes, and other taxes. See “Business—Material United States Federal Income Tax Considerations—Taxation as a REIT.” Also, some state jurisdictions may in the future limit or eliminate certain favorable income tax deductions, including the dividends paid deduction, which could increase our income tax expense. In addition, in order to meet the requirements for qualification and taxation as a REIT under the IRC, prevent the recognition of particular types of non-cash income, or avert the imposition of a 100% tax that applies to specified gains derived by a REIT from dealer property or inventory, we may hold or dispose of some of our assets and conduct some of our operations through our TRSs or other subsidiary corporations that will be subject to corporate level income tax at regular rates. In addition, while we intend that our transactions with our TRSs will be conducted on arm's length bases, we may be subject to a 100% excise tax on a transaction that the IRS or a court determines was not conducted at arm's length. Any of these taxes would decrease cash available for distribution to our shareholders.
If arrangements involving our TRSs fail to comply as intended with the REIT qualification and taxation rules, we may fail to qualifyfor taxationas a REIT under the IRC or be subject to significant penalty taxes.
We lease manymost of our properties to our TRSs pursuant to arrangements that, under the IRC, are intended to qualify the rents we receive from our TRSs as income that satisfies the REIT gross income tests. We also intend that our transactions with our TRSs be conducted on arm’sarm's length bases so that we and our TRSs will not be subject to penalty taxes under the IRC applicable to mispriced transactions. While relief provisions can sometimes excuse REIT gross income test failures, significant penalty taxes canmay still be imposed.
For ourthose TRS arrangements intended to comply as intended with the REIT qualification and taxation rules under the IRC, a number of requirements must be satisfied, including:
our TRSs may not directly or indirectly operate or manage a health carehealthcare facility, as defined by the IRC;
the leases to our TRSs must be respected as true leases for federal income tax purposes and not as service contracts, partnerships, joint ventures, financings or other types of arrangements;
the leased properties must constitute qualified health carehealthcare properties (including necessary or incidental property) under the IRC;
theour leased properties must be managed and operated on behalf of the TRSs by independent contractors who are less than 35% affiliated with us and who are actively engaged (or have affiliates so engaged) in the trade or business of managing and operating qualified health carehealthcare properties for personsany person unrelated to us; and
the rental and other terms of the leases must be arm’sarm's length.
There canWe cannot be no assurancesure that the IRS or a court will agree with our assessment that our TRS arrangements comply as intended with applicable REIT qualification and taxation rules. If arrangements involving our TRSs fail to comply as we intended, we may fail to qualify for taxation as a REIT under the IRC or be subject to significant penalty taxes.
Legislative or other actions affecting REITs could materially and adversely affect us and our shareholders.
The rules dealing with U.S. federal, state, and local taxation are constantly under review by persons involved in the legislative process and by the IRS, the U.S. Department of the Treasury, and other taxation authorities. Changes to the tax laws, with or without retroactive application, could materially and adversely affect us and our shareholders. We cannot predict how changes in the tax laws might affect us or our shareholders. New legislation, Treasury regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to remain qualified for taxation as a REIT or the tax consequences of such qualification to us and our shareholders.
Risks Related to Our Securities
Our distributions to our shareholders may decline.
Following entry into the Transaction Agreement with Five Star, due to the lower cash flow we received, or expect to receive, from our senior living communities operated by Five Star, on April 18, 2019, we lowered our regular quarterly distribution rate to $0.15 per common share, or at an annual rate of $0.60 per common share. We intend to continue to make regular quarterly distributions to our shareholders. However:
our ability to make or sustain the rate of our distributions will be adversely affected if any of the risks described herein, or other significant events,in this Annual Report on Form 10-K occur;
our making of distributions is subject to compliance with restrictions contained in our revolving credit facility and term loan agreements and may be subject to restrictions in future debt obligations we may incur; and
the timing and amount of any distributions will be madedetermined at the discretion of our Board of Trustees and will depend uponon various factors that our Board of Trustees deems relevant, including our financial condition, our results of operations, our financial condition, debt and equity capital available to us,liquidity, our expectation of our future capital requirements, our funds from operations attributable to common shareholders, or FFO attributable to common shareholders, our
normalized funds from operations attributable to common shareholders, or Normalized FFO attributable to common shareholders, restrictive covenants in our financial or other contractual arrangements, (including those containedgeneral economic conditions in our revolving credit facility and term loan agreements), tax lawthe United States, requirements under the IRC to maintain our qualificationremain qualified for taxation as a REIT and restrictions under Maryland law and our expected needs and availabilitythe laws of cash to pay our obligations.Maryland.
For these reasons, among others, our distribution rate may continue to decline or we may cease making distributions. Also,distributions to our distributions may include a return of capital.shareholders.
Changes in market conditions could adversely affect the market pricevalue of our common shares.securities.
As with other publicly traded equity securities and REIT securities, the market pricevalue of our common shares and other securities depends on various market conditions that mayare subject to change from time to time, including:
the extent of investor interest in our securities;
the general reputation of REITs and externally managed companies and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate based companies or by other issuers less sensitive to rises in interest rates;
our underlying asset value;
investor confidence in the stock and bond markets, generally;
market interest rates;
national economic conditions;
changes in tax laws;
changes in our credit ratings; and
general market conditions.
We believe that one of the factors that investors consider important in deciding whether to buy or sell equity securities of a REIT is the distribution rate, considered as a percentage of the price of the equity securities, relative to market interest rates. Interest rates have been at historically low levels for an extended period of time. There is a general market perception that REIT shares outperform in low interest rate environments and underperform in rising interest rate environments when compared to the broader market. In December 2016,The U.S. Federal Reserve steadily increased the targeted federal funds rate over the last several years, but recently took action to decrease its federal funds rate and may continue to make adjustments in the near future. If the U.S. Federal Reserve raised its benchmarkincreases interest rate by a quarter of a percentage point. Market interest rates may continue to increase in the near to intermediate term. If market interest rates continue to increase, or if there is a market expectation of such increases, prospective purchasers of REIT equity securities may
want to achieve a higher distribution rate. Thus, higher market interest rates, or the expectation of higher interest rates, could cause the market pricevalue of our common sharessecurities to decline.
Further issuances of equity securities may be dilutive to current shareholders.
The interests of our existing shareholders could be diluted if we issue additional equity securities to finance future acquisitions, or to repay indebtedness.indebtedness or for other reasons. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, which may include secured and unsecured debt, and equity financing, which may include common and preferred shares.
The Notes are structurally subordinated to the payment of all indebtedness and other liabilities and any preferred equity of our subsidiaries.
We are the sole obligor on our outstanding senior unsecured notes, and our outstanding senior unsecured notes and any notes or other debt securities we may issue in the future, or, together with our outstanding senior unsecured notes, the Notes, and such Notes are not, and any Notes we may issue in the future may not be guaranteed by any of our subsidiaries. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due on the Notes, or to make any funds available therefor, whether by dividend, distribution, loan or other payments. The rights of holders of Notes to benefit from any of the assets of our subsidiaries are subject to the prior satisfaction of claims of our subsidiaries’subsidiaries' creditors and
any preferred equity holders. As a result, the Notes are, and, except to the extent that future Notes are guaranteed by our subsidiaries, will be, structurally subordinated to all of the debt and other liabilities and obligations of our subsidiaries, including guarantees of other indebtedness of ours, payment obligations under lease agreements, trade payables and preferred equity. As of December 31, 2016,2019, our subsidiaries had total indebtedness and other liabilities (excluding security and other deposits and guaranties) of $1.2 billion.
$880.0 million.
The Notes are unsecured and effectively subordinated to all of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.
The outstanding Notes are not secured and any Notes we may issue in the future may not be secured. Upon any distribution to our creditors in a bankruptcy, liquidation, reorganization or similar proceeding relating to us or our property, the holders of our secured debt will be entitled to exercise the remedies available to a secured lender under applicable law and pursuant to the instruments governing such debt and to be paid in full, from the assets securing that secured debt before any payment may be made with respect to Notes that are not secured by those assets. In that event, because such Notes will not be secured by any of our assets, it is possible that there will be no assets from which claims of holders of such Notes can be satisfied or, if any assets remain, that the remaining assets will be insufficient to satisfy those claims in full. If the value of such remaining assets is less than the aggregate outstanding principal amount of such Notes and accrued interest and all future debt ranking equally with such Notes, we will be unable to fully satisfy our obligations under such Notes. In addition, if we fail to meet our payment or other obligations under our secured debt, the holders of that secured debt would be entitled to foreclose on our assets securing that secured debt and liquidate those assets. Accordingly, we may not have sufficient funds to pay amounts due on such Notes. As a result, noteholders may lose a portion of or the entire value of their investment in such Notes. Further, the terms of the outstanding Notes permit, and the terms of any Notes we may issue in the future may permit, us to incur additional secured indebtedness subject to compliance with certain debt ratios. The Notes that are not secured will be effectively subordinated to any such additional secured indebtedness. As of December 31, 2016,2019, we had $1.1 billion$694.7 million in secured debt, net of unamortized debt issuance costs, premiums and discounts.
There may be no public market for certain of the Notes, and one may not develop, be maintained or be liquid.
We have not applied for listing of certain of the Notes on any securities exchange or for quotation on any automatic dealer quotation system, and we may not do so for Notes issued in the future. We can give no assurances concerning the liquidity of any market that may develop for such Notes, the ability of any holder to sell such Notes or the price at which holders would be able to sell such Notes. If a market for such Notes does not develop, holders may be unable to resell such Notes for an extended period of time, if at all. If a market for such Notes does develop, it may not continue or it may not be sufficiently liquid to allow holders to resell such Notes. Consequently, holders of suchthe Notes may not be able to liquidate their investment readily, and lenders may not readily accept such Notes as collateral for loans.
The Notes may trade at a discount from their initial issue price or principal amount, depending upon many factors, including prevailing interest rates, the ratings assigned by rating agencies, the market for similar securities and other factors, including general economic conditions and our financial condition, performance and prospects. Any decline in market prices, regardless of cause, may adversely affect the liquidity and trading markets for the Notes.
A downgrade in credit ratings could materially adversely affect the market price of the Notes and may increase our cost of capital.
The outstanding Notes are rated by two rating agencies and any Notes we may issue in the future may be rated by one or more rating agencies. These credit ratings are continually reviewed by rating agencies and may change at any time based upon, among other things, our results of operations and financial condition. In May 2019, our senior unsecured debt rating was downgraded by Moody's Investors Service following our announcement of the Restructuring Transaction. Negative changes in the ratings assigned to our debt securities could have an adverse effect on the market price of the Notes and our costscost and availability of capital, which could in turn have a material adverse effect on our results of operations and our ability to satisfy our debt service obligations.
Redemption may adversely affect noteholders’noteholders' return on the Notes.
We have the right to redeem some or all of the outstanding Notes prior to maturity and may have such a right with respect to any Notes we issue in the future. We may redeem such Notes at times when prevailing interest rates may be relatively low compared to the interest rate of such Notes. Accordingly, noteholders may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as that of the Notes.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
At December 31, 2016,2019, we had real estate investments in 424 properties. These investments represent gross book value of real estate assets at cost plus certain acquisition costs, before depreciation and purchase price allocations and less impairment write downs, totaling $7.7$8.4 billion at undepreciated cost, in 433 properties (459 buildings). At December 31, 2016, 452019. As of December 31, 2019, 11 properties (47 buildings) with an aggregate costgross book value of $1.7real estate assets of $1.3 billion and an aggregate carryinga net book value of $1.4 billion$859.0 million were mortgaged or subject to secured financing and capital lease obligations with an aggregate principal balance of $1.1 billion.$698.2 million, of which $620.0 million is related to a joint venture arrangement in which we own a 55% equity interest.
The following table summarizes certain information about our properties as of December 31, 2016.2019. All dollar amounts are in thousands:
|
| | | | | | | | | | | | | | |
Location of Properties by State | | Number of Properties | | Number of Buildings | | Undepreciated Carrying Value | | Net Book Value |
Alabama | | 7 |
| | 7 |
| | $ | 67,503 |
| | $ | 57,252 |
|
Arizona | | 11 |
| | 11 |
| | 172,935 |
| | 127,753 |
|
Arkansas | | 3 |
| | 3 |
| | 31,412 |
| | 30,025 |
|
California | | 26 |
| | 31 |
| | 787,194 |
| | 649,860 |
|
Colorado | | 12 |
| | 13 |
| | 121,521 |
| | 94,657 |
|
Connecticut | | 2 |
| | 2 |
| | 11,063 |
| | 9,272 |
|
Delaware | | 6 |
| | 6 |
| | 93,990 |
| | 63,659 |
|
District of Columbia | | 2 |
| | 2 |
| | 70,171 |
| | 62,605 |
|
Florida | | 30 |
| | 35 |
| | 741,495 |
| | 565,981 |
|
Georgia | | 33 |
| | 33 |
| | 410,674 |
| | 361,637 |
|
Hawaii | | 1 |
| | 1 |
| | 68,701 |
| | 62,272 |
|
Idaho | | 2 |
| | 2 |
| | 17,886 |
| | 16,000 |
|
Illinois | | 15 |
| | 16 |
| | 216,052 |
| | 181,539 |
|
Indiana | | 13 |
| | 13 |
| | 207,809 |
| | 174,049 |
|
Iowa | | 4 |
| | 4 |
| | 10,315 |
| | 4,431 |
|
Kansas | | 4 |
| | 4 |
| | 58,924 |
| | 40,924 |
|
Kentucky | | 9 |
| | 9 |
| | 101,663 |
| | 63,214 |
|
Louisiana | | 6 |
| | 6 |
| | 7,025 |
| | 6,725 |
|
Maryland | | 15 |
| | 15 |
| | 317,457 |
| | 244,906 |
|
Massachusetts | | 21 |
| | 24 |
| | 1,107,336 |
| | 1,014,003 |
|
Michigan | | 5 |
| | 5 |
| | 16,836 |
| | 11,071 |
|
Minnesota | | 9 |
| | 11 |
| | 126,575 |
| | 107,137 |
|
Mississippi | | 3 |
| | 3 |
| | 27,176 |
| | 22,761 |
|
Missouri | | 7 |
| | 7 |
| | 148,122 |
| | 140,935 |
|
Montana | | 1 |
| | 1 |
| | 29,366 |
| | 28,105 |
|
Nebraska | | 13 |
| | 13 |
| | 63,205 |
| | 45,149 |
|
Nevada | | 2 |
| | 2 |
| | 77,302 |
| | 68,987 |
|
New Jersey | | 5 |
| | 5 |
| | 181,669 |
| | 150,884 |
|
New Mexico | | 5 |
| | 6 |
| | 100,796 |
| | 78,226 |
|
New York | | 6 |
| | 7 |
| | 218,086 |
| | 189,691 |
|
North Carolina | | 18 |
| | 18 |
| | 258,528 |
| | 228,563 |
|
Ohio | | 4 |
| | 5 |
| | 64,424 |
| | 47,126 |
|
Oregon | | 3 |
| | 3 |
| | 116,978 |
| | 112,100 |
|
Pennsylvania | | 18 |
| | 18 |
| | 166,836 |
| | 127,959 |
|
Rhode Island | | 1 |
| | 1 |
| | 10,052 |
| | 9,606 |
|
South Carolina | | 23 |
| | 23 |
| | 197,539 |
| | 164,608 |
|
South Dakota | | 3 |
| | 3 |
| | 7,589 |
| | 3,066 |
|
Tennessee | | 14 |
| | 14 |
| | 99,079 |
| | 80,578 |
|
Texas | | 28 |
| | 28 |
| | 526,891 |
| | 416,803 |
|
Virginia | | 18 |
| | 20 |
| | 254,899 |
| | 190,569 |
|
Washington | | 6 |
| | 7 |
| | 92,167 |
| | 82,619 |
|
Wisconsin | | 17 |
| | 20 |
| | 316,620 |
| | 261,573 |
|
Wyoming | | 2 |
| | 2 |
| | 8,662 |
| | 3,632 |
|
Total | | 433 |
| | 459 |
| | $ | 7,730,523 |
| | $ | 6,402,512 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Office Portfolio | | Senior Housing Operating Portfolio | | All Other | | Consolidated |
State | | Number of Properties | Gross Book Value of Real Estate Assets(1) | Net Book Value | | Number of Properties | Gross Book Value of Real Estate Assets(1) | Net Book Value | | Number of Properties | Gross Book Value of Real Estate Assets(1) | Net Book Value | | Number of Properties | Gross Book Value of Real Estate Assets(1) | Net Book Value |
AL | | — | $ | — |
| $ | — |
| | 8 | $ | 94,554 |
| $ | 73,102 |
| | — | $ | — |
| $ | — |
| | 8 | $ | 94,554 |
| $ | 73,102 |
|
AR | | — | — |
| — |
| | 3 | 42,184 |
| 27,777 |
| | — | — |
| — |
| | 3 | 42,184 |
| 27,777 |
|
AZ | | 4 | 63,980 |
| 49,241 |
| | 6 | 134,403 |
| 87,010 |
| | 1 | 3,510 |
| 2,196 |
| | 11 | 201,893 |
| 138,447 |
|
CA | | 12 | 566,456 |
| 438,387 |
| | 12 | 233,389 |
| 177,273 |
| | 1 | 7,279 |
| 5,048 |
| | 25 | 807,124 |
| 620,708 |
|
CO | | 2 | 20,118 |
| 13,548 |
| | 1 | 51,095 |
| 44,295 |
| | 2 | 18,555 |
| 13,896 |
| | 5 | 89,768 |
| 71,739 |
|
CT | | 1 | 7,474 |
| 5,364 |
| | — | — |
| — |
| | — | — |
| — |
| | 1 | 7,474 |
| 5,364 |
|
DC | | 2 | 99,392 |
| 82,024 |
| | — | — |
| — |
| | — | — |
| — |
| | 2 | 99,392 |
| 82,024 |
|
DE | | — | — |
| — |
| | 6 | 97,365 |
| 65,143 |
| | — | — |
| — |
| | 6 | 97,365 |
| 65,143 |
|
FL | | 7 | 39,519 |
| 29,154 |
| | 17 | 541,811 |
| 377,471 |
| | 2 | 12,326 |
| 11,247 |
| | 26 | 593,656 |
| 417,872 |
|
GA | | 5 | 73,378 |
| 50,716 |
| | 22 | 283,385 |
| 198,674 |
| | 5 | 96,853 |
| 76,923 |
| | 32 | 453,616 |
| 326,313 |
|
HI | | 1 | 77,308 |
| 61,464 |
| | — | — |
| — |
| | — | — |
| — |
| | 1 | 77,308 |
| 61,464 |
|
ID | | — | — |
| — |
| | — | — |
| — |
| | 2 | 21,340 |
| 16,407 |
| | 2 | 21,340 |
| 16,407 |
|
IL | | 4 | 68,994 |
| 47,929 |
| | 11 | 175,501 |
| 113,226 |
| | 1 | 20,641 |
| 15,073 |
| | 16 | 265,136 |
| 176,228 |
|
IN | | 1 | 21,972 |
| 13,747 |
| | 11 | 166,789 |
| 125,433 |
| | 2 | 68,767 |
| 55,070 |
| | 14 | 257,528 |
| 194,250 |
|
KS | | 2 | 61,388 |
| 41,847 |
| | 3 | 58,439 |
| 39,272 |
| | — | — |
| — |
| | 5 | 119,827 |
| 81,119 |
|
KY | | — | — |
| — |
| | 9 | 101,352 |
| 61,200 |
| | — | — |
| — |
| | 9 | 101,352 |
| 61,200 |
|
MA | | 10 | 1,295,579 |
| 860,634 |
| | 1 | 31,853 |
| 20,739 |
| | — | — |
| — |
| | 11 | 1,327,432 |
| 881,373 |
|
MD | | 3 | 45,784 |
| 32,355 |
| | 11 | 240,932 |
| 178,609 |
| | 1 | 20,964 |
| 16,253 |
| | 15 | 307,680 |
| 227,217 |
|
MI | | — | — |
| — |
| | — | — |
| — |
| | 5 | 15,942 |
| 10,018 |
| | 5 | 15,942 |
| 10,018 |
|
MN | | 9 | 115,138 |
| 86,108 |
| | 1 | 50,881 |
| 36,206 |
| | 2 | 6,319 |
| 3,991 |
| | 12 | 172,338 |
| 126,305 |
|
MO | | 3 | 138,081 |
| 98,592 |
| | 5 | 68,678 |
| 48,803 |
| | — | — |
| — |
| | 8 | 206,759 |
| 147,395 |
|
MS | | — | — |
| — |
| | 2 | 2,601 |
| 2,601 |
| | — | — |
| — |
| | 2 | 2,601 |
| 2,601 |
|
MT | | — | — |
| — |
| | — | — |
| — |
| | 1 | 32,582 |
| 25,996 |
| | 1 | 32,582 |
| 25,996 |
|
NC | | 2 | 60,078 |
| 46,216 |
| | 16 | 223,693 |
| 179,121 |
| | 1 | 6,839 |
| 4,291 |
| | 19 | 290,610 |
| 229,628 |
|
NE | | — | — |
| — |
| | 1 | 7,568 |
| 5,219 |
| | 1 | 26,702 |
| 20,440 |
| | 2 | 34,270 |
| 25,659 |
|
NJ | | — | — |
| — |
| | 4 | 113,387 |
| 80,246 |
| | — | — |
| — |
| | 4 | 113,387 |
| 80,246 |
|
NM | | 2 | 38,846 |
| 29,892 |
| | 1 | 32,655 |
| 21,287 |
| | 3 | 33,303 |
| 23,533 |
| | 6 | 104,804 |
| 74,712 |
|
NV | | — | — |
| — |
| | 2 | 82,643 |
| 63,082 |
| | — | — |
| — |
| | 2 | 82,643 |
| 63,082 |
|
NY | | 3 | 84,478 |
| 61,585 |
| | 1 | 113,955 |
| 90,312 |
| | — | — |
| — |
| | 4 | 198,433 |
| 151,897 |
|
OH | | 3 | 27,703 |
| 19,725 |
| | 1 | 44,608 |
| 29,201 |
| | 1 | 4,204 |
| 1,850 |
| | 5 | 76,515 |
| 50,776 |
|
OR | | — | — |
| — |
| | 1 | 45,825 |
| 45,256 |
| | — | — |
| — |
| | 1 | 45,825 |
| 45,256 |
|
PA | | 6 | 73,521 |
| 55,133 |
| | 9 | 95,061 |
| 63,350 |
| | 2 | 3,535 |
| 2,255 |
| | 17 | 172,117 |
| 120,738 |
|
SC | | 3 | 22,191 |
| 14,970 |
| | 18 | 184,040 |
| 137,670 |
| | 2 | 3,935 |
| 2,529 |
| | 23 | 210,166 |
| 155,169 |
|
TN | | 1 | 9,491 |
| 6,585 |
| | 14 | 162,745 |
| 131,992 |
| | 2 | 15,667 |
| 12,050 |
| | 17 | 187,903 |
| 150,627 |
|
TX | | 11 | 242,255 |
| 172,296 |
| | 13 | 344,425 |
| 248,928 |
| | 1 | 20,502 |
| 15,408 |
| | 25 | 607,182 |
| 436,632 |
|
VA | | 8 | 121,094 |
| 84,955 |
| | 12 | 141,075 |
| 100,928 |
| | — | — |
| — |
| | 20 | 262,169 |
| 185,883 |
|
WA | | 2 | 38,226 |
| 26,515 |
| | — | — |
| — |
| | 4 | 33,585 |
| 24,268 |
| | 6 | 71,811 |
| 50,783 |
|
WI | | 10 | 169,236 |
| 128,620 |
| | 10 | 134,334 |
| 101,015 |
| | — | — |
| — |
| | 20 | 303,570 |
| 229,635 |
|
Total | | 117 | 3,581,680 |
| 2,557,602 |
| | 232 | 4,101,226 |
| 2,974,441 |
| | 42 | 473,350 |
| 358,742 |
| | 391 | 8,156,256 |
| 5,890,785 |
|
Held for Sale | | 21 | 158,572 |
| 133,124 |
| | 12 | 105,795 |
| 63,218 |
| | — | — |
| — |
| | 33 | 264,367 |
| 196,342 |
|
Grand Total | | 138 | $ | 3,740,252 |
| $ | 2,690,726 |
| | 244 | $ | 4,207,021 |
| $ | 3,037,659 |
| | 42 | $ | 473,350 |
| $ | 358,742 |
| | 424 | $ | 8,420,623 |
| $ | 6,087,127 |
|
(1) Represents the gross book value of real estate assets at cost plus certain acquisition costs, before depreciation and purchase price allocations and less impairment write downs, if any.
Of the properties listed above, 304 (304 buildings) are senior living communities, 119 (145 buildings) are MOBs and 10 (10 buildings) are wellness centers.
Item 3. Legal Proceedings.
From time to time, we may become involved in litigation matters incidental to the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, we are currently not a party to any litigation which we expect to have a material adverse effect on our business.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’sRegistrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common shares were traded on the New York Stock Exchange, or the NYSE (symbol: SNH), through June 30, 2016. Beginning on July 1, 2016, our common shares are traded on the Nasdaq (symbol: SNH)DHC). The following table sets forth for the periods indicated the high and low sale prices for our common shares as reported by the NYSE or Nasdaq, as applicable:
|
| | | | | | | | |
| | High | | Low |
2016 | | | | |
First Quarter | | $ | 17.93 |
| | $ | 13.53 |
|
Second Quarter | | $ | 21.38 |
| | $ | 17.05 |
|
Third Quarter | | $ | 23.85 |
| | $ | 20.95 |
|
Fourth Quarter | | $ | 22.94 |
| | $ | 17.14 |
|
|
| | | | | | | | |
| | High | | Low |
2015 | | | | |
First Quarter | | $ | 23.83 |
| | $ | 21.19 |
|
Second Quarter | | $ | 22.41 |
| | $ | 17.52 |
|
Third Quarter | | $ | 18.25 |
| | $ | 14.98 |
|
Fourth Quarter | | $ | 17.16 |
| | $ | 13.63 |
|
The closing price of our common shares on the Nasdaq on February 1, 2017 was $18.93 per share. As of February 1, 2017,26, 2020, there were 1,7171,586 shareholders of record of our common shares.shares, although there is a larger number of beneficial owners.
InformationIssuer purchases of equity securities. The following table provides information about cash distributions declared on our common shares is summarized inpurchases of our equity securities during the table below. Common share cash distributions are generally paid in the quarter following the quarter to which they relate.three months ended December 31, 2019:
|
| | | | | | | | |
| | Cash Distributions per Common Share |
| | 2016 | | 2015 |
First Quarter | | $ | 0.39 |
| | $ | 0.39 |
|
Second Quarter | | $ | 0.39 |
| | $ | 0.39 |
|
Third Quarter | | $ | 0.39 |
| | $ | 0.39 |
|
Fourth Quarter | | $ | 0.39 |
| | $ | 0.39 |
|
|
| | | | | | | | | | | | | | |
Calendar Month | | Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
December 2019 | | 234 |
| | $ | 7.44 |
| | — |
| | $ | — |
|
Total | | 234 |
| | $ | 7.44 |
| | — |
| | $ | — |
|
We currently intend to continue to declare and pay common share distributions on a quarterly basis in cash. However, the timing, amount and form of future distributions is determined at the discretion of our Board of Trustees and will depend upon various factors that our Board of Trustees deems relevant, including, but not limited to, our results of operations, our financial condition, debt and equity capital available to us, our expectations of our future capital requirements and operating performance, including our FFO, our Normalized FFO, restrictive covenants in our financial or other contractual arrangements (including those
in our revolving credit facility and term loan agreements), tax law requirements to maintain our qualification for taxation as a REIT, restrictions under Maryland law and our expected needs and availability of cash to pay our obligations. Therefore, there can be no assurance that we will continue to pay distributions in the future or that the amount of distributions we do pay will not decrease.
In addition to the cash distributions paid to our common shareholders in 2015, on December 14, 2015, we distributed 2,635,379 shares, or 0.0111 of a share for each of our common shares, of RMR Inc. class A common stock we owned to our common shareholders as a special distribution. This distribution resulted in a taxable in-kind distribution of $0.1320 for each of our common shares.
| |
(1) | These common share withholding and purchases were made to satisfy tax withholding and payment obligations of a former employee of RMR LLC in connection with the vesting of awards of our common shares. We withheld and purchased these shares at their fair market value based upon the trading price of our common shares at the close of trading on Nasdaq on the purchase date. |
Item 6. Selected Financial Data.
The following table sets forth selected financial data for the periods and dates indicated. Comparative results are affected by property acquisitions and dispositions during the periods shown. This data should be read in conjunction with, and is qualified in its entirety by reference to “Management’s“Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K and to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. Amounts in the table below (but not the footnotes to the table) are in thousands, except per share data.
| | | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | | Year Ended December 31, |
Income Statement Data: | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | |
Income (Loss) Statement Data: | | | | | | | | | | | | |
Rental income | | $ | 666,200 |
| | $ | 630,899 |
| | $ | 526,703 |
| | $ | 459,380 |
| | $ | 450,769 |
| | $ | 606,558 |
| | $ | 700,641 |
| | $ | 681,022 |
| | $ | 666,200 |
| | $ | 630,899 |
| |
Residents fees and services(1) | | $ | 391,822 |
| | $ | 367,874 |
| | $ | 318,184 |
| | $ | 302,058 |
| | $ | 184,031 |
| | $ | 433,597 |
| | $ | 416,523 |
| | $ | 393,707 |
| | $ | 391,822 |
| | $ | 367,874 |
| |
Net income(2)(3) | | $ | 141,295 |
| | $ | 123,968 |
| | $ | 158,637 |
| | $ | 151,164 |
| | $ | 135,884 |
| |
Net (loss) income(2)(3) | | | $ | (82,878 | ) | | $ | 292,414 |
| | $ | 151,803 |
| | $ | 141,295 |
| | $ | 123,968 |
| |
Net (loss) income attributable to common shareholders | | | $ | (88,234 | ) | | $ | 286,872 |
| | $ | 147,610 |
| | $ | 141,295 |
| | $ | 123,968 |
| |
Common distributions declared(4) | | $ | 370,518 |
| | $ | 369,468 |
| | $ | 311,912 |
| | $ | 293,474 |
| | $ | 266,589 |
| | $ | (199,719 | ) | | $ | 370,786 |
| | $ | 370,641 |
| | $ | 370,518 |
| | $ | 369,468 |
| |
Weighted average shares outstanding (basic) | | 237,345 |
| | 232,931 |
| | 198,868 |
| | 187,271 |
| | 169,508 |
| | 237,604 |
| | 237,511 |
| | 237,420 |
| | 237,345 |
| | 232,931 |
| |
Weighted average shares outstanding (diluted) | | 237,382 |
| | 232,963 |
| | 198,894 |
| | 187,414 |
| | 169,671 |
| | 237,604 |
| | 237,546 |
| | 237,452 |
| | 237,382 |
| | 232,963 |
| |
Basic and Diluted Per Common Share Data: | | | | | | | | | | | | | | | | | | | | | |
Net income(2)(3) | | $ | 0.60 |
| | $ | 0.53 |
| | $ | 0.80 |
| | $ | 0.81 |
| | $ | 0.80 |
| |
Net (loss) income(2)(3) | | | $ | (0.37 | ) | | $ | 1.21 |
| | $ | 0.62 |
| | $ | 0.60 |
| | $ | 0.53 |
| |
Cash distributions declared to common shareholders(4) | | $ | 1.56 |
| | $ | 1.56 |
| (5) | | $ | 1.56 |
| | $ | 1.56 |
| | $ | 1.54 |
| | $ | 0.84 |
| | $ | 1.56 |
| | $ | 1.56 |
| | $ | 1.56 |
| | $ | 1.56 |
| (5) | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | |
Real estate properties, at undepreciated cost, net of impairment losses | | $ | 7,730,523 |
| | $ | 7,456,940 |
| | $ | 6,222,360 |
| | $ | 5,263,625 |
| | $ | 5,019,615 |
| | $ | 7,461,586 |
| | $ | 7,876,300 |
| | $ | 7,824,763 |
| | $ | 7,617,547 |
| | $ | 7,456,940 |
| |
Total assets (6) | | $ | 7,227,754 |
| | $ | 7,160,090 |
| | $ | 5,941,930 |
| | $ | 4,742,317 |
| | $ | 4,722,794 |
| | $ | 6,653,826 |
| | $ | 7,160,426 |
| | $ | 7,294,019 |
| | $ | 7,227,754 |
| | $ | 7,160,090 |
| |
Total indebtedness (6) | | $ | 3,714,465 |
| | $ | 3,479,136 |
| | $ | 2,774,365 |
| | $ | 1,870,415 |
| | $ | 1,981,322 |
| | $ | 3,501,661 |
| | $ | 3,648,417 |
| | $ | 3,674,526 |
| | $ | 3,714,465 |
| | $ | 3,479,136 |
| |
Total shareholders’ equity | | $ | 3,199,405 |
| | $ | 3,359,760 |
| | $ | 2,952,407 |
| | $ | 2,776,989 |
| | $ | 2,646,568 |
| |
Total equity | | | $ | 2,877,050 |
| | $ | 3,179,870 |
| | $ | 3,277,188 |
| | $ | 3,199,405 |
| | $ | 3,359,760 |
| |
| |
(1) | We earnIncludes residents fees and services primarily earned from the provision of housing and services to the residents of our third party managed senior living communities by third parties.communities. We recognize residents fees and services as the housing and services are provided. |
| |
(2) | Includes asset impairment of assets charges of $18.7$115.2 million ($0.080.48 per basic and diluted share) and losses on equity securities, net, of $41.9 million ($0.18 per basic and diluted share) in 2019. Includes asset impairment charges of $66.3 million ($0.28 per basic and diluted share) and losses on equity securities, net of $20.7 million ($0.09 per basic and diluted share) in 2018. Includes asset impairment charges of $5.1 million ($0.02 per basic and diluted share) and losses on early extinguishmentsextinguishment of debt of $0.5$7.6 million (less than $0.01($0.03 per basic and diluted share) in 2017. Includes asset impairment charges of $18.7 million ($0.08 per basic and diluted share) in 2016. Includes a loss on distribution to common shareholders of RMR Inc. common stock of $38.4 million ($0.16 per basic and diluted share) in 2015,, asset impairment of assets charges of $0.2 million (less than $0.01 per basic and diluted share) and losses on early extinguishmentsextinguishment of debt of $1.9 million ($0.01 per basic and diluted share) in 2015. |
| |
(3) | Includes impairmentgain on sale of assets chargesproperties of $4.4$39.7 million ($0.020.17 per basic and diluted share) in 2014.2019. Includes impairmentgain on sale of assets chargesproperties of $45.6$261.9 million ($0.24 per basic and diluted share) and losses on early extinguishments of debt of $0.8 million (less than $0.011.10 per basic and diluted share) in 2013.2018. Includes impairmentgain on sale of assets chargesproperties of $3.1$46.1 million ($0.02 per basic and diluted share) and losses on early extinguishments of debt of $6.3 million ($0.040.19 per basic and diluted share) in 2012. |
| |
(3) | 2017. Includes gain on sale of properties of $4.1 million ($0.02 per basic and diluted share) in 2016. Includes gains on sales of properties of $5.5 million ($0.03 per basic and diluted share) and $37.4 million ($0.20 per basic and diluted share) in 2014 and 2013, respectively. Includes losses on sales of properties of $0.1 million (less than $0.01 per basic and diluted share) in 2012. In May 2012, we entered an agreement with subsidiaries of Sunrise Senior Living, Inc., or Sunrise, for early terminations of leases for 10 senior living communities, which were previously scheduled to terminate on December 31, 2013; the leases for all of these ten communities were terminated prior to December 31, 2012, and resulted in gains on lease terminations of approximately $0.4 million (less than $0.01 per basic and diluted share) in 2012. |
| |
(4) | On January 13, 2017,16, 2020, we declared a regular quarterly distribution of $0.39 per share, or $92.6 million, to be paidpayable to common shareholders of record on January 23, 2017.27, 2020 in the amount of $0.15 per share, or approximately $35.7 million. We paid this distribution on February 21, 2017.20, 2020. |
| |
(5) | Excludes a $0.13 per share non-cash distribution of RMR Inc. class A common stock to our common shareholders on December 14, 2015. |
| |
(6) | The periods presented have been restated to reflect the adoption of Accounting Standards Update No. 2015-03, Debt Issuance Costs, which requires the reclassification of certain debt issuance costs as an offset to the associated debt liability in our consolidated balance sheets. We adopted this standard on January 1, 2016. |
Item 7. Management’sManagement's Discussion and Analysis ofFinancial Condition and Results of Operations.
The following discussion should be read in conjunction with our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
We are a REIT organized under Maryland law. As of December 31, 2019, we owned 424 properties, including 33 properties classified as held for sale, located in 39 states and Washington, D.C., including one life science property owned in a joint venture arrangement in which we own a 55% equity interest. At December 31, 2019, the gross book value of our real estate assets at cost plus certain acquisition costs, before depreciation and purchase price allocations and less impairment write downs, was $8.4 billion, including $264.4 million of gross book value classified as held for sale in our consolidated balance sheet.
PORTFOLIO OVERVIEW
The following tables present an overview of our portfolio (dollars in thousands, except investment per living unit / bed or square foot data):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(As of December 31, 2016) | | Number of Properties | | Number of Units/Beds or Square Feet | | | | Investment Carrying Value of Properties(1) | | % of Total Investment | | Investment per Unit/Bed or Square Foot(2) | | 2016 NOI(3) | | % of 2016 NOI |
Facility Type | | | | | | | | | | | | | | | | |
Independent living(4) | | 68 |
| | 16,452 |
| | | | $ | 2,278,668 |
| | 29.5 | % | | $ | 138,504 |
| | $ | 191,259 |
| | 29.2 | % |
Assisted living(4) | | 197 |
| | 14,425 |
| | | | 2,003,003 |
| | 25.9 | % | | $ | 138,856 |
| | 161,596 |
| | 24.7 | % |
Skilled nursing facilities(4) | | 39 |
| | 4,131 |
| | | | 183,249 |
| | 2.4 | % | | $ | 44,359 |
| | 18,245 |
| | 2.8 | % |
Subtotal senior living communities | | 304 |
| | 35,008 |
| | | | 4,464,920 |
| | 57.8 | % | | $ | 127,540 |
| | 371,100 |
| | 56.7 | % |
MOBs(5) | | 119 |
| | 11,431,292 |
| | sq. ft. | | 3,085,586 |
| | 39.9 | % | | $ | 270 |
| | 265,078 |
| | 40.5 | % |
Wellness centers | | 10 |
| | 812,000 |
| | sq. ft. | | 180,017 |
| | 2.3 | % | | $ | 222 |
| | 18,270 |
| | 2.8 | % |
Total | | 433 |
| | | | | | $ | 7,730,523 |
| | 100.0 | % | | | | $ | 654,448 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | |
Tenant/Operator/Managed Properties(5) | | | | | | | | | | | | | | | | |
Five Star | | 185 |
| | 20,187 |
| | | | $ | 2,293,257 |
| | 29.8 | % | | $ | 113,601 |
| | 203,337 |
| | 31.1 | % |
Sunrise / Marriott(6) | | 4 |
| | 1,619 |
| | | | 126,326 |
| | 1.6 | % | | $ | 78,027 |
| | 14,783 |
| | 2.3 | % |
Brookdale Senior Living | | 18 |
| | 894 |
| | | | 67,210 |
| | 0.9 | % | | $ | 75,179 |
| | 9,109 |
| | 1.4 | % |
11 private senior living companies (combined) | | 29 |
| | 3,520 |
| | | | 507,216 |
| | 6.6 | % | | $ | 144,095 |
| | 45,244 |
| | 6.9 | % |
Subtotal triple net leased senior living communities | | 236 |
| | 26,220 |
| | | | 2,994,009 |
| | 38.9 | % | | $ | 114,188 |
| | 272,473 |
| | 41.7 | % |
Managed senior living communities(7) | | 68 |
| | 8,788 |
| | | | 1,470,911 |
| | 18.9 | % | | $ | 167,377 |
| | 98,627 |
| | 15.0 | % |
Subtotal senior living communities | | 304 |
| | 35,008 |
| | | | 4,464,920 |
| | 57.8 | % | | $ | 127,540 |
| | 371,100 |
| | 56.7 | % |
MOBs(5) | | 119 |
| | 11,431,292 |
| | sq. ft. | | 3,085,586 |
| | 39.9 | % | | $ | 270 |
| | 265,078 |
| | 40.5 | % |
Wellness centers | | 10 |
| | 812,000 |
| | sq. ft. | | 180,017 |
| | 2.3 | % | | $ | 222 |
| | 18,270 |
| | 2.8 | % |
Total | | 433 |
| | | | | | $ | 7,730,523 |
| | 100.0 | % | | |
| | $ | 654,448 |
| | 100.0 | % |
Tenant/Managed Property Operating Statistics(8) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(As of December 31, 2019) | | Number of Properties | | Square Feet or Number of Units | |
Gross Book Value of Real Estate Assets(1) | | % of Total Gross Book Value of Real Estate Assets | | Investment per Square Foot or Unit(2) | | 2019 Revenues (3) | | % of 2019 Revenues | | 2019 NOI(3)(4) | | % of 2019 NOI |
Office Portfolio(5) | | 138 |
| | 11,878,421 |
| sq. ft. | $ | 3,740,252 |
| | 44.4 | % | | $ | 315 |
| | $ | 405,016 |
| | 38.9 | % | | $ | 272,668 |
| | 49.5 | % |
SHOP (6) | | 244 |
| | 29,013 |
| units | 4,207,021 |
| | 50.0 | % | | $ | 145,005 |
| | 571,495 |
| | 54.9 | % | | 214,773 |
| | 39.0 | % |
Other triple net leased senior living communities (7) | | 32 |
| | 2,605 |
| units | 295,240 |
| | 3.5 | % | | $ | 113,336 |
| | 44,919 |
| | 4.3 | % | | 44,919 |
| | 8.2 | % |
Wellness centers | | 10 |
| | 812,000 |
| sq. ft. | 178,110 |
| | 2.1 | % | | $ | 219 |
| | 18,725 |
| | 1.9 | % | | 18,725 |
| | 3.3 | % |
Total | | 424 |
| | | | $ | 8,420,623 |
| | 100.0 | % | | | | $ | 1,040,155 |
| | 100.0 | % | | $ | 551,085 |
| | 100.0 | % |
|
| | | | | | | | | | |
| | Rent Coverage | | Occupancy |
| | 2016 | | 2015 | | 2016 | | 2015 |
Five Star | | 1.21x | | 1.23x | | 83.9 | % | | 84.8 | % |
Sunrise / Marriott(6) | | 1.98x | | 1.98x | | 91.0 | % | | 91.4 | % |
Brookdale Senior Living | | 2.64x | | 2.77x | | 85.6 | % | | 90.9 | % |
11 private senior living companies (combined) | | 1.25x | | 1.46x | | 88.8 | % | | 87.2 | % |
Subtotal triple net leased senior living communities | | 1.31x | | 1.35x | | 85.1 | % | | 85.6 | % |
Managed senior living communities(7) | | N/A | | N/A | | 87.3 | % | | 88.2 | % |
Subtotal senior living communities | | 1.31x | | 1.35x | | 85.6 | % | | 86.2 | % |
MOBs(5) | | N/A | | N/A | | 96.5 | % | | 96.4 | % |
Wellness centers | | 1.89x | | 1.93x | | 100.0 | % | | 100.0 | % |
Total | | 1.35x | | 1.39x | | | | |
|
| | | | | | |
| | Occupancy |
| | As of and for the Year Ended December 31, |
| | 2019 | | 2018 |
Office Portfolio (8) | | 92.2 | % | | 94.5 | % |
SHOP (6)(9) | | 85.1 | % | | 86.2 | % |
Other triple net leases senior living communities (9)(10) | | 88.2 | % | | 88.4 | % |
Wellness centers | | 100.0 | % | | 100.0 | % |
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(1) | Amounts areRepresents gross book value of real estate assets at cost plus certain acquisition costs, before depreciation but afterand purchase price allocations and less impairment write downs,writedowns, if any. Amounts include $264,367 of gross book value of 33 properties classified as held for sale as of December 31, 2019, which amounts are included in assets of properties held for sale in our consolidated balance sheet. |
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(2) | Represents investment carryinggross book value of real estate assets divided by the number of living units, beds or rentable square feet or living units, as applicable, at December 31, 2016.2019. |
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(3) | Includes $23,802 of revenues and $22,699 of NOI from properties sold during the year ended December 31, 2019 and $53,223 of revenues and $24,165 of NOI from properties classified as held for sale as of December 31, 2019. |
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(4) | NOI is defined and calculated by reporting segmentreportable segment. Our definition of NOI and reconciled toour reconciliation of net income (loss) attributable to common shareholders to NOI are included below in this Item 7. Excludes NOI from properties that were sold or that was earned from properties prior tounder the transfer of operations to our TRSs during the periods presented.heading “Non-GAAP Financial Measures”. |
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(4) | Senior living communities are categorized by the type of living units or beds which constitute a majority of the living units or beds at the property. |
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(5) | These 119 MOB properties are comprised of 145 buildings. Our MOBmedical office and life science property leases include some triple net leases where, in addition to paying fixed rents, the tenants assume the obligation to operate and maintain the properties at their expense, and some net and modified gross leases where we are responsible for the operation and maintenance of the properties and we charge tenants for some or all of the property operating costs. A small percentage of our MOBmedical office and life science property leases are so-called "full-service"full-service leases where we receive fixed rent from our tenants and no reimbursement for our property operating costs. |
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(6) | Marriott International, Inc., or Marriott, guarantees the lessee’s obligations under these leases. |
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(7)(6) | TheseIncludes communities that were leased to Five Star and communities that were managed by Five Star for our account as of December 31, 2019. Pursuant to the Restructuring Transaction, our previously existing master leases and management and pooling agreements with Five Star were terminated and replaced with new management and omnibus agreements, or the New Management Agreements, as of January 1, 2020, for all of our senior living communities are managed for our account. The occupancy for the 12 month period ended or, if shorter, from the dateoperated by Five Star. |
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(7) | Triple net leased senior living communities that were leased to Five Star as of acquisitions through, December 31, 2016 was 87.2%.2019 are included in our SHOP segment. |
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(8) | OperatingMedical office and life science property occupancy data for multi‑tenant MOBs are presentedis as of December 31, 20162019 and 2015; operatingincludes (i) out of service assets undergoing redevelopment, (ii) space which is leased but is not occupied or is being offered for sublease by tenants and (iii) space being fitted out for occupancy. |
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(9) | Excludes data for periods prior to our ownership of certain properties, data for properties sold or classified as held for sale and data for which there was a transfer of operations during the periods presented. |
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(10) | Operating data for other properties, tenantstriple net leased senior living communities leased to third party operators other than Five Star and managerswellness centers are presented based upon the operating results provided by our tenants and managers for the 12 months ended September 30, 20162019 and September 30, 2015,2018, or the most recent prior period for which tenant and manager operating results are made available to us. Rent coverage is calculated as operating cash flow from our tenants’ operations of our properties, before subordinated charges, if any, divided by rents payable to us. We have not independently verified our tenants’tenant operating data. The table excludesExcludes data for periods prior to our ownership of somecertain properties, data for properties sold or classified as held for sale, and data for which there was a transfer of these properties.operations during the periods presented. |
We have fourIn connection with the Restructuring Transaction, as discussed below, we determined to redefine our reportable segments to better reflect our current operating segments,environment. As of which three are separate reportingDecember 31, 2019, we report under the following two segments: (1)Office Portfolio and SHOP. Our Office Portfolio segment consists of medical office properties leased to medical providers and other medical related businesses, as well as life science properties leased to biotech laboratories and other similar tenants. Our SHOP segment consists of managed senior living communities that provide short term and long term residential care and other services for residents where we pay fees to the operator to manage the communities for our account. In addition, our SHOP segment includes triple net leased senior living communities that provide short term and long term residential care and other services for residents (2) managedand from which we received rents from Five Star until January 1, 2020. Pursuant to the Restructuring Transaction, effective January 1, 2020, our previously existing master leases and management and pooling agreements with Five Star were terminated and replaced with the New Management Agreements for all of our senior living communities that provide short term and long term residential care and other services for residents and (3) MOBs. The “All Other” category includes alloperated by Five Star.
We also continue to report “non-segment” operations, which consists of our other operations, including certain properties that offer wellness, fitness and spa services to members, which we do not consider to be sufficiently material to constitute a separate reporting segment.
Triple Net Leased Senior Living Communities.
The following chart presents a summary of our triple net leased senior living community leases ascommunities that are leased to operators other than Five Star from which we receive rents and wellness centers.
Office Portfolio
As of December 31, 20162019, we owned 138 medical office and life science properties located in 27 states and Washington, D.C. These properties have a total of 11.9 million square feet. During the year ended December 31, 2019, we entered into lease renewals for 1,255,512 square feet and new leases for 261,960 square feet at our medical office and life science properties. The weighted average annual rental rate for leases entered during 2019 was $29.64 per square foot, which was 5.1% higher than the previous weighted average annual rental rate for the same space. Weighted (by annualized rental income) average lease term for leases entered during 2019 was 10.2 years. Commitments for tenant improvements, leasing commission costs and concessions for leases we entered during 2019 totaled $37.4 million, or $24.66 per square foot on average (approximately $2.69 per square foot per year of the lease term).
As of December 31, 2019, lease expirations at our medical office and life science properties in our Office Portfolio segment are as follows (dollars in thousands).This summary should be read in conjunction with the more detailed descriptions of our leases set forth below and under "Business - Lease Terms" in Part I, Item 1 of this Annual Report on Form 10-K.:
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| | | | | | | | | | | | | | | | | | | | | | | | | |
Tenant / Operator | | Number of Properties | | Number of Leases | | Units/Beds | | Investment Carrying Value of Properties | | Net Book Value of Properties | | Annualized Rental Income(1) | | Lease Expiration | | Renewal Options |
Five Star | | 185 |
| | 5 |
| | 20,187 |
| | $ | 2,293,257 |
| | 1,650,764 |
| | 209,011 |
| | 2024-2032 | | 2 for 10 or 15 years each. |
Sunrise Senior Living, Inc. | | 4 |
| | 4 |
| | 1,619 |
| | 126,326 |
| | 62,101 |
| | 14,781 |
| | 2023 | | 3 for 5 years each. |
Pacifica Senior Living | | 8 |
| | 8 |
| | 644 |
| | 116,255 |
| | 111,347 |
| | 13,424 |
| | 2023 | | 2 for 5 years each. |
Generations LLC | | 1 |
| | 1 |
| | 343 |
| | 80,731 |
| | 77,328 |
| | 4,708 |
| | 2030 | | 2 for 10 years each. |
Radiant Senior Living, Inc. | | 4 |
| | 4 |
| | 338 |
| | 67,500 |
| | 64,721 |
| | 5,171 |
| | 2023-2024 | | 2 for 5 years each. |
Brookdale Senior Living, Inc. | | 18 |
| | 1 |
| | 894 |
| | 67,210 |
| | 45,948 |
| | 9,101 |
| | 2032 | | 1 for 15 years. |
Stellar Senior Living, LLC | | 5 |
| | 1 |
| | 661 |
| | 65,899 |
| | 59,663 |
| | 5,521 |
| | 2027-2028 | | 2 for 10 years each. |
Senior Living Communities, LLC | | 1 |
| | 1 |
| | 213 |
| | 59,974 |
| | 57,374 |
| | 3,857 |
| | 2033 | | 2 for 5 years each. |
MorningStar Senior Living, LLC | | 1 |
| | 1 |
| | 238 |
| | 49,690 |
| | 47,498 |
| | 3,049 |
| | 2028 | | 2 for 5 years each. |
Oaks Senior Living, LLC (6) | | 3 |
| | 3 |
| | 264 |
| | 45,335 |
| | 43,519 |
| | 4,523 |
| | 2024-2030 | | 2 for 10 years each and 2 for 5 years each. |
Healthquest, Inc. | | 3 |
| | 1 |
| | 361 |
| | 7,589 |
| | 3,066 |
| | 1,424 |
| | 2021 | | 1 for 10 years. |
Evergreen Washington Healthcare, LLC | | 1 |
| | 1 |
| | 103 |
| | 5,193 |
| | 2,123 |
| | 1,462 |
| | 2030 | | 1 for 10 years. |
Covenant Care, LLC | | 1 |
| | 1 |
| | 180 |
| | 4,846 |
| | 2,978 |
| | 1,791 |
| | 2030 | | 1 for 15 years. |
The MacIntosh Company | | 1 |
| | 1 |
| | 175 |
| | 4,204 |
| | 2,140 |
| | 590 |
| | 2019 | | 1 for 10 years. |
Totals | | 236 |
| | 33 |
| | 26,220 |
| | $ | 2,994,009 |
| | $ | 2,230,570 |
| | $ | 278,413 |
| | | | |
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| | | | | | | | | | | | | | | | | | | | | |
Year | | Number of Tenants | | Square Feet(1) | | Percent of Total | | Cumulative Percent of Total | | Annualized Rental Income(2) | | Percent of Total | | Cumulative Percent of Total |
2020 | | 135 | | 1,035,986 |
| | 9.5 | % | | 9.5 | % | | $ | 29,387 |
| | 7.7 | % | | 7.7 | % |
2021 | | 97 | | 889,029 |
| | 8.1 | % | | 17.6 | % | | 29,203 |
| | 7.7 | % | | 15.4 | % |
2022 | | 109 | | 1,289,076 |
| | 11.8 | % | | 29.4 | % | | 36,459 |
| | 9.6 | % | | 25.0 | % |
2023 | | 58 | | 1,038,299 |
| | 9.5 | % | | 38.9 | % | | 20,610 |
| | 5.4 | % | | 30.4 | % |
2024 | | 82 | | 1,839,074 |
| | 16.8 | % | | 55.7 | % | | 50,404 |
| | 13.3 | % | | 43.7 | % |
2025 | | 53 | | 920,957 |
| | 8.4 | % | | 64.1 | % | | 21,612 |
| | 5.7 | % | | 49.4 | % |
2026 | | 34 | | 695,274 |
| | 6.3 | % | | 70.4 | % | | 21,243 |
| | 5.6 | % | | 55.0 | % |
2027 | | 27 | | 470,907 |
| | 4.3 | % | | 74.7 | % | | 11,255 |
| | 3.0 | % | | 58.0 | % |
2028 | | 17 | | 1,440,951 |
| | 13.2 | % | | 87.9 | % | | 113,790 |
| | 30.0 | % | | 88.0 | % |
2029 and thereafter | | 52 | | 1,332,849 |
| | 12.1 | % | | 100.0 | % | | 45,909 |
| | 12.0 | % | | 100.0 | % |
Total | | 664 | | 10,952,402 |
| | 100.0 | % | | | | $ | 379,872 |
| | 100.0 | % | | |
| | | | | | | | | | | | | | |
Weighted average remaining lease term (in years) | | 5.5 |
| | | | | | 6.4 |
| | | | |
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(1) | Includes 100% of square feet from a property owned in a joint venture arrangement in which we own a 55% equity interest. |
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(2) | Annualized rental income for 2016 is based on rents pursuant to existing leases as of December 31, 2016. Includes percentage2019, including straight line rent totaling $10.2 millionadjustments, estimated recurring expense reimbursements for the year ended December 31, 2016, based on increases incertain net and modified gross revenuesleases and excluding lease value amortization at certain of our medical office and life science properties. Annualized rental income also includes 100% of rental income as reported under GAAP from a property owned in a joint venture arrangement in which we own a 55% equity interest. |
Five Star: We lease 185 senior living communities to Five Star for annual rent
The following table presents information concerning our medical office and life science property tenants that represent 1% or more of $209.0 milliontotal medical office and life science property annualized rental income as of December 31, 2016, including percentage rent based on increases2019 (dollars in gross revenues at certain properties ($5.7 million in 2016). These rent amounts include rent payable to us as a resultthousands):
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| | | | | | | | | | | | | | | |
Tenant | | Square Feet Leased | | Percent of Total Square Feet Leased | | Annualized Rental Income(1) | | Percent of Total Annualized Rental Income(1) | | Lease Expiration |
Vertex Pharmaceuticals Inc. (2) | | 1,082,417 |
| | 9.9 | % | | $ | 94,956 |
| | 25.0 | % | | 2028 |
Advocate Aurora Health | | 643,499 |
| | 5.9 | % | | 16,896 |
| | 4.4 | % | | 2024 |
Cedars-Sinai Medical Center | | 145,065 |
| | 1.3 | % | | 15,265 |
| | 4.0 | % | | 2020 - 2032 |
Ology Bioservices, Inc. | | 165,586 |
| | 1.5 | % | | 8,324 |
| | 2.2 | % | | 2041 |
HCA Holdings, LLC | | 226,603 |
| | 2.1 | % | | 7,182 |
| | 1.9 | % | | 2020 - 2029 |
Medtronic, Inc. | | 376,828 |
| | 3.4 | % | | 6,983 |
| | 1.8 | % | | 2020 - 2022 |
Iqvia Holdings Inc. | | 176,839 |
| | 1.6 | % | | 5,379 |
| | 1.4 | % | | 2023 |
Magellan Health Inc. | | 232,521 |
| | 2.1 | % | | 4,496 |
| | 1.2 | % | | 2025 |
Sonova Holding AG | | 146,385 |
| | 1.3 | % | | 4,459 |
| | 1.2 | % | | 2024 |
Boston Children's Hospital | | 99,063 |
| | 0.9 | % | | 4,456 |
| | 1.2 | % | | 2028 |
Abbvie Inc. | | 197,976 |
| | 1.8 | % | | 4,395 |
| | 1.2 | % | | 2021 |
Seattle Genetics, Inc. | | 144,900 |
| | 1.3 | % | | 4,037 |
| | 1.1 | % | | 2024 |
Tokio Marine Holdings Inc. | | 81,072 |
| | 0.7 | % | | 3,949 |
| | 1.0 | % | | 2020 - 2033 |
Cigna Holding Co. | | 219,644 |
| | 2.0 | % | | 3,914 |
| | 1.0 | % | | 2024 |
United Healthcare Services, Inc. | | 149,719 |
| | 1.4 | % | | 3,898 |
| | 1.0 | % | | 2026 |
Duke University | | 126,225 |
| | 1.2 | % | | 3,686 |
| | 1.0 | % | | 2024 |
PerkinElmer, Inc. | | 105,462 |
| | 1.0 | % | | 3,681 |
| | 1.0 | % | | 2028 |
New York University | | 115,303 |
| | 1.1 | % | | 3,654 |
| | 1.0 | % | | 2020 - 2027 |
All other | | 6,517,295 |
| | 59.5 | % | | 180,262 |
| | 47.4 | % | | 2020 - 2035 |
Totals | | 10,952,402 |
| | 100.0 | % | | $ | 379,872 |
| | 100.0 | % | | |
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(1) | Annualized rental income is based on rents pursuant to existing leases as of December 31, 2019, including straight line rent adjustments and estimated recurring expense reimbursements for certain net and modified gross leases and excluding lease value amortization at certain of our medical office and life science properties. |
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(2) | The property leased by this tenant is owned by a joint venture arrangement in which we own a 55% equity interest. Rental income presented includes 100% of rental income as reported under GAAP. |
Senior Housing Operating Portfolio
As of our purchase of improvements to our properties leased toDecember 31, 2019, Five Star pursuant to the terms of the leases. Five Star (Nasdaq: FVE) was our 100% owned subsidiary until we distributed its common shares to our shareholders in 2001. A large majority of the revenues at these senior living communities is derived from private resources. For the year ended December 31, 2016, Five Star paid percentage rent equal to 4% of the increase in gross revenues at certainoperated 244 of our senior living communities over base year gross revenues as specified in the lease terms.
Lease No. 1 expires in 2024 and includes 83 communities, including independent living communities, assisted living communities and SNFs. At December 31, 2016, the annual rent for Lease No. 1 included percentage rent of $1.6 million for 2016. Lease No. 2 expires in 2026 and includes 47 communities, including independent living communities, assisted living communities and SNFs. At December 31, 2016, the annual rent for Lease No. 2 included percentage rent of $2.1 million for 2016. Lease No. 3 expires in 2028 and includes 17 communities, including independent living and assisted living communities, allour SHOP segment, of which secure mortgage debts payable to the Federal National Mortgage Association. At December 31, 2016, the annual rent for Lease No. 3 included percentage rent of $1.0 million for 2016. Lease No. 4 expires in 2032 and includes 29166 communities including independent living communities, assisted living communities and SNFs. At December 31, 2016, the annual rent for Lease No. 4 included percentage rent of $0.9 million for 2016.
In June 2016, we purchased seven senior living communities from Five Star, and simultaneously entered into a new long term lease agreement (Lease No. 5) whereby wewere leased those senior living communities back to Five Star. The initial term of this lease expires in 2028, and percentage rent commences in 2018. In December 2016, we acquired two senior living communities and upon acquisition, leased these communities to Five Star and amended Lease No.78 communities were managed by Five Star for our account. Pursuant to the Restructuring Transaction, effective January 1, 2020, or the Conversion Time, our previously existing master leases and management and pooling agreements with Five Star were terminated and replaced with the New Management Agreements for all of our senior living communities operated by Five Star. The Conversion is a significant change in our historical arrangements with Five Star and may result in our realizing significantly different operating results from our senior living communities in the future, including increased variability.
Also pursuant to the Restructuring Transaction, for the period beginning February 1, 2019 through December 31, 2019, the aggregate amount of monthly minimum rent payable to us by Five Star was reduced to $11.0 million as of February 1, 2019, which amount was then reduced during such period to approximately $10.8 million as a result of dispositions, and no additional rent was payable to us by Five Star for the period beginning February 1, 2019 to the Conversion Time. For further information regarding the Restructuring Transaction, the Transaction Agreement and our other business arrangements with Five Star, see Note 5 to include these communities.our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
•Pursuant to the New Management Agreements, Five Star will receive
•a management fee equal to 5% of the gross revenues realized at the applicable senior living communities
•plus reimbursement for its direct costs and expenses related to such communities,
as well as an annual incentive fee equal to 15% of the amount by which the annual EBITDA of all communities on a combined basis exceeds the target EBITDA for all communities on a combined basis for such calendar year, provided that in no event shall the incentive fee be greater than 1.5% of the gross revenues realized at all communities on a combined basis for such calendar year.
The New Management Agreements expire in 2034, subject to Five Star's right to extend for two consecutive five year terms if Five Star achieves certain performance targets for the combined managed communities portfolio, unless earlier terminated or timely notice of nonrenewal is delivered. The New Management Agreements also provide us with the right to terminate the New Management Agreement for any community that does not earn 90% of the target EBITDA for such community for two consecutive calendar years or in any two of three consecutive calendar years, with the measurement period commencing January 1, 2021 (and the first termination not possible until the beginning of calendar year 2023); provided we may not in any calendar year terminate communities representing more than 20% of the combined revenues for all communities for the calendar year prior to such termination. Pursuant to the Guaranty made by Five Star in favor of our applicable subsidiaries, Five Star has guaranteed the payment and performance of each of its applicable subsidiary's obligations under the applicable New Management Agreements.
For more information regarding our leases and management arrangements with Five Star, see Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, and for more information about our dealings and relationships with Five Star generally, and about the risks which may arise as a result of these related person transactions, please see “Risk Factors—Risks Related to Our Relationships with RMR Inc., RMR LLC and Five Star” in Part I, Item 1A of this Annual Report on Form 10-K, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Related Person Transactions” in Part II, Item 7 of this Annual Report on Form 10-K and Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Sunrise Senior Living, Inc: We leased four communities that include assisted living, independent living and SNF units to subsidiaries of Sunrise, which communities were, until 2003, owned by Marriott. In 2016, Sunrise exercised its option to extend these leases until 2023. At December 31, 2016, the annual rent for these leases included percentage rent of $2.3 million for 2016 based on increases in gross revenues at these communities. A large majority of our tenants’ revenues at these senior living communities is derived from private resources. Marriott guarantees the rent due to us for these 4 communities.
Pacifica Senior Living: We lease eight assisted living communities to subsidiaries of Pacifica Senior Living, or Pacifica, a privately owned company, until 2023. The rent payable to us is scheduled to increase at agreed upon times during the lease term. A large majority of these tenants’ revenues at our senior living communities leased to Pacifica’s subsidiaries is derived from private resources. An affiliate of the tenants has provided limited guarantees of these leases and these lease obligations are secured by deposits totaling approximately $3.8 million.
We previously leased an additional assisted living community to Pacifica. In April 2016, we and Pacifica terminated this lease. We entered into a new management agreement with Five Star to manage this community for our account under a TRS structure.
GenerationsLLC: We lease one independent living community to a subsidiary of Generations LLC, a privately owned company, until 2030. The rent payable to us under this lease is scheduled to increase at agreed upon times during the lease term. A large majority of this tenant’s revenues at this senior living community is derived from private resources. Generations LLC, provides a limited guarantee of this lease.
Radiant Senior Living, Inc.: We lease four assisted living communities to subsidiaries of Radiant Senior Living,Inc., a privately owned company, until 2023 and 2024. The rent payable to us under these leases is scheduled to increase at agreed upon times during the lease terms. A large majority of our tenants’ revenues at these senior living communities is derived from private resources. These lease obligations are secured by security deposits totaling approximately $0.2 million.
Brookdale Senior Living, Inc: We lease 18 assisted living communities to a subsidiary of Brookdale Senior Living, Inc. until 2032. At December 31, 2016, the annual rent for this lease included percentage rent of $1.9 million based on increases in gross revenues at these communities. A large majority of our tenant’s revenues at these senior living communities is derived from private resources. Brookdale Senior Living, Inc. guarantees the rent due to us under this lease.
Stellar Senior Living, LLC: We lease five senior living communities, that include independent and assisted living units, to subsidiaries of Stellar Senior Living, LLC, until 2027 and 2028. At December 31, 2016, the annual rent for this lease included percentage rent of $0.2 million for 2016 based on increases in gross revenues at these communities. A large majority of our tenants’ revenues at these senior living communities is derived from private resources. The owner of Stellar Senior Living, LLC personally guarantees the lease.
Senior Living Communities, LLC: We lease one independent living community to a subsidiary of Senior Living Communities LLC, a privately owned company, until 2033. The annual rent under this lease includes percentage rent based on increases in gross revenues at this community. A large majority of our tenant’s revenues at this senior living community is derived from private resources. An affiliate of the tenant guarantees this lease.
MorningStar Senior Living, LLC: We lease one independent living community to a subsidiary of MorningStar Senior Living, LLC, a privately owned company, until 2028. The rent payable to us under this lease is scheduled to increase at agreed upon times during the lease term. A large majority of our tenant’s revenues at this senior living community is derived from private resources.
Oaks Senior Living, LLC: We lease three assisted living communities to subsidiaries of Oaks Senior Living, LLC, a privately owned company, until 2024 and 2030. The rent payable to us under these leases is scheduled to increase at agreed upon times during the lease terms. A large majority of our tenants’ revenues at these senior living communities is derived from private resources. These lease obligations are secured by security deposits totaling approximately $1.0 million.
HealthQuest, Inc: We lease two SNFs and one independent living community to HealthQuest, Inc., a privately owned company, until 2021. The rent payable to us under these leases is scheduled to increase at agreed upon times during the lease term. The lease is guaranteed by the individual shareholder of HealthQuest, Inc.
Evergreen Washington Healthcare, LLC: We lease one SNF to a subsidiary of Evergreen Washington Healthcare, LLC, a privately owned company, until 2030. The rent payable to us under this lease is scheduled to increase at agreed upon times during the lease term. Evergreen Washington Healthcare, LLC guarantees this lease and has secured its obligation with a deposit of $0.4 million.
Covenant Care, LLC: We lease one SNF in Fresno, CA to a subsidiary of Covenant Care, LLC, a privately owned company, until 2030. The rent payable to us is scheduled to increase at agreed upon times during the lease term. Covenant Care, LLC guarantees the lease and has secured its obligation with a security deposit of $0.9 million.
The MacIntosh Company: We lease one SNF in Grove City, OH to The MacIntosh Company until 2019. A management company affiliate of this tenant and the former and current majority shareholders of the tenant guarantee this lease.
In addition to our relationships described above, we also previously leased an independent living community to an additional third party operator. In July 2016, we terminated this lease. We entered into a management agreement with Five Star to manage this community for our account under a TRS structure.
Managed Senior Living Communities.
As of December 31, 2016 we owned 68 senior living communities that are managed by Five Star. During the year ended December 31, 2016, Five Star began managing for our account eight senior living communities we own with an aggregate 696 living units. Two of these communities, located in North Carolina and Alabama with a combined 263 living units, had previously been leased to unrelated third parties that defaulted on such leases. We acquired one of these communities, located in Georgia with 38 living units, in May 2016 and Five Star began managing that community for our account at that time. Five of these communities, located in Georgia with a combined 395 living units, had previously been managed by affiliates of one of the unrelated third parties that defaulted on its lease referred to above. In December 2016, we terminated the in place management agreements for these communities and entered into new management agreements with Five Star to manage these five communities for our account. One of these new management agreements was added to one of our existing pooling agreements with Five Star and the remaining four new management agreements were added to a new pooling agreement with Five Star. During the year ended December 31, 2016, we also sold a formerly managed memory care building located in Florida. See Note 3 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K for further information regarding our acquisitions and dispositions.
On June 29, 2016, we and Five Star terminated three of our four then existing pooling agreements and entered into 10 new pooling agreements, or the new pooling agreements, that combine management agreements for senior living communities that include assisted living units, or our AL Management Agreements. Our management agreement with Five Star for the part of a senior living community located in New York that is not subject to the requirements of New York healthcare licensing laws, and the management agreement for one of our assisted living communities located in California, are not currently included in any of our pooling agreements with Five Star. Pursuant to our AL Management Agreements and the new pooling agreements, Five Star receives:
a management fee equal to either 3% or 5% of the gross revenues realized at the applicable communities,
reimbursement for its direct costs and expenses related to such communities,
an annual incentive fee equal to either 35% or 20% of the annual net operating income of such communities remaining after we realize an annual minimum return equal to either 8% or 7% of our invested capital, or, in the case of 10 communities, a specified amount plus 7% of our invested capital since December 31, 2015, and
a fee for its management of capital expenditure projects equal to 3% of amounts funded by us.
Each of the new pooling agreements combines various calculations of revenues and expenses from the operations of the applicable communities covered by such agreement.
Under the new pooling agreements, the calculations of Five Star’s fees and of our annual minimum return related to our AL Management Agreement that became effective before May 2015 and had been pooled under one of the previously existing pooling agreements are generally the same as they were under the previously existing pooling agreements. However, for certain communities, the new pooling agreements reduced our annual minimum return to 7%, and also, with respect to 10 communities, reset our annual minimum return as of January 1, 2016 to specified amounts. For our AL Management Agreements that became effective from and after May 2015, the new pooling agreements increased the management fee we pay Five Star from 3% to 5% of the gross revenues realized at the applicable community, and changed the annual incentive fee we pay Five Star from 35% to
20% of the annual net operating income of the applicable community remaining after we realize our requisite annual minimum return.
We have a pooling agreement with Five Star that combines our management agreements with Five Star for senior living communities consisting only of independent living units.
In December 2016, we terminated the in place management agreements with a third party senior living manager for five communities that we had acquired in 2015. We entered into new management agreements with Five Star to manage these five communities. The management agreement for one of these communities was added to the 10th pooling agreement with Five Star, and the management agreements for the other four communities were added to a new 11th pooling agreement with Five Star.
Our management agreements with Five Star generally expire between 2030 and 2040, and are subject to automatic renewal for two consecutive 15 year terms, unless earlier terminated or timely notice of nonrenewal is delivered. These management agreements also generally provide that we, and in some cases, Five Star, each have the option to terminate the agreements upon the acquisition by a person or group of more than 9.8% of the other’s voting stock and upon certain change in control events affecting the other party, as defined in the applicable agreements, including the adoption of any shareholder proposal (other than a precatory proposal) with respect to the other party, or the election to the board of directors or trustees, as applicable, of the other party of any individual, if such proposal or individual was not approved, nominated or appointed, as the case may be, by a majority of the other party’s board of directors or board of trustees, as applicable, in office immediately prior to the making of such proposal or the nomination or appointment of such individual.
For more information about our dealings and relationships with Five Star, and about the risks which may arise as a result of these related person transactions, please see “Risk Factors—Risks Related to Our Relationships with RMR Inc., RMR LLC and Five Star” in Part I, Item 1A of this Annual Report on Form 10-K, “Management’s“Management's Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” in Part II, Item 7 of this Annual Report on Form 10-K and Note 57 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
MOBs.All Other
At December 31, 2016, we owned 119 MOBs (145 buildings) located in 27 states and Washington, D.C. These properties range in size from 4,400 to 1.1 million square feet and have a total of 11.4 million square feet. Leases at these properties have current terms expiring between 2017 and 2035, plus renewal options in some cases. The annual rent payable to us by tenants of these MOBs is $367.8 million per year, including scheduled increases and reimbursements of certain operating and tax expenses and excluding lease value amortization.
During the year ended December 31, 2016, we entered into MOB lease renewals for 627,526 square feet and new MOB leases for 271,163 square feet, at weighted average rental rates that were 1.1% above rents previously charged for the same space. Weighted average lease terms for leases entered into during 2016 were 6.4 years. Commitments for tenant improvements, leasing commission costs and concessions for leases we entered into during 2016 totaled $14.4 million, or $16.04 per square foot on average (approximately $2.50 per square foot per year of the lease term).
The following chart presents a summary of our MOBs by state asAs of December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
State | | Number of Properties | | Number of Buildings | | Sq. Ft. | | Investment Carrying Value of Properties | | Net Book Value of Properties | | Annualized Rental Income(1) | | % of Total Annualized Rental Income(1) |
Arizona | | 4 |
| | 4 |
| | 405,364 |
| | $ | 53,739 |
| | $ | 50,251 |
| | $ | 6,406 |
| | 1.7 | % |
California | | 6 |
| | 11 |
| | 1,048,840 |
| | 474,122 |
| | 418,184 |
| | 53,543 |
| | 14.6 | % |
Colorado | | 2 |
| | 3 |
| | 77,113 |
| | 17,568 |
| | 15,786 |
| | 2,645 |
| | 0.7 | % |
Connecticut | | 2 |
| | 2 |
| | 96,962 |
| | 11,063 |
| | 9,272 |
| | 1,298 |
| | 0.4 | % |
District of Columbia | | 2 |
| | 2 |
| | 212,335 |
| | 70,171 |
| | 62,605 |
| | 9,388 |
| | 2.6 | % |
Florida | | 7 |
| | 12 |
| | 486,059 |
| | 103,185 |
| | 96,517 |
| | 13,557 |
| | 3.7 | % |
Georgia | | 6 |
| | 6 |
| | 419,507 |
| | 75,443 |
| | 68,243 |
| | 8,536 |
| | 2.3 | % |
Hawaii | | 1 |
| | 1 |
| | 204,063 |
| | 68,701 |
| | 62,272 |
| | 7,801 |
| | 2.1 | % |
Illinois | | 3 |
| | 4 |
| | 311,747 |
| | 51,876 |
| | 47,048 |
| | 8,267 |
| | 2.2 | % |
Indiana | | 1 |
| | 1 |
| | 94,238 |
| | 16,439 |
| | 14,584 |
| | 2,526 |
| | 0.7 | % |
Louisiana | | 6 |
| | 6 |
| | 40,575 |
| | 7,025 |
| | 6,725 |
| | 733 |
| | 0.2 | % |
Maryland | | 2 |
| | 2 |
| | 133,976 |
| | 23,285 |
| | 20,375 |
| | 3,258 |
| | 0.9 | % |
Massachusetts | | 20 |
| | 23 |
| | 2,153,099 |
| | 1,074,358 |
| | 991,516 |
| | 127,369 |
| | 34.6 | % |
Minnesota | | 6 |
| | 8 |
| | 503,848 |
| | 69,968 |
| | 63,914 |
| | 11,272 |
| | 3.1 | % |
Mississippi | | 1 |
| | 1 |
| | 71,983 |
| | 13,006 |
| | 11,904 |
| | 2,086 |
| | 0.6 | % |
Missouri | | 2 |
| | 2 |
| | 452,165 |
| | 92,090 |
| | 88,286 |
| | 9,116 |
| | 2.5 | % |
New Jersey | | 1 |
| | 1 |
| | 205,439 |
| | 69,223 |
| | 66,039 |
| | 5,211 |
| | 1.4 | % |
New Mexico | | 1 |
| | 2 |
| | 292,074 |
| | 36,466 |
| | 31,569 |
| | 4,917 |
| | 1.3 | % |
New York | | 5 |
| | 6 |
| | 597,401 |
| | 111,347 |
| | 94,568 |
| | 16,915 |
| | 4.6 | % |
North Carolina | | 1 |
| | 1 |
| | 126,225 |
| | 32,470 |
| | 30,966 |
| | 3,370 |
| | 0.9 | % |
Ohio | | 2 |
| | 3 |
| | 327,796 |
| | 21,357 |
| | 20,588 |
| | 2,668 |
| | 0.7 | % |
Pennsylvania | | 7 |
| | 7 |
| | 439,795 |
| | 66,939 |
| | 58,696 |
| | 7,742 |
| | 2.1 | % |
South Carolina | | 3 |
| | 3 |
| | 217,850 |
| | 17,595 |
| | 15,439 |
| | 3,101 |
| | 0.8 | % |
Tennessee | | 1 |
| | 1 |
| | 33,796 |
| | 7,722 |
| | 7,082 |
| | 1,133 |
| | 0.3 | % |
Texas | | 15 |
| | 15 |
| | 1,013,052 |
| | 231,882 |
| | 205,497 |
| | 27,076 |
| | 7.4 | % |
Virginia | | 4 |
| | 6 |
| | 677,591 |
| | 68,668 |
| | 60,862 |
| | 6,990 |
| | 1.9 | % |
Washington | | 1 |
| | 2 |
| | 144,900 |
| | 30,878 |
| | 28,407 |
| | 4,014 |
| | 1.1 | % |
Wisconsin | | 7 |
| | 10 |
| | 643,499 |
| | 169,000 |
| | 140,439 |
| | 16,896 |
| | 4.6 | % |
Totals | | 119 |
| | 145 |
| | 11,431,292 |
| | $ | 3,085,586 |
| | $ | 2,787,634 |
| | $ | 367,834 |
| | 100.0 | % |
| |
(1) | Annualized rental income is based on our MOB rents pursuant to existing leases as of December 31, 2016, including straight line rent adjustments, estimated recurring expense reimbursements for certain net and modified gross leases and excluding lease value amortization. |
The following chart presents information concerning2019, lease expirations at our MOB tenants that represent 1% or more of total MOB annualized rental incomeother triple net leased senior living communities leased to third party operators other than Five Star and wellness centers are as of December 31, 2016follows (dollars in thousands):
|
| | | | | | | | | | | | | | | |
Tenant | | Sq. Ft. Leased | | % of Total MOB Sq. Ft. Leased | | Annualized Rental Income(1) | | % of Total Annualized Rental Income(1) | | Lease Expiration |
Vertex Pharmaceuticals, Inc. | | 1,082,417 |
| | 9.8 | % | | $ | 92,096 |
| | 25.0 | % | | 2028 |
Aurora Health Care, Inc. | | 643,499 |
| | 5.8 | % | | 16,896 |
| | 4.6 | % | | 2024 |
Cedars-Sinai Medical Center | | 135,582 |
| | 1.2 | % | | 13,162 |
| | 3.6 | % | | 2017 - 2025 |
The Scripps Research Institute | | 164,091 |
| | 1.5 | % | | 10,158 |
| | 2.8 | % | | 2019 |
Medtronic, Inc. | | 460,228 |
| | 4.2 | % | | 8,070 |
| | 2.2 | % | | 2017, 2020 |
HCA Holdings, Inc. | | 253,831 |
| | 2.3 | % | | 7,996 |
| | 2.2 | % | | 2018 - 2025 |
Reliant Medical Group, Inc. | | 362,427 |
| | 3.3 | % | | 7,661 |
| | 2.1 | % | | 2019 |
Nanotherapeutics, Inc. | | 165,586 |
| | 1.5 | % | | 7,384 |
| | 2.0 | % | | 2031 |
Sanofi S.A. | | 205,439 |
| | 1.9 | % | | 5,211 |
| | 1.4 | % | | 2026 |
Magellan Health Inc. | | 232,521 |
| | 2.1 | % | | 5,202 |
| | 1.4 | % | | 2025 |
Abbvie Inc. | | 197,976 |
| | 1.8 | % | | 4,729 |
| | 1.3 | % | | 2017 |
Boston Children's Hospital | | 99,063 |
| | 0.9 | % | | 4,384 |
| | 1.2 | % | | 2028 |
Sonova Holding A.G. | | 146,385 |
| | 1.3 | % | | 4,330 |
| | 1.2 | % | | 2024 |
Emory Healthcare, Inc. | | 221,471 |
| | 2.0 | % | | 4,112 |
| | 1.1 | % | | 2020 - 2023 |
First Insurance Company of Hawaii | | 90,734 |
| | 0.8 | % | | 4,025 |
| | 1.1 | % | | 2017, 2033 |
Seattle Genetics, Inc. | | 144,900 |
| | 1.3 | % | | 4,014 |
| | 1.1 | % | | 2018 |
Express Scripts Holding Co. | | 219,644 |
| | 2.0 | % | | 3,914 |
| | 1.1 | % | | 2024 |
PerkinElmer, Inc. | | 105,462 |
| | 1.0 | % | | 3,681 |
| | 1.0 | % | | 2028 |
All other MOB tenants | | 6,095,684 |
| | 55.3 | % | | 160,809 |
| | 43.6 | % | | 2017 - 2035 |
Totals | | 11,026,940 |
| | 100.0 | % | | $ | 367,834 |
| | 100.0 | % | | |
|
| | | | | | | | | | | | | | | | |
Year | | Number of Properties | | Number of Units or Square Feet | | Annualized Rental Income(1) | | Percent of Total | | Cumulative Percent of Total |
2020 | | — |
| | — |
| | $ | — |
| | — | % | | — | % |
2021 | | — |
| | — |
| | — |
| | — | % | | — | % |
2022 | | — |
| | — |
| | — |
| | — | % | | — | % |
2023 | | 7 |
| | 131 units and 354,000 sq. ft. |
| | 10,591 |
| | 21.5 | % | | 21.5 | % |
2024 | | 4 |
| | 288 units |
| | 4,062 |
| | 8.3 | % | | 29.8 | % |
2025 | | — |
| | — |
| | — |
| | — | % | | 29.8 | % |
2026 | | — |
| | — |
| | — |
| | — | % | | 29.8 | % |
2027 | | 4 |
| | 511 units |
| | 4,161 |
| | 8.5 | % | | 38.3 | % |
2028 | | 4 |
| | 458,000 sq. ft. |
| | 10,550 |
| | 21.4 | % | | 59.7 | % |
2029 and thereafter | | 23 |
| | 1,675 units |
| | 19,847 |
| | 40.3 | % | | 100.0 | % |
Total | | 42 |
| | | | $ | 49,211 |
| | 100.0 | % | | |
| |
(1) | Annualized rental income is based on our MOB rents pursuant to existing leases as of December 31, 2016, including straight line rent adjustments, estimated recurring expense reimbursements for certain net and modified gross leases and excluding lease value amortization. |
Wellness Centers (included in “All Other Operations”).
The following chart presents a summary of our wellness center leases as of December 31, 2016 (dollars in thousands). This summary should be read in conjunction with the more detailed description of our leases set forth below.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Tenant | | Number of Properties | | Number of Leases | | Sq. Ft. | | Investment Carrying Value of Properties | | Net Book Value of Properties | | Annualized Rental Income(1) | | Lease Expirations | | Renewal Options |
Starmark Holdings, LLC | | 6 |
| | 3 |
| | 354,000 |
| | $ | 80,008 |
| | $ | 65,939 |
| | $ | 7,546 |
| | 2023 | | 3 for 10 years each. |
Life Time Fitness, Inc. | | 4 |
| | 1 |
| | 458,000 |
| | 100,009 |
| | 81,955 |
| | 10,550 |
| | 2028 | | 6 for 5 years each. |
Totals | | 10 |
| | 4 |
| | 812,000 |
| | $ | 180,017 |
| | $ | 147,894 |
| | $ | 18,096 |
| | | | |
| |
(1) | Annualized rental income is based on rents pursuant to existing leases as of December 31, 2016, including2019. Annualized rental income includes estimated percentage rents and straight line rent adjustments and excludingexcludes lease value amortization. |
StarmarkHoldings, LLC. We lease six wellness centers located in four states under three separate leases to subsidiaries of Starmark. Starmark is a subsidiary of Central Sports Co. LTD, a publicly owned company listed onGENERAL INDUSTRY TRENDS
Our medical office and life science properties have been impacted by at least two major industry trends for the Tokyo Stock Exchange. These properties operate under the brand Wellbridgepast 10 years which are continuing at this time and the leases are guaranteed by Starmark. These leasesthat have current terms expiring in 2023 and require aggregate annual rent of $7.5 million, plus consumer price index based increases.impacted our investment activities.
TableFirst, medical practices are being consolidated into hospital systems. This has caused the number of Contentsfree standing medical practices to decline. At the same time, the number of multi-practice medical office buildings that are anchor leased by hospital systems who employ doctors has increased. We believe hospital systems will continue the trend of providing an increasing amount of services in off campus medical offices away from main hospital campuses in order to reduce costs and serve as many patients as possible, which is reinforced by consumers' preference for healthcare services to be provided away from hospital campuses and closer to their residence or work locations.
Second, various advances in medical science have caused a large investment in new bio-medical research companies that require office, lab and medical products manufacturing space. We believe that about half of our total investments in our Office Portfolio segment may be considered biotech and life science properties.
Life Time Fitness, Inc.We lease four wellness centers locatedbelieve that the primary market for senior living services is individuals age 75 and older, and, according to U.S. Census data, that group is projected to be among the fastest growing age cohort in four states under one lease agreement to a subsidiary of Life Time Fitness. Life Time Fitness is a private company and guarantees the lease. The lease has a current term expiring in 2028. The aggregate annual rent payable to us averages $10.6 million per year during the lease term.
Portfolio Lease Expiration Schedules.
The following tables set forth information regarding our lease expirations as of December 31, 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Annualized Rental Income(1)(2) | | Percent of Total Annualized Rental Income Expiring | | Cumulative Percentage of Annualized Rental Income Expiring |
| | Triple Net Senior Living Communities | | | | | | | | |
| | | | | Wellness Centers | | | | |
Year | | | MOBs | | | Total | | |
2017 | | $ | — |
| | $ | 31,190 |
| | $ | — |
| | $ | 31,190 |
| | 4.7 | % | | 4.7 | % |
2018 | | — |
| | 25,049 |
| | — |
| | 25,049 |
| | 3.8 | % | | 8.5 | % |
2019 | | 590 |
| | 39,692 |
| | — |
| | 40,282 |
| | 6.1 | % | | 14.6 | % |
2020 | | — |
| | 30,850 |
| | — |
| | 30,850 |
| | 4.6 | % | | 19.2 | % |
2021 | | 1,424 |
| | 15,508 |
| | — |
| | 16,932 |
| | 2.5 | % | | 21.7 | % |
2022 | | — |
| | 15,532 |
| | — |
| | 15,532 |
| | 2.3 | % | | 24.0 | % |
2023 | | 28,205 |
| | 10,829 |
| | 7,546 |
| | 46,580 |
| | 7.0 | % | | 31.0 | % |
2024 | | 68,764 |
| | 37,532 |
| | — |
| | 106,296 |
| | 16.0 | % | | 47.0 | % |
2025 | | — |
| | 12,657 |
| | — |
| | 12,657 |
| | 1.9 | % | | 48.9 | % |
Thereafter | | 179,430 |
| | 148,995 |
| | 10,550 |
| | 338,975 |
| | 51.1 | % | | 100.0 | % |
Total | | $ | 278,413 |
| | $ | 367,834 |
| | $ | 18,096 |
| | $ | 664,343 |
| | 100.0 | % | | |
Average remaining lease term for all properties (weighted by annualized rental income): 8.7 years.
| |
(1) | Annualized rental income is based on rents pursuant to existing leases as of December 31, 2016, including estimated percentage rents, straight line rent adjustments, estimated recurring expense reimbursements for certain net and modified gross leases and excluding lease value amortization at certain of our MOBs and wellness centers. |
| |
(2) | Excludes rent received from our TRSs. If the NOI from our TRSs (three months ended December 31, 2016, annualized) were included in the foregoing table, the percent of total annualized rental income expiring would be: 2017 – 4.1%, 2018 – 3.3%; 2019 – 5.3%; 2020 – 4.0%; 2021 – 2.2%; 2022 – 2.0%; 2023 – 6.1%; 2024 – 14.0%; 2025 – 1.7%; and thereafter – 57.3%. |
|
| | | | | | | | | | | | | | | | | | |
| | Number of Tenants | | Percent of Total Number of Tenancies Expiring | | Cumulative Percentage of Number of Tenancies Expiring |
| | Triple Net Senior Living Communities (1) | | | | | | | | |
| | | | | Wellness Centers | | | | |
Year | | | MOBs | | | Total | | |
2017 | | — |
| | 152 |
| | — |
| | 152 |
| | 22.5 | % | | 22.5 | % |
2018 | | — |
| | 97 |
| | — |
| | 97 |
| | 14.3 | % | | 36.8 | % |
2019 | | 1 |
| | 88 |
| | — |
| | 89 |
| | 13.2 | % | | 50.0 | % |
2020 | | — |
| | 76 |
| | — |
| | 76 |
| | 11.2 | % | | 61.2 | % |
2021 | | 1 |
| | 63 |
| | — |
| | 64 |
| | 9.5 | % | | 70.7 | % |
2022 | | — |
| | 48 |
| | — |
| | 48 |
| | 7.1 | % | | 77.8 | % |
2023 | | 2 |
| | 25 |
| | 1 |
| | 28 |
| | 4.1 | % | | 81.9 | % |
2024 | | 3 |
| | 28 |
| | — |
| | 31 |
| | 4.6 | % | | 86.5 | % |
2025 | | — |
| | 24 |
| | — |
| | 24 |
| | 3.6 | % | | 90.1 | % |
Thereafter | | 11 |
| | 55 |
| | 1 |
| | 67 |
| | 9.9 | % | | 100.0 | % |
Total | | 18 |
| | 656 |
| | 2 |
| | 676 |
| | 100.0 | % | | |
| |
(1) | Excludes our managed senior living communities leased to our TRSs as tenants. |
Number of Living Units / Beds or Square Feet with Leases Expiring
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Living Units / Beds(1) | | Square Feet |
Year | | Triple Net Senior Living Communities (Units / Beds) | | Percent of Total Living Units / Beds Expiring | | Cumulative Percentage of Living Units / Beds Expiring | | MOBs (Square Feet) | | Wellness Centers (Square Feet) | | Total Square Feet | | Percent of Total Square Feet Expiring | | Cumulative Percent of Total Square Feet Expiring |
2017 | | — |
| | — | % | | — | % | | 1,043,748 |
| | — |
| | 1,043,748 |
| | 8.8 | % | | 8.8 | % |
2018 | | — |
| | — | % | | — | % | | 849,209 |
| | — |
| | 849,209 |
| | 7.2 | % | | 16.0 | % |
2019 | | 175 |
| | 0.7 | % | | 0.7 | % | | 1,272,165 |
| | — |
| | 1,272,165 |
| | 10.7 | % | | 26.7 | % |
2020 | | — |
| | — | % | | 0.7 | % | | 1,412,881 |
| | — |
| | 1,412,881 |
| | 11.9 | % | | 38.6 | % |
2021 | | 361 |
| | 1.4 | % | | 2.1 | % | | 472,254 |
| | — |
| | 472,254 |
| | 4.0 | % | | 42.6 | % |
2022 | | — |
| | — | % | | 2.1 | % | | 596,174 |
| | — |
| | 596,174 |
| | 5.0 | % | | 47.6 | % |
2023 | | 2,263 |
| | 8.6 | % | | 10.7 | % | | 755,538 |
| | 354,000 |
| | 1,109,538 |
| | 9.4 | % | | 57.0 | % |
2024 | | 6,561 |
| | 25.0 | % | | 35.7 | % | | 1,437,781 |
| | — |
| | 1,437,781 |
| | 12.1 | % | | 69.1 | % |
2025 | | — |
| | — | % | | 35.7 | % | | 537,124 |
| | — |
| | 537,124 |
| | 4.5 | % | | 73.6 | % |
Thereafter | | 16,860 |
| | 64.3 | % | | 100.0 | % | | 2,650,066 |
| | 458,000 |
| | 3,108,066 |
| | 26.4 | % | | 100.0 | % |
Total | | 26,220 |
| | 100.0 | % | | | | 11,026,940 |
| | 812,000 |
| | 11,838,940 |
| | 100.0 | % | | |
| |
(1) | Excludes 8,788 living units leased to our TRSs. If the number of living units included in our TRS leases were included in the foregoing table, the percent of total living units / beds expiring would be: 2017 – 0.0%; 2018 – 0.0%; 2019 – 0.5%; 2020 – 0.0%; 2021 – 1.0%; 2022 – 0.0%; 2023 – 6.5%; 2024 – 18.7%; 2025 – 0.0%; and thereafter – 73.3%. |
During the past several years, weak economic conditions throughout the United States have negatively affected many businessesover the next 20 years. Also, as a result of medical advances, seniors are living longer. Due to these demographic trends, we expect the demand for senior living services and housing to increase for the foreseeable future. Despite this trend, future economic downturns, softness in these areas. These conditions have resultedthe U.S. housing market, higher levels of unemployment among our potential residents' family members, lower levels of consumer confidence, stock market volatility and/or changes in among other things, a decrease indemographics could adversely affect the ability of seniors to afford the resident fees at our senior living communities’ occupancy, and it is unclear when these conditions may materially improve. Although many of the services that our senior living community tenants and managers providecommunities.
The medical advances which are increasing average life spans are also causing some seniors to residents are needs driven, some prospective residents may be deferring decisions to relocatedelay moving to senior living communities in light of economic circumstances, among other reasons.
For the past twountil they require greater care or to three years, low capital costs appearforgo moving to have encouraged increased senior living communities altogether, but we do not believe this factor is sufficient to offset the long term positive demographic trends causing increased demand for senior living communities for the foreseeable future.
In recent years, a significant number of new senior living communities have been developed and continue to be developed. Although there are indications that the rate of newly started developments has recently declined, the increased supply of senior living communities that has resulted from recent development activity has increased competitive pressures on our managers and tenants, particularly in areascertain geographic markets where we own senior living communities, and we expect these competitive challenges to continue for at least the next few years. These competitive challenges may prevent our managers and tenants from maintaining or improving occupancy and rates at our senior living communities, which may increase the risk of default under our leases, reduce the rents and returns we may receive and earn from our leased and managed senior living communities and adversely affect the profitability of our senior living communities, and may cause the value of our properties to decline. In response to these competitive pressures, we have invested capital in our existing senior living communities have historically experienced high occupancies. As recently developed senior living communities have begun operations, and as other recently developed or soon to be developed senior living communities begin operations, we have experienced and we expect to continue to experience challengesdo so in maintaining or increasing occupancy at, or the ratesorder that our tenantscommunities may remain competitive with newer communities.
Recently, the costs of insurance have increased significantly, and these increased costs have had an adverse effect on us and our managers and tenants. Increased insurance costs may adversely affect our managers' ability to operate our properties profitably and provide us with desirable returns and our tenants' ability to pay us rent or result in downward pressure on rents we can charge residents of, ourunder new or renewed leases.
The senior living communities.
this Annual Report on Form 10-K.
RESULTS OF OPERATIONS (dollars and square feet in thousands, unless otherwise noted)
The following table summarizes the results of operations of each of our segments for the years ended December 31, 2016, 20152019, 2018 and 2014:2017:
|
| | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
Revenues: | | | | | | |
Triple net leased senior living communities | | $ | 275,697 |
| | $ | 256,035 |
| | $ | 230,718 |
|
Managed senior living communities | | 391,822 |
| | 367,874 |
| | 318,184 |
|
MOBs | | 372,233 |
| | 356,586 |
| | 278,041 |
|
All other operations | | 18,270 |
| | 18,278 |
| | 17,944 |
|
Total revenues | | $ | 1,058,022 |
| | $ | 998,773 |
| | $ | 844,887 |
|
Net income: | | | | | | |
Triple net leased senior living communities | | $ | 168,719 |
| | $ | 160,403 |
| | $ | 149,011 |
|
Managed senior living communities | | 6,372 |
| | 19,025 |
| | 29,890 |
|
MOBs | | 121,301 |
| | 126,859 |
| | 102,399 |
|
All other operations | | (155,097 | ) | | (182,319 | ) | | (122,663 | ) |
Net income | | $ | 141,295 |
| | $ | 123,968 |
| | $ | 158,637 |
|
|
| | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Revenues: | | | | | | |
Office Portfolio | | $ | 405,016 |
| | $ | 412,813 |
| | $ | 382,127 |
|
SHOP | | 571,495 |
| | 629,145 |
| | 604,246 |
|
Non-Segment | | 63,644 |
| | 75,206 |
| | 88,356 |
|
Total revenues | | $ | 1,040,155 |
| | $ | 1,117,164 |
| | $ | 1,074,729 |
|
Net (loss) income attributable to common shareholders: | | | | | | |
Office Portfolio | | $ | 68,884 |
| | $ | 66,905 |
| | $ | 111,199 |
|
SHOP | | 28,446 |
| | 182,380 |
| | 162,539 |
|
Non-Segment | | (185,564 | ) | | 37,587 |
| | (126,128 | ) |
Net (loss) income attributable to common shareholders | | $ | (88,234 | ) | | $ | 286,872 |
| | $ | 147,610 |
|
The following sections analyze and discuss the results of operations of each of our segments for the periods presented.
Year Ended December 31, 20162019 Compared to Year Ended December 31, 2015:2018:
TripleUnless otherwise indicated, references in this section to changes or comparisons of results, income or expenses refer to comparisons of the results for the year ended December 31, 2019 to the year ended December 31, 2018. Our definition of NOI and our reconciliation of net leased senior living communities:income (loss) attributable to common shareholders to NOI and a description of why we believe NOI is an appropriate supplemental measure is included below under the heading “Non-GAAP Financial Measures.”
|
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | $ Change | | % Change |
NOI by segment: | | | | | | | | |
Office Portfolio | | $ | 272,668 |
| | $ | 285,081 |
| | $ | (12,413 | ) | | (4.4 | )% |
SHOP | | 214,773 |
| | 305,296 |
| | (90,523 | ) | | (29.7 | )% |
Non-Segment | | 63,644 |
| | 75,206 |
| | (11,562 | ) | | (15.4 | )% |
Total NOI | | 551,085 |
| | 665,583 |
| | (114,498 | ) | | (17.2 | )% |
| | | | | | | | |
Depreciation and amortization | | 289,025 |
| | 286,235 |
| | 2,790 |
| | 1.0 | % |
General and administrative | | 37,028 |
| | 85,885 |
| | (48,857 | ) | | (56.9 | )% |
Acquisition and certain other transaction related costs | | 13,102 |
| | 194 |
| | 12,908 |
| | nm |
|
Impairment of assets | | 115,201 |
| | 66,346 |
| | 48,855 |
| | 73.6 | % |
Gain on sale of properties | | 39,696 |
| | 261,916 |
| | (222,220 | ) | | (84.8 | )% |
Dividend income | | 1,846 |
| | 2,901 |
| | (1,055 | ) | | (36.4 | )% |
Losses on equity securities, net | | (41,898 | ) | | (20,724 | ) | | 21,174 |
| | 100.0 | % |
Interest and other income | | 941 |
| | 667 |
| | 274 |
| | 41.1 | % |
Interest expense | | (180,112 | ) | | (179,287 | ) | | 825 |
| | 0.5 | % |
Loss on early extinguishment of debt | | (44 | ) | | (22 | ) | | 22 |
| | 100.0 | % |
(Loss) income from continuing operations before income tax expense and equity in earnings of an investee | | (82,842 | ) | | 292,374 |
| | (375,216 | ) | | (128.3 | )% |
Income tax expense | | (436 | ) | | (476 | ) | | (40 | ) | | (8.4 | )% |
Equity in earnings of an investee | | 400 |
| | 516 |
| | (116 | ) | | (22.5 | )% |
Net (loss) income | | (82,878 | ) | | 292,414 |
| | (375,292 | ) | | (128.3 | )% |
Net income attributable to noncontrolling interest | | (5,356 | ) | | (5,542 | ) | | (186 | ) | | (3.4 | )% |
Net (loss) income attributable to common shareholders | | $ | (88,234 | ) | | $ | 286,872 |
| | $ | (375,106 | ) | | (130.8 | )% |
nm - not meaningful
Office Portfolio:
|
| | | | | | | | | | | | |
| | | | | | Comparable Properties(1) |
| | All Properties | |
| | As of the Year Ended December 31, | | As of the Year Ended December 31, |
| | |
| | 2016 | | 2015 | | 2016 | | 2015 |
Total properties | | 236 |
| | 231 |
| | 209 |
| | 209 |
|
# of units / beds | | 26,220 |
| | 26,114 |
| | 23,509 |
| | 23,509 |
|
Tenant operating data(2) | | | | | | | | |
Occupancy | | 85.1 | % | | 85.6 | % | | 84.4 | % | | 85.3 | % |
Rent coverage | | 1.31x |
| | 1.35x |
| | 1.33 | x | | 1.36 | x |
|
| | | | | | | | | | | | |
| | Comparable Properties(1) | | All Properties |
| | As of December 31, | | As of December 31, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Total buildings | | 110 |
| | 110 |
| | 138 |
| | 155 |
|
Total square feet(2) | | 10,303 |
| | 10,291 |
| | 11,878 |
| | 12,600 |
|
Occupancy(3) | | 93.9 | % | | 94.9 | % | | 92.2 | % | | 94.5 | % |
| |
(1) | Consists of triple net leased senior living communitiesmedical office and life science properties that we have owned and which have been in service continuously since January 1, 2015 and2018, including our life science property owned in a joint venture arrangement in which we own a 55% equity interest; excludes communitiesproperties classified as held for sale, if any. |
| |
(2) | All tenant operating data presented are based upon the operating results providedPrior periods exclude space remeasurements made subsequent to those periods. |
| |
(3) | Medical office and life science property occupancy includes (i) out of service assets undergoing redevelopment, (ii) space which is leased but is not occupied or is being offered for sublease by our tenants, and (iii) space being fitted out for the 12 months ended September 30, 2016 and 2015 or the most recent prior period for which tenant operating results are available to us. Rent coverage is calculated as operating cash flow from our triple net leases tenants’ operationsoccupancy. Comparable property occupancy excludes out of our properties, before subordinated charges, if any, divided by triple net lease minimum rents payable to us. We have not independently verified our tenants’ operating data. The table excludes data for periods prior to our ownership of some of these properties and for properties sold during the periods presented.service assets undergoing redevelopment. |
Triple net leased senior living communities, all properties:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | Change | | % Change |
Rental income | | $ | 275,697 |
| | $ | 256,035 |
| | $ | 19,662 |
| | 7.7 | % |
Property operating expenses | | (833 | ) | | — |
| | 833 |
| | 100.0 | % |
Net operating income (NOI) | | 274,864 |
| | 256,035 |
| | 18,829 |
| | 7.4 | % |
| | | | | | | | |
Depreciation and amortization expense | | (78,361 | ) | | (70,417 | ) | | 7,944 |
| | 11.3 | % |
Impairment of assets | | (6,583 | ) | | (194 | ) | | 6,389 |
| | 3,293.3 | % |
Operating income | | 189,920 |
| | 185,424 |
| | 4,496 |
| | 2.4 | % |
| | | | | | | | |
Interest expense | | (24,795 | ) | | (25,015 | ) | | (220 | ) | | (0.9 | )% |
Loss on early extinguishment of debt | | (467 | ) | | (6 | ) | | 461 |
| | 7,683.3 | % |
Gain on sale of properties | | 4,061 |
| | — |
| | 4,061 |
| | 100.0 | % |
Net income | | $ | 168,719 |
| | $ | 160,403 |
| | $ | 8,316 |
| | 5.2 | % |
Except as noted below under “Rental income,” we have not included a discussion and analysis of the results of our comparable properties data for the triple net leased senior living communities segment as we believe that a comparison of the results for our comparable properties for our triple net leased senior living communities segment is generally consistent from period to period and a separate, comparable properties comparison is not meaningful.
Rental income. Rental income increased primarily because of rents from the triple net leased senior living communities we acquired in 2015 and 2016. Rental income also increased due to increased rents resulting from our funding of capital improvements in the amount of $54,393 at these communities since January 1, 2015, pursuant to the terms of the applicable leases. These increases in rental income were partially offset by the reduced revenues resulting from the sale of six senior living communities since January 1, 2015. Rental income includes non-cash straight line rent adjustments totaling $4,133 and $4,051 for the years ended December 31, 2016 and 2015, respectively. Rental income increased year over year on a comparable property basis by $3,129, primarily as a result of our funding of capital improvements at certain of the communities we have owned continuously since January 1, 2015 and the resulting increased rent, pursuant to the terms of the applicable leases.
Property operating expenses. Property operating expenses recorded in 2016 relate to bad debt reserves associated with the lease defaults at two triple net leased senior living communities we acquired in 2015 which were previously leased to third party private operators. In April and July 2016, we terminated these leases and entered into management agreements with Five Star to manage the communities for our account under a TRS structure. In connection with the termination of one of these leases, we received $2,365 in amounts due under the lease, which we recorded as rental income.
Net operating income. NOI increased because of the changes in rental income described above. The reconciliation of NOI to net income for our triple net leased senior living communities segment is shown in the table above. Our definition of NOI and our reconciliation of NOI to net income are included below under the heading “Non‑GAAP Financial Measures”.
Depreciation and amortization expense. Depreciation and amortization expense increased primarily as a result of our acquisitions and our funding of capital improvements as described above.
Impairment of assets. Impairment of assets charges recorded in 2016 relate to the write off of acquired lease intangible assets associated with the lease defaults at two communities discussed above, as well as a reduction of the carrying value of one SNF that was previously leased to Five Star and was sold during the third quarter of 2016 to its sale price less costs to sell. During 2015, we recorded impairment of assets charges of $194 related to the sales of senior living communities in 2015.
Interest expense. Interest expense relates to mortgage debts and capital leases secured by certain of these communities. The decrease in interest expense is primarily due to our prepayment of certain mortgage notes as described below, as well as regularly scheduled amortization of our mortgage debts.
Loss on early extinguishment of debt. Loss on early extinguishment of debt recognized in 2016 is a result of our prepayment of mortgage notes encumbering eight senior living communities. Loss on early extinguishment of debt recognized in 2015 is a result of our prepayment of mortgage notes encumbering three senior living communities.
Gain on sale of properties. Gain on sale of properties is the result of our sale of one SNF in June 2016.
Managed senior living communities:
|
| | | | | | | | | | | | | | | | |
| | | | | | Comparable Properties(1) |
| | All Properties | |
| | As of the Year Ended December 31, | | As of the Year Ended December 31, |
| | |
| | 2016 | | 2015 | | 2016 | | 2015 |
Total properties | | 68 |
| | 65 |
| | 46 |
| | 46 |
|
# of units / beds | | 8,788 |
| | 8,585 |
| | 7,208 |
| | 7,208 |
|
Occupancy | | 87.2 | % | | 88.1 | % | | 87.0 | % | | 88.0 | % |
Average monthly rate | | $ | 4,243 |
| | $ | 4,213 |
| | $ | 4,336 |
| | $ | 4,264 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | Comparable(1) | | Non-Comparable | | |
| | Properties Results | | Properties Results | | Consolidated Properties Results |
| | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | 2019 | | 2018 | | $ Change | | % Change |
Rental income | | $ | 352,002 |
| | $ | 352,089 |
| | $ | (87 | ) | | 0.0 | % | | $ | 53,014 |
| | $ | 60,724 |
| | $ | 405,016 |
| | $ | 412,813 |
| | $ | (7,797 | ) | | (1.9 | )% |
Property operating expenses | | (116,794 | ) | | (111,697 | ) | | 5,097 |
| | 4.6 | % | | (15,554 | ) | | (16,035 | ) | | (132,348 | ) | | (127,732 | ) | | 4,616 |
| | 3.6 | % |
NOI | | $ | 235,208 |
| | $ | 240,392 |
| | $ | (5,184 | ) | | (2.2 | )% | | $ | 37,460 |
| | $ | 44,689 |
| | $ | 272,668 |
| | $ | 285,081 |
| | $ | (12,413 | ) | | (4.4 | )% |
| |
(1) | Consists of managed senior living communities medical office and life science properties that we have owned and managed by the same operatorwhich have been in service continuously since January 1, 2015 and2018, including our life science property owned in a joint venture arrangement in which we own a 55% equity interest; excludes communitiesproperties classified as held for sale, if any. |
Managed senior living communities, all properties:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | Change | | % Change |
Residents fees and services | | $ | 391,822 |
| | $ | 367,874 |
| | $ | 23,948 |
| | 6.5 | % |
Property operating expenses | | (293,195 | ) | | (278,242 | ) | | 14,953 |
| | 5.4 | % |
Net operating income (NOI) | | 98,627 |
| | 89,632 |
| | 8,995 |
| | 10.0 | % |
| | | | | | | | |
Depreciation and amortization expense | | (81,482 | ) | | (60,600 | ) | | 20,882 |
| | 34.5 | % |
Impairment of assets | | (2,174 | ) | | — |
| | 2,174 |
| | 100.0 | % |
Operating income | | 14,971 |
| | 29,032 |
| | (14,061 | ) | | (48.4 | )% |
| | | | | | | | |
Interest expense | | (8,540 | ) | | (9,973 | ) | | (1,433 | ) | | (14.4 | )% |
Loss on early extinguishment of debt | | (59 | ) | | (34 | ) | | 25 |
| | 73.5 | % |
Net income | | $ | 6,372 |
| | $ | 19,025 |
| | $ | (12,653 | ) | | (66.5 | )% |
Residents fees and services. Residents fees and services are the revenues earned at our managed senior living communities. We recognize these revenues as services are provided. Residents fees and services increasedRental income. Rental income decreased primarily due to our acquisitions and the transferdisposition of certain other senior living communities we own from triple net leased senior living communities to managed senior living communities17 properties since January 1, 2015.2018 and a decrease in rental income at our comparable properties, partially offset by an increase in rental income from our acquisitions of four properties since January 1, 2018. Rental income at our comparable properties decreased primarily due to reduced occupancy, partially offset by an increase in tax escalation income and other expense reimbursement income and higher average rents achieved from our new and renewal leasing activity at certain of our comparable properties.
Property operating expenses.Property operating expenses consist of management fees, real estate taxes, utility expense,expenses, insurance, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating these communities. The increase in property operating expenses is primarily the result of increases in real estate taxes and property operating expenses at our comparable properties and the net effect of our property acquisitions and dispositions since January 1, 2018. Property operating expenses at our comparable properties increased primarily due to increases in real estate taxes, insurance expense, salaries and benefit costs and other direct costs of operating our comparable properties.
Net operating income. The change in NOI reflects the net changes in rental income and property operating expenses described above.
SHOP:
|
| | | | | | | | | | | | |
| | Comparable Properties(1) | | All Properties |
| | As of and For the Year Ended December 31, | | As of and For the Year Ended December 31, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Total properties | | 224 |
| | 224 |
| | 244 |
| | 260 |
|
# of units | | 26,065 |
| | 26,065 |
| | 29,013 |
| | 29,745 |
|
Occupancy (2) | | 85.7 | % | | 86.3 | % | | 85.0 | % | | 86.1 | % |
Average monthly rate (2) (3) | | 4,276 |
| | 4,270 |
| | 4,179 |
| | 4,214 |
|
| |
(1) | Consists of senior living communitiesthat we have owned and which have been operated by the same operator continuously since January 1, 2018; excludes communities classified as held for sale, if any. |
| |
(2) | Occupancy and average monthly rate exclude data for senior living communities that were leased prior to January 1, 2020. |
| |
(3) | Average monthly rate is calculated by taking the average daily rate, which is defined as total residents fees and services divided by occupied units during the period, and multiplying it by 30 days. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | Comparable(1) | | Non-Comparable | | |
| | Properties Results | | Properties Results | | Consolidated Properties Results |
| | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | 2019 | | 2018 | | $ Change | | % Change |
Rental income | | $ | 129,449 |
| | $ | 205,185 |
| | $ | (75,736 | ) | | (36.9 | )% | | $ | 8,449 |
| | $ | 7,437 |
| | $ | 137,898 |
| | $ | 212,622 |
| | $ | (74,724 | ) | | (35.1 | )% |
Residents fees and services | | 377,782 |
| | 379,340 |
| | (1,558 | ) | | (0.4 | )% | | 55,815 |
| | 37,183 |
| | 433,597 |
| | 416,523 |
| | 17,074 |
| | 4.1 | % |
Property operating expenses | | (299,825 | ) | | (291,580 | ) | | 8,245 |
| | 2.8 | % | | (56,897 | ) | | (32,269 | ) | | (356,722 | ) | | (323,849 | ) | | 32,873 |
| | 10.2 | % |
NOI | | $ | 207,406 |
| | $ | 292,945 |
| | $ | (85,539 | ) | | (29.2 | )% | | $ | 7,367 |
| | $ | 12,351 |
| | $ | 214,773 |
| | $ | 305,296 |
| | $ | (90,523 | ) | | (29.7 | )% |
| |
(1) | Consists of senior living communities thatwe have owned and which have been operated by the same operator continuously since January 1, 2018; excludes communities classified as held for sale, if any. |
Rental income. Rental income decreased primarily due to a decrease in rental income at our comparable properties and our disposition of 19 properties since January 1, 2018. Rental income decreased at our comparable properties primarily due to the reduction in the aggregate amount of rent payable to us by Five Star during the year ended December 31, 2019 pursuant to the Restructuring Transaction. See Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K for information regarding the Restructuring Transaction.
Residents fees and services. Residents fees and services increased primarily due to our acquisitions ,acquisition of five properties and the transfer of certain senior living communities we own from triple net leased senior living communities to managed senior living communities since January 1, 2015, management2018, partially offset by decreases in residents fees earned by Five Star asand services at our comparable properties. Residents fees and services at our comparable properties decreased primarily due to a resultdecrease in occupancy at certain of the modifications madeour managed senior living communities.
Property operating expenses. Property operating expenses increased primarily due to our managementacquisitions and pooling arrangementsthe transfer of certain senior living communities we own from triple net leased senior living communities to managed senior living communities since January 1, 2018 as well as an increase in property operating expenses at our comparable properties. Property operating expenses at our comparable properties increased primarily due to increased costs associated with Five Star that took effect on July 1, 2016staffing and increased expenses incurred during the fourth quarter of 2016 duemaintenance, room turnover and other costs. Low unemployment and a competitive labor market are expected to casualty losses and evacuationcontinue to increase our staffing costs as a result of a hurricane.in 2020.
Net operating income. The change in NOI increased because ofreflects the net changes in rental income, residents fees and services and property operating expenses described above. The reconciliation of NOI to net income for our managed senior living communities segment is shown in the
table above. Our definition of NOI and our reconciliation of NOI to net income are included below under the heading “Non-GAAP Financial Measures”.
Depreciation and amortization expense. Depreciation and amortization expense includes the depreciation of owned property and equipment as well as the amortization expense of in place resident agreements assumed upon the acquisition of a community. Depreciation and amortization expense increased primarily as a result of the acquisitions and transfers of certain communities from leased to managed communities described above.
Impairment of assets: Impairment of assets for the year ended December 31, 2016 relates to reducing the carrying value of a formerly managed memory care building to its estimated sale prices less costs to sell.
Interest expense. Interest expense relates to mortgage debts secured by certain of these communities. The decrease in interest expense is due to our prepayment and repayment of $149,325 in aggregate principal amount of mortgage debts since January 1, 2015 with a weighted average annual interest rate of 5.94%, as well as regularly scheduled amortization of our mortgage debts, partially offset by our assumption of $94,786 in aggregate principal amount of mortgage debts with a weighted average annual interest rate of 4.12% in connection with our acquisitions since January 1, 2015.
Loss on early extinguishment of debt. Loss on early extinguishment of debt is a result of our prepayment of mortgage notes in 2016 and 2015.
Managed senior living communities, comparable properties (consists of managed senior living communities owned and managed by the same operator continuously since January 1, 2015 and excludes communities classified as held for sale, if any)Non-Segment(1):
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | Change | | % Change |
Residents fees and services | | $ | 331,855 |
| | $ | 331,270 |
| | $ | 585 |
| | 0.2 | % |
Property operating expenses | | (248,785 | ) | | (249,174 | ) | | (389 | ) | | (0.2 | )% |
Net operating income (NOI) | | 83,070 |
| | 82,096 |
| | 974 |
| | 1.2 | % |
| | | | | | | | |
Depreciation and amortization expense | | (37,442 | ) | | (34,704 | ) | | 2,738 |
| | 7.9 | % |
Operating income | | 45,628 |
| | 47,392 |
| | (1,764 | ) | | (3.7 | )% |
| | | | | | | | |
Interest expense | | (4,110 | ) | | (7,199 | ) | | (3,089 | ) | | (42.9 | )% |
Loss on early extinguishment of debt | | (59 | ) | | (34 | ) | | 25 |
| | 73.5 | % |
Net income | | $ | 41,459 |
| | $ | 40,159 |
| | $ | 1,300 |
| | 3.2 | % |
Residents fees and services. Residents fees and services are the revenues earned at our managed senior living communities. We recognize these revenues as fees are charged and services are provided. Residents fees and services increased slightly year over year on a comparable property basis primarily because of an increase in average monthly rates of 1.7% at the 46 communities we have owned continuously since January 1, 2015 partially offset by a decrease in occupancy.
Property operating expenses. Property operating expenses consist of management fees, real estate taxes, utility expense, insurance, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating these communities. Property operating expenses decreased slightly during the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to decreased salaries and benefit costs of property level personnel, partially offset by an increase in management fees earned by Five Star as a result of the modifications made to our management and pooling arrangements with Five Star that took effect July 1, 2016, and increased expenses incurred during the fourth quarter of 2016 due to casualty losses and evacuation costs as a result of a hurricane.
Net operating income. The decrease in NOI reflects the net changes in residents fees and services and property operating expenses described above. The reconciliation of NOI to net income for our managed senior living communities segment, comparable properties, is shown in the table above. Our definition of NOI and our reconciliation of NOI to net income are included below under the heading “Non-GAAP Financial Measures”.
Depreciation and amortization expense. Depreciation and amortization expense includes the depreciation of owned property and equipment, as well as the amortization expense of in place resident agreements assumed upon the acquisition of a
community. The increase in depreciation and amortization expense results primarily from our funding of capital improvements since January 1, 2015.
Interest expense. Interest expense relates to mortgage debts secured by certain of these communities. Interest expense decreased as a result of our prepayment and repayment of $149,325 in aggregate principal amount of mortgage debts since January 1, 2015 with a weighted average annual interest rate of 5.94%, as well as regularly scheduled amortization of our mortgage debts.
Loss on early extinguishment of debt. Loss on early extinguishment of debt recognized is a result of our prepayment of mortgage notes in 2016 and 2015.
MOBs:
|
| | | | | | | | | | | | |
| | All MOB Properties | | Comparable MOB Properties(1) |
| | As of the Year Ended December 31, | | As of the Year Ended December 31, |
| | |
| | 2016 | | 2015 | | 2016 | | 2015 |
Total properties | | 119 |
| | 121 |
| | 93 |
| | 93 |
|
Total buildings | | 145 |
| | 145 |
| | 117 |
| | 117 |
|
Total square feet(2) | | 11,431 |
| | 11,316 |
| | 8,872 |
| | 8,870 |
|
Occupancy(3) | | 96.5 | % | | 96.4 | % | | 95.4 | % | | 95.4 | % |
|
| | | | | | | | | | | | |
| | Comparable Properties(2) | | All Properties |
| | As of and For the Year Ended December 31, | | As of and For the Year Ended December 31, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Total properties: | | | | | | | | |
Other triple net leased senior living communities | | 32 |
| | 32 |
| | 32 |
| | 44 |
|
Wellness centers | | 10 |
| | 10 |
| | 10 |
| | 10 |
|
Rent coverage: | | | | | | | | |
Other triple net leased senior living communities (3) | | 1.65 | x | | 1.74 | x | | 1.65 | x | | 1.74 | x |
Wellness centers (3) | | 1.83 | x | | 2.03 | x | | 1.83 | x | | 2.03 | x |
| |
(1) | Consists of MOBs owned continuously since January 1, 2015 and excludes properties classified as held for sale, if any. |
| |
(2) | Prior periods exclude space remeasurements made during the periods presented. |
| |
(3) | MOB occupancy includes (i) space being fitted out for occupancy pursuant to existing leases and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants. |
MOBs, all properties:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | Change | | % Change |
Rental income | | $ | 372,233 |
| | $ | 356,586 |
| | $ | 15,647 |
| | 4.4 | % |
Property operating expenses | | (105,762 | ) | | (99,337 | ) | | 6,425 |
| | 6.5 | % |
Net operating income (NOI) | | 266,471 |
| | 257,249 |
| | 9,222 |
| | 3.6 | % |
| | | | | | | | |
Depreciation and amortization expense | | (124,196 | ) | | (122,974 | ) | | 1,222 |
| | 1.0 | % |
Impairment of assets | | (7,122 | ) | | — |
| | 7,122 |
| | 100.0 | % |
Operating income | | 135,153 |
| | 134,275 |
| | 878 |
| | 0.7 | % |
| | | | | | | | |
Interest expense | | (13,852 | ) | | (6,214 | ) | | 7,638 |
| | 122.9 | % |
Loss on early extinguishment of debt | | — |
| | (250 | ) | | (250 | ) | | (100.0 | )% |
Income from continuing operations | | 121,301 |
| | 127,811 |
| | (6,510 | ) | | (5.1 | )% |
Discontinued operations: | | | | | | | | |
Loss from discontinued operations | | — |
| | (350 | ) | | (350 | ) | | (100.0 | )% |
Loss on impairment of assets from discontinued operations | | — |
| | (602 | ) | | (602 | ) | | (100.0 | )% |
Net income | | $ | 121,301 |
| | $ | 126,859 |
| | $ | (5,558 | ) | | (4.4 | )% |
Rental income. Rental income increased primarily because of our acquisitions since January 1, 2015, as well as certain changes at our comparable MOB properties, as discussed below. Rental income includes non-cash straight line rent adjustments totaling $12,922 and $13,438 and net amortization of approximately $4,720 and $3,840 of above and below market lease adjustments for the years ended December 31, 2016 and 2015, respectively.
Property operating expenses. Property operating expenses consist of real estate taxes, utility expense, property management fees, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating these properties. Property operating expenses increased primarily because of our acquisitions since January 1, 2015, as well as certain changes at our comparable MOB properties, as discussed below.
Net operating income. NOI increased because of the increases in rental income, partially offset by the increased property operating expenses described above. The reconciliation of NOI to net income for our MOB segment is shown in the table above. Our definition of NOI and our reconciliation of NOI to net income are included below under the heading “Non-GAAP Financial Measures”.
Depreciation and amortization expense. Depreciation and amortization expense increased primarily because of an increase in depreciation expense related to our acquisitions and funding of capital expenditures since January 1, 2015, partially offset by a decrease in the amortization of acquired in place real estate leases during the year ended December 31, 2016 that we amortize over the respective lease terms.
Impairment of assets. Impairment of assets for the year ended December 31, 2016 relates to reducing the carrying value of five MOBs (five buildings) and one land parcel to their estimated sales prices less costs to sell.
Interest expense. Interest expense relates to mortgage debts secured by certain of our MOBs. The increase in interest expense is the result of our obtaining, in July 2016, an aggregate $620,000 secured debt financing with a weighted average fixed annual interest rate of 3.53%, partially offset by our prepayment of $70,000 in aggregate principal amount of mortgage debts since January 1, 2015 with a weighted average annual interest rate of 5.39%, as well as the regularly scheduled amortization of our mortgage debts.
Loss on early extinguishment of debt. Loss on early extinguishment of debt recognized is a result of our prepayment of mortgage notes in 2015.
Impairment of assets and loss from discontinued operations. Impairment of assets and loss from discontinued operations for the year ended December 31, 2015 relate to one MOB (four buildings) which we sold in April 2015.
MOBs, comparable properties (Consists of MOBs owned continuously since January 1, 2015 and excludes properties classified as held for sale, if any):
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | Change | | % Change |
Rental income | | $ | 320,328 |
| | $ | 313,463 |
| | $ | 6,865 |
| | 2.2 | % |
Property operating expenses | | (95,788 | ) | | (91,881 | ) | | 3,907 |
| | 4.3 | % |
Net operating income (NOI) | | 224,540 |
| | 221,582 |
| | 2,958 |
| | 1.3 | % |
| | | | | | | | |
Depreciation and amortization expense | | (102,005 | ) | | (103,015 | ) | | (1,010 | ) | | (1.0 | )% |
Operating income | | 122,535 |
| | 118,567 |
| | 3,968 |
| | 3.3 | % |
| | | | | | | | |
Interest expense | | (13,187 | ) | | (5,214 | ) | | 7,973 |
| | 152.9 | % |
Loss on early extinguishment of debt | | — |
| | (250 | ) | | (250 | ) | | (100.0 | )% |
Net income | | $ | 109,348 |
| | $ | 113,103 |
| | $ | (3,755 | ) | | (3.3 | )% |
Rental income. Rental income increased primarily due to an increase in tax escalation income and other reimbursable expenses, as well as increased net leasing activity at certain MOBs. Rental income includes non-cash straight line rent adjustments totaling $10,025 and $11,039 and net amortization of approximately $4,469 and $3,647 of acquired above and below market lease adjustments for the years ended December 31, 2016 and 2015, respectively.
Property operating expenses. Property operating expenses consist of real estate taxes, utility expense, property management fees, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating these properties. Property operating expense increased primarily because of increases in real estate taxes and salaries and benefit costs of property level personnel at certain MOBs and other direct costs of operating these properties, partially offset by decreased landscaping, snow removal and utility expense at certain of these properties during the year ended December 31, 2016 compared to the year ended December 31, 2015.
Net operating income. NOI reflects the net changes in rental income and property operating expenses described above. The reconciliation of NOI to net income for our MOB segment for comparable properties is shown in the table above. Our definition of NOI and our reconciliation of NOI to net income are included below under the heading “Non-GAAP Financial Measures”.
Depreciation and amortization expense. Depreciation and amortization expense decreased slightly due to a reduction in amortization of acquired in place real estate leases that we amortize over the respective lease terms, partially offset by an increase in the amortization of leasing costs and depreciation expense on fixed assets.
Interest expense. Interest expense relates to mortgage debts secured by certain MOBs. The increase in interest expense is the result of our obtaining, in July 2016, an aggregate $620,000 secured debt financing with a weighted average fixed annual interest rate of 3.53%, partially offset by our prepayment of $52,000 in aggregate principal amount of mortgage debts since January 1, 2015 with a weighted average annual interest rate of 5.64% as well as the regularly scheduled amortization of our mortgage debts.
Loss on early extinguishment of debt. Loss on early extinguishment of debt recognized is a result of our prepayment of mortgage notes in 2015.
All other operations:(1)
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | Change | | % Change |
Rental income (NOI) | | $ | 18,270 |
| | $ | 18,278 |
| | $ | (8 | ) | | — | % |
| | | | | | | | |
Expenses: | | | | | | | | |
Depreciation and amortization expense | | (3,792 | ) | | (3,792 | ) | | — |
| | — | % |
General and administrative | | (46,559 | ) | | (42,830 | ) | | 3,729 |
| | 8.7 | % |
Acquisition and certain other transaction related costs | | (2,085 | ) | | (6,853 | ) | | (4,768 | ) | | (69.6 | )% |
Impairment of assets | | (2,795 | ) | | — |
| | 2,795 |
| | 100.0 | % |
Total expenses | | (55,231 | ) | | (53,475 | ) | | 1,756 |
| | 3.3 | % |
Operating loss | | (36,961 | ) | | (35,197 | ) | | 1,764 |
| | 5.0 | % |
| | | | | | | | |
Dividend income | | 2,108 |
| | 2,773 |
| | (665 | ) | | (24.0 | )% |
Interest and other income | | 430 |
| | 379 |
| | 51 |
| | 13.5 | % |
Interest expense | | (120,387 | ) | | (109,679 | ) | | 10,708 |
| | 9.8 | % |
Loss on distribution to common shareholders of The RMR Group Inc. common stock | | — |
| | (38,437 | ) | | (38,437 | ) | | (100.0 | )% |
Loss on early extinguishment of debt | | — |
| | (1,604 | ) | | (1,604 | ) | | (100.0 | )% |
Loss before income tax expense and equity in earnings of an investee | | (154,810 | ) | | (181,765 | ) | | (26,955 | ) | | (14.8 | )% |
Income tax expense | | (424 | ) | | (574 | ) | | (150 | ) | | (26.1 | )% |
Equity in earnings of an investee | | 137 |
| | 20 |
| | 117 |
| | 585.0 | % |
Net loss | | $ | (155,097 | ) | | $ | (182,319 | ) | | $ | (27,222 | ) | | (14.9 | )% |
| |
(1) | All otherNon-segment operations includesinclude all of our other operations, including certain properties that offersenior living communities leased to third party operators other than Five Star, as well as wellness fitness and spa services to members,centers, which segment we do not consider to be sufficiently material to constitute a separate reporting segment, and any operating expenses that are not attributable to a specific reporting segment. |
Rental income (NOI). Rental income (NOI) includes non-cash straight line rent adjustments totaling approximately $550 in each of the years ended December 31, 2016 and 2015. Rental income also includes net amortization of approximately $221 of acquired real estate leases and obligations in each of the years ended December 31, 2016 and 2015. The slight decrease for the year ended December 31, 2016 is due to a non-recurring true-up of rental income recorded in the year ended December 31, 2015.
Depreciation and amortization expense. Depreciation and amortization expense remained consistent as we did not make any wellness center acquisitions or other capital investments in this segment for the years ended December 31, 2016 and 2015. We generally depreciate our long lived wellness center assets on a straight line basis.
General andadministrative expense. General and administrative expenses consist of fees and expenses of our Trustees, fees paid to RMR LLC under our business management agreement, equity compensation expense, legal and accounting fees and other costs relating to our status as a publicly owned company. General and administrative expenses increased primarily due to our acquisitions since January 1, 2015 and increased equity compensation expense resulting from an increase in the market price of our common shares.
Acquisition and certain other transaction related costs. Acquisition and certain other transaction related costs represent legal and professional fees, including due diligence costs, incurred in connection with our acquisition and disposition activities during the years ended December 31, 2016 and 2015. Acquisition and certain other transaction related costs decreased during the year ended December 31, 2016 due to a decrease in acquisition activity, partially offset by an increase in disposition and certain other transaction activities during the year ended December 31, 2016 compared to the year ended December 31, 2015.
Impairment of assets: At December 31, 2016, we recorded a $2,795 loss on impairment to reduce the carrying value of our Five Star investment to its estimated fair value due to the public trading price of the Five Star common shares being below the carrying value of our Five Star common shares for an extended period.
Dividend income. Dividend income reflects cash dividends received from our investment in RMR Inc.
Interest and other income. Interest and other income increased slightly for the year ended December 31, 2016 compared to the year ended December 31, 2015 and is generally a result of our investable cash on hand.
Interest expense. Interest expense increased due to our September 2015 term loan borrowing of $200,000 at an interest rate of LIBOR plus a premium of 180 basis points, our issuance of $250,000 of 6.25% senior unsecured notes due 2046 in February 2016 and increased borrowings under our revolving credit facility during the year ended December 31, 2016 compared to the year ended December 31, 2015. These increases were partially offset by our November 2015 prepayment of our $250,000 of 4.30% senior unsecured notes due 2016.
Loss on distributionto common shareholdersof The RMR Group Inc.common stock. We recorded a $38,437 loss on the distribution of RMR Inc. shares we distributed to our shareholders in December 2015, which represented the difference between our carrying value and the fair value of the RMR Inc. shares on the distribution date.
Loss on early extinguishment of debt. In December 2014, we entered an agreement to acquire 38 senior living communities. Simultaneous with entering this agreement, we obtained a bridge loan commitment for $700,000. In February 2015, we terminated the bridge loan commitment and recognized a loss of $1,409 on early extinguishment of debt in the first quarter of 2015. In September 2015, we amended our revolving credit facility agreement, which resulted in a loss on early extinguishment of debt of $21 related to the write off of certain capitalized but unamortized costs of the prior revolving credit facility agreement. In November 2015, we prepaid our $250,000 of 4.30% senior unsecured notes due January 2016, which resulted in a loss on early extinguishment of debt of $175 related to the write off of certain unamortized origination costs of the notes.
Equity in earnings of an investee. Equity in earnings of an investee represents our proportionate share of earnings from AIC.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014:
Triple net leased senior living communities:
|
| | | | | | | | | | | | |
| | | | | | Comparable Properties(1) |
| | All Properties | |
| | As of the Year Ended December 31, | | As of the Year Ended December 31, |
| | |
| | 2015 | | 2014 | | 2015 | | 2014 |
Total properties(2) | | 231 |
| | 215 |
| | 211 |
| | 211 |
|
# of units / beds(2) | | 26,114 |
| | 24,136 |
| | 23,824 |
| | 23,824 |
|
Tenant operating data(3) | | | | | | | | |
Occupancy | | 84.6 | % | | 84.6 | % | | 85.2 | % | | 85.5 | % |
Rent coverage | | 1.33 | x | | 1.33 | x | | 1.36 | x | | 1.35 | x |
| |
(1) | Consists of triple net leased senior living communities owned continuously since January 1, 2014. |
| |
(2) | The change in totalComparable properties consists of properties that we have owned and number of units / beds for All Properties reflects the 2015 acquisitions of 20 triple net leased senior living communities offset by our sales of four triple net leased communities formerlywhich have been leased to Five Star.the same operator continuously since January 1, 2018; excludes properties classified as held for sale, if any. |
| |
(3) | All tenant operating data presented areis based upon the operating results provided by our tenants for the 12 months ended September 30, 20152019 and 20142018 or the most recent prior period for which tenant operating results wereare available to us at the time we originally published our results for the year ended December 31, 2015.us. Rent coverage is calculated asusing the operating cash flowflows from our triple net lease tenants’ operations of our properties, before subordinated charges, if any, divided by triple net lease minimum rents payable to us. We have not independently verified our tenants’ operating data. The table excludes data for periods prior to our ownership of some of these properties. |
Tripleour triple net lease tenants' operations of our properties, before subordinated charges, if any, divided by triple net lease minimum rents payable to us. We have not independently verified tenant operating data. Excludes data for historical periods prior to our ownership of certain properties, as well as data for properties sold or classified as held for sale during the periods presented.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | Comparable(1) | | Non-Comparable | | |
| | Properties Results | | Properties Results | | Consolidated Properties Results |
| | 2019 | | 2018 | | $ Change | | % Change | | 2019 | | 2018 | | 2019 | | 2018 | | $ Change | | % Change |
Rental income | | $ | 49,446 |
| | $ | 48,928 |
| | $ | 518 |
| | 1.1 | % | | $ | 14,198 |
| | $ | 26,278 |
| | $ | 63,644 |
| | $ | 75,206 |
| | $ | (11,562 | ) | | (15.4 | )% |
NOI | | $ | 49,446 |
| | $ | 48,928 |
| | $ | 518 |
| | 1.1 | % | | $ | 14,198 |
| | $ | 26,278 |
| | $ | 63,644 |
| | $ | 75,206 |
| | $ | (11,562 | ) | | (15.4 | )% |
| |
(1) | Comparable properties consists of properties that we have owned and which have been leased to the same operator continuously since January 1, 2018; excludes properties classified as held for sale, if any. |
Rental income. Rental income decreased primarily due to the sale of 15 senior living communities all properties:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | Change | | % Change |
Rental income (NOI) | | $ | 256,035 |
| | $ | 230,718 |
| | $ | 25,317 |
| | 11.0 | % |
| | | | | | | | |
Depreciation and amortization expense | | (70,417 | ) | | (61,825 | ) | | 8,592 |
| | 13.9 | % |
Impairment of assets | | (194 | ) | | 10 |
| | 204 |
| | 2,040.0 | % |
Operating income | | 185,424 |
| | 168,903 |
| | 16,521 |
| | 9.8 | % |
| | | | | | | | |
Interest expense | | (25,015 | ) | | (25,473 | ) | | (458 | ) | | (1.8 | )% |
(Loss) gain on early extinguishment of debt | | (6 | ) | | 128 |
| | 134 |
| | 104.7 | % |
Gain on sale of properties | | — |
| | 5,453 |
| | (5,453 | ) | | (100.0 | )% |
Net income | | $ | 160,403 |
| | $ | 149,011 |
| | $ | 11,392 |
| | 7.6 | % |
Except as noted below under “Rental income,”leased to private operators and the transfer of certain senior living communities we have not included a discussion and analysis of the results of our comparable properties data for theown from triple net leased senior living communities segment as we believe that a comparison of the results for our comparable properties for our triple net leased senior living communities segment is generally consistent from period to period and a separate, comparable properties comparison is not meaningful.
Rental income (NOI). Rental income (NOI) increased primarily because of rents from 20 leased senior living communities we acquired in May and September 2015. These acquisitions represent $23,756, or 93.8%, of the net increase in rental income. Rental income also increased due to increased rents resulting from our funding of approximately $47,248 of capital improvements at our properties that are leased by Five Star since January 1, 2014. These increases in rental income were partially offset by the sale of 10managed senior living communities since January 1, 2014. Rental income2018, partially offset by increased year over year on arents resulting from our purchase of improvements at our comparable property basis by $3,074, primarily as a resultproperties since January 1, 2018 and increased rents due to consumer price index adjustments pursuant to leases at certain of our fundingwellness centers.
Net operating income. The change in NOI reflects the net changes in rental income described above.
References to changes in the income and expense categories below relate to the comparison of consolidated results for the year ended December 31, 2019, compared to the year ended December 31, 2018.
Depreciation and amortization expense. Depreciation and amortization expense increased primarily due to our acquisitions of nine properties and the purchase of capital improvements at certain of the 211 communities we have owned continuouslyour properties since January 1, 20142018, partially offset by our disposition of 51 properties, certain depreciable leasing related assets becoming fully depreciated and the resulting increased rent, pursuantcertain of our acquired resident agreements becoming fully amortized since January 1, 2018.
General and administrative expense. General and administrative expense consists of fees paid to the termsRMR LLC under our business management agreement, legal and accounting fees, fees and expenses of the leases.
Depreciationour Trustees, equity compensation expense and amortization expense. Depreciationother costs relating to our status as a publicly traded company. General and amortizationadministrative expense recognizeddecreased primarily due to a decrease in this segment increased primarilybusiness management incentive fees as a result of our acquisitions and our fundingno incentive fees recognized for 2019, compared to $40,642 of capital improvements, as described above.
Impairment of assets. During 2015,business management incentive fees that we recorded impairment of assets charges of $194 related to our sales of senior living communities in 2015. During 2014,recognized during 2018. In addition, we recorded an impairment adjustment of $610 related to the sale of one senior living community in October 2014, and also recorded an impairment of assets charge of $600 to reduce the carrying value of one of our senior living communities classified as held for sale as of December 31, 2014 to its estimated net sale price.
Interest expense. Interest expense relates to mortgage debts and capital leases secured by 31 of our triple net leased senior living communities. Therecognized a decrease in interestour base business management fees expense is theas a result of loan repayments since January 1, 2014lower trading prices for our common shares during 2019 compared to 2018.
Acquisition and the regularly scheduled amortization of our mortgage debts. In October 2014, we prepaid a $14,700 loan associated with certain revenue bonds that had an annual interest rate of 5.88%other transaction related costs. Acquisition and since January 1, 2014, we have prepaid or repaid mortgage debts of $25,768 with a weighted average annual interest rate of 5.99%. The decrease in interest expense is partially offset by mortgage debts of $56,691 encumbering four properties with a weighted average annual interest rate of 5.33% which we assumedcertain other transaction related costs primarily represents costs incurred in connection with the Restructuring Transaction.
Impairment of assets. For further information about our May and September 2015 acquisitionasset impairment charges, see Note 3 to our Consolidated Financial Statements included in Part IV, Item 15 of 20 triple net leased senior living communities described above.this Annual Report on Form 10-K.
(Loss) gain on early extinguishment of debt. Loss on early extinguishment of debt recognized in 2015 is a result of the prepayment of three mortgages in the second quarter of 2015. Gain on early extinguishment of debt recognized in 2014 is a result of our prepayment of a mortgage note in October 2014.
Gain on sale of properties. Gain on sale of properties is athe result of theour sale of one senior living community in January 2014, twocertain office properties and senior living communities during 2019 and 2018. For further information regarding gain on sale of properties, see Note 3 to our Consolidated Financial Statements included in June 2014Part IV, Item 15 of this Annual Report on Form 10-K.
Dividend income. The decrease in dividend income is the result of our sale of all of the RMR Inc. class A common stock that we owned on July 1, 2019, partially offset by an increase in dividends per share paid by RMR Inc. during 2019 compared to 2018.
Losses on equity securities, net. Losses on equity securities, net, represents the net unrealized gains and threelosses to adjust our investment in Five Star and RMR Inc. to their fair values.
Interest and other income. The increase in interest and other income is primarily due to an increase in average investable cash on hand and restricted cash.
Interest expense. Interest expense increased primarily due to an increase in borrowings under our revolving credit facility and changes in LIBOR, resulting in an increase in interest expense with respect to our floating rate debt. In addition, interest expense increased due to our February 2018 issuance of $500,000 of 4.75% senior living communitiesunsecured notes due 2028. These increases were partially offset by our redemption in October 2014.May 2019 of our $400,000 of 3.25% senior unsecured notes due 2019, our prepayment in December 2019 of our $350,000 term loan and a lower interest rate on our new $250,000 term loan obtained in December 2019.
Managed senior living communities:Loss on early extinguishment of debt. We recognized a loss on early extinguishment of debt in connection with our prepayment of mortgage debts and of our $350,000 term loan.
Income tax expense. Income tax expense is the result of operating income we earned in certain jurisdictions that is subject to state income taxes.
Equity in earnings of an investee. Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017:
Unless otherwise indicated, references in this section to changes or comparisons of results, income or expenses refer to comparisons of the results for the year ended December 31, 2018 to the year ended December 31, 2017. Our definition of NOI and our reconciliation of net income (loss) to NOI and a description of why we believe NOI is an appropriate supplemental measure is included below under the heading “Non-GAAP Financial Measures.”
|
| | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2018 | | 2017 | | $ Change | | % Change |
NOI by segment: | | | | | | | | |
Office Portfolio | | $ | 285,081 |
| | $ | 269,197 |
| | $ | 15,884 |
| | 5.9 | % |
SHOP | | 305,296 |
| | 303,684 |
| | 1,612 |
| | 0.5 | % |
Non-Segment | | 75,206 |
| | 88,356 |
| | (13,150 | ) | | (14.9 | )% |
Total NOI | | 665,583 |
| | 661,237 |
| | 4,346 |
| | 0.7 | % |
| | | | | | | | |
Depreciation and amortization | | 286,235 |
| | 276,861 |
| | 9,374 |
| | 3.4 | % |
General and administrative | | 85,885 |
| | 103,694 |
| | (17,809 | ) | | (17.2 | )% |
Acquisition and certain other transaction related costs | | 194 |
| | 403 |
| | (209 | ) | | (51.9 | )% |
Impairment of assets | | 66,346 |
| | 5,082 |
| | 61,264 |
| | nm |
|
Gain on sale of properties | | 261,916 |
| | 46,055 |
| | 215,861 |
| | nm |
|
Dividend income | | 2,901 |
| | 2,637 |
| | 264 |
| | 10.0 | % |
Unrealized losses on equity securities, net | | (20,724 | ) | | — |
| | 20,724 |
| | 100.0 | % |
Interest and other income | | 667 |
| | 406 |
| | 261 |
| | 64.3 | % |
Interest expense | | (179,287 | ) | | (165,019 | ) | | (14,268 | ) | | 8.6 | % |
Loss on early extinguishment of debt | | (22 | ) | | (7,627 | ) | | 7,605 |
| | (99.7 | )% |
Income from continuing operations before income tax expense and equity in earnings of an investee | | 292,374 |
| | 151,649 |
| | 140,725 |
| | 92.8 | % |
Income tax expense | | (476 | ) | | (454 | ) | | 22 |
| | 4.8 | % |
Equity in earnings of an investee | | 516 |
| | 608 |
| | (92 | ) | | (15.1 | )% |
Net income | | 292,414 |
| | 151,803 |
| | 140,611 |
| | 92.6 | % |
Net income attributable to noncontrolling interest | | (5,542 | ) | | (4,193 | ) | | 1,349 |
| | 32.2 | % |
Net income attributable to common shareholders | | $ | 286,872 |
| | $ | 147,610 |
| | $ | 139,262 |
| | 94.3 | % |
nm - not meaningful
Office Portfolio:
|
| | | | | | | | | | | | | | | | |
| | | | | | Comparable Properties(1) |
| | All Properties | |
| | As of the Year Ended December 31, | | As of the Year Ended December 31, |
| | |
| | 2015 | | 2014 | | 2015 | | 2014 |
Total properties(2) | | 65 |
| | 46 |
| | 44 |
| | 44 |
|
# of units / beds(2) | | 8,585 |
| | 7,278 |
| | 7,079 |
| | 7,079 |
|
Occupancy | | 87.9 | % | | 88.5 | % | | 87.7 | % | | 88.5 | % |
Average monthly rate | | $ | 4,213 |
| | $ | 4,179 |
| | $ | 4,263 |
| | $ | 4,179 |
|
|
| | | | | | | | | | | | |
| | Comparable Properties(1) | | All Properties |
| | As of December 31, | | As of December 31, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Total buildings | | 143 |
| | 143 |
| | 155 |
| | 151 |
|
Total square feet(2) | | 11,402 |
| | 11,402 |
| | 12,600 |
| | 12,066 |
|
Occupancy(3) | | 94.1 | % | | 94.9 | % | | 94.5 | % | | 95.0 | % |
| |
(1) | Consists of managed senior living communitiesmedical office and life science properties that we have owned and which have been in service continuously since January 1, 2014. |
| |
(2) | The change2017, including our life science property owned in total properties and number of units / beds for All Properties reflects our May 2015 acquisition of 19 managed senior living communities. We also acquired an additional managed senior living communitya joint venture arrangement in May 2015 located adjacent to a community thatwhich we own which is managed by Five Star. This community and the community we previously owned are now operateda 55% equity interest; excludes properties classified as a single integrated community under one management agreement. |
Managed senior living communities, all properties:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | Change | | % Change |
Residents fees and services | | $ | 367,874 |
| | $ | 318,184 |
| | $ | 49,690 |
| | 15.6 | % |
Property operating expenses | | (278,242 | ) | | (245,093 | ) | | 33,149 |
| | 13.5 | % |
Net operating income (NOI) | | 89,632 |
| | 73,091 |
| | 16,541 |
| | 22.6 | % |
| | | | | | | | |
Depreciation and amortization expense | | (60,600 | ) | | (32,462 | ) | | 28,138 |
| | 86.7 | % |
Operating income | | 29,032 |
| | 40,629 |
| | (11,597 | ) | | (28.5 | )% |
| | | | | | | | |
Interest expense | | (9,973 | ) | | (10,599 | ) | | (626 | ) | | (5.9 | )% |
Loss on early extinguishment of debt | | (34 | ) | | (140 | ) | | (106 | ) | | (75.7 | )% |
Net income | | $ | 19,025 |
| | $ | 29,890 |
| | $ | (10,865 | ) | | (36.3 | )% |
Residents fees and services. Residents fees and services are the revenues earned at our managed senior living communities. We recognize these revenues as services are provided. The increase in residents fees and services primarily results from residents fees and services from the managed senior living communities we acquired in May 2015. We also acquired two managed senior living communities in December 2014. These acquisitions represent $45,594, or 91.8%, of the net increase in residents fees and services. The remainder of the change is caused by the increase in rates charged offset by a decrease in occupancy.
Property operating expenses. Property operating expenses consist of management fees, real estate taxes, utility expense, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating these communities. The acquisitions described above represent $31,956, or 96.3%, of the net increase in property operating expenses.
Net operating income. NOI increased because of the changes in residents fees and services and property operating expenses described above. The reconciliation of NOI to net income for our managed senior living communities segment is shown in the table above. Our definition of NOI and our reconciliation of NOI to net income are included below under the heading “Non-GAAP Financial Measures”.
Depreciation and amortization expense. Depreciation and amortization expense includes the depreciation of owned property and equipment as well as the amortization expense of in place resident agreements assumed upon the acquisition of a community. Depreciation and amortization expense increased primarily as a result of the acquisitions described above.
Interest expense. Interest expense relates to mortgage debts secured by 19 of these communities. The decrease in interest expense is due to our prepayment or repayment of eight mortgages since January 1, 2014 with an aggregate principal balance of $93,070 and a weighted average annual interest rate of 5.93%, as well as regularly scheduled amortization of our mortgage debts, partially offset by our assumption of mortgage debts of $94,786 encumbering 13 properties with a weighted average annual interest rate of 4.12% in connection with the May 2015 acquisition of 19 managed senior living communities, as described above.
Loss on early extinguishment of debt. Loss on early extinguishment of debt recognized in 2015 is a result of the prepayment of four mortgages in the second quarter of 2015 and the write off of certain unamortized origination costs. Loss on early extinguishment of debt recognized in 2014 is a result of a December 2014 mortgage prepayment and the write off of certain unamortized origination costs.
Managed senior living communities, comparable properties (managed senior living communities we owned continuously since January 1, 2014):
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | Change | | % Change |
Residents fees and services | | $ | 321,394 |
| | $ | 317,298 |
| | $ | 4,096 |
| | 1.3 | % |
Property operating expenses | | (243,241 | ) | | (244,392 | ) | | (1,151 | ) | | (0.5 | )% |
Net operating income (NOI) | | 78,153 |
| | 72,906 |
| | 5,247 |
| | 7.2 | % |
| | | | | | | | |
Depreciation and amortization expense | | (32,561 | ) | | (32,362 | ) | | 199 |
| | 0.6 | % |
Operating income | | 45,592 |
| | 40,544 |
| | 5,048 |
| | 12.5 | % |
| | | | | | | | |
Interest expense | | (7,199 | ) | | (10,599 | ) | | (3,400 | ) | | (32.1 | )% |
Loss on early extinguishment of debt | | (33 | ) | | (140 | ) | | (107 | ) | | (76.4 | )% |
Net income | | $ | 38,360 |
| | $ | 29,805 |
| | $ | 8,555 |
| | 28.7 | % |
Residents fees and services. We recognize residents fees and services as services are provided. Residents fees and services increased year over year on a comparable property basis primarily due to an increase in average monthly rates of 2.0% at the 44 communities we have owned continuously since January 1, 2014, partially offset by a decline in occupancy of 80 basis points.
Property operating expenses. Property operating expenses consist of management fees real estate taxes, utility expense, insurance, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating these communities. Property operating expenses decreased at the 44 communities we have owned continuously since January 1, 2014, primarily due to decreases in repairs and maintenance expense.
Net operating income. The increase in NOI reflects the net changes in residents fees and services and property operating expenses described above. The reconciliation of NOI to net income for our managed senior living communities segment, comparable properties, is shown in the table above. Our definition of NOI and our reconciliation of NOI to net income are included below under the heading “Non‑GAAP Financial Measures”.
Depreciation and amortization expense. Depreciation and amortization expense includes the depreciation of owned property and equipment, as well as the amortization expense of in place resident agreements assumed upon the acquisition of a community. The increase in depreciation expense results from our funding of capital improvements, partially offset by a decrease in amortization due to certain in place resident agreements becoming fully amortized.
Interest expense. Interest expense relates to mortgage debts secured by six of these communities. Interest expense decreased as a result of the prepayment or repayment of eight mortgages since January 1, 2014 that had an aggregate principal balance of $93,070 and a weighted average annual interest rate of 5.93%, as well as regularly scheduled amortization of our mortgage debts.
Loss on early extinguishment of debt. Loss on early extinguishment of debt recognized in 2015 is a result of our prepayment of four mortgages in the second quarter of 2015 and the write off of certain unamortized origination costs. Loss on early extinguishment of debt recognized in 2014 is a result of our mortgage prepayment and our write off of certain unamortized origination costs in December 2014.
MOBs:
|
| | | | | | | | | | | | |
| | All MOB Properties | | Comparable MOB Properties(1) |
| | As of the Year Ended December 31, | | As of the Year Ended December 31, |
| | |
| | 2015 | | 2014(2) | | 2015 | | 2014 |
Total properties(3) | | 121 |
| | 98 |
| | 96 |
| | 96 |
|
Total buildings(3) | | 145 |
| | 122 |
| | 119 |
| | 119 |
|
Total square feet(3)(4) | | 11,316 |
| | 9,142 |
| | 7,883 |
| | 7,880 |
|
Occupancy(5) | | 96.4 | % | | 95.9 | % | | 94.9 | % | | 95.2 | % |
| |
(1) | Consists of MOBs we have owned continuously since January 1, 2014.held for sale, if any. |
| |
(2) | Excludes properties classified in discontinued operations, if any.Prior periods exclude space remeasurements made subsequent to those periods. |
| |
(3) | The change in total properties, total buildingsMedical office and total square feet for All MOB Properties reflects our January 2015 acquisitions of 23 MOBs. |
| |
(4) | Prior periods exclude space remeasurements made during the periods presented. |
| |
(5) | MOBlife science property occupancy includes (1) space being fitted(i) out for occupancy pursuant to existing leases and (2)of service assets undergoing redevelopment, (ii) space which is leased but is not occupied or is being offered for sublease by tenants.tenants, and (iii) space being fitted out for occupancy. |
MOBs, all properties:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | Change | | % Change |
Rental income | | $ | 356,586 |
| | $ | 278,041 |
| | $ | 78,545 |
| | 28.2 | % |
Property operating expenses | | (99,337 | ) | | (79,471 | ) | | 19,866 |
| | 25.0 | % |
Net operating income (NOI) | | 257,249 |
| | 198,570 |
| | 58,679 |
| | 29.6 | % |
| | | | | | | | |
Depreciation and amortization expense | | (122,974 | ) | | (87,312 | ) | | 35,662 |
| | 40.8 | % |
Operating income | | 134,275 |
| | 111,258 |
| | 23,017 |
| | 20.7 | % |
| | | | | | | | |
Interest expense | | (6,214 | ) | | (5,844 | ) | | 370 |
| | 6.3 | % |
Loss on early extinguishment of debt | | (250 | ) | | — |
| | 250 |
| | 100.0 | % |
Income from continuing operations | | 127,811 |
| | 105,414 |
| | 22,397 |
| | 21.2 | % |
Discontinued operations: | | | | | | | | |
(Loss) income from discontinued operations | | (350 | ) | | 1,362 |
| | 1,712 |
| | 125.7 | % |
Loss on impairment of assets from discontinued operations | | (602 | ) | | (4,377 | ) | | (3,775 | ) | | (86.2 | )% |
Net income | | $ | 126,859 |
| | $ | 102,399 |
| | $ | 24,460 |
| | 23.9 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | Comparable(1) | | Non-Comparable | | |
| | Properties Results | | Properties Results | | Consolidated Properties Results |
| | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | 2018 | | 2017 | | $ Change | | % Change |
Rental income | | $ | 380,937 |
| | $ | 375,999 |
| | $ | 4,938 |
| | 1.3 | % | | $ | 31,876 |
| | $ | 6,128 |
| | $ | 412,813 |
| | $ | 382,127 |
| | $ | 30,686 |
| | 8.0 | % |
Property operating expenses | | (116,147 | ) | | (110,618 | ) | | 5,529 |
| | 5.0 | % | | (11,585 | ) | | (2,312 | ) | | (127,732 | ) | | (112,930 | ) | | 14,802 |
| | 13.1 | % |
NOI | | $ | 264,790 |
| | $ | 265,381 |
| | $ | (591 | ) | | (0.2 | )% | | $ | 20,291 |
| | $ | 3,816 |
| | $ | 285,081 |
| | $ | 269,197 |
| | $ | 15,884 |
| | 5.9 | % |
| |
(1) | Consists of medical office and life science properties that we have owned and which have been in service continuously since January 1, 2017, including our life science property owned in a joint venture arrangement in which we own a 55% equity interest; excludes properties classified as held for sale, if any. |
Rental income. Rental income increased primarily due to rentsrental income from 25 MOBs (26 buildings)the ten medical office and life science properties we acquired for approximately $1,694,207 since January 1, 2014. These acquisitions represent $79,577, or 101.3%, of the net2017 and an increase in rental income which wasat our comparable properties. Rental income at our comparable properties increased primarily due to an increase in tax escalation income and other expense reimbursement income at certain of our comparable properties, partially offset by a decrease in rental income fromoccupancy at certain of our comparable properties. Rental income includes non-cash straight line rent adjustments totaling $13,438 and $8,788 and net amortization of approximately $3,840 and $2,101 of acquired above and below market lease adjustments for the years ended December 31, 2015 and 2014, respectively.
Property operating expenses.The increase in property operating expenses is primarily the result of our property acquisitions and an increase in property operating expenses at our comparable properties. Property operating expenses consist ofat our comparable properties increased primarily due to increases in real estate taxes utility expense, property management fees, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating these properties. The acquisitions described above represent $15,848, or 79.8%, of the net increase in property operating expenses. The remainder of the change is primarily attributable to increased real estate taxes.
Net operating income. The change in NOI increased because ofreflects the net changes in rental income and property operating expenses described above. The reconciliation of NOI to net
SHOP:
|
| | | | | | | | | | | | |
| | Comparable Properties(1) | | All Properties |
| | As of and For the Year Ended December 31, | | As of and For the Year Ended December 31, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Total properties | | 252 |
| | 252 |
| | 260 |
| | 255 |
|
# of units | | 28,809 |
| | 28,809 |
| | 29,745 |
| | 29,176 |
|
Occupancy (2) | | 86.0 | % | | 85.8 | % | | 86.1 | % | | 85.8 | % |
Average monthly rate (2) (3) | | 4,266 |
| | 4,279 |
| | 4,214 |
| | 4,279 |
|
| |
(1) | Consists of senior living communities that we have owned and which have been operated by the same operator continuously since January 1, 2017; excludes communities classified as held for sale, if any. |
| |
(2) | Occupancy and average monthly rate exclude data for senior living communities that were leased prior to January 1, 2020. |
| |
(3) | Average monthly rate is calculated by taking the average daily rate, which is defined as total residents fees and services divided by occupied units during the period, and multiplying it by 30 days. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | Comparable(1) | | Non-Comparable | | |
| | Properties Results | | Properties Results | | Consolidated Properties Results |
| | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | 2018 | | 2017 | | $ Change | | % Change |
Rental income | | $ | 212,467 |
| | $ | 210,155 |
| | $ | 2,312 |
| | 1.1 | % | | $ | 155 |
| | $ | 384 |
| | $ | 212,622 |
| | $ | 210,539 |
| | $ | 2,083 |
| | 1.0 | % |
Residents fees and services | | 393,759 |
| | 393,602 |
| | 157 |
| | 0.0 | % | | 22,764 |
| | 105 |
| | 416,523 |
| | 393,707 |
| | 22,816 |
| | 5.8 | % |
Property operating expenses | | (306,886 | ) | | (300,347 | ) | | 6,539 |
| | 2.2 | % | | (16,963 | ) | | (215 | ) | | (323,849 | ) | | (300,562 | ) | | 23,287 |
| | 7.7 | % |
NOI | | $ | 299,340 |
| | $ | 303,410 |
| | $ | (4,070 | ) | | (1.3 | )% | | $ | 5,956 |
| | $ | 274 |
| | $ | 305,296 |
| | $ | 303,684 |
| | $ | 1,612 |
| | 0.5 | % |
| |
(1) | Consists of senior living communities that we have owned and which have been operated by the same operator continuously since January 1, 2017; excludes communities classified as held for sale, if any. |
Rental income. Rental income for our MOB segment is shown in the table above. Our definition of NOI and our reconciliation of NOI to net income are included below under the heading “Non‑GAAP Financial Measures”.
Depreciation and amortization expense. Depreciation and amortization expense increased primarily becausedue to an increase in rents at our comparable properties, partially offset by the sale of our MOB acquisitionsone senior living community previously leased to Five Star since January 1, 2014,2017. Rental income at our comparable properties increased primarily due to increased rents resulting from our purchase of capital improvements since January 1, 2017.
Residents fees and services. Residents fees and services increased primarily due to our acquisition of four properties and the transfer of certain senior living communities we own from triple net leased senior living communities to managed senior living communities since January 1, 2017 as well as capital expendituresincreases in residents fees and services at our comparable properties. Residents fees and services at our comparable properties increased modestly year over year on a comparable property basis primarily due to improve our MOBs of $49,409 since January 1, 2014.
Interest expense. Interest expense for our MOBs arises from mortgage debts secured by nine properties (10 buildings). Thean increase in interest expense is the result of our assumption of $45,585 of mortgage debts in connection with our acquisition of three MOBs (three buildings) since January 1, 2014 with a weighted average annual interest rate of 5.26%, partially offset by one prepayment of two mortgage debts during the fourth quarter of 2015 that had a total principal balance of $52,000 and a weighted average annual interest rate of 5.64%, as well as the regularly scheduled amortization of our mortgage debts.
Loss on early extinguishment of debt. Loss on early extinguishment of debt recognized is a result of our prepayment of mortgage notes in 2015.
(Loss) income from discontinued operations. Loss from discontinued operations for the year ended December 31, 2015 relates to a loss on one MOB (four buildings) sold in April 2015 and the reduction in rental income due to the sale of three MOBs (three buildings) during the second and third quarters of 2014.
Loss on impairment of assets from discontinued operations. During the year ended December 31, 2015, we recorded impairment of assets charges to reduce the carrying value of one MOB (four buildings) to its estimated fair value less costs to sell. During the year ended December 31, 2014, we recorded asset impairment adjustments of $333 to increase the carrying value of the three MOBs (three buildings) sold in 2014 to their sales price. We also recorded impairment of assets charges of $4,710 to reduce the carrying value of the one MOB (four buildings) then classified as discontinued operations to its estimated net sales price.
MOBs, comparable properties (MOBs we have owned continuously since January 1, 2014):
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | Change | | % Change |
Rental income | | $ | 209,655 |
| | $ | 210,686 |
| | $ | (1,031 | ) | | (0.5 | )% |
Property operating expenses | | (71,333 | ) | | (67,429 | ) | | 3,904 |
| | 5.8 | % |
Net operating income (NOI) | | 138,322 |
| | 143,257 |
| | (4,935 | ) | | (3.4 | )% |
| | | | | | | | |
Depreciation and amortization expense | | (55,158 | ) | | (54,754 | ) | | 404 |
| | 0.7 | % |
Operating income | | 83,164 |
| | 88,503 |
| | (5,339 | ) | | (6.0 | )% |
| | | | | | | | |
Interest expense | | (4,368 | ) | | (5,214 | ) | | (846 | ) | | (16.2 | )% |
Loss on early extinguishment of debt | | (250 | ) | | — |
| | 250 |
| | 100.0 | % |
Net income | | $ | 78,546 |
| | $ | 83,289 |
| | $ | (4,743 | ) | | (5.7 | )% |
Rental income. Rental income decreased as a result of a decrease in rents and occupancy, at certain comparable properties since January 1, 2014, including lower net non‑cash items affecting rental income. Rental income includes non‑cash straight line rent adjustments totaling $4,308 and $4,550 and net amortization of approximately $(3,728) and $(3,162) of acquired above and below market lease adjustments for the years ended December 31, 2015 and 2014, respectively.
Property operating expenses. Property operating expenses consist of real estate taxes, utility expense, property management fees, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating these properties. Property operating costs increased principally because of increases in real estate tax expense and increased repairs and maintenance expenses at certain MOBs. These increased expenses were partially offset by a decreasedecline in utilityaverage monthly rates.
Property operating expenses. Property operating expenses increased primarily due to our acquisitions and the transfer of certain senior living communities we own from triple net leased senior living communities to managed senior living communities since January 1, 2017 as well as increases at our comparable properties. Property operating expenses at variousour comparable properties for the year ended December 31, 2015 comparedincreased primarily due to the year ended December 31, 2014.increased costs associated with staffing and increased room turnover and maintenance costs.
Net operating income. The change in NOI decreased because ofreflects the net changes in rental income, residents fees and services and property operating expenses described above. The reconciliation of NOI to net income for our MOB segment for comparable properties is shown in the table above. Our
definition of NOI and our reconciliation of NOI to net income are included below under the heading “Non‑GAAP Financial Measures”.
Depreciation and amortization expense. Depreciation and amortization expense increased due to an increase in the amortization of leasing costs and depreciation expense on fixed assets, partially offset by a reduction in amortization of acquired in place real estate leases that we amortize over the respective lease terms due to certain of those assets having been fully amortized.
Interest expense. Interest expense relates to mortgage debts secured by certain MOBs. The decrease in interest expense is the result of our prepayment of two mortgages during the fourth quarter of 2015 that had a total principal balance of $52,000 and a weighted average annual interest rate of 5.64%, as well as the regularly scheduled amortization of our mortgage debts.
Loss on early extinguishment of debt. Loss on early extinguishment of debt recognized is a result of our prepayment of mortgage notes in 2015.
All other operations:Non-Segment(1):
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | Change | | % Change |
Rental income (NOI) | | $ | 18,278 |
| | $ | 17,944 |
| | $ | 334 |
| | 1.9 | % |
| | | | | | | | |
Expenses: | | | | | | | | |
Depreciation and amortization expense | | 3,792 |
| | 3,792 |
| | — |
| | — |
|
General and administrative | | 42,830 |
| | 38,946 |
| | 3,884 |
| | 10.0 | % |
Acquisition and certain other transaction related costs | | 6,853 |
| | 4,607 |
| | 2,246 |
| | 48.8 | % |
Total expenses | | 53,475 |
| | 47,345 |
| | 6,130 |
| | 12.9 | % |
Operating loss | | (35,197 | ) | | (29,401 | ) | | 5,796 |
| | 19.7 | % |
| | | | | | | | |
Dividend income | | 2,773 |
| | 63 |
| | 2,710 |
| | 4,301.6 | % |
Interest and other income | | 379 |
| | 362 |
| | 17 |
| | 4.7 | % |
Interest expense | | (109,679 | ) | | (93,198 | ) | | 16,481 |
| | 17.7 | % |
Loss on distribution to common shareholders of The RMR Group Inc. common stock | | (38,437 | ) | | — |
| | 38,437 |
| | 100.0 | % |
Loss on early extinguishment of debt | | (1,604 | ) | | — |
| | 1,604 |
| | 100.0 | % |
Loss before income tax expense and equity in earnings of an investee | | (181,765 | ) | | (122,174 | ) | | 59,591 |
| | 48.8 | % |
Income tax expense | | (574 | ) | | (576 | ) | | 2 |
| | (0.3 | )% |
Equity in earnings of an investee | | 20 |
| | 87 |
| | 67 |
| | (77.0 | )% |
Net loss | | $ | (182,319 | ) | | $ | (122,663 | ) | | $ | 59,656 |
| | 48.6 | % |
|
| | | | | | | | | | | | |
| | Comparable Properties(2) | | All Properties |
| | As of and For the Year Ended December 31, | | As of and For the Year Ended December 31, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Total properties: | | | | | | | | |
Other triple net leased senior living communities | | 44 |
| | 44 |
| | 44 |
| | 50 |
|
Wellness centers | | 10 |
| | 10 |
| | 10 |
| | 10 |
|
Rent coverage: | | | | | | | | |
Other triple net leased senior living communities (3) | | 1.42 | x | | 1.50 | x | | 1.42 | x | | 1.50 | x |
Wellness centers (3) | | 2.01 | x | | 1.76 | x | | 2.01 | x | | 1.76 | x |
| |
(1) | All otherNon-segment operations includesinclude all of our other operations, including certain properties that offersenior living communities leased to third party operators other than Five Star, as well as wellness fitness and spa services to members,centers, which segment we do not consider to be sufficiently material to constitute a separate reporting segment, and any operating expenses that are not attributable to a specific reporting segment. |
| |
(2) | Comparable properties consists of properties that we have owned and which have been leased to the same operator continuously since January 1, 2017; excludes properties classified as held for sale, if any. |
| |
(3) | All tenant operating data presented is based upon the operating results provided by our tenants for the 12 months ended September 30, 2018 and 2017 or the most recent prior period for which tenant operating results was available to us as of the date we filed our Annual Report on Form 10-K for the year ended December 31, 2018. Rent coverage is calculated using the operating cash flows from our triple net lease tenants' operations of our properties, before subordinated charges, if any, divided by triple net lease minimum rents payable to us. We have not independently verified tenant operating data. Excludes data for historical periods prior to our ownership of certain properties, as well as data for properties sold or classified as held for sale during the periods presented. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | Comparable(1) | | Non-Comparable | | |
| | Properties Results | | Properties Results | | Consolidated Properties Results |
| | 2018 | | 2017 | | $ Change | | % Change | | 2018 | | 2017 | | 2018 | | 2017 | | $ Change | | % Change |
Rental income | | $ | 67,366 |
| | $ | 67,027 |
| | $ | 339 |
| | 0.5 | % | | $ | 7,840 |
| | $ | 21,329 |
| | $ | 75,206 |
| | $ | 88,356 |
| | $ | (13,150 | ) | | (14.9 | )% |
NOI | | $ | 67,366 |
| | $ | 67,027 |
| | $ | 339 |
| | 0.5 | % | | $ | 7,840 |
| | $ | 21,329 |
| | $ | 75,206 |
| | $ | 88,356 |
| | $ | (13,150 | ) | | (14.9 | )% |
| |
(1) | Comparable properties consists of properties that we have owned and which have been leased to the same operator continuously since January 1, 2017; excludes properties classified as held for sale, if any. |
Rental income. Rental income increaseddecreased primarily due to scheduled rent increasesreduced rental income resulting from the sale of five senior living communities leased to private operators and the transfer of certain senior living communities we own from triple net leased senior living communities to managed senior living communities since January 1, 2017, partially offset by increased rents resulting from our acquisition of two properties and the purchase improvements at certainour comparable properties since January 1, 2017.
References to changes in the income and expense categories below relate to the comparison of our wellness centers where increases are based onconsolidated results for the consumer price index. Rental income includes non-cash straight line rent adjustments totaling approximately $550 in each of the yearsyear ended December 31, 2015 and 2014. Rental income also includes net amortization of approximately $221 of acquired real estate leases and obligations in each of2018, compared to the yearsyear ended December 31, 2015 and 2014, respectively.2017.
Depreciation and amortization expense.Depreciation and amortization expense remained consistent as we did not make any wellness centerincreased primarily due to our acquisitions or otherof 16 properties and the purchase of capital investments in this segment for the years ended December 31, 2015 and 2014. improvements since January 1, 2017, partially offset by our disposition of six senior living communities since January 1, 2017.
General and administrative expense.expense. General and administrative expenses consist of fees and expenses for our Trustees, fees paidexpense decreased primarily due to RMR LLC under oura decrease in business management agreement, equity compensation expense, legal and accountingincentive fees. We recognized business management incentive fees and other costs relating to our status as a publicly owned company. General and administrative expenses increased principallyof $40,642 during 2018 as a result of property acquisitions made since January 1, 2014, partially offsetour total shareholder return, as defined, exceeding the returns for the SNL U.S. REIT Healthcare index over the applicable measurement period by lower9.6%, compared to $55,740 of business management incentive fees payable to RMR
LLC due to the fees being based on an average market capitalization calculation rather than average historical cost of assets for part of 2015, the amortization of the liabilityrecognized during 2017. In addition, we recorded in connection with our June 2015 acquisition of RMR Inc. shares described below andrecognized a decrease in equity compensationour base business management fees expense as a result of a decrease inlower trading prices for our share price in 2015 ascommon shares during 2018 compared to 2014. For further discussion of the liability recorded2017.
Acquisition and certain other transaction related costs. Acquisition and certain other transaction related costs include legal and diligence costs incurred in connection with our June 2015 acquisition, disposition and operations transaction activities that we expensed under GAAP.
Impairment of RMR Inc. shares,assets. For further information about our asset impairment charges, see Note 53 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10‑K.10-K.
Acquisition and certain other transaction related costs. Acquisition related costs represent legal and due diligence costs incurred in connection with our acquisition activity during the years ended December 31, 2015 and 2014. Acquisition related costs increased during the year ended December 31, 2015 due to an increase in the numberGain on sale of properties. Gain on sale of properties acquiredis the result of our sale of five senior living communities during 2018 and one senior living community in December 2017 and a permanent land eminent domain taking at our wellness center in Romeoville, Illinois that period compared to the year ended December 31, 2014.occurred in 2017.
Dividend income. income. Dividend income reflects cash dividends received in 2015 from our investment in RMR Inc. shares related
Unrealized losses on equity securities. Unrealized losses on equity securities represents the net unrealized losses to the period from June 5, 2015adjust our investments in RMR Inc. and Five Star to their fair value as of December 14, 2015. Dividend income recognized31, 2018 in 2014 isaccordance with a result of dividends receivedchange in 2014 fromGAAP standards effective January 1, 2018. We sold our investment in Equity Commonwealth, or EQC (f/k/a CommonWealth REIT). We sold all of our EQC shares in 2015.RMR Inc. on July 1, 2019.
Interest and other income. Interest The increase in interest and other income were substantially flat for the years ended December 31, 2015,is primarily due to comparable amounts ofan increase in average investable cash on hand during those periods.and restricted cash.
Interest expense.Interest expense increased primarily due to our February 2018 issuance of $400,000 of 3.25% senior unsecured notes and $250,000$500,000 of 4.75% senior unsecured notes due 2028, changes in April 2014,LIBOR impacting our May 2014 term loan borrowingfloating rate debt and our assumption of $350,000 at an annual interest rate of LIBOR plus 140 basis points,certain mortgage notes in connection with our September 2015 term loan borrowing of $200,000 at an annual interest rate of LIBOR plus 180 basis points and increased borrowings under our revolving credit facility.acquisitions since January 1, 2017. These increases were partially offset by lower borrowings under our November 2015revolving credit facility and our prepayment of our $250,000 of 4.30% senior unsecured notes.certain mortgage debts since January 1, 2017.
Loss on distributionto common shareholdersof The RMR Group Inc.common stock. We recorded a $38,437 loss on the distribution of RMR Inc. shares we distributed to our shareholders in December 2015, which represents the difference between our carrying value and the fair value of the RMR Inc. shares on the distribution date.
Loss on early extinguishment of debt. In December 2014, we entered an agreement to acquire 38 senior living communities. Simultaneous with entering this agreement, we obtained 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 September 2015, we amended our revolving credit facility agreement, which resulted in a loss on early extinguishment of debt in connection with our prepayment of $21 relatedmortgage debts and in connection with the amendments to the write off of certain capitalized but unamortized costs of the prioragreements governing our revolving credit facility agreement. In November 2015,and our $200,000 term loan.
Income tax expense. Income tax expense is the result of operating income we prepaid our $250,000 of 4.30% senior unsecured notes due January 2016, which resultedearned in a loss on early extinguishment of debt of $175 relatedcertain jurisdictions that is subject to the write off of certain unamortized origination costs of the notes.state income taxes.
Equity in earnings of an investee.Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC.
Non‑GAAPNon-GAAP Financial Measures (dollars in thousands, except per share amounts)
We provide below calculationspresent certain "non-GAAP financial measures" within the meaning of ourapplicable SEC rules, including FFO attributable to common shareholders, Normalized FFO attributable to common shareholders and NOI for the years ended December 31, 2016, 20152019, 2018 and 2014. These measures should be considered in conjunction with net income and operating income as presented in our consolidated statements of comprehensive income and consolidated statements of cash flows.2017. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income (loss) or operatingnet income (loss) attributable to common shareholders as an indicatorindicators of our operating performance or as a measuremeasures of our liquidity. Other real estate companiesThese measures should be considered in conjunction with net income (loss) and net income (loss) attributable to common shareholders as presented in our consolidated statements of comprehensive income (loss). We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss) and net income (loss) attributable to common shareholders. We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization, they may facilitate a comparison of our operating performance between periods and with other REITs and, in the case of NOI, reflecting only those income and expense items that are generated and incurred at the property level may calculate FFO, Normalized FFO or NOI differently than we do.help both investors and management to understand the operations at our properties.
Funds From Operations and Normalized Funds From Operations Attributable to Common Shareholders
We calculate FFO attributable to common shareholders and Normalized FFO attributable to common shareholders as shown below. FFO attributable to common shareholders is calculated on the basis defined by the National Association of Real Estate Investment Trusts, or NAREIT, which is net income (loss) attributable to common shareholders, calculated in accordance with GAAP, excluding any gain or loss on sale of properties, andloss on impairment of real estate assets and gains or losses on equity securities, net, if any, plus real estate depreciation and amortization and minus FFO attributable to noncontrolling interest, as well as certain other adjustments currently not applicable to us. Our calculation ofIn calculating Normalized FFO differs from NAREIT’s definition of FFO becauseattributable to common shareholders, we adjust for the items shown below and include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will ultimately be payable when all contingencies for determining any such fees are determinedknown at the end of the calendar year, and we exclude acquisition and certain other transaction related costs such as legal and professional fees associated with our acquisition and disposition activities, gains and losses on early extinguishment of debt, if any, and loss on distributionyear. FFO attributable to common shareholders of RMR common stock. We consider FFO and Normalized FFO attributable to be appropriate supplemental measures of operating performance for a
REIT, along with net income and operating income. We believe that FFO and Normalized FFO provide useful information to investors, because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, FFO and Normalized FFO may facilitate a comparison of our operating performance between periods and with other REITs. FFO and Normalized FFOcommon shareholders are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in our revolving credit facility and term loan agreements and our public debt covenants, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance, and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO attributable to common shareholders and Normalized FFO attributable to common shareholders differently than we do.
Our calculations of FFO attributable to common shareholders and Normalized FFO attributable to common shareholders for the years ended December 31, 2016, 20152019, 2018 and 20142017 and reconciliations of net income (loss) attributable to common shareholders, the most directly comparable financial measure under GAAP reported in our consolidated financial statements, to FFO attributable to common shareholders and Normalized FFO attributable to common shareholders appear in the following table. This table also provides a comparison of distributions to shareholders, FFO attributable to common shareholders and Normalized FFO attributable to common shareholders and net income (loss) attributable to common shareholders per share for these periods.
|
| | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
Net income | | $ | 141,295 |
| | $ | 123,968 |
| | $ | 158,637 |
|
Depreciation and amortization expense | | 287,831 |
| | 257,783 |
| | 185,391 |
|
Gain on sale of properties(1) | | (4,061 | ) | | — |
| | (5,453 | ) |
Impairment of assets from continuing operations(2) | | 18,674 |
| | 194 |
| | (10 | ) |
Impairment of assets from discontinued operations(3) | | — |
| | 602 |
| | 4,377 |
|
FFO | | 443,739 |
| | 382,547 |
| | 342,942 |
|
Acquisition and certain other transaction related costs | | 2,085 |
| | 6,853 |
| | 4,607 |
|
Loss on distribution to common shareholders of The RMR Group Inc. common stock(4) | | — |
| | 38,437 |
| | — |
|
Loss on early extinguishment of debt(5) | | 526 |
| | 1,894 |
| | 12 |
|
Normalized FFO | | $ | 446,350 |
| | $ | 429,731 |
| | $ | 347,561 |
|
| | | | | | |
Weighted average shares outstanding (basic) | | 237,345 |
| | 232,931 |
| | 198,868 |
|
Weighted average shares outstanding (diluted) | | 237,382 |
| | 232,963 |
| | 198,894 |
|
| | | | | | |
Net income per share (basic and diluted) | | $ | 0.60 |
| | $ | 0.53 |
| | $ | 0.80 |
|
FFO per share (basic and diluted) | | $ | 1.87 |
| | $ | 1.64 |
| | $ | 1.72 |
|
Normalized FFO per share (basic and diluted) | | $ | 1.88 |
| | $ | 1.84 |
| | $ | 1.75 |
|
Distributions declared per share | | $ | 1.56 |
| | $ | 1.56 |
| | $ | 1.56 |
|
|
| | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Net (loss) income attributable to common shareholders | | $ | (88,234 | ) | | $ | 286,872 |
| | $ | 147,610 |
|
Depreciation and amortization | | 289,025 |
| | 286,235 |
| | 276,861 |
|
FFO attributable to noncontrolling interest | | (21,147 | ) | | (21,200 | ) | | (16,370 | ) |
Gain on sale of properties | | (39,696 | ) | | (261,916 | ) | | (46,055 | ) |
Impairment of assets | | 115,201 |
| | 66,346 |
| | 5,082 |
|
Losses on equity securities, net | | 41,898 |
| | 20,724 |
| | — |
|
FFO attributable to common shareholders | | 297,047 |
| | 377,061 |
| | 367,128 |
|
| | | | | | |
Acquisition and certain other transaction related costs | | 13,102 |
| | 194 |
| | 403 |
|
Loss on early extinguishment of debt | | 44 |
| | 22 |
| | 7,627 |
|
Normalized FFO attributable to common shareholders | | $ | 310,193 |
| | $ | 377,277 |
| | $ | 375,158 |
|
| | | | | | |
Weighted average common shares outstanding (basic) | | 237,604 |
| | 237,511 |
| | 237,420 |
|
Weighted average common shares outstanding (diluted) | | 237,604 |
| | 237,546 |
| | 237,452 |
|
| | | | | | |
Per common share data (basic and diluted): | | | | | | |
Net (loss) income attributable to common shareholders | | $ | (0.37 | ) | | $ | 1.21 |
| | $ | 0.62 |
|
FFO attributable to common shareholders | | $ | 1.25 |
| | $ | 1.59 |
| | $ | 1.55 |
|
Normalized FFO attributable to common shareholders | | $ | 1.31 |
| | $ | 1.59 |
| | $ | 1.58 |
|
Distributions declared | | $ | 0.84 |
| | $ | 1.56 |
| | $ | 1.56 |
|
| |
(1) | During 2016, we recognized a gain on the sale of one senior living community. During 2014, we recognized a gain on the sale of six senior living communities. |
| |
(2) | During 2016, we recorded a net impairment of assets charge of $18,674 to adjust the carrying values of eight of our properties to their estimated sales prices less costs to sell, write off acquired lease intangible assets associated with the lease defaults at two triple net leased senior living communities and to reduce the carrying value of our Five Star investment to its estimated fair value. During 2015, we recorded a net impairment of assets charge of $194 to adjust the carrying value of three of our properties to their estimated sales prices less costs to sell. During 2014, we recorded a net impairment of assets adjustment of $10 to adjust the carrying value of two of our properties to their estimated sales prices less costs to sell. |
| |
(3) | During 2015, we recorded an impairment of assets charge of $602 to reduce the carrying value of one MOB (four buildings) to its estimated sale price less costs to sell. During 2014, we recorded a net impairment of assets charge of $4,377 to adjust the carrying value of four MOBs (seven buildings) to their estimated sales prices less costs to sell. |
| |
(4) | In 2015, we recognized a $38,437 non-cash loss on the distribution of shares of RMR Inc. shares to our shareholders as a result of the closing price of RMR Inc.’s shares being lower than our carrying amount per share on the distribution date. |
| |
(5) | In 2016, we recorded a net loss on early extinguishment of debt totaling $526 related to the prepayment of mortgage notes encumbering 13 properties. In 2015, we recorded losses on early extinguishment of debt totaling $1,604 related to |
the termination of a bridge loan commitment, an amendment to our revolving credit facility agreement and the prepayment of our $250,000 4.30% senior unsecured notes due January 2016. Also in 2015, we prepaid certain mortgages and recorded a loss on early extinguishment of debt of approximately $290. In 2014, we recorded a net loss on early extinguishment of debt of approximately $12 in connection with the prepayment of two mortgages.
Property Net Operating Income (NOI)
We calculate NOI as shown below. The calculation of NOI excludes certain components of net income (loss) in order to provide results that are more closely related to our property level results of operations. We define NOI as income from our real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions becausethat we record those amounts as depreciation and amortization. We consider NOI to be an appropriate supplemental measure to net income because it may help both investors and management to understand the operations of our properties. We use NOI internally to evaluate individual and company wide property level performance, and we believe that NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are generated and incurred at the property level and may facilitate comparisons of our operating performance between periods and with other REITs.performance. Other real estate companies and REITs may calculate FFO, Normalized FFO or NOI differently than we do.
The calculation of NOI by reportingreportable segment is included above in this Item 7. The following table includes the reconciliation of NOI to net income the most directly comparable financial measure under GAAP reported in our consolidated financial statements,(loss) to NOI for the years ended December 31, 2016, 20152019, 2018 and 2014.2017.
|
| | | | | | | | | | | | |
| | For the Year Ended December 31, |
Reconciliation of NOI to Net Income: | | 2016 | | 2015 | | 2014 |
Triple net leased senior living communities NOI | | $ | 274,864 |
| | $ | 256,035 |
| | $ | 230,718 |
|
Managed senior living communities NOI | | 98,627 |
| | 89,632 |
| | 73,091 |
|
MOB NOI | | 266,471 |
| | 257,249 |
| | 198,570 |
|
All other operations NOI | | 18,270 |
| | 18,278 |
| | 17,944 |
|
Total NOI | | 658,232 |
| | 621,194 |
| | 520,323 |
|
| | | | | | |
Depreciation and amortization expense | | (287,831 | ) | | (257,783 | ) | | (185,391 | ) |
General and administrative expense | | (46,559 | ) | | (42,830 | ) | | (38,946 | ) |
Acquisition and certain other transaction related costs | | (2,085 | ) | | (6,853 | ) | | (4,607 | ) |
Impairment of assets(1) | | (18,674 | ) | | (194 | ) | | 10 |
|
Operating income | | 303,083 |
| | 313,534 |
| | 291,389 |
|
| | | | | | |
Dividend income | | 2,108 |
| | 2,773 |
| | 63 |
|
Interest and other income | | 430 |
| | 379 |
| | 362 |
|
Interest expense | | (167,574 | ) | | (150,881 | ) | | (135,114 | ) |
Loss on distribution to common shareholders of The RMR Group Inc. common stock(2) | | — |
| | (38,437 | ) | | — |
|
Loss on early extinguishment of debt(3) | | (526 | ) | | (1,894 | ) | | (12 | ) |
Income before income tax expense and equity in earnings of an investee | | 137,521 |
| | 125,474 |
| | 156,688 |
|
Income tax expense | | (424 | ) | | (574 | ) | | (576 | ) |
Equity in earnings of an investee | | 137 |
| | 20 |
| | 87 |
|
Income from continuing operations | | 137,234 |
| | 124,920 |
| | 156,199 |
|
(Loss) income from discontinued operations | | — |
| | (350 | ) | | 1,362 |
|
Loss on impairment of assets from discontinued operations(4) | | — |
| | (602 | ) | | (4,377 | ) |
Income before gain on sale of properties | | 137,234 |
| | 123,968 |
| | 153,184 |
|
Gain on sale of properties(5) | | 4,061 |
| | — |
| | 5,453 |
|
Net income | | $ | 141,295 |
| | $ | 123,968 |
| | $ | 158,637 |
|
|
| | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Reconciliation of Net Income (Loss) to NOI: | | |
| | |
| | |
|
Net (loss) income | | $ | (82,878 | ) | | $ | 292,414 |
| | $ | 151,803 |
|
| | | | | | |
Equity in earnings of an investee | | (400 | ) | | (516 | ) | | (608 | ) |
Income tax expense | | 436 |
| | 476 |
| | 454 |
|
(Loss) income from continuing operations before income tax expense and equity in earnings of an investee | | (82,842 | ) | | 292,374 |
| | 151,649 |
|
Loss on early extinguishment of debt | | 44 |
| | 22 |
| | 7,627 |
|
Interest expense | | 180,112 |
| | 179,287 |
| | 165,019 |
|
Interest and other income | | (941 | ) | | (667 | ) | | (406 | ) |
Losses on equity securities, net | | 41,898 |
| | 20,724 |
| | — |
|
Dividend income | | (1,846 | ) | | (2,901 | ) | | (2,637 | ) |
Gain on sale of properties | | (39,696 | ) | | (261,916 | ) | | (46,055 | ) |
Impairment of assets | | 115,201 |
| | 66,346 |
| | 5,082 |
|
Acquisition and certain other transaction related costs | | 13,102 |
| | 194 |
| | 403 |
|
General and administrative | | 37,028 |
| | 85,885 |
| | 103,694 |
|
Depreciation and amortization | | 289,025 |
| | 286,235 |
| | 276,861 |
|
Total NOI | | $ | 551,085 |
| | $ | 665,583 |
| | $ | 661,237 |
|
| | | | | | |
Office Portfolio NOI | | $ | 272,668 |
| | $ | 285,081 |
| | $ | 269,197 |
|
SHOP NOI | | 214,773 |
| | 305,296 |
| | 303,684 |
|
Non-Segment NOI | | 63,644 |
| | 75,206 |
| | 88,356 |
|
Total NOI | | $ | 551,085 |
| | $ | 665,583 |
| | $ | 661,237 |
|
| |
(1) | During 2016, we recorded a net impairment of assets charge of $18,674 to adjust the carrying values of eight of our properties to their estimated sales prices less costs to sell, write off acquired lease intangible assets associated with the |
lease defaults at two triple net leased senior living communities and to reduce the carrying value of our Five Star investment to its estimated fair value. During 2015, we recorded a net impairment of assets charge of $194 to adjust the carrying value of three of our properties to their estimated sales prices less costs to sell. During 2014, we recorded a net impairment of assets adjustment of $10 to adjust the carrying value of two of our properties to their estimated sales prices less costs to sell.
| |
(2) | In 2015, we recognized a $38,437 non-cash loss on the distribution of shares of class A common stock of RMR Inc. to our shareholders as a result of the closing price of RMR Inc.’s shares being lower than our carrying amount per share on the distribution date. |
| |
(3) | In 2016, we recorded a net loss on early extinguishment of debt totaling $526 related to the prepayment of mortgage notes encumbering 13 properties. In 2015, we recorded losses on early extinguishment of debt totaling $1,604 related to the termination of a bridge loan commitment, an amendment to our revolving credit facility agreement and the prepayment of our $250,000 4.30% senior unsecured notes due January 2016. Also in 2015, we prepaid certain mortgages and recorded a loss on early extinguishment of debt of approximately $290. In 2014, we recorded a net loss on early extinguishment of debt of approximately $12 in connection with the prepayment of two mortgages. |
| |
(4) | During 2015, we recorded an impairment of assets charge of $602 to reduce the carrying value of one MOB (four buildings) to its estimated sale price less costs to sell. During 2014, we recorded a net impairment of assets charge of $4,377 to adjust the carrying value of four MOBs (seven buildings) to their estimated sales prices less costs to sell. |
| |
(5) | During 2016, we recognized a gain on the sale of one senior living community. During 2014, we recognized a gain on the sale of six senior living communities. |
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of fundscash to meet operating and capital expenses, andpay debt service obligations and make distributions to pay distributions on our common sharesshareholders are the operating cash flows we generate as rental income revenues from our leased properties, residents fees and services revenues from our managed communities, proceeds from the disposition of certain properties and borrowings under our revolving credit facility. To reduce our leverage, we have sold properties and other assets and have identified additional properties to sell, with a focus on the sale of underperforming senior living communities and non-core assets. We believe that these sources will be sufficient to meet our operating and capital expenses, andpay debt service obligations and paymake distributions onto our common sharesshareholders for the next 12 months and for the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon:
our ability to maintain or increase the occupancy of, and the rental rates at, our properties;
our ability to control operating expenses and capital expenses at our properties;
our managers’manager's ability to operate our managed senior living communities so as to maintain or increase our returns; and
our ability to purchase additional properties which produce cash flows in excess of our cost of acquisition capital and the related property operating expenses.
Following entry into the Transaction Agreement, due to the lower cash flows we would receive from our senior living communities operated by Five Star, on April 18, 2019, we lowered our regular quarterly distribution rate to $0.15 per common share ($0.60 per common share annually), which was based on a target distribution payout ratio of approximately 80% of projected cash available for distribution after the disposition of certain properties and the stabilization of our transitioned senior living communities.
Pursuant to the Restructuring Transaction, on January 1, 2020, Five Star issued 10,268,158 Five Star common shares to us and an aggregate of 16,118,849 Five Star common shares to our shareholders of record as of December 13, 2019. In consideration
of these share issuances, we assumed $75.0 million of Five Star's working capital liabilities related to our senior living communities that were previously leased to Five Star. For further information regarding the Restructuring Transaction, see Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
The following is a summary of our sources and uses of cash flows for the periods presented (dollars in thousands):
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
Cash and cash equivalents and restricted cash at beginning of period | | $ | 70,071 |
| | $ | 47,321 |
|
Net cash provided by (used in): | | | | |
Operating activities | | 265,845 |
| | 392,840 |
|
Investing activities | | 86,171 |
| | 99,091 |
|
Financing activities | | (369,863 | ) | | (469,181 | ) |
Cash and cash equivalents and restricted cash at end of period | | $ | 52,224 |
| | $ | 70,071 |
|
Our Operating Liquidity and Resources
We generally receive minimum rents monthly or quarterly from our tenants we receive percentage rents from our senior living community tenants monthly quarterly or annually andquarterly, we receive residents fees and services revenues, net of expenses, from our managed senior living communities monthly. Our changes in cash flows for the year ended December 31, 2016 compared to the year ended December 31, 2015 were as follows: (1) cash provided by operating activities increased to $426.8 million in 2016monthly and we receive percentage rents from $405.5 million in 2015; (2) cash used for investing activities decreased to $(292.9) million in 2016 from $(1.2) billion in 2015; and (3) cash (used for) provided by financing activities decreased to $(139.8) million used in 2016 from $817.6 million provided in 2015.certain of our senior living community tenants monthly, quarterly or annually.
The increasedecrease in cash provided by operating activities for the year ended December 31, 20162019 compared to the prior year was primarily due to the reduction in the aggregate amount of rent payable to us by Five Star during 2019 pursuant to the Restructuring Transaction, as described in Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, and reduced NOI as a result of additional operating income from acquisitionsdispositions of properties during 2016 as well as working capital changes2019, partially offset by a decrease in 2016, including prepaid expenses, prepaid rentbusiness management fees expense in 2019 compared to 2018.
Our Investing Liquidity and various accrued expenses and liabilities. Cash used forResources
The decrease in cash provided by investing activities decreased in 2016, primarily due to higher acquisition activity infor the year ended December 31, 20152019 compared to the prior year was primarily due to an increase in purchases of fixed assets and improvements and lower proceeds from the sale of real estate properties during 2019 compared to 2018, partially offset by the proceeds from our sale of all of the RMR Inc. class A common stock that we owned in July 2019 and a decrease in real estate acquisitions in 2019 compared to 2018.
The following is a summary of cash used for capital expenditures, development, redevelopment and other activities for the periods presented (dollars in thousands):
|
| | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 |
Office Portfolio segment capital expenditures: | | | | |
Tenant improvements(1) | | $ | 14,920 |
| | $ | 12,045 |
|
Leasing costs (2) | | 11,617 |
| | 6,178 |
|
Building improvements (3) | | 17,099 |
| | 16,402 |
|
SHOP segment fixed assets and capital improvements | | 17,196 |
| | 13,001 |
|
Recurring capital expenditures | | $ | 60,832 |
| | $ | 47,626 |
|
| | | | |
Development, redevelopment and other activities - Office Portfolio segment (4) | | 30,763 |
| | 9,942 |
|
Development, redevelopment and other activities - SHOP segment(4) (5) (6) | | 144,957 |
| | 45,084 |
|
Total development, redevelopment and other activities | | $ | 175,720 |
| | $ | 55,026 |
|
| |
(1) | Office Portfolio segment tenant improvements generally include capital expenditures to improve tenants' space or amounts paid directly to tenants to improve their space. |
| |
(2) | Office Portfolio segment leasing costs generally include leasing related costs, such as brokerage commissions and tenant inducements. |
| |
(3) | Office Portfolio segment building improvements generally include expenditures to replace obsolete building components that extend the useful life of existing assets. |
| |
(4) | Development, redevelopment and other activities generally include capital expenditures that reposition a property or result in new sources of revenue. |
| |
(5) | Includes capital improvements for communities leased to Five Star and for communities managed by Five Star for our account. |
| |
(6) | Pursuant to the Restructuring Transaction, we purchased $49,155 of fixed assets and capital improvements related to certain of our senior living communities that were leased to Five Star during 2019. |
During the year ended December 31, 20162019, we invested $1.7 million in revenue producing capital improvements at certain of our triple net leased senior living communities leased to private operators, and, higher proceeds fromas a result, annual rents payable to us increased by approximately $0.09 million pursuant to the saleterms of properties duringthe applicable leases. We used cash on hand and borrowings under our revolving credit facility to fund these purchases. These capital improvement amounts are not included in the table above.
During the year ended December 31, 2016, partially offset by increased funding2019, commitments made for real estateexpenditures in connection with leasing space in our medical office and life science properties, such as tenant improvements during 2016. and leasing costs, were as follows (dollars and square feet in thousands, except per square foot amounts):
|
| | | | | | | | | | | | |
| | New Leases | | Renewals | | Total |
Square feet leased during the year | | 262 |
| | 1,256 |
| | 1,518 |
|
Total leasing costs and concession commitments(1) | | $ | 14,044 |
| | $ | 23,374 |
| | $ | 37,418 |
|
Total leasing costs and concession commitments per square foot(1) | | $ | 53.61 |
| | $ | 18.62 |
| | $ | 24.66 |
|
Weighted average lease term (years)(2) | | 8.1 |
| | 10.6 |
| | 10.2 |
|
Total leasing costs and concession commitments per square foot per year(1) | | $ | 6.67 |
| | $ | 1.98 |
| | $ | 2.69 |
|
| |
(1) | Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. |
| |
(2) | Weighted based on annualized rental income pursuant to existing leases as of December 31, 2019, including straight line rent adjustments and estimated recurring expense reimbursements, and excluding lease value amortization. |
In July 2019, we completed our sale of 2,637,408 shares of class A common stock of RMR Inc. in an underwritten public offering at a price to the public of $40.00 per common share. We received $98.6 million in net proceeds after deducting underwriting discounts and commissions and other offering expenses, which we used to repay amounts outstanding under our revolving credit facility.
Also in July 2019, a tenant in our Office Portfolio segment vacated three buildings with an aggregate of 164,091 square feet in California. We have evaluated our options and have begun a full redevelopment of these buildings. The redevelopment of these buildings may take significant capital expenditures and time.
Following the Conversion, we plan to invest capital into our senior living communities to better position these communities in their respective markets in order to increase our returns in future years.
For further information regarding our acquisitions and dispositions, see Note 3 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Our Financing Liquidity and Resources
The decrease in cash (used for) provided byused in financing activities for the year ended December 31, 20162019 compared to the prior year was primarily due primarily to (1) proceedshigher repayments of $659.5 million fromdebt in 2018 related to our issuancesale of common sharesreal estate properties discussed above and a reduction in 2015, (2) increased aggregate distributions paid to our shareholders in 2016 due to additional common shares outstanding2019 .
and (3) net repayments of borrowings under our revolving credit facility in 2016 compared to borrowings under our revolving credit facility in the prior year and proceeds from our term loan that we obtained in 2015, partially offset by our issuance of $250.0 million senior unsecured notes and $620.0 million of secured debt in 2016.
Our Investment and Financing Liquidity and Resources
As of December 31, 2016, we had $31.7 million of cash and cash equivalents and $673.0 million available to borrow under our revolving credit facility. We expect to use cash balances, borrowings under our revolving credit facility, net proceeds from offerings of debt or equity securities and the cash flows from our operations to fund our operations, debt repayments, distributions, property acquisitions, capital expenditures related to the repair, maintenance or renovation of our properties and other general business purposes. We believe these funding sources will be sufficient to fund these activities for the next 12 months and the foreseeable future thereafter.
In order to fund acquisitions and to meet cash needs that may result from timing differences between our receiptsreceipt of rents and our needdesire or desireneed to make distributions or pay operating or capital expenses, we maintain a $1.0 billion unsecured revolving credit facility with a group of institutional lenders.facility. The maturity date of our revolving credit facility is January 15, 20182022, and, subject to ourthe payment of an extension fee and meeting other conditions, we have anthe option to extend the stated maturity date of ourthe facility for an additional year. Our revolving credit facility by one year to January 15, 2019. In addition, our revolving credit facility includes a feature under which the maximum borrowing availability under the facility may be increased to up to $1.5 billion in certain circumstances. We pay interest on borrowings under our revolving credit facility at a rate of LIBOR plus a premium, which was 130 basis points per annum as of December 31, 2016. We also pay a facility fee of 30 basis points per annum on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. Weprovides that we can borrow, repay and re-borrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. The facility also includes a feature pursuant to which in certain circumstances maximum borrowings under the facility may be increased to up to $2.0 billion. Our revolving credit facility requires interest to
be paid on borrowings at the annual rate of LIBOR plus a premium (currently 120 basis points per annum) that is subject to adjustment based upon changes to our credit ratings, plus a facility fee of 25 basis points per annum on the total amount of lending commitments. As of December 31, 2016,2019, the annual interest rate required on borrowings under our revolving credit facility was 2.0%2.8%. As of December 31, 20162019 and February 24, 2017,28, 2020, we had $327.0$537.5 million and $378.0$593.0 million outstanding under our revolving credit facility, respectively.
When significant amounts are outstanding under our revolving credit facility, or as the maturities of our indebtedness approach, we intend to explore refinancing alternatives. Such alternatives may include incurring additional debt, selling certain properties and issuing new equity securities. In addition, we may also seek to participate in joint ventures or other arrangements that may provide us additional sources of financing. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities. We may also assume mortgage debtsdebt in connection with our acquisitions of properties or place new mortgagesdebt on properties we own.
We have a $350.0$250.0 million unsecured term loan that matures on January 15, 2020, and is prepayable without penalty, at any time. In addition,June 12, 2020. Subject to the satisfaction of certain conditions, including the payment of an extension fee, we have the option to extend the maturity date by six months. We obtained this term loan includes a feature under which maximum borrowings may be increased to up to $700.0 million in certain circumstances.December 2019. This term loan requires annual interest to be paid at the rate of LIBOR plus a premium (currently 140of 125 basis points per annum) that is subject to adjustment based upon changes to our credit ratings. As of At December 31, 2016,2019, the annual interest rate payable foron amounts outstanding under this term loan was 2.0%2.9%.
We used the net proceeds from our $250.0 million term loan, together with proceeds from our dispositions, borrowings under our revolving credit facility and cash on hand, to prepay in full our $350.0 million senior unsecured term loan that was scheduled to mature on January 15, 2020. The interest rate on the new term loan is LIBOR plus 125 basis points.
We also have a $200.0 million unsecured term loan that matures on September 28, 2022, and is prepayable without penalty beginning September 29, 2017. In addition, this2022. This term loan includes a feature under which maximum borrowings may be increased to up to $400.0 million in certain circumstances. This term loan requires interest to be paid at the rate of LIBOR plus a premium (currently 180135 basis points per annum) that is subject to adjustment based upon changes to our credit ratings. As of At December 31, 2016,2019, the annual interest rate payable foron amounts outstanding under this term loan was 2.6%3.2%.
In February 2016,During the year ended December 31, 2019, we issued $250.0 million of 6.25% senior unsecured notes due 2046, raising net proceeds of approximately $241.4 million after underwriting discounts and expenses. We used the net proceeds of this offering to repay, in part, the then outstanding amount under our revolving credit facility and for general business purposes.
In July 2016, we entered into loan agreements and obtained an aggregate $620.0 million secured debt financing that matures in August 2026. These loans are secured by one MOB (two buildings) located in Massachusetts and require interest to be paid at a weighted average fixed annual interest rate of 3.53%. We used the net proceeds from these loans to repay, in part, the then outstanding amount under our revolving credit facility and for general business purposes.
In January 2016, we prepaid, at par plus accrued interest, a $6.1 million note secured by one of our properties with a maturity date in April 2016 and an annual interest rate of 5.97%. In April 2016, we prepaid, at par plus accrued interest, an $18.0 million mortgage note secured by one of our properties with a maturity date in July 2016 and an annual interest rate of 4.65%. In July 2016, we prepaid, at par plus accrued interest, an $11.9 million mortgage note secured by one of our properties with a maturity
date in November 2016 and an annual interest rate of 6.25%. In September 2016, we prepaid, at par plus accrued interest, mortgage notes secured by two of our properties with an aggregate principal balance of approximately $80.0 million, maturity dates in November 2016 and a weighted average annual interest rate of 5.92%. In October 2016, we prepaid, at par plus prepayment premiums and accrued interest, mortgage notes secured by eight of our properties with an aggregate principal balance of approximately $42.5 million, maturity dates in May 2017 and a weighted average annual interest rate of 6.54%. In December 2016, we prepaid, at par plus accrued interest, one mortgage note secured by one of our properties with an outstanding principal balance of approximately $5.4 million, a maturity date in March 2017 and an annual interest rate of 5.86%.
In February 2016, we acquired one MOB (three buildings) located in Minnesota with approximately 128,000 square feet for a purchase price of approximately $22.7 million, excluding closing costs.
In May 2016, we acquired one senior living community located in Georgia with 38 living units for a purchase price of approximately $8.4 million, excluding closing costs. We acquired this community using a TRS structure, and entered into a management agreement with Five Star to manage this community for our account. In December 2016, we acquired a land parcel adjacent to this community for approximately $1.6 million excluding closing costs.
In May 2016, we acquired one MOB (one building) located in Florida with approximately 166,000 square feet for a purchase price of approximately $45.0 million, excluding closing costs.
In June 2016, we acquired seven senior living communities located in four states with 545 living units from Five Star for approximately $112.4 million, excluding closing costs, and simultaneously entered into a new long term master lease with Five Star for those communities. See Notes 3 and 5quarterly cash distributions to our consolidated financial statements included in Part I, Item 1 of this Annual Report on Form 10-K for further information regarding this sale and leaseback transaction with Five Star.
In October 2016, we acquired one MOB (one building) located in Ohio withshareholders totaling approximately 96,000 square feet for approximately $18.5$199.7 million excluding closing costs.
In December 2016, we acquired two senior living communities with a combined 126 living units located in Illinois for approximately $18.6 million, excluding closing costs. These communities were added to our existing Lease #5 with Five Star. See Notes 3 and 5 to our consolidated financial statements included in Part I, Item 1 of this Annual Report on Form 10-K for further information regarding our leases with Five Star.
In January 2017, we acquired one MOB (one building) located in Kansas with approximately 117,000 square feet for approximately $15.5 million, excluding closing costs.
We funded the foregoing acquisitions withusing cash on hand and borrowings under our revolving credit facility.
In December 2016, Five Star began managing five senior living communities For further information regarding the distributions we own pursuantpaid during 2019, see Note 4 to management agreements, oneour Consolidated Financial Statements included in Part IV, Item 15 of which was added to one of our existing pooling agreements with Five Star and the other four of which were added to a new pooling agreement with Five Star.
In March 2016, we sold a land parcel that was previously classified as held for sale for approximately $0.7 million, excluding closing costs. In June 2016, we sold one triple net leased senior living community that was previously classified as held for sale for approximately $9.1 million, excluding closing costs. We recognized a gainthis Annual Report on sale of approximately $4.1 million during the second quarter of 2016 related to the sale of that senior living community. In July 2016, we sold four MOBs (four buildings) that were previously classified as held for sale for approximately $20.2 million, excluding closing costs. In September 2016, we sold one senior living community previously leased to Five Star for approximately $0.2 million, excluding closing costs. In December 2016, we sold one MOB located in Pennsylvania for approximately $2.8 million, excluding closing costs. Also in December 2016, we sold a formerly managed memory care building located in Florida for approximately $2.1 million, excluding closing costs.
During the year ended December 31, 2016, we invested $30.3 million of revenue producing capital improvements at certain of our triple net leased senior living communities, and, as a result, annual rent payable to us increased by approximately $2.4 million, pursuant to the terms of certain of our leases. We used cash on hand and borrowings under our revolving credit facility to fund these purchases.
During the years ended December 31, 2016 and 2015, cash expenditures made and capitalized for leasing costs and building improvements at our MOBs and our funding of capital improvements at our managed senior living communities were as follows (dollars in thousands):
|
| | | | | | | | |
| | For the Year Ended December 31, |
| | 2016 | | 2015 |
MOB tenant improvements(1)(2) | | $ | 12,237 |
| | $ | 10,181 |
|
MOB leasing costs(1)(3) | | 4,870 |
| | 7,148 |
|
MOB building improvements(1)(4) | | 13,426 |
| | 8,506 |
|
Managed senior living communities capital improvements | | 16,300 |
| | 11,144 |
|
Development, redevelopment and other activities(5) | | 31,835 |
| | 21,338 |
|
Total capital expenditures | | $ | 78,668 |
| | $ | 58,317 |
|
| |
(1) | Excludes expenditures at properties classified in discontinued operations, if any. |
| |
(2) | MOB tenant improvements generally include capital expenditures to improve tenants' space or amounts paid directly to tenants to improve their space. |
| |
(3) | MOB leasing costs generally include leasing related costs, such as brokerage commissions and other tenant inducements. |
| |
(4) | MOB building improvements generally include expenditures to replace obsolete building components and to extend the useful life of existing assets. |
| |
(5) | Development, redevelopment and other activities generally include (1) capital expenditures that are identified at the time of a property acquisition and incurred within a short period after acquiring the property; and (2) capital expenditure projects that reposition a property or result in new sources of revenue. |
During the year ended December 31, 2016, commitments made for expenditures in connection with leasing space in our MOBs, such as tenant improvements and leasing costs, were as follows (dollars and square feet in thousands, except per square foot amounts):
|
| | | | | | | | | | | | |
| | New Leases | | Renewals | | Total |
Square feet leased during the year | | 271 |
| | 628 |
| | 899 |
|
Total leasing costs and concession commitments(1) | | $ | 7,518 |
| | $ | 6,894 |
| | $ | 14,412 |
|
Total leasing costs and concession commitments per square foot(1) | | $ | 27.73 |
| | $ | 10.99 |
| | $ | 16.04 |
|
Weighted average lease term (years)(2) | | 7.2 |
| | 6.1 |
| | 6.4 |
|
Total leasing costs and concession commitments per square foot per year(1) | | $ | 3.88 |
| | $ | 1.81 |
| | $ | 2.50 |
|
| |
(1) | Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. |
| |
(2) | Weighted based on annualized rental income pursuant to existing leases as of December 31, 2016, including straight line rent adjustments, estimated recurring expense reimbursements and excluding lease value amortization. |
As of December 31, 2016, our contractual obligations were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Payment due by period |
Contractual Obligations(1) | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Borrowings under revolving credit facility | | $ | 327,000 |
| | $ | — |
| | $ | 327,000 |
| | $ | — |
| | $ | — |
|
Term loans | | 550,000 |
| | — |
| | — |
| | 350,000 |
| | 200,000 |
|
Senior unsecured notes | | 1,750,000 |
| | — |
| | 400,000 |
| | 500,000 |
| | 850,000 |
|
Mortgage notes payable | | 1,109,807 |
| | 21,313 |
| | 428,867 |
| | 4,170 |
| | 655,457 |
|
Capital lease obligations | | 11,466 |
| | 772 |
| | 1,820 |
| | 2,238 |
| | 6,636 |
|
Ground lease obligations | | 8,859 |
| | 383 |
| | 771 |
| | 779 |
| | 6,926 |
|
Projected interest expense(2) | | 1,342,243 |
| | 139,635 |
| | 245,308 |
| | 134,011 |
| | 823,289 |
|
Tenant related obligations(3) | | 23,271 |
| | 20,514 |
| | 2,127 |
| | 55 |
| | 575 |
|
Total | | $ | 5,122,646 |
| | $ | 182,617 |
| | $ | 1,405,893 |
| | $ | 991,253 |
| | $ | 2,542,883 |
|
| |
(1) | In addition to the amounts discussed above, we also have business and property management agreements with continuing 20 year terms, which require us to pay management fees to RMR LLC. See Note 6 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
|
| |
(2) | Projected interest expense is attributable to only our debt obligations at existing rates as of December 31, 2016 and is not intended to estimate future interest costs which may result from debt prepayments, additional borrowings under our revolving credit facility, new debt issuances or changes in interest rates. |
| |
(3) | Committed tenant related obligations include leasing commissions and tenant improvements and are based on leases in effect as of December 31, 2016. |
Form 10-K.
On January 13, 2017,16, 2020, we declared a regular quarterly distribution of $0.39 per common share, or $92.6 million,payable to our common shareholders of record on January 23, 2017 for27, 2020 in the quarter ended December 31, 2016.amount of $0.15 per share, or approximately $35.7 million. We paid this distribution to shareholders on February 21, 201720, 2020 using cash on hand and borrowings under our revolving credit facility.
We believe we will have access to various types of financings, including debt or equity offerings, to fund our future acquisitions and to pay our debts and other obligations as they become due. Our ability to complete, and the costs associated with, future equity and debt transactions depends primarily upon credit market conditions and our credit ratings.then creditworthiness. We have no control over market conditions. Our credit ratings depend upon evaluations by credit rating agencies of our business practices and plans, including our ability to maintain our earnings, , to stagger our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. Similarly, our ability to raise equity capital in the future will depend primarily upon equity capital market conditions and our ability to conduct our business to maintain and grow our operating cash flows. We intend to conduct our business activities in a manner which will continue to afford us reasonable access to capital for investment and financing activities, but we cannot be sure that we will be able to successfully carry out that intention.
In April 2019, our issuer credit rating was downgraded from BBB- to BB+ by S&P following our announcement of the restructuring of our business arrangements with Five Star. The ratings on our senior notes were reaffirmed at BBB- by S&P and, as a result, the interest rate premium on our revolving credit facility and our $200.0 million term loan was not changed.
In May 2019, our senior unsecured debt rating was downgraded from Baa3 to Ba1 by Moody's Investors Service following our announcement of the Transaction Agreement. The interest rate premium on our revolving credit facility and our $200.0 million term loan was not changed.
In May 2019, we redeemed at par all of our outstanding 3.25% senior notes due 2019 for a redemption price equal to principal amount of $400.0 million. We funded this redemption with cash on hand and borrowings under our revolving credit facility.
In May 2019, we prepaid, at par plus accrued interest, a mortgage note secured by four of our senior living communities with an outstanding principal balance of approximately $42.2 million, a maturity date in July 2019 and an annual interest rate of 3.79%. We prepaid this mortgage using cash on hand and borrowings under our revolving credit facility.
We have $200.0 million of 6.75% senior unsecured notes due in April 2020. We expect to pay this debt using borrowings under our revolving credit facility and proceeds from our dispositions.
For further information regarding our outstanding debt, see Note 8 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Contractual Obligations
As of December 31, 2019, our contractual obligations were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Payment due by period |
Contractual Obligations | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Borrowings under revolving credit facility | | $ | 537,500 |
| | $ | — |
| | $ | 537,500 |
| | $ | — |
| | $ | — |
|
Term loans | | 450,000 |
| | 250,000 |
| | 200,000 |
| | — |
| | — |
|
Senior unsecured notes | | 1,850,000 |
| | 200,000 |
| | 300,000 |
| | 250,000 |
| | 1,100,000 |
|
Mortgage notes payable | | 689,361 |
| | 2,737 |
| | 40,997 |
| | 15,783 |
| | 629,844 |
|
Capital lease obligations | | 8,874 |
| | 1,062 |
| | 2,472 |
| | 3,000 |
| | 2,340 |
|
Ground lease obligations | | 6,345 |
| | 308 |
| | 535 |
| | 412 |
| | 5,090 |
|
Projected interest expense (1) | | 1,358,006 |
| | 146,591 |
| | 240,455 |
| | 180,483 |
| | 790,477 |
|
Tenant related obligations (2) | | 23,994 |
| | 13,346 |
| | 9,071 |
| | 1,577 |
| | — |
|
Total | | $ | 4,924,080 |
| | $ | 614,044 |
| | $ | 1,331,030 |
| | $ | 451,255 |
| | $ | 2,527,751 |
|
| |
(1) | Projected interest expense is attributable to only our debt obligations at existing rates as of December 31, 2019 and is not intended to estimate future interest costs which may result from debt prepayments, additional borrowings under our revolving credit facility, new debt issuances or changes in interest rates. |
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(2) | Committed tenant related obligations include leasing commissions and tenant improvements and are based on leases in effect as of December 31, 2019. |
Off Balance Sheet Arrangements
As of December 31, 2016,2019, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Debt Covenants
Our principal debt obligations at December 31, 2016 were: (1) outstanding borrowings under our $1.0 billion revolving credit facility; (2) six public issuances of senior unsecured notes, including: (a) $400.0 million principal amount at an annual interest rate of 3.25% due 2019, (b) $200.0 million principal amount at an annual interest rate of 6.75% due 2020, (c) $300.0 million principal amount at an annual interest rate of 6.75% due 2021, (d) $250.0 million principal amount at an annual interest rate of 4.75% due 2024, (e) $350.0 million principal amount at an annual interest rate of 5.625% due 2042 and (f) $250.0 million principal amount at an annual interest rate of 6.25% due 2046; (3) our $350.0 million principal amount term loan due 2020; (4) our $200.0 million principal amount term loan due 2022; and (5) $1.1 billion aggregate principal amount of mortgage notes secured by 43 of our properties (45 buildings) with maturity dates between 2017 and 2043. We also have two properties encumbered by capital leases with lease obligations totaling $11.5 million at December 31, 2016; the capital leases expire in 2026. We had $327.0
million outstanding under our revolving credit facility as of December 31, 2016. Our senior unsecured notes are governed by our senior unsecured notes indentures and their supplements. Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our revolving credit facility and term loan agreements, a change of control of us, as defined, which includes RMR LLC ceasing to act as our business manager and property manager. Our senior unsecured notes indentures and their supplements and our revolving credit facility and term loan agreements also contain a number of covenants whichthat restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts and require us to maintain various financial ratios, and our revolving credit facility and term loan agreements containscontain covenants whichthat restrict our ability to make distributions to our shareholders in certain circumstances. As of December 31, 2016,2019, we believe we were in compliance with all of the covenants under our senior unsecured notes indentures and their supplements, our revolving credit facility and term loan agreements and our other debt obligations.
Neither our senior unsecured notes indentures and their supplements, nor our revolving credit facility and term loan agreements, contain provisions for acceleration which could be triggered by our debt ratings. However, under our revolving credit facility and term loan agreements, our senior unsecured debt ratings are used to determine the fees and interest rates we pay. Accordingly, if our debt ratings are further downgraded, by credit rating agencies, our interest expense and related costs under our revolving credit facility and term loan agreements wouldmay increase.
See "—Our Financing Liquidity and Resources" above for information regarding recent downgrades of our issuer credit rating and senior unsecured debt rating that did not result in a change in the interest rate premiums under our revolving credit facility or term loans.
Our senior unsecured notes indentures and their supplements contain cross default provisions to any other debts of more than $20.0 million ($5050.0 million or more in the case of our senior unsecured notes indentureindentures and supplementsupplements entered into in February 2016)2016 and February 2018). Similarly, our revolving credit facility and term loan agreements have cross default provisions to other indebtedness that is recourse of $25.0 million or more and indebtedness that is non-recourse of $75.0 million or more.
The loan agreements governing the aggregate $620$620.0 million secured debt financing we obtained in July 2016on the property owned by our joint venture contain customary covenants and provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default.
For further information regarding our principal debt obligations, see Note 8 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Related Person Transactions
We have relationships and historical and continuing transactions with RMR LLC, RMR Inc., Five Star and others related to them. For example: we have no employees and the personnel and various services we require to operate our business are provided to us by RMR LLC pursuant to our business management agreement and property management agreementagreements with RMR LLC; RMR Inc. is the managing member of RMR LLC; Adam D. Portnoy, the Chair of our Board of Trustees and one of our Managing Trustees, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is owned by our Managing Trustees, is the controlling shareholder of RMR Inc.;, and he is also a managing director and the president and chief executive officer of RMR Inc., an officer and employee of RMR LLC and the chair of the board of directors and a managing director of Five Star; Jennifer B. Clark, our other Managing Trustee and our Secretary, is a managing director and the executive vice president, general counsel and secretary of RMR Inc., an officer of ABP Trust, an officer and employee of RMR LLC and a managing director and the secretary of Five Star; each of our officers is also an officer and employee of RMR LLC; and, until July 1, 2019, we ownowned shares of class A common stock of RMR Inc. We also have relationships and historical and continuing transactions with other companies to which RMR LLC providesor its subsidiaries provide management services and some of which may have trustees, directors andor officers who are also trustees, directors or officers of us, RMR LLC or RMR Inc., including:including Five Star, which is our former subsidiary and former largest tenant, and is currently the manager of most of our managed senior living communities and ofwith which we restructured our business arrangements as of January 1, 2020. We and a wholly owned subsidiary ofAdam D. Portnoy, directly and indirectly through ABP Trust and its subsidiaries, are significant stockholders; D&R Yonkers LLC, which is owned by our President and Chief Operating Officer and Five Star’s chief financial officer and treasurer and to which onestockholders of our TRSs subleases a part of a senior living community we own in order to accommodate certain requirements of New York healthcare licensing laws; SIR, from which we purchased entities owning 23 MOBs, or the CCIT MOBs, that SIR acquired in connection with its acquisition of Cole Corporate Income Trust, Inc., or CCIT, in January 2015; and AIC, of which we, ABP Trust, Five Star, owning, as of December 31, 2019, 8.2% (33.9% as of January 1, 2020) and four other companies to which RMR LLC provides management services each own 14.3% and which arranges and reinsures in part a combined property insurance program for us and its six other shareholders. 35.3% (6.3% as of January 1, 2020), respectively, of outstanding Five Star common shares.
For further information about these and other such relationships and related person transactions, see NoteNotes 3, 5, 6 and 7 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, which isare incorporated herein by reference and our other filings with the SEC andincluding our definitive Proxy Statement for our 20172020 Annual Meeting of Shareholders, or our definitive Proxy Statement, to be filed with the SEC within 120 days after the close of the fiscal year ended December 31, 2016.2019. For further information about these transactions and relationships and about the risks that may arise as a result of these and other related person transactions and relationships, see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward LookingForward-Looking Statements,” Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors.” Our filings with the SEC and copies of certain of our agreements with these related persons, including our business management agreement and property management agreementagreements with RMR LLC, the New Management Agreements, our prior leases, forms of management agreements and related pooling agreements with Five Star, our 2019 and 2017 transaction agreements with D&R Yonkers LLCFive Star, and its owners, the purchase and sale agreement for our purchase from SIR of the CCIT MOBs, the consent agreement with Adam Portnoy and Barry Portnoy and certain of theirhis affiliates related to theirhis acquisition of Five Star common shares and our shareholders agreement with AIC and its six other shareholders, are available as exhibits to our public filings with the SEC and accessible at the SEC’sSEC's website, www.sec.gov.www.sec.gov. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its affiliatessubsidiaries provide management services.
Critical Accounting Policies
Our critical accounting policies are those that will have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and estimates arehave been and will be consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting policies involve our investments in real property. These policies affect our:
allocation of purchase prices among various asset categories, including allocations to above and below market leases, for properties qualifying as acquired businesses under FASB Accounting Standards Codification (Topic 805): Business Combinations, and the related impact on the recognition of rental income and depreciation and amortization expense;
expenses; andassessment of the carrying values and impairments of long lived assets; and
classification of leases.assets.
We allocate the acquisition costpurchase prices of each property investmentour properties to various property components such as land, buildingsbuilding and improvements and intangibles based on theirdeterminations of the fair values and each component generally has a different useful life. For real estate acquired, we record building, land and improvements, and, if applicable,of these assets assuming the value of in place leases, the fair market value of above or below market leases and customer relationships at fair value.properties are vacant. We allocate the excess, if any, of the consideration overdetermine the fair value of assets acquiredeach property using methods similar to goodwill. We base purchase price allocationsthose used by independent appraisers, which may involve estimated cash flows that are based on a number of factors, including capitalization rates and the determination of useful lives on our estimates and, underdiscount rates, among others. In some circumstances, studies fromwe engage independent real estate appraisal firms to provide market information and evaluations thatwhich are relevant to management'sour purchase price allocations and determinations of depreciable useful lives; however, management iswe are ultimately responsible for the purchase price allocations and determinationdeterminations of useful lives.
We compute depreciation expense usingallocate a portion of the straight line method over estimated useful lives of uppurchase price to 40 years. We do not depreciate the allocated cost of land. We amortize capitalized above market and below market leases based on the present value (using an interest rate which reflects the risks associated with acquired in place leases at the time each property was acquired by us) of the difference, if any, between (i) the contractual amounts to be paid pursuant to the acquired in place leases and (ii) our estimates of fair market lease values (included in acquired real estate leases) asrates for the corresponding leases, measured over a reductionperiod equal to rental income over the remaining non‑cancelable terms of the respective leases. We amortize capitalizedThe terms of below market leases that include bargain renewal options, if any, are further adjusted if we determine that renewal is probable. We allocate a portion of the purchase price to acquired in place leases and tenant relationships based upon market estimates to lease up the property based on the leases in place at the time of purchase. In making these allocations, we consider factors such as estimated carrying costs during the expected lease up periods, including real estate taxes, insurance and other operating income and expenses and costs, such as leasing commissions, legal and other related expenses, to execute similar leases in current market conditions at the time a property was acquired by us. We allocate this aggregate value between acquired in place lease values (presented as acquired real estate lease obligations) as an increase to rental income over the remaining termsand tenant relationships based on our evaluation of the respective leases. We amortizespecific characteristics of each tenant's lease. However, we have not separated the value of tenant relationships from the value of acquired in place leases exclusive ofbecause such value and related amortization expense is immaterial to our consolidated financial statements. If the value of above markettenant relationships becomes material in the future, we may separately allocate those amounts and below market in place leases to expenseamortize the allocated amount over the remaining non‑cancelable periodsestimated life of the respective leases. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are written off. Purchase price allocations require us to make certain assumptions and estimates. Incorrect assumptions and estimates may result in inaccurate depreciation and amortization charges over future periods.relationships.
We periodically evaluate our properties for impairment. Impairment indicators may include declining tenant occupancy, weakour concerns about a tenant’s financial condition (which may be endangered by a rent default or declining tenant profitability, cash flowother information which comes to our attention) or liquidity, our decision to dispose of an asset before the end of its estimated useful life and legislative, as well as 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 related property by comparing it to the expected future undiscounted cash flows to be generated from that property. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. The future net undiscounted cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. If we misjudge or estimate incorrectly or if future tenant operations, market or industry factors differ from our expectations we may record an impairment charge that is inappropriate or fail to record a charge when we should have done so, or the amount of any such charges may be inaccurate.
Each time we enter a new lease or materially modify an existing lease, we evaluate its classification as either a capital or operating lease. The classification of a lease as capital or operating affects the carrying value of a property, as well as our recognition of rental payments as revenue. These evaluations require us to make estimates of, among other things, the remaining useful life and fair market value of a leased property, appropriate discount rates and future cash flows. Incorrect assumptions or estimates may result in misclassification of our leases.
These accounting policies involve significant judgments made based upon our experience and the experience of our management and our Board of Trustees, including judgments about current valuations, ultimate realizable value, estimated useful lives, salvage or residual value, the ability and willingness of our tenants to perform their obligations to us, and the current and likely future operating and competitive environments in which our properties are operated. In the future, we may need to revise our carrying value assessments to incorporate information which is not now known, and such revisions could increase or decrease our depreciation expense or impairment charges related to properties we own, result in the classification of our leases as other than operating leases or decrease the carrying values of our assets.
Impact of Inflation
Inflation in the past several years in the United States has been modest, but recently there have been indications of inflation in the U.S. economy and elsewhere and some market forecasts indicate an expectation of increased inflation in the near to intermediate term. Future inflation might have both positive and negative impacts on our business. Inflation might cause the value of our real estate assets to increase. In an inflationary environment, the percentage rents which we receive based upon a percentage of our tenants’ tenants'
revenues should increase. Further, inflation may permit us to increase rents upon renewal or enter into new leases for the leased space for increased rent amounts. Offsetting these benefits, inflation might cause our costs of equity and debt capital and operating costs to increase. An increase in our capital costs or in our operating costs may result in decreased earnings unless it is offset by increased revenues. In periods of rapid inflation, our tenants’tenants' or managers’managers' operating costs may increase faster than revenues, which may have an adverse impact upon us if our tenants’tenants' or managers’managers' operating income from our properties becomes insufficient to pay our rents or returns. To mitigate the adverse impact of increased tenant financial distress upon us, we generally require our tenants to provide guarantees for our rent.
To mitigate the adverse impact of any increased cost of debt capital in the event of material inflation, we previously have purchased interest rate cap agreements and we may enter into additional interest rate hedge arrangements in the future. The decision to enter into these agreements was and will be based on various factors, including the amount of our floating rate debt outstanding, our belief that material interest rate increases are likely to occur, the costs of, and our expected benefit from, these agreements and upon possible requirements of our borrowing arrangements.
Other than continued increases in labor costs discussed above in "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K, we do not expect inflation to have a material impact on our financial results for the next 12 months or for the current foreseeable future thereafter.
Impact of Government Reimbursement
For the year ended December 31, 2016,2019, approximately 97% of our NOI was generated from properties where a majority of the revenue isrevenues are derived from our tenants' and residents' private resources, and the remaining 3% of our NOI was generated from properties where a majority of the revenue wasrevenues are derived from Medicare and Medicaid payments. Nonetheless, we own, and our tenants and managersmanager operate, facilities in many states andthat participate in federal and state healthcare payment programs, including the federal Medicare and state Medicaid programs for services in SNFs and other similar facilities, state Medicaid programs for services in certain assisted living communities, and other federal and state healthcare payment programs. Also, some of our medical office and life science property tenants participate in federal Medicare and state Medicaid programs and other government healthcare payment programs. Because of shifting policy priorities, the current and projected federal budget deficit, and other federal spending priorities and challenging state fiscal conditions in some states, there have been numerous recent legislative and regulatory actions or proposed actions with respect to federal Medicare rates, and state Medicaid rates and federal payments to states for Medicaid programs, as well as existing regulations that impact these matters. Further, there are other existing and recently enacted legislation, and related litigation, related to government payments, insurance and healthcare delivery. Examples of these, and other information regarding such matters and developments, are provided under the caption “Business—Government“Business-Government Regulation and Reimbursement” above in this Annual Report on Form 10-K. We cannot estimatecurrently predict the type and magnitude of these matters. However, these matters could result in the failure ofpotential Medicare and Medicaid or private payment rates to cover our or our tenants’ and managers’ costs of providing required services to residents, in reductions in paymentspolicy changes, rate changes or other circumstanceschanges that could have amay be implemented, but we believe that some of these changes will cause these government funded healthcare programs to fail to provide rates that match our and our tenants' increasing expenses and that such changes may be material and adverse effect on the ability ofto our tenants to pay rent to us, the profitability of our managed senior living communities and the values of our properties.future financial results.
Seasonality
Skilled nursing and assisted livingSenior housing operations have historically reflected modest seasonality. During fourth quarter holiday periods, residents at such facilities are sometimes discharged to spend time with family and admission decisions are often deferred. The first quarter of each calendar year usually coincides with increased illness among residents which can result in increased costs or discharges to hospitals. As a result of these and other factors, these operations sometimes produce greater earnings in the second and third quarters of a calendar year and lesser earnings in the fourth and first calendar quarters. We do not expect these seasonal differences to have a material impact upon the ability of our tenants to pay our rent or our ability to fund our managed senior living operations or our other businesses. Our MOBsmedical office and life science properties and wellness center businesscenters do not typically experience seasonality.
Impact of Climate Change
The political debateConcerns about global climate change hashave resulted in various treaties, laws and regulations whichthat are intended to limit carbon emissions. We believe theseemissions and address other environmental concerns. These and other laws being enacted or proposed may cause energy or other costs at our properties to increase in the future. In an effort to reduce the effects of any increased energy costs in the future, we and our manager, RMR LLC, continuously study ways to improve the energy efficiency at all of our properties. RMR LLC is a member of the Energy Star Partner program, a joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy which is focused on promoting energy efficiency and sustainability at commercial properties through its “ENERGY STAR” label program, and a member of the U.S. Green Building Council, a nonprofit organization focused on promoting energy efficiency and sustainability at commercial properties through its LEED® green building certificate program.increase. We do not expect the direct impact of these possible increases in energy costs resulting from laws designed to address climate change to be material to our results of operations, because most of the increased costs either maywould be the responsibility of our tenants directly or in large part may be
passed through by us to our tenants as additional lease payments or, in the longer term, would be passed through as higher chargesand paid by the patients, residents and other customerstenants of our properties; however, increased costs incurred by our managers may affect their ability to pay us our minimum returns and may prevent or reduce any additional returns we may receive.properties. Although we do not believe it is likely in the foreseeable future, laws enacted to mitigate climate change may make some of our buildings obsolete or cause us to make material investments in our properties, which could materially and adversely affect our financial condition and results of operations or the financial condition of our tenants or managers and their ability to pay rent or returns to us.
In an effort to reduce the effects of any increased energy costs in the future, we continuously study ways to improve the energy efficiency at all of our properties. Our property manager, RMR LLC, is a member of the ENERGY STAR program, a joint
program of the U.S. Environmental Protection Agency and the U.S. Department of Energy that is focused on promoting energy efficiency at commercial properties through its “ENERGY STAR” partner program, and a member of the U.S. Green Building Council, a nonprofit organization focused on promoting energy efficiency at commercial properties through its leadership in energy and environmental design, or LEED®, green building program.
Some observers believe severe weather activities in different parts of the countryworld over the last few years is evidence of global climate change. Such severeSevere weather that may result from climate changehave an adverse effect on certain properties we own. Rising sea levels could cause flooding at some of our properties, which may have an adverse effect on individual properties we own. We mitigate these risks by owning a geographically diversified portfolio of properties and by procuring, or requiring our tenants to procure, insurance coverage we believe adequate to protect us from material damages and losses resulting from such activities.the consequences of losses caused by climate change. However, there canwe cannot be no assurancesure that our mitigation efforts will be sufficient or that future storms, rising sea levels or other changes that may occur due to future climate change or otherwise could not have a material adverse effect on our business.
financial results.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Other than as described below, we do not currently foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.
Although we have no present plans to do so, we may in the future enter into hedge arrangements or derivative contracts from time to time to mitigate our exposure to changes in interest rates.
Fixed Rate Debt
At December 31, 2016,2019, our outstanding fixed rate debt included the following (dollars in thousands): |
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| | | | Annual | | Annual | | | | |
| | Principal | | Interest | | Interest | | | | Interest |
Debt | | Balance (1) | | Rate (1) | | Expense | | Maturity | | Payments Due |
Senior unsecured notes | | $ | 400,000 |
| | 3.25 | % | | $ | 13,000 |
| | 2019 | | Semi-Annually |
Senior unsecured notes | | 350,000 |
| | 5.63 | % | | 19,705 |
| | 2042 | | Quarterly |
Senior unsecured notes | | 300,000 |
| | 6.75 | % | | 20,250 |
| | 2021 | | Semi-Annually |
Senior unsecured notes | | 250,000 |
| | 4.75 | % | | 11,875 |
| | 2024 | | Semi-Annually |
Senior unsecured notes | | 250,000 |
| | 6.25 | % | | 15,625 |
| | 2046 | | Quarterly |
Senior unsecured notes | | 200,000 |
| | 6.75 | % | | 13,500 |
| | 2020 | | Semi-Annually |
Mortgages | | 620,000 |
| | 3.53 | % | | 21,886 |
| | 2026 | | Monthly |
Mortgage | | 279,505 |
| | 6.71 | % | | 18,755 |
| | 2019 | | Monthly |
Mortgages | | 69,953 |
| | 4.47 | % | | 3,127 |
| | 2018 | | Monthly |
Mortgages | | 44,462 |
| | 3.79 | % | | 1,685 |
| | 2019 | | Monthly |
Mortgage | | 14,300 |
| | 6.28 | % | | 898 |
| | 2022 | | Monthly |
Mortgages | | 12,772 |
| | 6.31 | % | | 806 |
| | 2018 | | Monthly |
Mortgages | | 12,061 |
| | 6.24 | % | | 753 |
| | 2018 | | Monthly |
Mortgage | | 11,594 |
| | 4.85 | % | | 562 |
| | 2022 | | Monthly |
Mortgage | | 10,653 |
| | 6.15 | % | | 655 |
| | 2017 | | Monthly |
Mortgage | | 8,882 |
| | 5.95 | % | | 528 |
| | 2037 | | Monthly |
Mortgage | | 8,686 |
| | 6.73 | % | | 585 |
| | 2018 | | Monthly |
Mortgage | | 6,565 |
| | 4.69 | % | | 308 |
| | 2019 | | Monthly |
Mortgage | | 4,427 |
| | 4.38 | % | | 194 |
| | 2043 | | Monthly |
Mortgages | | 3,128 |
| | 7.49 | % | | 234 |
| | 2022 | | Monthly |
Mortgage | | 2,819 |
| | 6.25 | % | | 176 |
| | 2033 | | Monthly |
| | $ | 2,859,807 |
| | | | $ | 145,107 |
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| | | | | | | | | | | | | | | |
| | | | Annual | | Annual | | | | |
| | Principal | | Interest | | Interest | | | | Interest |
Debt | | Balance (1) | | Rate (1) | | Expense | | Maturity | | Payments Due |
Senior unsecured notes | | $ | 200,000 |
| | 6.75 | % | | $ | 13,500 |
| | 2020 | | Semi-Annually |
Senior unsecured notes | | 300,000 |
| | 6.75 | % | | 20,250 |
| | 2021 | | Semi-Annually |
Senior unsecured notes | | 250,000 |
| | 4.75 | % | | 11,875 |
| | 2024 | | Semi-Annually |
Senior unsecured notes | | 500,000 |
| | 4.75 | % | | 23,750 |
| | 2028 | | Semi-Annually |
Senior unsecured notes | | 350,000 |
| | 5.63 | % | | 19,705 |
| | 2042 | | Quarterly |
Senior unsecured notes | | 250,000 |
| | 6.25 | % | | 15,625 |
| | 2046 | | Quarterly |
Mortgage notes (2) | | 1,426 |
| | 7.49 | % | | 107 |
| | 2022 | | Monthly |
Mortgage notes | | 12,513 |
| | 6.28 | % | | 786 |
| | 2022 | | Monthly |
Mortgage note | | 10,958 |
| | 4.85 | % | | 531 |
| | 2022 | | Monthly |
Mortgage notes | | 16,131 |
| | 5.75 | % | | 928 |
| | 2022 | | Monthly |
Mortgage note | | 16,056 |
| | 6.64 | % | | 1,066 |
| | 2023 | | Monthly |
Capital leases | | 8,874 |
| | 7.70 | % | | 683 |
| | 2026 | | Monthly |
Mortgage notes (3) | | 620,000 |
| | 3.53 | % | | 21,886 |
| | 2026 | | Monthly |
Mortgage note (2) (4) | | 1,589 |
| | 6.25 | % | | 99 |
| | 2026 | | Monthly |
Mortgage note | | 10,688 |
| | 4.44 | % | | 475 |
| | 2043 | | Monthly |
| | $ | 2,548,235 |
| | | | $ | 131,266 |
| | | | |
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(1) | The principal balances annualand interest rates and annual interest expense are based on the amounts stated in the applicable contracts. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we assumed these debts. This table does not include obligations under capital leases. |
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(2) | The properties encumbered by these mortgages are classified as held for sale as of December 31, 2019. |
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(3) | The property encumbered by these mortgages is owned in a joint venture arrangement in which we own a 55% equity interest. The principal amounts listed in the table for these debts have not been adjusted to reflect the equity interest in the joint venture that we do not own. |
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(4) | We prepaid this mortgage in February 2020. |
No principal repayments are due under our unsecured notes until maturity. Our mortgage debtsnotes generally require principal and interest payments through maturity pursuant to amortization schedules. Because these debts require interest to be paid at a fixed rate, changes in market interest rates during the term of these debts will not affect our interest obligations. If these debts were refinanced at interest rates which are 100 basis pointsone percentage point higher or lower than shown above, our annual interest cost would increase or decrease by approximately $28.6$25.4 million.
Changes in market interest rates also would affect the fair value of our fixed rate debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. Based on the balances outstanding at December 31, 2016,2019, and discounted cash flowflows analyses through the respective maturity dates, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligations, a hypothetical immediate 100 basisone percentage point changeincrease in interest rates would change the fair value of those obligations by approximately $60.1$38.8 million.
Our senior unsecured notes and certain of our mortgages contain provisions that allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and we are generally allowed to make prepayments only at a premium equal to a make whole amount, as defined, which is generally designed to preserve a stated yield to the noteholder. In the past, we have repurchased and retired some of our outstanding debts and we may do so again in the future. These prepayment rights and our ability to repurchase and retire outstanding debt may afford us opportunities to mitigate the risk of refinancing our debts at maturity at higher rates by refinancing prior to maturity.
Floating Rate Debt
At December 31, 2016,2019, our floating rate debt obligations consisted of our $1.0 billion revolving credit facility, under which we had $327.0$537.5 million outstanding, our $350.0$250.0 million term loan and our $200.0 million term loan. Our revolving credit facility matures in January 2018,2022, and, subject to our payment of an extension fee and our meeting other conditions, we have the option to extend the stated maturity date by one year to January 2019.2023. No principal repayments are required under our revolving credit facility prior to maturity, and we can borrow, repay and re-borrow funds available, subject to conditions, at any time without penalty. Our $350.0$250.0 million term loan matures on January 15,in June 2020 and our $200.0 million term loan matures onin September 28, 2022. Our $350.0Subject to our payment of an extension fee and our meeting other conditions, we have an option to extend the maturity date of our $250.0 million term loan isby six months to December 2020. Our $250.0 million term loan and our $200.0 million term loan are prepayable without penalty at any time. Our $200.0 million term loan is prepayable without penalty beginning September 29, 2017.
Borrowings under our revolving credit facility and term loans are in U.S. dollars and interest is required to be paid at the rate of LIBOR plus premiums that are subject to adjustment based upon changes to our credit ratings. Accordingly, we are exposed to interest rate risk for changes in U.S. dollar based short term rates, specifically LIBOR.LIBOR, and to changes in our credit ratings. In addition, upon renewal or refinancing of our revolving credit facility or our term loans, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit characteristics. Generally, a change in interest rates would not affect the value of our floating rate debt but would affect our operating results.
The following table presents the impact a 100 basisone percentage point increase in interest rates would have on our annual floating rate interest expense as of December 31, 20162019 (dollars in thousands except per share amounts):
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| | | | | | | | | | | | | | | |
| | Impact of Changes in Interest Rates |
| | Interest Rate Per Year(1) | | Outstanding Debt | | Total Interest Expense Per Year | | Annual Earnings per Share Impact(2) |
At December 31, 2016 | | 2.14 | % | | $ | 877,000 |
| | $ | 18,768 |
| | $ | 0.08 |
|
100 basis point increase | | 3.14 | % | | $ | 877,000 |
| | $ | 27,538 |
| | $ | 0.12 |
|
|
| | | | | | | | | | | | | | | |
| | Impact of Changes in Interest Rates |
| | Interest Rate (1) | | Outstanding Floating Rate Debt | | Total Interest Expense Per Year | | Annual Earnings per Share Impact(2) |
At December 31, 2019 | | 2.89 | % | | $ | 987,500 |
| | $ | 28,539 |
| | $ | 0.12 |
|
One percentage point increase | | 3.89 | % | | $ | 987,500 |
| | $ | 38,414 |
| | $ | 0.16 |
|
| |
(1) | Weighted based on the respective interest rates and outstanding borrowings under our credit facilitiesfacility and term loans as of December 31, 2016.2019. |
| |
(2) | Based on weighted average number of shares outstanding (basic and diluted) for the year ended December 31, 2016.2019. |
The following table presents the impact a 100 basisone percentage point increase in interest rates would have on our annual floating rate interest expense as of December 31, 20162019 if we were fully drawn on our revolving credit facility and our term loans remained outstanding (dollars in thousands except per share amounts):
|
| | | | | | | | | | | | | | | |
| | Impact of Changes in Interest Rates |
| | Interest Rate Per Year(1) | | Outstanding Debt | | Total Interest Expense Per Year | | Annual Earnings per Share Impact(2) |
At December 31, 2016 | | 2.08 | % | | $ | 1,550,000 |
| | $ | 32,240 |
| | $ | 0.14 |
|
100 basis point increase | | 3.08 | % | | $ | 1,550,000 |
| | $ | 47,740 |
| | $ | 0.20 |
|
|
| | | | | | | | | | | | | | | |
| | Impact of Changes in Interest Rates |
| | Interest Rate (1) | | Outstanding Floating Rate Debt | | Total Interest Expense Per Year | | Annual Earnings per Share Impact(2) |
At December 31, 2019 | | 2.86 | % | | $ | 1,450,000 |
| | $ | 41,470 |
| | $ | 0.17 |
|
One percentage point increase | | 3.86 | % | | $ | 1,450,000 |
| | $ | 55,970 |
| | $ | 0.24 |
|
| |
(1) |
Weighted based on the respective interest rates and outstanding borrowings under our credit facility (assuming fully drawn) and term loans as of December 31, 2019. |
(1) Weighted based on the interest rates and outstanding borrowings as of December 31, 2016.
(2) Based on weighted average number of shares outstanding (basic and diluted) for the year ended December 31, 2016.2019.
The foregoing tables show the impact of an immediate increase in floating interest rates. If interest rates were to changeincrease gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the amount of our borrowings outstanding under our revolving credit facility or other floating rate debt.
Although we have no present plansLIBOR Phase Out
LIBOR is currently expected to do so,be phased out in 2021. We are required to pay interest on borrowings under our revolving credit facility and term loans at floating rates based on LIBOR. Future debt that we may incur may also require that we pay interest based upon LIBOR. We currently expect that the determination of interest under our credit facility and term loan agreements would be revised as provided under the agreement or amended as necessary to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we cannot be sure that, if LIBOR is phased out or transitioned, the future enter into hedge arrangements from timechanges to time to mitigatethe determination of interest under our exposure to changesagreements would approximate the current calculation in interest rates.
accordance with LIBOR. We do not know what standard, if any, will replace LIBOR if it is phased out or transitioned.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is included in Part IV, Item 15 of this Annual Report on Form 10‑K.10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
As of the end of the period covered by this Annual Report on Form 10-K, our management carried out an evaluation, under the supervision and with the participation of our Managing Trustees, our President and Chief Operating Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to the Exchange Act Rules 13a‑1513a-15 and 15d‑15.15d-15. Based upon that evaluation, our Managing Trustees, our President and Chief Operating Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting during the quarter ended December 31, 20162019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management Report on Assessment of Internal Control Over Financial ReportingReporting.
We are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and Board of Trustees regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016.2019. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
in Internal Control—Integrated Framework (2013 framework). Based on ourthis assessment, we believe that, as of December 31, 2016,2019, our internal control over financial reporting is effective.
Ernst & Young LLP, the independent registered public accounting firm that audited our 2016 consolidated financial statements2019 Consolidated Financial Statements included in this Annual Report on Form 10‑K,10-K, has issued an attestation report on our internal control over financial reporting. The report appears elsewhere herein.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have a Code of Conduct that applies to all our representatives, including our officers and Trustees, RMR Inc. and RMR LLC, senior level officers of RMR LLC, senior level officers and directors of RMR Inc. and certain other officers and employees of RMR LLC. Our Code of Conduct is posted on our website, www.snhreit.com.www.dhcreit.com. A printed copy of our Code of Conduct is also available free of charge to any person who requests a copy by writing to our Secretary, Senior Housing PropertiesDiversified Healthcare Trust, Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458‑1634.02458-1634. We intend to disclose anysatisfy the requirements under Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers tofrom, provisions of our Code of Conduct applicableto apply to our principal executive officer, principal financial officer, principal accounting officer or controller, (oror any personpersons performing similar functions)functions, on our website.
The remainder of the information required by Item 10 is incorporated by reference to our definitive Proxy Statement.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to our definitive Proxy Statement.
Item 12. Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.
Equity Compensation Plan Information. We may grant common shares to our officers and other employees of RMR LLC under our 2012 Equity Compensation Plan, or the 2012 Plan. In addition, each of our Trustees receives common shares as part of his or her annual compensation for serving as a Trustee and such shares are awarded under the 2012 Plan. The terms of awards made under the 2012 Plan are determined by the Compensation Committee of our Board of Trustees at the time of the award.awards. The following table is as of December 31, 2016:2019:
|
| | | | | | | | | |
| | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under our equity compensation plan excluding securities reflected in column (a) | | |
Plan Category | | (a) | | (b) | | (c) | | |
Equity compensation plans approved by security holders—securityholders—2012 Plan | | None. | | None. | | 2,567,6162,214,932 |
| | (1) |
Equity compensation plan not approved by security holderssecurityholders | | None. | | None. | | None. |
| | |
Total | | None. | | None. | | 2,567,6162,214,932 |
| | (1) |
| |
(1) | Consists of common shares available for issuance pursuant to the terms of the 2012 Plan. Share awards that are repurchased or forfeited will be added to the common shares available for issuance under the 2012 Plan. |
Payments by us to RMR LLC and RMR LLC employees are described in Notes 4 and 57 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10‑K.10-K. The remainder of the information required by Item 12 is incorporated by reference to our definitive Proxy Statement.
Item 13. Certain Relationships and RelatedTransactions, and Director Independence.
The information required by Item 13 is incorporated by reference to our definitive Proxy Statement.
Item 14. Principal Accountant Feesand Services.
The information required by Item 14 is incorporated by reference to our definitive Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Index to Financial Statements and Financial Statement Schedules
The following consolidated financial statements and financial statement schedules of Senior Housing PropertiesDiversified Healthcare Trust are included on the pages indicated:
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, or are inapplicable, and therefore have been omitted.
Financial information about Five Star may be found on the SEC’sSEC's website by entering Five Star’sStar's name at http://www.sec.gov/edgar/searchedgar/companysearch.html. Reference to Five Star’sStar's financial information on this external website is presented to comply with applicable accounting regulations of the SEC. Except for such financial information contained therein as is required to be included herein under such regulations, Five Star’sStar's public filings and other information located in external websites are not incorporated by reference into these financial statements.
(b) Exhibits
|
| | | |
Exhibit Number | | Description |
| | |
3.1 |
| | |
3.2 |
| | |
3.3 |
| | |
3.4 |
| | |
4.1 |
| | |
4.2 |
| | |
4.3 |
| | |
4.4 |
| | |
4.5 |
| | |
4.6 |
| | Supplemental Indenture No. 8, dated as of April 28, 2014, between the Company and U.S. Bank National Association, related to 3.25% Senior Notes due 2019, including form thereof. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.) |
4.7 |
| | |
4.8 4.7 |
| | |
4.9 4.8 |
| | |
4.9 | |
4.10 |
| | |
4.11 | |
8.1 |
| | |
10.1 |
| | Transaction Agreement, dated as of June 5, 2015, among the Company, The RMR Group LLC (f/k/a Reit Management & Research LLC), ABP Trust and The RMR Group Inc. (f/k/a Reit Management & Research Inc.). (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 5, 2015.) |
10.2 |
| | |
10.310.2 |
| | |
10.410.3 |
| | |
10.510.4 |
| | |
10.6 |
| | Form of Restricted Share Agreement.(+) (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.) |
10.7 |
| | Form of Restricted Share Agreement.(+) (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015.) |
|
10.5 | | | |
10.8 |
| | |
10.910.6 |
| | |
10.1010.7 |
| | |
|
10.11 |
|
10.8 | | |
10.12 |
| | First Amendment to Credit Agreement, dated as of September 4, 2013, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and each of the other financial institutions party thereto. (Incorporated by reference to the Company’s Current Report on Form 8-K dated September 4, 2013.) |
10.13 |
| | Second Amendment to Credit Agreement, dated as of May 6, 2014,August 1, 2017, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and each of the other financial institutions party thereto. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.2017.) |
10.1410.9 |
| | Third Amendment to Credit Agreement, dated as of September 28, 2015, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and each of the other financial institutions party thereto. (Incorporated by reference to the Company’s Current Report on Form 8-K dated October 1, 2015.) |
10.15 |
| | |
10.1610.10 |
| | |
10.1710.11 |
| | Second Amendment to $350.0 Million Term Loan Agreement, dated as of September 28, 2015,August 1, 2017, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and each of the other financial institutions initially a signatoryparty thereto. (Incorporated by reference to the Company’s CurrentQuarterly Report on Form 8-K dated October 1, 2015.10-Q for the quarter ended June 30, 2017.) |
10.1810.12 |
|
10.13 | |
10.14 | Transaction Agreement, dated December 7, 2001, among the Company, certain subsidiaries of the Company party thereto, Five Star Senior Living Inc. (f/k/a Five Star Quality Care, Inc.), certain subsidiaries of Five Star Quality Care,Senior Living Inc. party thereto, FSQ, Inc., Service Properties Trust (f/k/a Hospitality Properties TrustTrust) and The RMR Group LLC. (Incorporated by reference to the Company’s Current Report on Form 8-K dated December 13, 2001, File No. 001-15319.2001.) |
10.1910.15 |
| | |
10.20 10.16 |
| | Purchase and SaleOmnibus Agreement, dated June 29, 2016,as of January 1, 2020, among the Company, as Purchaser,Five Star Senior Living Inc., FVE Managers, Inc. and certain subsidiaries of Five Star Quality Care, Inc., as Seller. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.Company. (Filed herewith.) |
10.2110.17 |
| | Key Principal |
10.22 |
| | Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 4, 2009, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 001-15319.) |
10.23 |
| | Partial Termination of and First Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of OctoberJanuary 1, 2009, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, File No. 001-15319.) |
10.24 |
| | Second Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of November 17, 2009, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 001-15319.) |
10.25 |
| | Third Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of December 10, 2009, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 001-15319.) |
10.26 |
| | Partial Termination of and Fourth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 1, 2010, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, File No. 001-15319.) |
|
| | | |
10.27 |
| | Fifth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of May 1, 2011, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 27, 2011, File No. 001-15319.) |
10.28 |
| | Partial Termination of and Sixth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of June 1, 2011, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 27, 2011, File No. 001-15319.) |
10.29 |
| | Seventh Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of June 20, 2011, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 27, 2011, File No. 001-15319.) |
10.30 |
| | Eighth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 31, 2012, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.) |
10.31 |
| | Partial Termination of and Ninth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 1, 2013, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.) |
10.32 |
| | Partial Termination of and Tenth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of January 22, 2014, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.) |
10.33 |
| | Partial Termination of and Eleventh Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of October 1, 2014, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014.) |
10.34 |
| | Partial Termination of and Twelfth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of October 31, 2014, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated February 3, 2015.) |
10.35 |
| | Partial Termination of and Thirteenth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of February 17, 2015, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015.) |
10.36 |
| | Partial Termination of and Fourteenth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 4, 2015, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015.) |
10.37 |
| | Partial Termination of and Fifteenth Amendment to Amended and Restated Master Lease Agreement (Lease No. 1), dated as of December 29, 2015, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.) |
10.38 |
| | Amended and Restated Guaranty Agreement (Lease No. 1), dated as of August 4, 2009, made2020, by Five Star Quality Care,Senior Living Inc., as Guarantor, for the benefit of certain subsidiaries of the Company, relating to the Amended and Restated Master Lease Agreement (Lease No. 1), dated as of August 4, 2009, among certain subsidiaries of the Company, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 001-15319.Company. (Filed herewith.) |
10.3910.18 |
| | Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 4, 2009, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 001-15319.) |
10.40 |
| | Partial Termination of and First Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of November 1, 2009, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 001-15319.) |
10.41 |
| | Partial Termination of and Second Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 1, 2010, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, File No. 001-15319.) |
|
| | | |
10.42 |
| | Third Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of June 20, 2011, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 27, 2011, File No. 001-15319.) |
10.43 |
| | Fourth Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of July 22, 2011, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, File No. 001-15319.) |
10.44 |
| | Fifth Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 31, 2012, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.) |
10.45 |
| | Partial Termination of and Sixth Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of September 19, 2013, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated September 19, 2013.) |
10.46 |
| | Partial Termination of and Seventh Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of June 1, 2014, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.) |
10.47 |
| | Partial Termination of and Eighth Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of July 20, 2015, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015.) |
10.48 |
| | Partial Termination of and Ninth Amendment to Amended and Restated Master Lease Agreement (Lease No. 2), dated as of September 29, 2016, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.) |
10.49 |
| | Amended and Restated Guaranty Agreement (Lease No. 2), dated as of August 4, 2009, made by Five Star Quality Care, Inc., as Guarantor, for the benefit of certain subsidiaries of the Company, relating to the Amended and Restated Master Lease Agreement (Lease No. 2), dated as of August 4, 2009, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 001-15319.) |
10.50 |
| | Amended and Restated Master Lease Agreement (Lease No. 4), dated as of August 4, 2009, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 001-15319.) |
10.51 |
| | First Amendment to Amended and Restated Master Lease Agreement (Lease No. 4), dated as of October 1, 2009, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 001-15319.) |
10.52 |
| | Partial Termination of and Second Amendment to Amended and Restated Master Lease Agreement (Lease No. 4), dated as of May 1, 2011, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 27, 2011, File No. 001-15319.) |
10.53 |
| | Third Amendment to Amended and Restated Master Lease Agreement (Lease No. 4), dated as of June 20, 2011, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 27, 2011, File No. 001-15319.) |
10.54 |
| | Fourth Amendment to Amended and Restated Master Lease Agreement (Lease No. 4), dated as of August 31, 2012, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.) |
10.55 |
| | Fifth Amendment to Amended and Restated Master Lease Agreement (Lease No. 4), dated July 10, 2014, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated July 10, 2014.) |
10.56 |
| | Amended and Restated Guaranty Agreement (Lease No. 4), dated as of August 4, 2009, made by Five Star Quality Care, Inc., as Guarantor, for the benefit of certain subsidiaries of the Company, relating to the Amended and Restated Master Lease Agreement (Lease No. 4), dated as of August 4, 2009, among certain subsidiaries of the Company, as Landlord, and certain subsidiaries of Five Star Quality Care, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 001-15319.) |
|
| | | |
10.57 |
| | Master Lease Agreement (Lease No. 5), dated as of June 29, 2016, between SNH/LTA Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
10.58 |
| | Joinder and First Amendment to Master Lease Agreement (Lease No. 5), dated as of December 8, 2016, by and between SNH/LTA Properties Trust and SNH/LTA Properties GA LLC, as Landlord, and Five Star Quality Care Trust, as Tenant. (Filed herewith.) |
10.59 |
| | Guaranty Agreement (Lease No. 5), dated as of June 29, 2016, made by Five Star Quality Care, Inc., as Guarantor, for the benefit of SNH/LTA Properties Trust, relating to Master Lease Agreement (Lease No. 5), dated as of June 29, 2016, between SNH/LTA Properties Trust, as Landlord, and Five Star Quality Care Trust, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
10.60 |
| | Amended and Restated Master Lease Agreement, dated as of August 4, 2009, among SNH FM Financing LLC, SNH FM Financing Trust and Ellicott City Land I, LLC, as Landlord, and FVE FM Financing, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 001-15319.) |
10.61 |
| | Amendment No. 1 to Amended and Restated Master Lease Agreement, dated as of August 4, 2009, among SNH FM Financing LLC, SNH FM Financing Trust and Ellicott City Land I, LLC, as Landlord, and FVE FM Financing, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 001-15319.) |
10.62 |
| | Partial Termination of and Amendment No. 2 to Amended and Restated Master Lease Agreement, dated as of August 31, 2012, among SNH FM Financing LLC, SNH FM Financing Trust and Ellicott City Land I, LLC, as Landlord, and FVE FM Financing, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.) |
10.63 |
| | Amended and Restated Guaranty Agreement, dated as of August 4, 2009, made by Five Star Quality Care, Inc., as Guarantor, for the benefit of SNH FM Financing LLC, SNH FM Financing Trust and Ellicott City Land I, LLC, relating to the Amended and Restated Master Lease Agreement, dated as of August 4, 2009, among SNH FM Financing LLC, SNH FM Financing Trust and Ellicott City Land I, LLC, as Landlord, and FVE FM Financing, Inc., as Tenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 001-15319.) |
10.64 |
| | Lease Realignment Agreement, dated as of August 4, 2009, among the Company and certain of its subsidiaries, and Five Star Quality Care, Inc. and certain of its subsidiaries. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, File No. 001-15319.) |
10.65 |
| | Amended and Restated Shareholders Agreement, dated May 21, 2012, among Affiliates Insurance Company, Five Star Quality Care, Inc., Hospitality Properties Trust, the Company, TravelCenters of America LLC, ABP Trust, Government Properties Income Trust and Select Income REIT. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.) |
10.66 |
| | Lease for 50 Northern Avenue (Parcel A - Fan Pier) Boston, Massachusetts, dated as of May 5, 2011, between SNH Fan Pier, Inc. (as successor by assignment from Fifty Northern Avenue LLC) and Vertex Pharmaceuticals Incorporated. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.) |
10.6710.19 |
| | |
10.6810.20 |
| | |
10.6910.21 |
| | |
10.7010.22 |
| | |
10.7110.23 |
| | |
10.7210.24 |
| | |
10.7310.25 |
| | |
12.1 |
| | Computation of Ratio of Earnings to Fixed Charges. (Filed herewith.) |
|
| | | |
21.1 |
| | |
23.1 |
| | |
23.2 |
| | |
31.1 |
| | |
31.2 |
| | |
31.3 |
| | |
31.4 |
| | |
32.1 |
| | |
99.1 |
| | Master Lease |
99.2 |
| | Guaranty Agreement, dated as of September 1, 2008, made by Five Star Quality Care, Inc., for the benefit of certain subsidiaries of the Company. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-15319.) |
99.3 |
| | Lease Agreement, dated as of June 20, 2011, between SNH/LTA SE McCarthy New Bern LLC, as Landlord, and FVE SE McCarthy New Bern LLC, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 27, 2011, File No. 001-15319.) |
99.4 |
| | Guaranty Agreement, dated as of June 20, 2011, from Five Star Quality Care, Inc. in favor of SNH/LTA SE McCarthy New Bern LLC. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 27, 2011, File No. 001-15319.) |
99.5 |
| | Lease Agreement, dated as of June 23, 2011, between SNH/LTA SE Wilson LLC, as Landlord, and FVE SE Wilson LLC, as Tenant. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 27, 2011, File No. 001-15319.) |
99.6 |
| | Guaranty Agreement, dated as of June 23, 2011, from Five Star Quality Care, Inc. in favor of SNH/LTA SE Wilson LLC. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 27, 2011, File No. 001-15319.) |
99.7 |
| | |
99.899.3 |
| | Registration Rights Agreement, dated as of June 5, 2015, between the Company and The RMR Group Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 5, 2015.) |
99.9 |
| | Pooling Agreement No. 1, dated as of June 29, 2016, among FVE Managers, Inc. and certain subsidiaries of the Company. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
99.10 |
| | Pooling Agreement No. 2, dated as of June 29, 2016, among FVE Managers, Inc. and certain subsidiaries of the Company. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
99.11 |
| | Pooling Agreement No. 3, dated as of June 29, 2016, among FVE Managers, Inc. and certain subsidiaries of the Company. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
99.12 |
| | Pooling Agreement No. 4, dated as of June 29, 2016, among FVE Managers, Inc. and certain subsidiaries of the Company. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
99.13 |
| | Pooling Agreement No. 5, dated as of June 29, 2016, between FVE Managers, Inc. and SNH SE Tenant TRS, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
99.14 |
| | Pooling Agreement No. 6, dated as of June 29, 2016, between FVE Managers, Inc. and SNH SE Tenant TRS, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
99.15 |
| | Pooling Agreement No. 7, dated as of June 29, 2016, between FVE Managers, Inc. and SNH SE Tenant TRS, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
99.16 |
| | Pooling Agreement No. 8, dated as of June 29, 2016, between FVE Managers, Inc. and SNH AL AIMO Tenant, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
99.17 |
| | Pooling Agreement No. 9, dated as of June 29, 2016, among FVE Managers, Inc. and certain subsidiaries of the Company. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
99.18 |
| | Pooling Agreement No. 10, dated as of June 29, 2016, among FVE Managers, Inc. and certain subsidiaries of the Company. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
99.19 |
| | Accession Agreement to Pooling Agreement No. 10, dated as of December 15, 2016, by SNH AL Cumming Tenant LLC. (Filed herewith.) |
99.20 |
| | Pooling Agreement No. 11, dated as of December 15, 2016, between FVE Managers, Inc. and SNH AL Georgia Tenant LLC. (Filed herewith.) |
99.21 |
| | Representative form of AL Management Agreement, dated March 30, 2015, between certain subsidiaries of the Company and FVE Managers, Inc. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015.) |
|
| | | |
99.22 |
| | Amendment to AL Management Agreements, dated July 10, 2014, between FVE Managers, Inc. and certain subsidiaries of the Company. (Incorporated by reference to the Company’s Current Report on Form 8-K dated July 10, 2014.) |
99.23 |
| | Villa Valencia Agreement, dated July 10, 2014, between SNH SE Tenant Inc. and certain other subsidiaries of the Company and FVE Managers, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K dated July 10, 2014.) |
99.24 |
| | Amendment to Villa Valencia Management Agreement, dated June 29, 2016, between FVE Managers, Inc. and SNH SE Tenant TRS, Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2016.) |
99.25 |
| | Pooling Agreement, dated August 31, 2012, between FVE IL Managers, Inc. and certain subsidiaries of the Company. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.) |
99.26 |
| | Representative form of IL Management Agreement, dated as of December 15, 2011, between FVE IL Managers, Inc., as Manager, and SNH IL Properties Trust, as Owner. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, File No. 001-15319.) |
99.27 |
| | Amendment to IL Management Agreements, dated July 10, 2014, between FVE IL Managers, Inc. and certain subsidiaries of the Company. (Incorporated by reference to the Company’s Current Report on Form 8-K dated July 10, 2014.) |
99.28 |
| | Sublease Agreement, dated as of August 31, 2012, between SNH Yonkers Tenant Inc., as Sublessor, and D&R Yonkers LLC, as Subtenant. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.) |
99.2999.4 |
| | |
99.3099.5 |
| | |
99.3199.6 |
| | |
99.32101.INS |
| | Consent Agreement, dated October 2, 2016, amongXBRL Instance Document - the Company, ABP Trust, ABP Acquisition LLC, Barry M. Portnoy and Adam D. Portnoy. (Incorporated by reference toinstance document does not appear in the Company’s Current Report on Form 8-K dated October 2, 2016.)Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
99.33101.SCH |
| | Letter Agreement, dated October 28, 2016, between the Company and Five Star Quality Care, Inc. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.) |
101.1 |
| | The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes to these financial statements, tagged as blocks of text and in detail.Taxonomy Extension Schema Document. (Filed herewith.) |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.) |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.) |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.) |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.) |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
(+) Management contract or compensatory plan or arrangement.
Item 16. Form 10-K Summary.
None.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustees and Shareholders of Senior Housing PropertiesDiversified Healthcare Trust
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Diversified Healthcare Trust (the Company) (formerly known as Senior Housing Properties Trust (the “Company”)Trust) as of December 31, 20162019 and 2015, and2018, the related consolidated statements of comprehensive income shareholders’(loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). TheseIn our opinion, the consolidated financial statements and schedule arepresent fairly, in all material respects, the responsibilityfinancial position of the Company’s management. Our responsibility is to express an opinion on these financial statementsCompany at December 31, 2019 and schedule based on our audits.2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 2, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion,Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements referredthat was communicated or required to above present fairly, in allbe communicated to the audit committee and that: (1) relates to accounts or disclosures that are material respects,to the consolidated financial position of Senior Housing Properties Trust at December 31, 2016statements and 2015, and the consolidated results of its operations and its cash flows for each(2) involved our especially challenging, subjective or complex judgments. The communication of the three yearscritical audit matter does not alter in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, inany way our opinion on the related financial statement schedule, when considered in relation to the basicconsolidated financial statements, taken as a whole, presents fairlyand we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
|
| |
| Impairment of Real Estate Properties |
Description of the Matter | The Company's net real estate properties totaled $5.9 billion as of December 31, 2019. As discussed in Note 3 to the consolidated financial statements, the Company evaluates their properties for impairment quarterly, or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. Auditing management's property impairment analysis was complex and involved a high degree of subjectivity due to the significant estimation required in determining the future undiscounted net cash flows expected to be generated from those assets with indicators of impairment. The future net undiscounted cash flows are sensitive to significant assumptions, such as hold periods, market rents, and terminal capitalization rates, which are forward-looking and could be affected by future economic and market conditions. |
|
| |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company's process for assessing impairment of real estate properties. For example, we tested controls over management's review of the future net undiscounted cash flows calculations, including the significant assumptions and data inputs used to develop the undiscounted cash flows. Our testing of the Company's impairment assessment included, among other procedures, evaluating the assumptions used to develop the estimated undiscounted cash flows used to assess the recoverability of real estate properties. Specifically, we evaluated the significant assumptions used to estimate the property cash flows, including market rents and terminal capitalization rates through comparison to current industry and economic trends and tested the completeness and accuracy of the underlying data supporting the significant assumptions. We compared the projected forecasted amounts to past performance of the properties and the Company's history related to similar properties and other forecasted financial information prepared by the Company. We also held discussions with management about the current status of potential transactions and about management's judgments to understand the probability of future events that could affect the hold period and other cash flow assumptions for the properties. We searched for and evaluated information that corroborated or contradicted the Company’s assumptions. |
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1998.
Boston, Massachusetts
March 2, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustees and Shareholders of Diversified Healthcare Trust
Opinion on Internal Control over Financial Reporting
We have audited Diversified Healthcare Trust's (formerly known as Senior Housing Properties Trust) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Diversified Healthcare Trust (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the information set forth therein.COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Senior Housing Properties Trust’s internal control over financial reportingthe consolidated balance sheets of the Company as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by2019 and 2018, the Committeerelated consolidated statements of Sponsoring Organizationscomprehensive income (loss), shareholders' equity and cash flows for each of the Treadway Commission (2013 framework)three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 27, 2017March 2, 2020 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLPBasis for Opinion
Boston, Massachusetts
February 27, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustees and Shareholders of Senior Housing Properties Trust
We have audited Senior Housing Properties Trust’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Senior Housing Properties Trust’sThe Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Item 9A of Senior Housing Properties Trust’s Annual Report on Form 10-K under the headingaccompanying Management Report on Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Senior Housing Properties Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2016 consolidated financial statements of Senior Housing Properties Trust and our report dated February 27, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 27, 2017March 2, 2020
SENIOR HOUSING PROPERTIESDIVERSIFIED HEALTHCARE TRUST
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
amounts in thousands, except share data) | | | | December 31, | | December 31, |
| | 2016 | | 2015 | | 2019 | | 2018 |
ASSETS | | | | | | | | |
Real estate properties: | | | | | | | | |
Land | | $ | 803,773 |
| | $ | 781,426 |
| | $ | 793,123 |
| | $ | 844,567 |
|
Buildings, improvements and equipment | | 6,926,750 |
| | 6,675,514 |
| |
Buildings and improvements | | | 6,668,463 |
| | 7,031,733 |
|
Total real estate properties, gross | | | 7,461,586 |
| | 7,876,300 |
|
Accumulated depreciation | | | (1,570,801 | ) | | (1,534,392 | ) |
Total real estate properties, net | | | 5,890,785 |
| | 6,341,908 |
|
| | 7,730,523 |
| | 7,456,940 |
| | | | |
Less accumulated depreciation | | (1,328,011 | ) | | (1,147,540 | ) | |
| | 6,402,512 |
| | 6,309,400 |
| |
| | | | | |
Assets of properties held for sale | | | 209,570 |
| | 1,928 |
|
Cash and cash equivalents | | 31,749 |
| | 37,656 |
| | 37,357 |
| | 54,976 |
|
Restricted cash | | 3,829 |
| | 6,155 |
| | 14,867 |
| | 15,095 |
|
Investments in available for sale securities | | 115,612 |
| | 51,472 |
| |
Due from affiliate | | 18,439 |
| | 17,912 |
| |
Investments in equity securities | | | 1,571 |
| | 142,027 |
|
Due from affiliates | | | 1,990 |
| | 18,701 |
|
Acquired real estate leases and other intangible assets, net | | 514,446 |
| | 604,286 |
| | 337,875 |
| | 419,244 |
|
Other assets | | 141,167 |
| | 133,209 |
| |
Other assets, net | | | 159,811 |
| | 166,547 |
|
Total assets | | $ | 7,227,754 |
| | $ | 7,160,090 |
| | $ | 6,653,826 |
| | $ | 7,160,426 |
|
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | |
Unsecured revolving credit facility | | $ | 327,000 |
| | $ | 775,000 |
| | $ | 537,500 |
| | $ | 139,000 |
|
Unsecured term loans, net | | 547,058 |
| | 546,305 |
| | 448,741 |
| | 548,286 |
|
Senior unsecured notes, net | | 1,722,758 |
| | 1,478,536 |
| | 1,820,681 |
| | 2,216,945 |
|
Secured debt and capital leases, net | | 1,117,649 |
| | 679,295 |
| | 694,739 |
| | 744,186 |
|
Liabilities of properties held for sale | | | 6,758 |
| | — |
|
Accrued interest | | 18,471 |
| | 16,974 |
| | 24,060 |
| | 26,182 |
|
Due to affiliate | | 22,296 |
| | 15,008 |
| |
Due to affiliates | | | 8,779 |
| | 54,299 |
|
Assumed real estate lease obligations, net | | 106,038 |
| | 115,363 |
| | 76,705 |
| | 86,304 |
|
Other liabilities | | 167,079 |
| | 173,849 |
| | 158,813 |
| | 165,354 |
|
Total liabilities | | 4,028,349 |
| | 3,800,330 |
| | 3,776,776 |
| | 3,980,556 |
|
| | | | | | | | |
Commitments and contingencies | |
| |
| |
| |
|
| | | | | | | | |
Shareholders’ equity: | | | | | |
Common shares of beneficial interest, $.01 par value: 300,000,000 shares authorized, 237,544,479 and 237,471,559 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively | | 2,375 |
| | 2,375 |
| |
Equity: | | | | | |
Equity attributable to common shareholders: | | | | | |
Common shares of beneficial interest, $.01 par value: 300,000,000 shares authorized, 237,897,163 and 237,729,900 shares issued and outstanding at December 31, 2019 and 2018, respectively | | | 2,379 |
| | 2,377 |
|
Additional paid in capital | | 4,533,456 |
| | 4,531,703 |
| | 4,612,511 |
| | 4,611,419 |
|
Cumulative net income | | 1,618,885 |
| | 1,477,590 |
| | 2,052,562 |
| | 2,140,796 |
|
Cumulative other comprehensive income (loss) | | 34,549 |
| | (32,537 | ) | |
Cumulative other comprehensive loss | | | — |
| | (266 | ) |
Cumulative distributions | | (2,989,860 | ) | | (2,619,371 | ) | | (3,930,933 | ) | | (3,731,214 | ) |
Total shareholders’ equity | | 3,199,405 |
| | 3,359,760 |
| |
Total liabilities and shareholders’ equity | | $ | 7,227,754 |
| | $ | 7,160,090 |
| |
Total equity attributable to common shareholders | | | 2,736,519 |
| | 3,023,112 |
|
Noncontrolling interest: | | | | | |
Total equity attributable to noncontrolling interest | | | 140,531 |
| | 156,758 |
|
Total equity | | | 2,877,050 |
| | 3,179,870 |
|
Total liabilities and equity | | | $ | 6,653,826 |
| | $ | 7,160,426 |
|
See accompanying notes.
See accompanying notes.
SENIOR HOUSING PROPERTIESDIVERSIFIED HEALTHCARE TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)amounts in thousands, except per share data) |
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
Revenues: | | | | | | |
Rental income | | $ | 666,200 |
| | $ | 630,899 |
| | $ | 526,703 |
|
Residents fees and services | | 391,822 |
| | 367,874 |
| | 318,184 |
|
Total revenues | | 1,058,022 |
| | 998,773 |
| | 844,887 |
|
| | | | | | |
Expenses: | | | | | | |
Property operating expenses | | 399,790 |
| | 377,579 |
| | 324,564 |
|
Depreciation and amortization | | 287,831 |
| | 257,783 |
| | 185,391 |
|
General and administrative | | 46,559 |
| | 42,830 |
| | 38,946 |
|
Acquisition and certain other transaction related costs | | 2,085 |
| | 6,853 |
| | 4,607 |
|
Impairment of assets | | 18,674 |
| | 194 |
| | (10 | ) |
Total expenses | | 754,939 |
| | 685,239 |
| | 553,498 |
|
| | | | | | |
Operating income | | 303,083 |
| | 313,534 |
| | 291,389 |
|
| | | | | | |
Dividend income | | 2,108 |
| | 2,773 |
| | 63 |
|
Interest and other income | | 430 |
| | 379 |
| | 362 |
|
Interest expense | | (167,574 | ) | | (150,881 | ) | | (135,114 | ) |
Loss on distribution to common shareholders of The RMR Group Inc. common stock | | — |
| | (38,437 | ) | | — |
|
Loss on early extinguishment of debt | | (526 | ) | | (1,894 | ) | | (12 | ) |
Income from continuing operations before income tax expense and equity in earnings of an investee | | 137,521 |
| | 125,474 |
| | 156,688 |
|
Income tax expense | | (424 | ) | | (574 | ) | | (576 | ) |
Equity in earnings of an investee | | 137 |
| | 20 |
| | 87 |
|
Income from continuing operations | | 137,234 |
| | 124,920 |
| | 156,199 |
|
Discontinued operations: | | | | | | |
(Loss) income from discontinued operations | | — |
| | (350 | ) | | 1,362 |
|
Loss on impairment of assets from discontinued operations | | — |
| | (602 | ) | | (4,377 | ) |
Income before gain on sale of properties | | 137,234 |
| | 123,968 |
| | 153,184 |
|
Gain on sale of properties | | 4,061 |
| | — |
| | 5,453 |
|
Net income | | 141,295 |
| | 123,968 |
| | 158,637 |
|
| | | | | | |
Other comprehensive income: | | | | | | |
Unrealized gain (loss) on investments in available for sale securities | | 64,139 |
| | (35,846 | ) | | (5,085 | ) |
Amounts reclassified from cumulative other comprehensive income to net income | | 2,795 |
| | — |
| | — |
|
Equity in unrealized gain (loss) of an investee | | 152 |
| | (20 | ) | | 2 |
|
Other comprehensive income: | | 67,086 |
| | (35,866 | ) | | (5,083 | ) |
Comprehensive income: | | $ | 208,381 |
| | $ | 88,102 |
| | $ | 153,554 |
|
| | | | | | |
Weighted average shares used in computing earnings per common share: | | | | | | |
Basic | | 237,345 |
| | 232,931 |
| | 198,868 |
|
Diluted | | 237,382 |
| | 232,963 |
| | 198,894 |
|
| | | | | | |
Earnings per common share (basic and diluted): | | | | | | |
Income from continuing operations | | $ | 0.60 |
| | $ | 0.54 |
| | $ | 0.81 |
|
Loss from discontinued operations | | — |
| | (0.01 | ) | | (0.01 | ) |
Net income | | $ | 0.60 |
| | $ | 0.53 |
| | $ | 0.80 |
|
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Revenues: | | | | | | |
Rental income | | $ | 606,558 |
| | $ | 700,641 |
| | $ | 681,022 |
|
Residents fees and services | | 433,597 |
| | 416,523 |
| | 393,707 |
|
Total revenues | | 1,040,155 |
| | 1,117,164 |
| | 1,074,729 |
|
| | | | | | |
Expenses: | | | | | | |
Property operating expenses | | 489,070 |
| | 451,581 |
| | 413,492 |
|
Depreciation and amortization | | 289,025 |
| | 286,235 |
| | 276,861 |
|
General and administrative | | 37,028 |
| | 85,885 |
| | 103,694 |
|
Acquisition and certain other transaction related costs | | 13,102 |
| | 194 |
| | 403 |
|
Impairment of assets | | 115,201 |
| | 66,346 |
| | 5,082 |
|
Total expenses | | 943,426 |
| | 890,241 |
| | 799,532 |
|
| |
|
| |
|
| |
|
|
Gain on sale of properties | | 39,696 |
| | 261,916 |
| | 46,055 |
|
Dividend income | | 1,846 |
| | 2,901 |
| | 2,637 |
|
Gains and losses on equity securities, net | | (41,898 | ) | | (20,724 | ) | | — |
|
Interest and other income | | 941 |
| | 667 |
| | 406 |
|
Interest expense (including net amortization of debt premiums, discounts and issuance costs of $6,032, $6,221 and $5,282, respectively) | | (180,112 | ) | | (179,287 | ) | | (165,019 | ) |
Loss on early extinguishment of debt | | (44 | ) | | (22 | ) | | (7,627 | ) |
(Loss) income from continuing operations before income tax expense and equity in earnings of an investee | | (82,842 | ) | | 292,374 |
| | 151,649 |
|
Income tax expense | | (436 | ) | | (476 | ) | | (454 | ) |
Equity in earnings of an investee | | 400 |
| | 516 |
| | 608 |
|
Net (loss) income | | (82,878 | ) | | 292,414 |
| | 151,803 |
|
Net income attributable to noncontrolling interest | | (5,356 | ) | | (5,542 | ) | | (4,193 | ) |
Net (loss) income attributable to common shareholders | | $ | (88,234 | ) | | $ | 286,872 |
| | $ | 147,610 |
|
| | | | | | |
Other comprehensive income (loss): | | | | | | |
Unrealized gain on investments in equity securities, net | | $ | — |
| | $ | — |
| | $ | 47,138 |
|
Amounts reclassified from cumulative other comprehensive income to net income | | 175 |
| | — |
| | 5,082 |
|
Equity in unrealized gain (loss) of an investee | | 91 |
| | (68 | ) | | 462 |
|
Other comprehensive income (loss) | | 266 |
| | (68 | ) | | 52,682 |
|
Comprehensive (loss) income | | (82,612 | ) | | 292,346 |
| | 204,485 |
|
Comprehensive income attributable to noncontrolling interest | | (5,356 | ) | | (5,542 | ) | | (4,193 | ) |
Comprehensive (loss) income attributable to common shareholders | | $ | (87,968 | ) | | $ | 286,804 |
| | $ | 200,292 |
|
| | | | | | |
Weighted average common shares outstanding (basic) | | 237,604 |
| | 237,511 |
| | 237,420 |
|
Weighted average common shares outstanding (diluted) | | 237,604 |
| | 237,546 |
| | 237,452 |
|
| | | | | | |
Per common share amounts (basic and diluted) | | | | | | |
Net (loss) income attributable to common shareholders | | $ | (0.37 | ) | | $ | 1.21 |
| | $ | 0.62 |
|
See accompanying notes.
SENIOR HOUSING PROPERTIESDIVERSIFIED HEALTHCARE TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’SHAREHOLDERS'EQUITY
(AMOUNTSIN THOUSANDS, EXCEPT SHARE DATA)amounts in thousands, except share data)
| | | | Number of Shares | | Common Shares | | Additional Paid-in Capital | | Cumulative Net Income | | Cumulative Distributions | | Cumulative Other Comprehensive Income (Loss) | | Totals | | Number of Shares | | Common Shares | | Additional Paid-in Capital | | Cumulative Net Income | | Cumulative Other Comprehensive Income (Loss) | | Cumulative Distributions | | Total Equity Attributable to Common Shareholders | | Total Equity Attributable to Noncontrolling Interest | | Total Equity |
Balance at December 31, 2013: | | 188,167,643 |
| | $ | 1,881 |
| | $ | 3,497,590 |
| | $ | 1,194,985 |
| | $ | (1,925,879 | ) | | $ | 8,412 |
| | $ | 2,776,989 |
| |
Comprehensive income (loss) | | — |
| | — |
| | — |
| | 158,637 |
| | — |
| | (5,083 | ) | | 153,554 |
| |
Distributions | | — |
| | — |
| | — |
| | — |
| | (305,767 | ) | | — |
| | (305,767 | ) | |
Issuance of shares | | 15,648,462 |
| | 156 |
| | 325,455 |
| | — |
| | — |
| | — |
| | 325,611 |
| |
Share grants | | 94,200 |
| | 2 |
| | 2,018 |
| | — |
| | — |
| | — |
| | 2,020 |
| |
Balance at December 31, 2014: | | 203,910,305 |
| | 2,039 |
| | 3,825,063 |
| | 1,353,622 |
| | (2,231,646 | ) | | 3,329 |
| | 2,952,407 |
| |
Comprehensive income (loss) | | — |
| | — |
| | — |
| | 123,968 |
| | — |
| | (35,866 | ) | | 88,102 |
| |
Distributions | | — |
| | — |
| | — |
| | — |
| | (356,384 | ) | | — |
| | (356,384 | ) | |
Distribution to common shareholders of The RMR Group Inc. common stock | | — |
| | — |
| | — |
| | — |
| | (31,341 | ) | | — |
| | (31,341 | ) | |
Issuance of shares | | 33,475,367 |
| | 335 |
| | 705,413 |
| | — |
| | — |
| | — |
| | 705,748 |
| |
Share grants | | 99,000 |
| | 1 |
| | 1,439 |
| | — |
| | — |
| | — |
| | 1,440 |
| |
Share repurchases | | (13,113 | ) | | — |
| | (212 | ) | | — |
| | — |
| | — |
| | (212 | ) | |
Balance at December 31, 2015: | | 237,471,559 |
| | 2,375 |
| | $ | 4,531,703 |
| | 1,477,590 |
| | $ | (2,619,371 | ) | | (32,537 | ) | | 3,359,760 |
| |
Comprehensive income | | — |
| | — |
| | — |
| | 141,295 |
| | — |
| | 67,086 |
| | 208,381 |
| |
Balance at December 31, 2016: | | | 237,544,479 |
| | $ | 2,375 |
| | $ | 4,533,456 |
| | $ | 1,618,885 |
| | $ | 34,549 |
| | $ | (2,989,860 | ) | | $ | 3,199,405 |
| | $ | — |
| | $ | 3,199,405 |
|
Net income | | | — |
| | — |
| | — |
| | 147,610 |
| | — |
| | — |
| | 147,610 |
| | 4,193 |
| | 151,803 |
|
Other comprehensive income | | | — |
| | — |
| | — |
| | — |
| | 52,682 |
| | — |
| | 52,682 |
| | — |
| | 52,682 |
|
Distributions | | — |
| | — |
| | — |
| | — |
| | (370,489 | ) | | — |
| | (370,489 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (370,608 | ) | | (370,608 | ) | | — |
| | (370,608 | ) |
Share grants | | 92,150 |
| | 1 |
| | 2,204 |
| | — |
| | — |
| | — |
| | 2,205 |
| | 103,100 |
| | 1 |
| | 2,129 |
| | — |
| | — |
| | — |
| | 2,130 |
| | — |
| | 2,130 |
|
Share repurchases | | (19,230 | ) | | (1 | ) | | (451 | ) | | — |
| | — |
| | — |
| | (452 | ) | | (17,170 | ) | | — |
| | (341 | ) | | — |
| | — |
| | — |
| | (341 | ) | | — |
| | (341 | ) |
Balance at December 31, 2016: | | 237,544,479 |
| | $ | 2,375 |
| | $ | 4,533,456 |
| | $ | 1,618,885 |
| | $ | (2,989,860 | ) | | $ | 34,549 |
| | $ | 3,199,405 |
| |
Contributions from noncontrolling interest | | | — |
| | — |
| | 74,072 |
| | — |
| | — |
| | — |
| | 74,072 |
| | 181,859 |
| | 255,931 |
|
Distributions to noncontrolling interest | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,814 | ) | | (13,814 | ) |
Balance at December 31, 2017: | | | 237,630,409 |
| | 2,376 |
| | 4,609,316 |
| | 1,766,495 |
| | 87,231 |
| | (3,360,468 | ) | | 3,104,950 |
| | 172,238 |
| | 3,277,188 |
|
Cumulative adjustment upon adoption of ASU No. 2016-01 | | | — |
| | — |
| | — |
| | 87,429 |
| | (87,429 | ) | | — |
| | — |
| | — |
| | — |
|
Balance at January 1, 2018: | | | 237,630,409 |
| | 2,376 |
| | 4,609,316 |
| | 1,853,924 |
| | (198 | ) | | (3,360,468 | ) | | 3,104,950 |
| | 172,238 |
| | 3,277,188 |
|
Net income | | | — |
| | — |
| | — |
| | 286,872 |
| | — |
| | — |
| | 286,872 |
| | 5,542 |
| | 292,414 |
|
Other comprehensive loss | | | — |
| | — |
| | — |
| | — |
| | (68 | ) | | — |
| | (68 | ) | | — |
| | (68 | ) |
Distributions | | | — |
| | — |
| | — |
| | — |
| | — |
| | (370,746 | ) | | (370,746 | ) | | — |
| | (370,746 | ) |
Share grants | | | 123,800 |
| | 1 |
| | 2,514 |
| | — |
| | — |
| | — |
| | 2,515 |
| | — |
| | 2,515 |
|
Share repurchases | | | (24,309 | ) | | — |
| | (411 | ) | | — |
| | — |
| | — |
| | (411 | ) | | — |
| | (411 | ) |
Distributions to noncontrolling interest | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (21,022 | ) | | (21,022 | ) |
Balance at December 31, 2018: | | | 237,729,900 |
| | 2,377 |
| | 4,611,419 |
| | 2,140,796 |
| | (266 | ) | | (3,731,214 | ) | | 3,023,112 |
| | 156,758 |
| | 3,179,870 |
|
Net (loss) income | | | — |
| | — |
| | — |
| | (88,234 | ) | | — |
| | — |
| | (88,234 | ) | | 5,356 |
| | (82,878 | ) |
Amounts reclassified from cumulative other comprehensive income to net income | | | — |
| | — |
| | — |
| | — |
| | 175 |
| | — |
| | 175 |
| | — |
| | 175 |
|
Other comprehensive income | | | — |
| | — |
| | — |
| | — |
| | 91 |
| | — |
| | 91 |
| | — |
| | 91 |
|
Distributions | | | — |
| | — |
| | — |
| | — |
| | — |
| | (199,719 | ) | | (199,719 | ) | | — |
| | (199,719 | ) |
Share grants | | | 202,500 |
| | 2 |
| | 1,391 |
| | — |
| | — |
| | — |
| | 1,393 |
| | — |
| | 1,393 |
|
Share repurchases | | | (35,237 | ) | | — |
| | (299 | ) | | — |
| | — |
| | — |
| | (299 | ) | | — |
| | (299 | ) |
Distributions to noncontrolling interest | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (21,583 | ) | | (21,583 | ) |
Balance at December 31, 2019: | | | 237,897,163 |
| | $ | 2,379 |
| | $ | 4,612,511 |
| | $ | 2,052,562 |
| | $ | — |
| | $ | (3,930,933 | ) | | $ | 2,736,519 |
| | $ | 140,531 |
| | $ | 2,877,050 |
|
See accompanying notes.
SENIOR HOUSING PROPERTIESDIVERSIFIED HEALTHCARE TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)amounts in thousands)
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net (loss) income | | $ | (82,878 | ) | | $ | 292,414 |
| | $ | 151,803 |
|
Adjustments to reconcile net (loss) income to cash provided by operating activities: | | | | | | |
Depreciation and amortization | | 289,025 |
| | 286,235 |
| | 276,861 |
|
Amortization of debt premiums, discounts and issuance costs | | 6,032 |
| | 6,221 |
| | 5,282 |
|
Straight line rental income | | (4,508 | ) | | (10,227 | ) | | (13,958 | ) |
Amortization of acquired real estate leases and other intangible assets | | (6,791 | ) | | (5,787 | ) | | (5,349 | ) |
Loss on early extinguishment of debt | | 44 |
| | 22 |
| | 7,627 |
|
Impairment of assets | | 115,201 |
| | 66,346 |
| | 5,082 |
|
Gain on sale of properties | | (39,696 | ) | | (261,916 | ) | | (46,055 | ) |
Gains and losses on equity securities, net | | 41,898 |
| | 20,724 |
| | — |
|
Other non-cash adjustments | | (3,771 | ) | | (3,772 | ) | | (3,772 | ) |
Equity in earnings of an investee | | (400 | ) | | (516 | ) | | (608 | ) |
Distribution of earnings from Affiliates Insurance Company | | 2,574 |
| | — |
| | — |
|
Change in assets and liabilities: | | | | | | |
Other assets | | 1,794 |
| | (3,586 | ) | | (5,197 | ) |
Accrued interest | | (2,105 | ) | | 8,195 |
| | (484 | ) |
Other liabilities | | (50,574 | ) | | (1,513 | ) | | 48,072 |
|
Net cash provided by operating activities | | 265,845 |
| | 392,840 |
| | 419,304 |
|
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Real estate acquisitions and deposits | | (50,636 | ) | | (129,494 | ) | | (159,290 | ) |
Real estate improvements | | (222,417 | ) | | (103,804 | ) | | (117,213 | ) |
Proceeds from sale of properties, net | | 254,241 |
| | 332,389 |
| | 55,068 |
|
Proceeds from sale of RMR Inc. common shares, net | | 98,557 |
| | — |
| | — |
|
Distributions in excess of earnings from Affiliates Insurance Company | | 6,426 |
| | — |
| | — |
|
Net cash provided by (used in) investing activities | | 86,171 |
| | 99,091 |
| | (221,435 | ) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Proceeds from issuance of senior unsecured notes, net | | — |
| | 491,560 |
| | — |
|
Proceeds from borrowings on revolving credit facility | | 994,500 |
| | 727,000 |
| | 764,000 |
|
Repayments of borrowings on revolving credit facility | | (596,000 | ) | | (1,184,000 | ) | | (495,000 | ) |
Redemption of senior notes | | (400,000 | ) | | — |
| | — |
|
Repayment of unsecured term loan | | (100,000 | ) | | — |
| | — |
|
Repayment of other debt | | (46,345 | ) | | (107,116 | ) | | (313,964 | ) |
Loss on early extinguishment of debt settled in cash | | — |
| | (150 | ) | | (5,485 | ) |
Payment of debt issuance costs | | (417 | ) | | (4,296 | ) | | (6,845 | ) |
Repurchase of common shares | | (299 | ) | | (411 | ) | | (341 | ) |
Proceeds from noncontrolling interest, net | | — |
| | — |
| | 255,931 |
|
Distributions to noncontrolling interest | | (21,583 | ) | | (21,022 | ) | | (13,814 | ) |
Distributions to shareholders | | (199,719 | ) | | (370,746 | ) | | (370,608 | ) |
Net cash used in financing activities | | (369,863 | ) | | (469,181 | ) | | (186,126 | ) |
| | | | | | |
(Decrease) increase in cash and cash equivalents and restricted cash | | (17,847 | ) | | 22,750 |
| | 11,743 |
|
Cash and cash equivalents and restricted cash at beginning of period | | 70,071 |
| | 47,321 |
| | 35,578 |
|
Cash and cash equivalents and restricted cash at end of period | | $ | 52,224 |
| | $ | 70,071 |
| | $ | 47,321 |
|
See accompanying notes.
DIVERSIFIED HEALTHCARE TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS(CONTINUED)
(amounts in thousands)
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | | $ | 141,295 |
| | $ | 123,968 |
| | $ | 158,637 |
|
Adjustments to reconcile net income to cash provided by operating activities: | | | | | | |
Depreciation and amortization | | 287,831 |
| | 257,783 |
| | 185,391 |
|
Net amortization of debt discounts, premiums and deferred financing fees | | 5,729 |
| | 5,942 |
| | 6,319 |
|
Straight line rental income | | (17,604 | ) | | (18,039 | ) | | (9,672 | ) |
Amortization of acquired real estate leases and other intangible assets | | (4,941 | ) | | (4,060 | ) | | (2,322 | ) |
Loss on early extinguishment of debt | | 526 |
| | 1,894 |
| | 12 |
|
Impairment of assets | | 18,674 |
| | 796 |
| | 4,367 |
|
Loss on distribution to common shareholders of The RMR Group Inc. common stock | | — |
| | 38,437 |
| | — |
|
Other non-cash adjustments | | (3,772 | ) | | (2,145 | ) | | — |
|
Gain on sale of properties | | (4,061 | ) | | — |
| | (5,453 | ) |
Gain on sale of investments | | — |
| | (71 | ) | | — |
|
Equity in earnings of an investee | | (137 | ) | | (20 | ) | | (87 | ) |
Change in assets and liabilities: | | | | | | |
Restricted cash | | 2,326 |
| | 4,389 |
| | 1,970 |
|
Other assets | | (1,548 | ) | | (19,917 | ) | | (1,102 | ) |
Accrued interest | | 1,497 |
| | (3,072 | ) | | 4,207 |
|
Other liabilities | | 992 |
| | 19,636 |
| | 8,634 |
|
Net cash provided by operating activities | | 426,807 |
| | 405,521 |
| | 350,901 |
|
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Real estate acquisitions and deposits | | (227,072 | ) | | (1,134,735 | ) | | (1,225,770 | ) |
Real estate improvements | | (99,663 | ) | | (70,427 | ) | | (64,754 | ) |
Investment in Affiliates Insurance Company | | — |
| | — |
| | (825 | ) |
Investment in The RMR Group Inc. | | — |
| | (17,286 | ) | | — |
|
Proceeds from sale of properties | | 33,866 |
| | 2,782 |
| | 27,325 |
|
Proceeds from sale of investments | | — |
| | 6,571 |
| | — |
|
Net cash used for investing activities | | (292,869 | ) | | (1,213,095 | ) | | (1,264,024 | ) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Proceeds from issuance of common shares, net | | — |
| | 659,496 |
| | 322,807 |
|
Proceeds from issuance of unsecured senior notes, net of discount | | 250,000 |
| | — |
| | 648,915 |
|
Proceeds from unsecured term loan | | — |
| | 200,000 |
| | 350,000 |
|
Proceeds from borrowings on revolving credit facility | | 662,000 |
| | 1,640,243 |
| | 570,000 |
|
Proceeds from issuance of secured debt | | 620,000 |
| | — |
| | — |
|
Redemption of senior notes | | — |
| | (250,000 | ) | | — |
|
Repayments of borrowings on revolving credit facility | | (1,110,000 | ) | | (945,243 | ) | | (590,000 | ) |
Repayment of other debt | | (178,418 | ) | | (125,879 | ) | | (86,432 | ) |
Loss on early extinguishment of debt settled in cash | | (470 | ) | | (1,448 | ) | | — |
|
Payment of debt issuance costs | | (12,016 | ) | | (2,931 | ) | | (8,039 | ) |
Repurchase of common shares | | (452 | ) | | (212 | ) | | — |
|
Distributions to shareholders | | (370,489 | ) | | (356,390 | ) | | (305,767 | ) |
Net cash (used for) provided by financing activities | | (139,845 | ) | | 817,636 |
| | 901,484 |
|
| | | | | | |
(Decrease) increase in cash and cash equivalents | | (5,907 | ) | | 10,062 |
| | (11,639 | ) |
Cash and cash equivalents at beginning of period | | 37,656 |
| | 27,594 |
| | 39,233 |
|
Cash and cash equivalents at end of period | | $ | 31,749 |
| | $ | 37,656 |
| | $ | 27,594 |
|
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
SUPPLEMENTAL CASH FLOWS INFORMATION: | | | | | | |
Interest paid | | $ | 177,308 |
| | $ | 164,996 |
| | $ | 160,221 |
|
Income taxes paid | | $ | 452 |
| | $ | 474 |
| | $ | 441 |
|
| | | | | | |
NON-CASH INVESTING ACTIVITIES: | | | | | | |
Acquisitions funded by assumed debt | | $ | — |
| | $ | (44,386 | ) | | $ | — |
|
Capitalized interest | | $ | 1,124 |
| | $ | 124 |
| | $ | — |
|
| | | | | | |
NON-CASH FINANCING ACTIVITIES: | | | | | | |
Assumption of mortgage notes payable | | $ | — |
| | $ | 44,386 |
| | $ | — |
|
Supplemental disclosure of cash and cash equivalents and restricted cash:
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the amount shown in the consolidated statements of cash flows:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Cash and cash equivalents | | $ | 37,357 |
| | $ | 54,976 |
| | $ | 31,238 |
|
Restricted cash (1) | | 14,867 |
| | 15,095 |
| | 16,083 |
|
Total cash and cash equivalents and restricted cash shown in the consolidated statements of cash flows | | $ | 52,224 |
| | $ | 70,071 |
| | $ | 47,321 |
|
(1) Restricted cash consists of amounts escrowed for real estate taxes, insurance and capital expenditures at certain of our mortgaged properties and cash held for the operations of one of our life science properties that is owned in a joint venture arrangement in which we own a 55% equity interest.
See accompanying notes.
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS(CONTINUED)
(AMOUNTS IN THOUSANDS)
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | |
Interest paid | | $ | 160,348 |
| | $ | 148,011 |
| | $ | 124,588 |
|
Income taxes paid | | $ | 435 |
| | $ | 477 |
| | $ | 155 |
|
| | | | | | |
NON-CASH INVESTING ACTIVITIES: | | | | | | |
Investment acquired by issuance of common shares | | $ | — |
| | $ | (44,521 | ) | | $ | — |
|
Acquisitions funded by assumed debt | | $ | — |
| | $ | (181,433 | ) | | $ | (15,630 | ) |
| | | | | | |
NON-CASH FINANCING ACTIVITIES: | | | | | | |
Assumption of mortgage notes payable | | $ | — |
| | $ | 181,433 |
| | $ | 15,630 |
|
Issuance of common shares | | $ | — |
| | $ | 47,691 |
| | $ | 4,823 |
|
Distribution to common shareholders of The RMR Group Inc. common stock | | $ | — |
| | $ | (31,335 | ) | | $ | — |
|
See accompanying notes.
SENIOR HOUSING PROPERTIESDIVERSIFIED HEALTHCARE TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share data or as otherwise stated)
Note 1.1. Organization
We areDiversified Healthcare Trust (formerly known as Senior Housing Properties Trust) is a real estate investment trust, or REIT, organized under Maryland law. Atlaw, which owns medical office and life science properties, senior living communities and other healthcare related properties throughout the United States. As of December 31, 2016,2019, we owned 433424 properties (459 buildings) located in 4239 states and Washington, D.C. On that date the gross book value of our real estate assets at cost plus certain acquisition costs, before depreciation and purchase price allocations and less impairment write downs, was $8,420,623.
Note 2.2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION. Our consolidated financial statements include the accounts of Senior Housing PropertiesDiversified Healthcare Trust, or SNH, we, us or our, and our subsidiaries, all of which, except for the joint venture discussed below, are 100% owned directly or indirectly by us. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Accounting principles generally accepted in the United States, or GAAP, require us to make estimates and assumptions that may affect the amounts reported in these financial statements and related notes. The actual results could differ from these estimates. We have made reclassifications to the prior years’years' financial statements to conform to the current year’syear's presentation. These reclassifications had no effect on net income (loss) or shareholders’ equity.
In March 2017, we entered a joint venture with a sovereign investor for 1 of our life science properties located in Boston, Massachusetts. We have determined that this joint venture is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or the Codification. We concluded that we must consolidate this VIE because we are the entity with the power to direct the activities that most significantly impact the VIE's economic performance and we have the obligation to absorb losses of, and the right to receive benefits from, the VIE that could be significant to the VIE, and therefore are the primary beneficiary of the VIE. The assets of this VIE were $1,015,661 and $1,061,593 as of December 31, 2019 and 2018, respectively, and consist primarily of the net real estate owned by the joint venture. The liabilities of this VIE were $704,344 and $714,226 as of December 31, 2019 and 2018, respectively, and consist primarily of the secured debts on the property. The sovereign investor's interest in this consolidated entity is reflected as noncontrolling interest in our consolidated financial statements. See Note 10 for further information about this joint venture.
REAL ESTATE PROPERTIES. We record properties at our cost and calculate depreciation on real estate investments on a straight line basis over estimated useful lives generally up to 40 years. When we acquire a property, we estimate the purchase price allocations and the useful lives of our properties. In some circumstances, we engage third party real estate appraisal firms to provide market information and evaluations which are relevant to our purchase price allocations and determinations of useful lives; however, we are ultimately responsible for the purchase price allocations and determinations of useful lives.
We allocate the purchase prices of our properties to land, building and improvements based on determinations of the fair values of these assets assuming the properties are vacant. We determine the fair value of each property using methods similar to those used by third party appraisers. For properties qualifying as acquired businesses under Accounting Standards Codification, orindependent appraisers, which may involve estimated cash flows that are based on a number of factors, including capitalization rates and discount rates, among others. In some circumstances, we engage independent real estate appraisal firms to provide market information and evaluations which are relevant to our purchase price allocations and determinations of depreciable useful lives; however, we are ultimately responsible for the Codification, Topic No. 805, Business Combinations, wepurchase price allocations and determinations of useful lives. We allocate a portion of the purchase price of our properties to above market and below market leases based on the present value (using an interest rate which reflects the risks associated with acquired in place leases at the time each property was acquired by us) of the difference, if any, between (i) the contractual amounts to be paid pursuant to the acquired in place leases and (ii) our estimates of fair market lease rates for the corresponding leases, measured over a period equal to the terms of the respective leases. The terms of below market leases that include bargain renewal options, if any, are further adjusted if we determine that renewal is probable. We allocate a portion of the purchase price to acquired in place leases and tenant relationships based upon market estimates to lease up the property based on the leases in place at the time of purchase. In making these allocations, we consider factors such as estimated carrying costs during the expected lease up periods, including real estate taxes, insurance and other operating income and expenses and costs, such as leasing commissions, legal and other related expenses, to execute similar leases in current market conditions at the time a property was acquired by us. We allocate this aggregate value between acquired in place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant's lease. However, we have not separated the value of tenant relationships from the value of acquired in place leases because such value and related amortization expense is immaterial to our consolidated financial statements. If the value of tenant relationships becomes material in the future, we may separately allocate those amounts and amortize the allocated amount over the estimated life of the relationships.
We amortize capitalized above market lease values (included in acquired real estate leases in our consolidated balance sheets) as a reduction to rental income over the remaining non‑cancelablenon-cancelable terms of the respective leases. We amortize capitalized below market lease values (presented as acquiredassumed real estate lease obligations in our consolidated balance sheets) as an increase
to rental income over the non‑cancelablenon-cancelable periods of the respective leases. For the years ended December 31, 2016, 20152019, 2018 and 2014,2017, such amortization resulted in ana net increase in rental income of $4,941, $4,060$6,791, $5,787 and $2,322,$5,349, respectively. We amortize the value of in place leases exclusive of the value of above market and below market in place leases to expense over the remaining non‑cancelablenon-cancelable periods of the respective leases. During the years ended December 31, 2016, 20152019, 2018 and 2014,2017, such amortization included in depreciation totaled $92,818, $80,040$64,203, $72,925 and $38,970,$72,035, respectively. If a lease is terminated prior to its stated expiration, the unamortized amount relating to that lease is written off.
As of December 31, 2019 and 2018, our acquired real estate leases and assumed real estate lease obligations, excluding properties held for sale, were as follows:
|
| | | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
Acquired real estate leases: | | | | |
Capitalized above market lease values | | $ | 34,587 |
| | $ | 35,056 |
|
Less: accumulated amortization | | (30,039 | ) | | (27,375 | ) |
Capitalized above market lease values, net | | 4,548 |
| | 7,681 |
|
| | | | |
Lease origination value | | 642,158 |
| | 656,163 |
|
Less: accumulated amortization | | (308,831 | ) | | (244,600 | ) |
Lease origination value, net | | 333,327 |
| | 411,563 |
|
Acquired real estate leases, net | | $ | 337,875 |
| | $ | 419,244 |
|
| | | | |
Assumed real estate lease obligations: | | | | |
Capitalized below market lease values | | $ | 134,225 |
| | $ | 134,395 |
|
Less: accumulated amortization | | (57,520 | ) | | (48,091 | ) |
Assumed real estate lease obligations, net | | $ | 76,705 |
| | $ | 86,304 |
|
As of December 31, 2019, the weighted average amortization periods for capitalized above market lease values, lease origination value and capitalized below market lease values were 4.1 years, 8.2 years and 8.9 years, respectively. Future amortization of net intangible acquired real estate lease assets and liabilities to be recognized over the current terms of the associated leases as of December 31, 2019 are estimated to be $41,458 in 2020, $37,152 in 2021, $33,307 in 2022, $32,226 in 2023, $27,168 in 2024 and $89,859 thereafter.
CASH AND CASH EQUIVALENTS. We carry cash and cash equivalents, consisting of overnight repurchase agreements and short termconsider highly liquid investments with original maturities of three months or less at the date of purchase at cost plus accrued interest, which approximates fair value.to be cash equivalents.
RESTRICTED CASH. Restricted cash consists of amounts escrowed for real estate taxes, insurance and capital expenditures at certain of our mortgaged properties and security depositscash held for residentsthe operations of 1 of our managed senior living communities.life science properties that is owned in a joint venture arrangement in which we own a 55% equity interest.
INVESTMENTS IN AVAILABLE FOR SALEEQUITY SECURITIES. We classify thepreviously owned 2,637,408 shares we own of Five Star Quality Care, Inc., or Five Star, andclass A common stock of The RMR Group Inc., or RMR Inc., that we sold on July 1, 2019. Prior to July 1, 2019, our equity securities were recorded at fair value based on their quoted market price at the end of each reporting period. We classify the common shares we own of Five Star Senior Living Inc., or Five Star, as available for saleequity securities and carry them at fair value in other assetsinvestments of equity securities in our consolidated balance sheets,sheets. Effective January 1, 2018, changes in the fair value of our equity securities were recorded through earnings in accordance with FASB Accounting Standards Update, or ASU, No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. Prior to the adoption of ASU No. 2016-01, unrealized gains and losses reportedwere recorded as a component of shareholders'cumulative other comprehensive income (loss) in shareholder's equity. We evaluate
At December 31, 2018 and 2019, we owned 423,500 Five Star common shares, after giving effect to the one-for-ten reverse stock split effected by Five Star with respect to its common shares on September 30, 2019. Our adjusted cost basis for our investmentsFive Star common shares is $6,353. At December 31, 2019 and 2018, our investment in available for sale securities to determine ifFive Star had a decline in the fair value below our carrying value is other than temporary. We consider the severityof $1,571 and the duration$2,033, respectively, including unrealized losses of the decline,$462 and our ability and intent to hold the investment until recovery when making this assessment. If a decline in fair value is determined to be other than temporary, an impairment loss equal to the difference between the investment’s carrying value and its fair value is recognized in earnings.
At December 31, 2016 and 2015, we owned 4,235,000 common shares of Five Star.$4,320, respectively. In performing our periodic evaluation of other than temporary impairment of our investment in Five Star for the fourth quarter ofyear ended December 31, 2016, we determined, based on the length of time and the extent to which the market value of our Five Star investment was below our carrying value, that the decline in fair value was deemed to be other than temporary at December 31, 2016. Other than temporary impairment review of equity
securities is no longer applicable subsequent to the adoption of ASU No. 2016-01. Accordingly, we recorded a $2,795 loss on impairment to reduce the carrying value of our Five Star investment to its estimated fair value during the fourth quarter of 2016. We estimated fair value using the closing price of Five Star common shares as of December 31, 2016 ($2.70 per share). At December 31, 2016,We recorded an additional loss on impairment of $5,082 to reduce the carrying value of our investment in Five Star had an adjusted cost basis and fair value of $11,435. At December 31, 2015, our investment in Five Star had a fair value of $13,467, including an unrealized loss of $747.
At December 31, 2016 and 2015, we owned 2,637,408 shares of class A common stock of RMR Inc. Our historical cost basis for these shares is $69,826. At December 31, 2016 and 2015, our investment in RMR Inc. had a fair value of $104,178 and $38,005, respectively, including an unrealized gain of $34,352 and an unrealized loss of $31,821, respectively. We concluded, for accounting purposes, that the cash and share consideration of $60,700 we paid for our investment in 5,272,787 shares of class A common stock of RMR Inc. represented a discount to the fair value of these shares. We initially accounted for this investment under the cost method of accounting and recorded this investment at its estimated 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 recorded a liability for the amount by which the estimated fair value of these shares exceeded the price we paid for these shares. This liability is included in other liabilities in our consolidated balance sheets. This liability is being amortized on a straight line basis through December 31, 2035 as an allocated reduction to our business management and property management fee expense. We amortized $3,772 and $2,145 of this liability during the years ended December 31, 2016 and 2015, respectively. These amounts are included in the net business management and property management fee amounts for such periods. Assecond quarter of December 31, 2016, the remaining unamortized amount of this liability was $71,933.
2017.
See Notes 5 and 7 for further information regarding our investmentsinvestment in Five Star and former investment in RMR Inc.
EQUITY METHOD INVESTMENTS. At December 31, 2016, we owned 14.3% ofWe account for our investment in Affiliates Insurance Company, or AIC’s, outstanding equity. Although we own less than 20% of AIC, we useuntil AIC was dissolved as described in Note 7, using the equity method of accounting. Significant influence is present through common representation on our Board of Trustees and the board of directors of AIC until February 13, 2020. The Chair of our Board of Trustees and one of our Managing Trustees, Adam D. Portnoy, as the sole trustee of ABP Trust, is the controlling shareholder of RMR Inc. He is also a managing director and an executive officer of RMR Inc. Substantially all of the business of RMR Inc. is conducted by its majority owned subsidiary, The RMR Group LLC, or RMR LLC, which is our manager and provided management and administrative services to account for this investment because we believe that we have significant influence over AIC because allAIC. Most of our Trustees are alsowere directors of AIC. Under the equity method, we record our percentage share of net earnings from AIC in our consolidated statements of comprehensive income. See Note 7 for furthermore information regardingabout our investment in AIC.
We periodically evaluate our equity method investments to determine if there are anyfor possible indicators of other than temporary impairment whenever events or changes in circumstances (impairment indicators) that are likely to have a significant adverse effect onindicate the fair value of the investment. Fair value estimates consider all available financial information related to the investee. Examples of such impairment indicators include, but are not limited to, a significant deterioration in earnings performance, a significant adverse change in the regulatory or economic environment of an investee; or a significant doubt about an investee's ability to continue as a going concern. If an impairment indicator is identified, an estimate of the fair valuecarrying amount of the investment might not be recoverable. These indicators may include the length of time and the extent to which the market value of our investment is comparedbelow our carrying value, the financial condition of our investees, our intent and ability to its carrying value. If the fair valuebe a long term holder of the investment is less than its carrying value, a determination is made as to whetherand other considerations. If the related impairment is other than temporary. If a decline in fair value is determinedjudged to be other than temporary, we record an impairment loss equalcharge to adjust the difference betweenbasis of the investment’s carrying value andinvestment to its estimated fair value is recognized in earnings.value.
DEBT ISSUANCE COSTS. Debt issuance costs include issuance or assumption costs related to borrowings and we amortize those costs as interest expense over the terms of the respective loans. Debt issuance costs for our unsecured revolving credit facility totaled $10,980$17,170 at both December 31, 20162019 and 2015,2018, and accumulated amortization of debt issuance costs totaled $9,039$13,944 and $7,174$12,364 at December 31, 20162019 and 2015,2018, respectively, and are included in other assets in our consolidated balance sheets. Debt issuance costs for our unsecured term loans, senior notes, and mortgage notes payable totaled $49,331$41,452 and $39,497$44,117 at December 31, 20162019 and 2015,2018, respectively, and accumulated amortization of debt issuance costs totaled $17,560$16,887 and $15,608,$16,665, respectively, and are presented in our balance sheet as a direct deduction from the associated debt liability. Future amortization of debt issuance costs to be recognized with respect to our loans as of December 31, 20162019 are estimated to be $5,829 in 2017, $4,084 in 2018, $3,225 in 2019, $1,810$4,271 in 2020, $1,695$3,791 in 2021, $1,949 in 2022, $1,632 in 2023, $1,499 in 2024 and $17,069$14,649 thereafter.
DEFERRED LEASING COSTS. Deferred leasing costs include capitalized brokerage legal and other fees associated with the successful negotiation of leases, which are amortized to depreciation and amortization expense on a straight line basis over the terms of the respective leases. Deferred leasing costs are included in other assets onin our consolidated balance sheets. Deferred leasing costs totaled $24,825$42,014 and $21,708$35,145 at December 31, 20162019 and 2015,2018, respectively, and accumulated amortization of deferred leasing costs totaled $6,898$14,922 and $5,561$11,422 at December 31, 20162019 and 2015,2018, respectively. Included in deferred leasing costs at December 31, 2016, is $140 of estimated costs associated with leases under negotiation. At December 31, 2016,2019, the remaining weighted average amortization period is approximately 8.513.0 years. Future amortization of deferred leasing costs to be recognized
during the current terms of our existing leases as of December 31, 2016,2019, are estimated to be $3,183$5,013 in 2017, $2,8352020, $4,292 in 2018,2021, $3,469 in 2022, $2,944 in 2023, $2,473 in 2019, $2,030 in 2020, $1,449 in 20212024 and $5,817$8,901 thereafter.
REVENUE RECOGNITION. We are a lessor of medical office and life science properties, senior living communities and other healthcare related properties. Our leases provide our tenants with the contractual right to use and economically benefit from all of the premises demised under the leases; therefore, we have determined to evaluate our leases as lease arrangements.
In February 2016, FASB issued Accounting Standards Update, or ASU, No. 2016-02, Leases. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. In December 2018, the FASB issued ASU No. 2018-20 Leases (Topic 842), Narrow-Scope Improvements for Lessors. Collectively, these standards set out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. ASU No. 2016-02 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. These standards were effective as of January 1, 2019. Upon adoption, we applied the package of practical expedients that has allowed us to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. Furthermore,
we applied the optional transition method in ASU No. 2018-11, which has allowed us to initially apply the new leases standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the adoption period, although we did not have an adjustment. Additionally, our leases met the criteria in ASU No. 2018-11 to not separate non-lease components from the related lease component; therefore, the accounting for these leases remained largely unchanged from the previous standard. The adoption of ASU No. 2016-02 and the related improvements did not have a material impact in our consolidated financial statements. Upon adoption, (i) allowances for bad debts are now recognized as a direct reduction of rental income, and (ii) legal costs associated with the execution of our leases, which were previously capitalized and amortized over the life of their respective leases, are expensed as incurred. Subsequent to January 1, 2019, provisions for credit losses are now included in rental income in our consolidated financial statements for our leased properties. Provisions for credit losses prior to January 1, 2019 were previously included in property operating expenses in our consolidated financial statements for our leased properties and prior periods were not reclassified to conform to the current presentation. We completed our assessment of predominance as it relates to our contracts with residents for housing services at properties leased to our taxable REIT subsidiaries, or TRSs, and have recognized revenue from these properties under Codification Topic 606, Revenue from Contract with Customers, which did not have any impact to the timing or amount of our revenue recognized. For leases in which we are the lessee, we recognized a right of use asset and a lease liability equal to the present value of the minimum lease payments with rental payments being applied to the lease liability and the right of use asset being amortized over the term of the lease. The adoption of this standard resulted in an increase in total assets and liabilities of $4,507. The right of use asset and related lease liability are included within other assets, net and other liabilities, respectively, within our consolidated balance sheets. In addition, we lease equipment at certain of our managed senior living communities. These leases are short term in nature, are cancelable with no fee or do not result in an annual expense in excess of our capitalization policy and, as a result, will not be recorded on our consolidated balance sheets.
Certain of our leases provide for base rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market based indices, is recognized on a straight line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. We do not include in our measurement of our lease receivables certain variable payments, including changes in the index or market based indices after the inception of the lease, certain tenant reimbursements and other income until the specific events that trigger the variable payments have occurred. Such payments totaled $78,668 for the year ended December 31, 2019.
Certain of our leases contain non-lease components, such as property level operating expenses and capital expenditures reimbursed by our tenants as well as other required lease payments. We have determined that all of our leases qualify for the practical expedient to not separate the lease and non-lease components because (i) the lease components are operating leases and (ii) the timing and pattern of recognition of the non-lease components are the same as those of the lease components. We apply Codification Topic 842, Leases, to the combined component. Income derived by our leases is recorded in rental income in our consolidated statements of comprehensive income (loss).
Certain tenants are obligated to pay directly their obligations under their leases for insurance, real estate taxes and certain other expenses. These obligations, which have been assumed by the tenants under the terms of their respective leases, are not reflected in our consolidated financial statements. To the extent any tenant responsible for any such obligations under the applicable lease defaults on such lease or if it is deemed probable that the tenant will fail to pay for such obligations, we would record a liability for such obligations.
The following table presents our operating lease maturity analysis, excluding lease payments from properties classified as held for sale, as of December 31, 2019:
|
| | | | |
Year | | Amount |
2020 | | $ | 318,279 |
|
2021 | | 302,064 |
|
2022 | | 282,652 |
|
2023 | | 260,308 |
|
2024 | | 234,220 |
|
Thereafter | | 838,608 |
|
Total | | $ | 2,236,131 |
|
For the years ended December 31, 2019, 2018 and 2017, we recognized the rental income from our operating leases on a straight line basis over the term of each lease agreement. We recognizerecognized percentage rents when realizable and earned, which is
was generally during the fourth quarter of the year. For the years ended December 31, 2016, 20152019, 2018 and 2014,2017, percentage rents earned aggregated $10,169, $10,062$2,958, $8,443 and $10,155,$10,168, respectively.
As of December 31, 2016,2019, we owned 6878 senior living communities that are managed by Five Star for our account. Five communities were previously managed from the date we acquired these communities in May 2015 through December 14, 2016 by a third party operator that was affiliated with a triple net leased senior living tenant of ours that defaulted on its lease obligations to us in the first half of 2016. We refer to these 68 communities as the managed senior living communities. We derive our revenues at these managed senior living communities primarily from services our managers provideFive Star provides to residents on our behalf and we record revenues when the services are provided. We use the taxable REIT subsidiary, or TRS structure authorized by the REIT Investment Diversification and Empowerment Act for nearly allmost of our managed senior living communities.
PER COMMON SHARE AMOUNTS. We calculate basic earnings per common share by dividing net income (loss) by the weighted average number of our common shares of beneficial interest, $.01 par value, or our common shares, outstanding during the period. We calculate diluted earnings per common share using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common shares and the related impact on earnings, are considered when calculating diluted earnings per share.
INCOME TAXES. We have elected to be taxed as a REIT under the United States Internal Revenue Code of 1986, as amended, or the IRC, 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 nearlysubstantially all of our managedthe senior living communities managed for our account to our TRSs, that, unlike most of our subsidiaries, file separate tax returns 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 incurred by us, despite our REIT status.
The Income Taxes Topic of the Codification prescribes how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Tax benefits are recognized to the extent that it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that has a greater than 50% likelihood of being realized upon settlement. We classify interest and penalties related to uncertain tax positions, if any, in our financial statements as a component of general and administrative expense.
SEGMENT REPORTING. As of December 31, 2016,2019, we have fourhad 2 reporting segments: our portfolio of medical office and life science properties, or our Office Portfolio, and our senior housing operating segments, of which three are separate reporting segments.portfolio, or SHOP. We aggregate our triple net leased senior living communities, our managed senior living communities and our MOBs into threethese two reporting segments based on their similar operating and economic characteristics. The first reporting segment includes triple net leased senior living communities that provide short term and long term residential care and other services for residents. The second reporting segment includes managed senior living communities that provide short term and long term residential care and other services for residents. The third reporting segment includes properties leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or MOBs. Our fourth segment includes all of our other operations, including certain properties that offer wellness, fitness and spa services to members, which we do not consider to be sufficiently material to constitute a separate reporting segment.
See Note 1011 for further information regarding our reportable operating segments.
NEW ACCOUNTING PRONOUNCEMENTS. On January 1, 2016, we adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, No. 2015-02, Consolidation. Among other things, this update changed how an entity determines the primary beneficiary of a variable interest entity. The implementation of this update did not have an impact in our consolidated financial statements.
On January 1, 2016, we adopted FASB ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability, and ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which addresses the presentation of debt issuance costs related to line of credit arrangements. The implementation of these updates resulted in the reclassification of certain of our capitalized debt issuance costs as an offset to the associated debt liability in our consolidated balance sheets. The
classification of capitalized debt issuance costs related to our unsecured revolving credit facility remains unchanged in accordance with ASU No. 2015-15. As of December 31, 2015, debt issuance costs related to our unsecured term loans, senior unsecured notes and secured debt and capital leases of $3,695, $16,530 and $3,664, respectively, were reclassified from assets to an offset to the associated debt liability in our consolidated balance sheets.
On January 1, 2016, we adopted FASB ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement for an acquirer in a business combination to account for measurement period adjustments retrospectively. Instead, acquirers must recognize measurement period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The implementation of this update did not have an impact in our consolidated financial statements.
In December 2016, we adopted FASB ASU, No. 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances. The implementation of this update did not have an impact in our consolidated financial statements.
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 ASU 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. In 2015, the FASB provided for a one year deferral of the effective date for ASU 2014-09, which is now effective for us beginning January 1, 2018. A substantial portion of our revenue consists of rental income from leasing arrangements, including leases with residents at properties leased to our TRSs, which is specifically excluded from ASU 2014-09. We are continuing to evaluate ASU 2014-09 (and related clarifying guidance issued by the FASB); however, we do not expect its adoption to have a significant impact on the timing of our revenue recognition in our consolidated financial statements. We currently expect to adopt the standard using the modified retrospective approach.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. This update is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted subject to certain conditions. Currently, changes in fair value of these investments are recorded through other comprehensive income. Under this ASU, these changes will be recorded through earnings. We are continuing to evaluate this guidance, but we expect the implementation of this guidance will affect how changes in the fair value of available for sale equity investments we hold are presented in our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have in our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation, which identifies areas for simplification involving several aspects of accounting for share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU No. 2016-09 is effective for reporting periods beginning after December 31, 2016. We do not expect the adoption of ASU No. 2016-09 to have a material impact in our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-CreditInstruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward lookingforward-looking “expected loss” model that generally will result
in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessingadopted this standard on January 1, 2020 using the potentialmodified retrospective approach. The implementation of this standard did not have a material impact that adoption of ASU No. 2016-13 will have inon our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact that adoption of ASU No. 2016-15 will have in our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which clarifies how companies should present restricted cash and restricted cash equivalents. Companies will show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The new standard requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the potential impact that adoption of ASU No. 2016-18 will have in our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which provides additional guidance on evaluating whether transactions should be accounted for as an acquisition (or disposal) of assets or of a business. The update defines three requirements for a set of assets and activities (collectively referred to as a “set”) to be considered a business: inputs, processes and outputs. ASU No. 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. This update will be applied prospectively to any transactions occurring within the period of adoption. We are currently assessing the impact of the update; however, subsequent to adoption we believe certain property acquisitions which under previous guidance would have been accounted for as business combinations will be accounted for as acquisitions of assets. In an acquisition of assets, certain acquisition costs are capitalized as opposed to expensed under business combination guidance.
Note 3.3. Real Estate Properties
Our real estate properties, excluding those classified as held for sale, consisted of land of $803,773,$793,123 and buildings and improvements of $6,620,158 and FF&E of $306,592$6,668,463 as of December 31, 2016;2019, and land of $781,426,$844,567 and buildings and improvements of $6,391,482 and FF&E of $284,032$7,031,733 as of December 31, 2015.2018. Accumulated depreciation was $1,149,083$1,428,850 and $178,928$141,951 for buildings and improvements, and FF&E, respectively, as of December 31, 2016;2019; and $992,361$1,408,793 and $155,179$125,599 for buildings and improvements, and FF&E, respectively, as of December 31, 2015.2018.
The future minimum lease payments due to us during the current terms of our leasesOur portfolio as of December 31, 2016, are $561,815 in 2017, $545,286 in 2018, $525,489 in 2019 $498,099 in 2020, $477,962 in 2021includes: 138 medical office and $2,626,668 thereafter.life science properties with approximately 11.9 million rentable square feet; 276 senior living communities, including independent living (including active adult), assisted living, memory care and skilled nursing facilities, or SNFs, with 31,618 living units; and 10 wellness centers with approximately 812,000 square feet of interior space plus outdoor developed facilities.
We have accounted for the followingour 2019, 2018 and 2017 acquisitions as business combinations unless otherwise noted.
Senior Living Community Acquisitions:
In May 2016, we acquired one senior living community located in Georgia with 38 private pay units for $8,400, excluding closing costs. We acquired this community usingacquisitions of assets following our adoption of ASU No. 2017-01, Clarifying the Definition of a TRS structure and entered a management agreement with Five Star to manage this community.
In June 2016, we entered into a transaction agreement with Five Star pursuant to which, among other things: we acquired seven senior living communities located in four states with 545 living units from Five Star for $112,350, excluding closing costs, and simultaneously leased these communities back to Five Star under a new long term lease agreement pursuant to which Five Star is required to pay to us initial annual rent of $8,426; we and Five Star terminated three of our four then existing pooling agreements with Five Star; and we and Five Star entered into 10 new pooling agreements, or the new pooling agreements, with Five Star that combine our management agreements with Five Star for senior living communities that include assisted living units, or our AL Management Agreements. See Notes 5 and 7 for further information regarding these transactions and transaction agreement.
In September 2016, we acquired an additional living unit at a senior living community located in Florida that we lease to Five Star, for $130, excluding closing costs. This living unit was added to the applicable lease and Five Star’s annual rent payable to us increased by $10 in accordance with the terms of that lease.
In December 2016, we acquired two senior living communities located in Illinois with a combined 126 living units for $18,600, excluding closing costs. These two senior living communities were added to one of our leases with Five Star and Five Star’s annual rent payable to us increased by $1,395 in accordance with the terms of that lease.
Also in December 2016, we acquired a land parcel adjacent to a senior living community located in Georgia that Five Star manages for our account, for $1,600, excluding closing costs. This land parcel was added to the applicable management agreement.
In December 2014, we entered into an agreement to acquire 38 senior living communities with 3,439 living units for an aggregate purchase price of $790,000, excluding net closing adjustments of $77 and closing costs. In May 2015, we acquired 37 of these 38 senior living communities and in September 2015 we acquired the one remaining community.Business on January 1, 2017. We funded thethese acquisitions of these 38 senior living communities using cash on hand, borrowings under our revolving credit facility and the assumption of approximately $151,477 of mortgage debts with a weighted average annual interest rate of 4.57%.
At the time of acquisition, nineteen of the 38 communities were triple net leased senior living communities with 2,206 living units, and were leased to seven senior living operators. As of the date acquired, the weighted average amortization period for capitalized lease origination values was 11.5 years. The remaining 19 acquired managed communities with 1,233 living units were acquired using TRS structures and are being managed for our account. We paid fees of $975 and terminated the pre-existing management agreements that were in place for 14 of these 19 managed communities, with 838 living units and we entered into new management agreements with Five Star to manage those 14 communities. The remaining five managed communities, with 395 living units, continued to be managed by a third party senior living manager in place at the time of our acquisition of these communities.
In the first quarter of 2016, the tenants at two of our triple net leased senior living communities that we acquired as part of the portfolio acquisition described above were in default of their leases. In April 2016, we reached an agreement with one of these tenants and its guarantor to settle past due amounts, terminate the lease and transfer operations. As part of this agreement, we received $2,365 and entered into a management agreement with Five Star to operate this community for our account under a TRS structure. In July 2016, we terminated the other lease and entered into a management agreement with Five Star to operate the community for our account under a TRS structure. In December 2016, we entered a settlement agreement and terminated the in place management agreements with the third party senior living manager affiliated with one of the tenants that defaulted on its lease for five of the communities acquired in May 2015. We paid fees of $115 to terminate the existing management agreements and we entered into new management agreements with Five Star to manage these five communities.
In February 2015, we acquired a land parcel adjacent to a senior living community we lease to Five Star for $490. This property was added to the lease for that senior living community and Five Star’s annual minimum rent payable to us increased by $39 as a result.
In May 2015, we acquired one senior living community with 40 private pay independent living units for a purchase price of approximately $9,750, excluding closing costs. Pursuant to the purchase agreement, $1,000 of the purchase price was withheld until the seller satisfied various conditions. The conditions were satisfied and in February 2016 we funded the $1,000 of holdback funds and eliminated the liability that had been recorded when we acquired the community. This senior living community is adjacent to another community that we own which is managed by Five Star; and the operations of this community and the community we previously owned are now conducted as a single integrated community under one management agreement.
In September 2015, we acquired one triple net leased senior living community with 84 living units for a purchase price of $18,250, excluding closing costs. We funded the acquisition of this community using cash on hand and borrowings under our $1,000,000 unsecured revolving credit facility. This community is leased to a privately owned third party senior living operator. We accounted for this acquisition as an asset acquisition.
During 2014, we acquired two senior living communities with an aggregate 228 living units for an aggregate purchase price of $47,430, excluding closing costs, and entered into management agreements with Five Star to manage these communities.facility, unless otherwise noted.
Acquisitions:
The table below represents the purchase price allocations (including net closing adjustments) of acquisitions for the senior living community acquisitions described above.years ended December 31, 2019, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Date | Location | Leased / Managed | Number of Properties | | Units/ Beds | Cash Paid plus Assumed Debt(1) | Land | Buildings and Improvements | FF&E | Acquired Real Estate Leases | Other Liabilities | Assumed Debt | (Premium) / Discount on Assumed Debt |
Senior Living Community Acquisitions during the year ended December 31, 2016: |
May 2016 | Georgia | Managed | 1 |
| | 38 |
| $ | 8,400 |
| $ | 327 |
| $ | 6,195 |
| $ | 478 |
| $ | 1,400 |
| $ | — |
| $ | — |
| $ | — |
|
June 2016 | 4 States | Leased | 7 |
| | 545 |
| 112,493 |
| 11,085 |
| 94,940 |
| 6,468 |
| — |
| — |
| — |
| — |
|
December 2016 | Illinois | Leased | 2 |
| | 126 |
| 18,600 |
| 1,814 |
| 13,377 |
| 1,087 |
| 2,323 |
| — |
| — |
| — |
|
| | | 10 |
| | 709 |
| $ | 139,493 |
| $ | 13,226 |
| $ | 114,512 |
| $ | 8,033 |
| $ | 3,723 |
| $ | — |
| $ | — |
| $ | — |
|
| | | | | | | | | | | | | |
Senior Living Community Acquisitions during the year ended December 31, 2015: |
May 2015 | 11 States | Leased | 18 |
| | 2,119 |
| $ | 459,184 |
| $ | 29,716 |
| $ | 373,471 |
| $ | 21,117 |
| $ | 54,096 |
| $ | (18,091 | ) | $ | (44,395 | ) | $ | (1,125 | ) |
May 2015 | 5 States | Managed | 19 |
| | 1,233 |
| 313,345 |
| 12,267 |
| 214,064 |
| 12,342 |
| 73,840 |
| — |
| (94,785 | ) | 832 |
|
September 2015 | NC | Leased | 1 |
| | 87 |
| 17,548 |
| 1,134 |
| 13,749 |
| 1,022 |
| 2,208 |
| — |
| (12,297 | ) | (565 | ) |
Subtotal 38 senior living communities portfolio | 38 |
| | 3,439 |
| 790,077 |
| 43,117 |
| 601,284 |
| 34,481 |
| 130,144 |
| (18,091 | ) | (151,477 | ) | (858 | ) |
| | | | | | | | | | | | | |
May 2015 | GA | Managed | — |
| (2) | 40 |
| 9,750 |
| 993 |
| 8,169 |
| 427 |
| 161 |
| — |
| — |
| — |
|
September 2015 | GA | Leased | 1 |
| | 84 |
| 18,409 |
| 3,479 |
| 14,021 |
| 909 |
| — |
| — |
| — |
| — |
|
| | | 39 |
| | 3,563 |
| $ | 818,236 |
| $ | 47,589 |
| $ | 623,474 |
| $ | 35,817 |
| $ | 130,305 |
| $ | (18,091 | ) | $ | (151,477 | ) | $ | (858 | ) |
| | | | | | | | | | | | | |
Senior Living Community Acquisitions during the year ended December 31, 2014: |
December 2014 | WI | Managed | 1 |
| | 52 |
| $ | 7,000 |
| $ | 188 |
| $ | 5,862 |
| $ | 101 |
| $ | 849 |
| $ | — |
| $ | — |
| $ | — |
|
December 2014 | WI | Managed | 1 |
| | 176 |
| 40,430 |
| 2,615 |
| 34,957 |
| 588 |
| 2,270 |
| — |
| — |
| — |
|
| | | 2 |
| | 228 |
| $ | 47,430 |
| $ | 2,803 |
| $ | 40,819 |
| $ | 689 |
| $ | 3,119 |
| $ | — |
| $ | — |
| $ | — |
|
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Date | Location | Type of Property | Number of Properties | | Square Feet or Number of Units | | | Cash Paid plus Assumed Debt (1) | | Land | | Buildings and Improvements | | FF&E | | Acquired Real Estate Leases / Resident Agreements | | Acquired Real Estate Lease Obligations | | Assumed Debt | | Premium on Assumed Debt |
Acquisitions during the year ended December 31, 2019: |
December 2019 | Texas | IL | 1 |
| | 169 |
| units | | $ | 50,506 |
| | $ | 3,463 |
| | $ | 44,189 |
| | $ | 652 |
| | $ | 2,202 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | |
Acquisitions during the year ended December 31, 2018: |
January 2018 | 3 States | Medical Office / Life Science | 3 |
| | 400,000 |
| sq. ft. | | $ | 91,698 |
| | $ | 16,873 |
| | $ | 54,605 |
| | $ | — |
| | $ | 20,220 |
| | $ | — |
| | $ | — |
| | $ | — |
|
January 2018 (2) | Tennessee | AL | 1 |
| | 88 |
| units | | 19,868 |
| | 580 |
| | 14,884 |
| | 1,209 |
| | 3,195 |
| | — |
| | — |
| | — |
|
February 2018 (2) | Arizona | IL | 1 |
| | 127 |
| units | | 22,622 |
| | 2,017 |
| | 17,123 |
| | 390 |
| | 4,451 |
| | — |
| | (16,748 | ) | | (1,359 | ) |
March 2018 | Virginia | Medical Office | 1 |
| | 135,000 |
| sq. ft. | | 23,275 |
| | 2,863 |
| | 11,105 |
| | — |
| | 9,307 |
| | — |
| | (11,050 | ) | | — |
|
June 2018 (2) | Tennessee | IL | 2 |
| | 151 |
| units | | 23,860 |
| | 965 |
| | 17,910 |
| | 1,628 |
| | 3,843 |
| | — |
| | (16,588 | ) | | (486 | ) |
| | | 8 |
| |
|
| | | $ | 181,323 |
| | $ | 23,298 |
| | $ | 115,627 |
| | $ | 3,227 |
| | $ | 41,016 |
| | $ | — |
| | $ | (44,386 | ) | | $ | (1,845 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Acquisitions during the year ended December 31, 2017: | | | | | | | | | | | | | | | | | | | |
January 2017 | Kansas | Medical Office | 1 |
| | 117,000 |
| sq. ft. | | $ | 15,106 |
| | $ | 1,522 |
| | $ | 7,246 |
| | $ | — |
| | $ | 6,338 |
| | $ | — |
| | $ | — |
| | $ | — |
|
July 2017 | Maryland | Life Science | 1 |
| | 59,000 |
| sq. ft. | | 16,601 |
| | 6,138 |
| | 6,526 |
| | — |
| | 3,937 |
| | — |
| | — |
| | — |
|
October 2017 | 2 States | Medical Office / Life Science | 2 |
| | 255,000 |
| sq. ft. | | 38,794 |
| | 6,738 |
| | 25,040 |
| | — |
| | 7,016 |
| | — |
| | — |
| | — |
|
November 2017 | California | Life Science | 1 |
| | 63,000 |
| sq. ft. | | 26,823 |
| | 7,957 |
| | 13,430 |
| | — |
| | 5,436 |
| | — |
| | — |
| | — |
|
December 2017 | Virginia | Medical Office | 1 |
| | 136,000 |
| sq. ft. | | 15,844 |
| | 3,263 |
| | 7,615 |
| | — |
| | 4,986 |
| | (20 | ) | | — |
| | — |
|
December 2017 (2) | 2 States | IL / AL | 2 |
| | 229 |
| units | | 39,457 |
| | 4,055 |
| | 26,424 |
| | 1,204 |
| | 7,774 |
| | — |
| | — |
| | — |
|
| | | 8 |
| |
|
| | | $ | 152,625 |
| | $ | 29,673 |
| | $ | 86,281 |
| | $ | 1,204 |
| | $ | 35,487 |
| | $ | (20 | ) | | $ | — |
| | $ | — |
|
| |
(1) | Cash paid plus assumed debt, if any, excludesincludes closing costs. With respect to the June 2016 acquisition of seven senior living communities and the September 2015 acquisition of one senior living community in Georgia that are being accounted for as asset acquisitions, these amounts include the cash we paid as well as various closing settlement adjustments and closing costs. The allocation of the purchase prices of certain of our 2016 acquisitions shown above are based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. The final amounts allocated to assets acquired and liabilities assumed may differ from the preliminary allocations presented in these consolidated financial statements upon the completion of (i) third party valuations and (ii) our analysis of acquired in place lease and land and building valuations. |
| |
(2) | This senior living community is adjacent to another community that we own which is managed byAcquired from Five Star. The operations of this community and the community we previously owned are now conducted as a single integrated community under one management agreement. |
In August 2017, we acquired a land parcel from Five Star adjacent to a senior living community located in Delaware that we previously leased to Five Star.
In January 2020, we acquired a land parcel adjacent to a life science property we own located in Arizona for $2,600, excluding closing costs.
Pursuant to a transaction agreement we entered into with Five Star in April 2019, or the Transaction Agreement, to restructure our business arrangements with Five Star, or the Restructuring Transaction, effective January 1, 2020, the senior living communities which we own that were operated by Five Star pursuant to lease agreements are now operated by Five Star pursuant to new management agreements and a related omnibus agreement, or collectively, the New Management Agreements. See Notes 5 and 7 for further information regarding the arrangements we have with Five Star.
MOB Acquisitions:
In February 2016, we acquired one MOB (three buildings) located in Minnesota with approximately 128,000 square feet for a purchase price of approximately $22,700, excluding closing costs. We funded this acquisition using cash on hand and borrowings under our revolving credit facility. As of the date acquired, the weighted average amortization periods for capitalized lease origination costs and below market lease values were 6.4 years and 7.3 years, respectively.
In May 2016, we acquired one MOB (one building) located in Florida with approximately 166,000 square feet for a purchase price of approximately $45,000, excluding closing costs. We funded this acquisition using cash on hand and borrowings under our revolving credit facility. We accounted for this acquisition as an asset acquisition.
In October 2016, we acquired one MOB (one building) located in Ohio with approximately 96,000 square feet for approximately $18,500, excluding closing costs. We funded this acquisition using cash on hand and borrowings under our revolving credit facility.
As of the date acquired, the weighted average amortization periods for capitalized lease origination costs and above market lease values, respectively, were 14.1 years.
In January 2015, we acquired 23 MOBs (23 buildings) for an aggregate purchase price of $539,000, excluding net credits received of $7,377 related to debt assumption 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 facilityRestructuring Transaction and the assumption of $29,955 of mortgage debts with a weighted average annual interest rate of 4.73%. As of the date acquired, the weighted average amortization periods for capitalized lease origination costs, above market lease values and below market lease values were 9.5 years, 9.7 years and 11.2 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 7 for further information regarding this transaction.
During 2014, we acquired two MOBs (three buildings) with a total of 1,776,277 square feet for total purchase prices of
approximately $1,162,584 including the assumption of approximately $15,630 of mortgage debt and excluding closing costs.
The table below represents the purchase price allocations (including net closing adjustments) of the MOB acquisitions described above.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Date | Location | Number of Properties | Square Feet (000's) | Cash Paid plus Assumed Debt(1) | Land | Buildings and Improvements | Acquired Real Estate Leases | Acquired Real Estate Lease Obligations | Assumed Debt | Premium on Assumed Debt |
MOB Acquisitions during the year ended December 31, 2016: |
February 2016 | Minnesota | 1 |
| 128 |
| $ | 22,700 |
| $ | 4,028 |
| $ | 14,710 |
| $ | 5,053 |
| $ | (1,091 | ) | $ | — |
| $ | — |
|
May 2016 | Florida | 1 |
| 166 |
| 45,232 |
| 2,792 |
| 42,440 |
| — |
| — |
| — |
| — |
|
October 2016 | Ohio | 1 |
| 96 |
| 18,500 |
| 1,025 |
| 12,883 |
| 4,592 |
| — |
| — |
| — |
|
| | 3 |
| 390 |
| $ | 86,432 |
| $ | 7,845 |
| $ | 70,033 |
| $ | 9,645 |
| $ | (1,091 | ) | $ | — |
| $ | — |
|
| | | | | | | | | | |
MOB Acquisitions during the year ended December 31, 2015: |
January 2015 | 12 States | 23 |
| 2,170 |
| $ | 531,623 |
| $ | 50,429 |
| $ | 397,637 |
| $ | 87,780 |
| $ | (3,150 | ) | $ | (29,955 | ) | $ | (1,073 | ) |
| | 23 |
| 2,170 |
| $ | 531,623 |
| $ | 50,429 |
| $ | 397,637 |
| $ | 87,780 |
| $ | (3,150 | ) | $ | (29,955 | ) | $ | (1,073 | ) |
| | | | | | | | | | |
MOB acquisitions during the year ended December 31, 2014: |
April 2014 | TX | 1 |
| 125 |
| $ | 32,932 |
| $ | 3,141 |
| $ | 23,142 |
| $ | 7,672 |
| $ | (10 | ) | $ | (15,630 | ) | $ | (1,013 | ) |
May 2014 | MA | 1 |
| 1,651 |
| 1,129,652 |
| 52,643 |
| 792,146 |
| 403,282 |
| (118,419 | ) | — |
| — |
|
| | 2 |
| 1,776 |
| $ | 1,162,584 |
| $ | 55,784 |
| $ | 815,288 |
| $ | 410,954 |
| $ | (118,429 | ) | $ | (15,630 | ) | $ | (1,013 | ) |
| | | | | | | | | | |
| |
(1) | Cash paid plus assumed debt, if any, excludes closing costs. With respect to the property located in Florida that is being accounted for as an asset acquisition, this amount includes the cash we paid as well as various closing settlement adjustments and closing costs. The allocations of the purchase prices of certain of our 2016 acquisitions shown above are based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. The final amounts allocated to assets acquired and liabilities assumed may differ from the preliminary allocations presented in these consolidated financial statements upon the completion of (i) third party valuations and (ii) our analysis of acquired in place lease and land and building valuations. |
In January 2017, we acquired one MOB (one building) located in Kansas with approximately 117,000 square feet for approximately $15,500, excluding closing costs.
Intangible Lease Assets and Obligations:
At December 31, 2016, we had recorded intangible lease assets of $775,935, including $43,906 of capitalized above market lease values and $732,029 of the value of in place leases. At December 31, 2015, we had recorded intangible lease assets of $779,761, including $48,048 of capitalized above market lease values and $731,713 of the value of in place leases. We had recorded intangible lease obligations of $137,351 and $139,346 at December 31, 2016 and 2015, respectively. Accumulated amortization of capitalized above market lease values was $28,739 and $26,828 at December 31, 2016 and 2015, respectively. At December 31, 2016, the remaining weighted average amortization period of capitalized above market lease values is approximately 4.8 years. Accumulated
amortization of capitalized below market lease values was $31,312 and $23,819 at December 31, 2016 and 2015, respectively. At December 31, 2016, the remaining weighted average amortization period of intangible lease obligations is approximately 11.6 years. Accumulated amortization of the value of in place leases exclusive of the value of above and below market in place leases was $232,750 and $148,647 at December 31, 2016 and 2015, respectively. At December 31, 2016, the remaining weighted average amortization period of the value of in place leases exclusive of the value of above and below market in place leases is approximately 10.4 years. We expect to recognize net future amortization of these intangible lease assets and liabilities in the amounts of approximately $64,832 in 2017, $46,101 in 2018, $39,599 in 2019, $37,089 in 2020, $34,813 in 2021 and $185,974 thereafter.
Dispositions:
In March 2016, we sold a land parcel located in Pennsylvania for $700, excluding closing costs. In June 2016, we sold a triple net leased skilled nursing facility, or SNF, located in Pennsylvania for $9,100, excluding closing costs; we recognized a gain on sale of $4,061 from this sale. In July 2016, we sold four MOBs (four buildings) located in Oklahoma for $20,150, excluding closing costs. In September 2016, we and Five Star sold a vacant SNF located in Wisconsin that we leased to Five Star for $248, excluding closing costs; as a result of this sale, Five Star's annual rent payable to us decreased by $25 in accordance with the terms of the applicable lease. In December 2016, we sold one MOB located in Pennsylvania for $2,800, excluding closing costs. In December 2016, we sold a formerly managed memory care building located in Florida for $2,100, excluding closing costs.
In February 2015, we and Five Star sold a senior living community located in Pennsylvania that we leased to Five Star with 120 assisted living units for $250, excluding closing costs; as a result of this sale, Five Star's annual rent payable to us decreased by $23 in accordance with the terms of the applicable lease. In April 2015, we sold one MOB (four buildings) located in New Mexico that was previously included in discontinued operations for $1,500, excluding closing costs. In July 2015, we and Five Star sold a senior living community located in Iowa that we leased to Five Star with 12 SNF units for $155, excluding closing costs; as a result of this sale, Five Star's annual 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 located in Wisconsin that we leased to Five Star with 63 SNF units for $850, excluding closing costs; as a result of this sale, Five Star's annual rent payable to us decreased by $85 in accordance with the terms of the applicable lease. In December 2015, we and Five Star sold a senior living community located in Iowa that we leased to Five Star with 117 SNF units for $21, excluding closing costs; as a result of this sale, Five Star's annual rent payable to us decreased by $2 in accordance with the terms of the applicable lease.
In January 2014, we and Five Star sold an assisted living community located in Texas that we leased to Five Star with 36 assisted living units for $2,400, excluding closing costs; as a result of this sale, Five Star’s annual rent payable to us decreased by $210 in accordance with the terms of the applicable lease. In April 2014, we sold one MOB (one building) located in New Hampshire that was previously included in discontinued operations for $5,000, excluding closing costs. In June 2014, we and Five Star sold two senior living communities located in Wisconsin that we leased to Five Star with a combined 156 SNF units for $4,500, excluding closing costs; as result of this sale, Five Star’s annual rent payable to us decreased by $452 in accordance with the terms of the applicable lease. In June 2014, we sold one MOB (one building) located in Pennsylvania for $6,000, excluding closing costs. In September 2014, we sold one MOB (one building) located in Rhode Island that was previously included in discontinued operations for $675, excluding closing costs. In October 2014, we and Five Star sold a senior living community located in Virginia that we leased to Five Star with 70 assisted living units for $2,850, excluding closing costs; as a result of this sale, Five Star’s annual rent payable to us decreased by $285 in accordance with the terms of the applicable lease. Also in October 2014, we and Five Star sold two senior living communities located in Arizona that we leased to Five Star with a combined 177 assisted living and SNF units for $5,900, excluding closing costs; as a result of this sale, Five Star’s annual rent payable to us decreased by $590 in accordance with the terms of the applicable lease.Transaction Agreement.
Impairment:
We periodicallyregularly evaluate our assets for impairments.indications of impairment. Impairment indicators may include declining tenant or resident occupancy, weak or declining profitability from the property, decreasing tenant cash flows or liquidity, our decision to dispose of an asset before the end of its estimated useful life, and legislative, market or industry changes that could permanently reduce the value of an asset. If indicators of impairment are present, we evaluate the carrying value of the affected assetassets by comparing it to the expected future undiscounted net cash flows to be generated from that asset. those assets. The future net undiscounted cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the asset to its estimated fair value.See Note 9 for further information on impairment.
During 2016,2019, we recorded net impairment charges of $11,488$72,166 to adjust the carrying values of two MOBs (five buildings), one land parcel and two25 senior living communities that were sold during 2016 to their aggregate estimated netfair value. These 25 senior living communities included 15 SNFs which we sold in September 2019. NaN of these senior living communities are classified as held for sale price.in our consolidated balance sheet as of December 31, 2019. During 2016,2019, we also recorded impairment charges of $4,391$43,035 to adjust the carrying value of 20 medical office properties and 1 life science property to their estimated fair value. We sold 5 of these medical office properties, along with the life science property, in 2019. The remaining 15 medical office properties are classified as held for sale in our consolidated balance sheet as of December 31, 2019. These impairment charges, in aggregate, are included in impairment of assets in our consolidated statements of comprehensive income (loss).
During 2018, we recorded impairment charges of $46,797 to adjust the carrying values of 13 medical office properties to their aggregate estimated fair value. NaN of these medical office properties were classified as held for sale as of December 31, 2018. We sold all 13 of these medical office properties during 2019. During 2018, we also recorded impairment charges of $19,549 to write off acquiredunamortized lease intangible assets associated withrelated to lease defaults at two3 of our triple net leased senior living communities located in California, Colorado and Oregon that were leased to two third party private operators. During 2015,As a result of these leases being terminated, or during the termination process, we recorded netconcluded that there was no value to the unamortized lease assets and wrote them off completely during 2018. In June 2018, we reached an agreement with the tenant leasing the senior living community located in California and its guarantor to settle past due amounts, terminate the lease and transfer operations, and in connection with this agreement, we received $2,150 of settlement proceeds. In November 2018, we reached an agreement with the tenant leasing the senior living community in Colorado to terminate the lease and transfer operations. In April 2019, we reached an agreement with the tenant leasing the senior living community in Oregon to terminate the lease and transfer operations. We entered management agreements with Five Star to operate these communities for our account under TRS structures. These impairment charges, in aggregate, are included in impairment of $796 to adjustassets in our consolidated statements of comprehensive income (loss).
No impairment charges were recorded on real estate properties during 2017.
Dispositions:
During the carrying valuesyears ended December 31, 2019, 2018 and 2017, we sold 46, 5, and 1 properties, respectively, for aggregate sales prices of one MOB (four buildings)$260,783, $334,865, and three senior living communities to$55,000, respectively, excluding closing costs, as presented in the table below. The sales of these properties do not represent significant dispositions individually or in the aggregate, nor do we believe they represent a strategic shift in our business. As a result, the results of the operation for these properties are included in continuing operations through the date of sale of such properties in our consolidated statements of comprehensive income (loss).
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Date of Sale | | Location | | Type of Property | | Number of Properties | | Square Feet or Number of Units | | | Sales Price (1) | | Gain (loss) on Sale |
Dispositions during the year ended December 31, 2019: |
February 2019 | | Florida | | Life Science | | 1 | | 60,396 |
| sq. ft. | | $ | 2,900 |
| | $ | (69 | ) |
March 2019 | | Massachusetts | | Medical Office | | 1 | | 4,400 |
| sq. ft. | | 75 |
| | (58 | ) |
May 2019 (2) | | California | | SNF | | 3 | | 278 |
| units | | 21,500 |
| | 15,207 |
|
May 2019 | | Colorado | | Medical Office | | 1 | | 15,647 |
| sq. ft. | | 2,590 |
| | 1,029 |
|
June 2019 | | Massachusetts | | Medical Office | | 7 | | 164,121 |
| sq. ft. | | 8,042 |
| | 1,590 |
|
July 2019 | | Massachusetts | | Medical Office | | 3 | | 103,484 |
| sq. ft. | | 4,955 |
| | 2,332 |
|
August 2019 | | Massachusetts | | Medical Office | | 1 | | 49,357 |
| sq. ft. | | 2,221 |
| | 812 |
|
September 2019 (2) | | Various | | SNF | | 15 | | 964 |
| units | | 8,000 |
| | — |
|
September 2019 | | Massachusetts | | Medical Office | | 1 | | 41,065 |
| sq. ft. | | 2,750 |
| | 1,044 |
|
October 2019 | | South Dakota | | SNF / IL | | 3 | | 245 |
| units | | 10,500 |
| | 6,661 |
|
October 2019 | | New Jersey | | Life Science | | 1 | | 205,439 |
| sq. ft. | | 47,500 |
| | — |
|
December 2019 | | Georgia | | Medical Office | | 1 | | 95,010 |
| sq. ft. | | 14,000 |
| | (63 | ) |
December 2019 | | Washington | | IL | | 1 | | 150 |
| units | | 32,500 |
| | 7,618 |
|
December 2019 | | Various | | AL | | 7 | | 566 |
| units | | 103,250 |
| | 3,593 |
|
| | | | | | 46 | | | | | $ | 260,783 |
| | $ | 39,696 |
|
| | | | | | | | | | | | | |
Dispositions during the year ended December 31, 2018: |
March 2018 (3) | | Various | | IL | | 2 | | 843 |
| units | | $ | 217,000 |
| | $ | 181,154 |
|
May 2018 (3) | | Maryland | | IL | | 1 | | 354 |
| units | | 96,000 |
| | 78,856 |
|
June 2018 (2) | | California | | SNF | | 1 | | 98 |
| units | | 6,500 |
| | 3,699 |
|
June 2018 (4) | | Oregon | | AL | | 1 | | 99 |
| units | | 15,365 |
| | (1,793 | ) |
| | | | | | 5 | | | | | $ | 334,865 |
| | $ | 261,916 |
|
| | | | | | | | | | | | | |
Dispositions during the year ended December 31, 2017: |
December 2017 (3) | | Virginia | | IL | | 1 | | 422 |
| units | | $ | 55,000 |
| | $ | 45,901 |
|
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(1) | Sales price excludes closing costs. |
| |
(2) | These senior living communities were previously leased to Five Star. |
| |
(3) | These senior living communities were leased to Sunrise Senior Living LLC. |
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(4) | This senior living community was leased to a private operator, where the tenant exercised its purchase option. |
their aggregate estimated netIn December 2017, we recognized a gain on sale price. During 2014, we recorded net impairment charges of $4,377 to adjust the carrying values$154 from an eminent domain taking of four MOBs (seven buildings) to their aggregate estimated net sale price.land at one of our wellness centers in Romeoville, Illinois.
We classify all properties as held for sale in our consolidated balance sheets that meet the applicable criteria for that treatment as set forth in the Property, Plant and Equipment Topic of the Codification. As of December 31, 2016,2019, we had no21 medical office and life science properties with 875,617 square feet and 12 senior living communities with 1,670 units classified as held for sale. As of December 31, 2015,2018, we had one senior living community2 medical office properties with 140 living units and one vacant land parcel32,604 square feet classified as held for sale. The real estate assetsAs of this senior living community and land parcel are included in other assets in our December 31, 2015 consolidated balance sheets and2017, we had a4 triple net book value (after impairment) of approximately $5,356. These properties were sold in 2016 as described above.
Results of operations for properties sold or held for sale are included in discontinued operations in our consolidated statements of comprehensive income when the criteria for discontinued operations in the Codification Topic No. 2015-20, Discontinued Operations, are met. With the exception of four MOBs (seven buildings) that were sold in 2014 and 2015 that met the criteria for discontinued operations, theleased senior living communities with 1,295 units classified as held for sale.
As of February 28, 2020, we had 52 properties under agreements to sell or in first or second round offer stages for an aggregate sales price of approximately $539,679, excluding closing costs. We may not complete the sales of any or all of the properties we currently plan to sell. Also, we may sell some or all of these properties at amounts that are less than currently expected and/or less than the carrying values of such properties and MOBs whichwe may incur losses on any such sales as a result.
In January 2020, we sold
during the periods presented did not meet the criteria6 medical office buildings located in Louisiana for
discontinued operations and are includeda sales price of approximately $5,925, excluding closing costs. In February 2020, we sold 1 medical office building located in
continuing operations. Summarized income statement informationPennsylvania for
the four MOBs (seven buildings) that met the criteria for discontinued operations is included in discontinued operations as follows: |
| | | | | | | | | | | | |
| | For the year ended December 31, |
| | 2016 | | 2015 | | 2014 |
Rental income | | $ | — |
| | $ | 56 |
| | $ | 3,949 |
|
Property operating expenses | | — |
| | (406 | ) | | (2,587 | ) |
(Loss) income from discontinued operations | | $ | — |
| | $ | (350 | ) | | $ | 1,362 |
|
a sales price of approximately $2,900, excluding closing costs.Investments and Capital Expenditures:
During 20162019 and 2015,2018, pursuant to the terms of our existing leases, we invested $1,739 and $5,420, respectively, in revenue producing capital improvements at certain of our senior living communities leased to private operators. As a result of these investments, annualized rental income payable to us increased by approximately $90 and $383, respectively, pursuant to the
terms of the applicable leases. Under our previously existing leases with Five Star, Five Star could request that we purchased $21,438 and $21,444, respectively, ofpurchase certain improvements to our propertiesthe leased to Five Star,communities and, as a result,until we entered into the Transaction Agreement, the annual rent payable to us by Five Star would increase in accordance with a formula specified in the applicable lease in return for such purchases. During the year ended December 31, 2018, we purchased $17,956 of such improvements and Five Star's annual rent payable to us increased by approximately $1,719$1,433 in accordance with the terms of the applicable leases. Pursuant to the Transaction Agreement, the $111,603 of improvements to communities leased to Five Star, including $49,155 of fixed assets and $1,734, respectively.improvements that were purchased pursuant to the Transaction Agreement, that we funded during the year ended December 31, 2019 did not result in increased rent payable by Five Star. See Note 5 for further information regarding the Restructuring Transaction and the Transaction Agreement.
During 2016,2019, we committed $12,422$30,135 for capital expenditures related to 899,0001.5 million square feet of leases executed at our MOBs.medical office and life science properties. During 2015,2018, we committed $20,314$17,212 for capital expenditures related to 1,032,000881,502 square feet of leases executed at our MOBs.medical office and life science properties.
Committed and unspent tenant related obligations based on executed leases as of December 31, 20162019 and 20152018 were $23,271$23,994 and $30,260,$22,009, respectively.
For the years ended December 31, 2019 and 2018, we recorded capitalized interest of $1,124 and $124, respectively.
In July 2019, a tenant in our Office Portfolio segment vacated 3 buildings with an aggregate of 164,091 square feet in California. After evaluating our options, we determined to, and have begun, a full redevelopment of these buildings. The redevelopment of these buildings may take significant capital expenditures and time.
Note 4. Shareholders’4. Shareholders' Equity
We have common shares available for issuance under the terms of our equity compensation plan adopted in 2012, Equity Compensation Plan, or the 2012 Plan. We awarded 79,650During the years ended December 31, 2019, 2018 and 2017, we granted to our officers and other employees of RMR LLC annual share awards of 187,500, 105,800 and 88,100 of our common shares, respectively, valued at $1,633, $2,022 and $1,743, in aggregate, respectively. In accordance with our Trustee compensation arrangements, we also granted each of our Trustees 3,000 common shares with an aggregate market value of $1,724 during the year ended December 31, 2016, 84,000$119 ($24 per Trustee), 3,000 common shares with an aggregate market value of $1,321 during the year ended December 31, 2015$248 ($50 per Trustee) and 81,7003,000 common shares with an aggregate market value of $1,750 during$319 ($64 per Trustee) in 2019, 2018 and 2017, respectively. In addition, in accordance with our trustee compensation arrangements, we granted 3,000 common shares with a value of $47 in connection with the year ended December 31, 2014election of one of our Managing Trustees in March 2018. The values of the share awards were based upon the closing price of our common shares trading on The Nasdaq Stock Market LLC, or Nasdaq, on the dates of grant. The common shares granted to our Trustees vested immediately. The common shares granted to our officers and certain other employees of The RMR Group LLC, or RMR LLC pursuant to the 2012 Plan. In addition, in May 2016, we awarded each of our five Trustees 2,500 common shares with an aggregate market value of $228 ($46 to each Trustee) pursuant to the 2012 Plan as part of their annual fees. In May 2015, we awarded each of our five Trustees at that time 2,500 common shares with an aggregate market value of $252 ($50 to each Trustee) pursuant to the 2012 Plan as part of their annual fees. In September 2015, we awarded 2,500 of our common shares with a market value of $41 to a new Independent Trustee who was elected to our Board of Trustees at that time. In 2014, we awarded each of our five Trustees at that time 2,500 common shares with an aggregate market value of $306 ($61 to each Trustee) pursuant to the 2012 Plan as part of their annual fees. Shares awarded to our Trustees vest immediately. The shares awarded to our officers and certain other employees of our manager vest in five equal annual installments beginning on the date of grant. We include the value of awardedgranted shares in general and administrative expenses in our consolidated statements of comprehensive income at(loss) ratably over the time the awards vest.vesting period. At December 31, 2016, 2,567,6162019, 2,214,932 of our common shares remain available for issuance under the 2012 Plan.
A summary of shares granted, forfeited, vested and vestedunvested under the terms of the 2012 Plan from January 1, 20142017 to December 31, 20162019 is as follows: |
| | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Unvested shares at December 31, 2013 | 150,711 |
| | $ | 23.84 |
|
Shares granted in 2014 | 94,200 |
| | $ | 21.83 |
|
Shares vested / forfeited in 2014 | (91,433 | ) | | $ | 21.87 |
|
Unvested shares at December 31, 2014 | 153,478 |
| | $ | 23.39 |
|
Shares granted in 2015 | 99,000 |
| | $ | 16.30 |
|
Shares vested / forfeited in 2015 | (93,604 | ) | | $ | 16.17 |
|
Unvested shares at December 31, 2015 | 158,874 |
| | $ | 19.39 |
|
Shares granted in 2016 | 92,150 |
| | $ | 21.18 |
|
Shares vested / forfeited in 2016 | (97,614 | ) | | $ | 21.09 |
|
Unvested shares at December 31, 2016 | 153,410 |
| | $ | 19.92 |
|
|
| | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Unvested shares at December 31, 2016 | 153,410 |
| | $ | 19.92 |
|
Shares granted in 2017 | 103,100 |
| | $ | 19.99 |
|
Shares vested / forfeited in 2017 | (108,500 | ) | | $ | 20.05 |
|
Unvested shares at December 31, 2017 | 148,010 |
| | $ | 19.71 |
|
Shares granted in 2018 | 123,800 |
| | $ | 18.72 |
|
Shares vested / forfeited in 2018 | (109,820 | ) | | $ | 18.31 |
|
Unvested shares at December 31, 2018 | 161,990 |
| | $ | 19.41 |
|
Shares granted in 2019 | 202,500 |
| | $ | 8.65 |
|
Shares vested / forfeited in 2019 | (137,150 | ) | | $ | 8.94 |
|
Unvested shares at December 31, 2019 | 227,340 |
| | $ | 12.52 |
|
The 153,410227,340 unvested shares as of December 31, 20162019 are scheduled to vest as follows: 60,040 in 2017, 46,05073,080 shares in 2018, 31,3902020, 63,840 shares in 20192021, 53,520 shares in 2022 and 15,93036,900 shares in 2020. These unvested shares are remeasured at fair value on a recurring basis using quoted market prices of the underlying shares.2023. As of December 31, 2016,2019, the estimated future compensation for the unvested shares was $2,904$2,423 based on the closing share priceadjusted grant date fair value of $18.93 on December 31, 2016.these shares. At December 31, 2016,2019, the weighted
average period over which the compensation expense will be recorded is approximately 1.72.0 years. We recorded share based compensation expense of $2,195$1,388 in 2016, $1,3732019, $2,224 in 20152018 and $1,914$2,155 in 2014.2017.
In February 2015, we issued 31,050,000 common shares in a public offering, raising net proceeds of approximately $659,496. On June 5, 2015, we issued 2,345,000 of our common shares in connection with our acquisition of an interest in RMR Inc., as further described in Note 7.
In September 2016During 2019, 2018 and 2015,2017, we purchased an aggregate of 19,23031,747, 22,999 and 13,113,17,170, respectively, of our common shares from certain employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. See Note 7 for further information regarding these purchases.
During the year ended December 31, 2015, we issued 81,557 of our common shares to RMR LLC as part of the business management fees payable by us under our business management agreement. See Note 6 for further information regarding this agreement. |
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| | Annual Per | | | | Characterization of Distribution |
| | Share | | Total | | Ordinary | | Capital | | Return of |
Year | | Distribution | | Distribution | | Income | | Gain | | Capital |
2019 | | $ | 0.84 |
| | $ | 199,719 |
| | — | % | | 25.7 | % | | 74.3 | % |
2018 | | $ | 1.56 |
| | $ | 370,746 |
| | 38.1 | % | | 61.9 | % | | — | % |
2017 | | $ | 1.56 |
| | $ | 370,608 |
| | 89.2 | % | | 10.8 | % | | — | % |
Our cash distributions to our common shareholders were $1.56 per share for each of the years ended December 31, 2016, 2015 and 2014. As described in Note 7, on December 31, 2015, we distributed $2,635,379, or $0.0111 of a share for each of our common shares, of RMR Inc. shares of class A common stock we owned to our common shareholders as a special distribution. The distribution of shares of class A common stock of RMR Inc. resulted in a taxable in-kind distribution of $0.1320 for each of our common shares. The characterization of our distributions paid or accrued in 2016, 2015 and 2014 was 58.77%, 51.48% and 54.00% ordinary income, respectively; 40.67%, 47.80% and 46.00% return of capital, respectively; and 0.56%, 0.72% and 0.00% qualified dividend respectively. On January 13, 2017,16, 2020, we declared a regular quarterly distribution of $0.39 per share, or $92,642,payable to our common shareholders of record on January 23, 2017, with respect to our operating results for27, 2020 in the quarter ended December 31, 2016; weamount of $0.15 per share, or approximately $35,684. We paid this distribution on February 21, 2017,20, 2020, using cash on hand and borrowings under our revolving credit facility.
Note 5.5. Leases and Management Agreements With Five Star
Restructuring our Business Arrangements with Five Star
The Transaction Agreement with Five Star. Pursuant to the Transaction Agreement, effective January 1, 2020, or the Conversion Time:
our previously existing master leases with Five Star for all of our senior living communities that Five Star leased, as well as our previously existing management agreements and pooling agreements with Five Star for our senior living communities that Five Star managed, were terminated and replaced with the New Management Agreements;
Five Star issued to us 10,268,158 of its common shares and an aggregate of approximately 16,118,849 to our shareholders of record as of December 13, 2019; and
as consideration for these share issuances, we provided Five Star with $75,000 of additional consideration, by way of our assumption of certain then current and future working capital liabilities of Five Star.
Pursuant to the Transaction Agreement: (1) commencing February 1, 2019, the aggregate amount of monthly minimum rent payable to us by Five Star under our previously existing master leases with Five Star was set at $11,000, as of February 1, 2019, subject to adjustment, and subsequently reduced in accordance with the Transaction Agreement as a result of our subsequent sales of certain of the leased senior living communities, and no additional rent was payable to us by Five Star from such date until the Conversion Time; and (2) on April 1, 2019, we purchased from Five Star $49,155 of unencumbered Qualifying PP&E (as defined in the Transaction Agreement) related to our senior living communities leased and operated by Five Star.
Pursuant to the New Management Agreements, Five Star will receive a management fee equal to 5% of the gross revenues realized at the applicable senior living communities plus reimbursement for its direct costs and expenses related to such communities, as well as an annual incentive fee equal to 15% of the amount by which the annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of all communities on a combined basis exceeds the target EBITDA for all communities on a combined basis for such calendar year, provided that in no event shall the incentive fee be greater than 1.5% of the gross revenues realized at all communities on a combined basis for such calendar year.
The New Management Agreements expire in 2034, subject to Five Star's right to extend for 2 consecutive five year terms if Five Star achieves certain performance targets for the combined managed communities portfolio, unless earlier terminated or timely notice of nonrenewal is delivered. The New Management Agreements also provide us with the right to terminate the New Management Agreement for any community that does not earn 90% of the target EBITDA for such community for two consecutive calendar years or in any two of three consecutive calendar years, with the measurement period commencing January 1, 2021 (and the first termination not possible until the beginning of calendar year 2023), provided we may not in any calendar year terminate communities representing more than 20% of the combined revenues for all communities for the calendar year prior to such termination. Pursuant to a guaranty agreement dated as of January 1, 2020, or
the Guaranty, made by Five Star in favor of our applicable subsidiaries, Five Star has guaranteed the payment and performance of each of its applicable subsidiary's obligations under the applicable New Management Agreements.
In connection with the Transaction Agreement, we entered into a credit agreement with Five Star, pursuant to which we extended to Five Star a $25,000 line of credit. This line of credit matured and was terminated on January 1, 2020, and there were no borrowings outstanding under this line of credit at the time of such termination and Five Star did not make any borrowing under this line of credit at any time.
On April 1, 2019, we concluded that the Restructuring Transaction constituted a reconsideration event requiring us to assess whether we held a controlling financial interest in Five Star. As a result of this assessment, we determined that Five Star was a VIE effective as of the date of the Transaction Agreement. We determined not to consolidate Five Star in our consolidated financial statements, as we do not have the power to direct the activities of Five Star that most significantly impact Five Star's economic performance and therefore are not the primary beneficiary of Five Star. Effective January 1, 2020, we determined that Five Star is not a VIE and we will account for our 33.9% investment in Five Star using the equity method of accounting because we are deemed to exert significant influence, but not control, over Five Star's most significant activities.
Our Senior Living Communities Formerly Leased by Five Star. We are As of December 31, 2019, we were Five Star’sStar's largest landlord and Five Star iswas our largest tenant. We leased 185, 177166, 184 and 181185 senior living communities to Five Star as of December 31, 2016, 20152019, 2018 and 2014,2017, respectively. We leaseleased senior living communities to Five Star pursuant to the following five5 leases with Five Star:Star, each of which was terminated as of January 1, 2020 pursuant to the Transaction Agreement:
Lease No. 1, which expireswas to expire in 2024 and includes 83included 73 independent living communities, assisted living communities and SNFs.SNFs as of December 31, 2019.
Lease No. 2, which expireswas to expire in 2026 and includes 47included 39 independent living communities, assisted living communities and SNFs.
December 31, 2019.
Lease No. 3, which expireswas to expire in 2028 and includesincluded 17 independent living communities and assisted living communities allas of which secure our mortgage debts payable to the Federal National Mortgage Association.December 31, 2019.
Lease No. 4, which expireswas to expire in 2032 and includes 29included 28 independent living communities, assisted living communities and SNFs.SNFs as of December 31, 2019.
Lease No. 5, which expireswas to expire in 2028 and includes nineincluded 9 assisted living communities.communities as of December 31, 2019.
UnderAs of December 31, 2019, under our previously existing leases with Five Star, Five Star payspaid us annual rent plus percentage rent equal to 4%4.0% of the increase in gross revenues at certain of our senior living communities over base year gross revenues as specified in the applicable lease.leases. Pursuant to the Transaction Agreement, commencing February 1, 2019, no percentage rent was payable to us by Five Star’sStar. Five Star's obligation to pay percentage rent under Lease No. 5 commencescommenced in 2018. We determinedetermined percentage rent due under these leases annually and recognizerecognized it at year end when all contingencies are met.were met, which was typically at year end. We recognized total rental income from Five Star of $203,581, $196,919$137,898, $212,622 and $196,269$210,539 (including percentage rent of $5,686, $5,666$538, $5,525 and $5,752,$5,533) for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. As of December 31, 2016, Five Star’s total annual rent payable to us was $203,356, excluding percentage rent. As of December 31, 20162019, 2018 and 2015,2017, our rents receivablenet receivables from Five Star were $18,320$1,989, $18,697 and $17,466,$18,539, respectively, and those amounts are included in due from affiliate in our consolidated balance sheets. UnderNo rent or percentage rent is payable to us by Five Star as of December 31, 2019.
As of December 31, 2019, our leases with Five Star Five Star has the option to extend the lease term for two consecutive 10 or 15 year terms. We have the right, in connection with a financing or other capital raising transaction, to reassign one or more of the communities covered by Lease No. 5, and, after repayment of certain mortgage debt financing of ours, to reassign one or more of the communities covered by Lease No. 3, to another of our long term lease agreements with Five Star.
Our leases with Five Star are so calledwere “triple net” leases, which generally requirerequired Five Star to pay rent and all property operating expenses, to indemnify us from liability which may arise by reason of our ownership of the properties, to maintain the properties at Five Star’sStar's expense, to remove and dispose of hazardous substances on the properties in compliance with applicable law and to maintain insurance on the properties for Five Star’sStar's and our benefit. In the event of any damage, or immaterial condemnation, of a leased property, Five Star is generally required to rebuild with insurance or condemnation proceeds or, if such proceeds are insufficient, other amounts made available by us, if any, but if other amounts are made available by us, the rent will be increased accordingly. In the event of any material or total condemnation of a leased property, the lease will terminate with respect to that leased property, in which event we will be entitled to the condemnation proceeds and the rent will be reduced accordingly. In the event of any material or total destruction of a leased property, Five Star may terminate the lease with respect to that leased property, in which event Five Star will be required to pay us any shortfall in the amount of proceeds we receive from insurance compared to the replacement cost of that leased property and the rent will be reduced accordingly.
Under our previously existing leases with Five Star, Five Star maycould request that we purchase certain improvements to the leased communities in return forand, until we entered into the Transaction Agreement, the annual rent increasespayable to us by Five Star would increase in accordance with a formula specified in the applicable lease; however, we are not obligated to purchaselease in return for such improvements and Five Star is not obligated to sell them to us.purchases. During the years ended December 31, 2016, 20152018 and 2014,2017, we purchased $21,438, $21,444$17,956 and $25,804,$39,800, respectively, of such improvements and Five Star’sStar's annual rent payable to us increased by $1,719, $1,734$1,433 and $2,066,$3,193, respectively, in accordance with the terms of the applicable leases.
Pursuant to the Transaction Agreement, the $111,603 of improvements to communities leased to Five Star, isincluding $49,155 of fixed assets and improvements that were purchased pursuant to the Transaction Agreement as discussed above, that we funded during the year ended December 31, 2019 did not result in increased rent payable by Five Star.
As of December 31, 2019, Five Star was our most significant tenant. The following is a summary of the assets leased to and revenues earned from Five Star as a tenant as of and for the years ended December 31, 20162019 and 20152018 compared to all our other assets and revenues from all sources:
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| | | | | | | | | | | | | | |
| | At | | At |
| | December 31, 2016 | | December 31, 2015 |
| | Real Estate Properties, at Cost | | % of Total | | Real Estate Properties, at Cost | | % of Total |
Five Star | | $ | 2,293,257 |
| | 30 | % | | $ | 2,147,388 |
| | 29 | % |
All others | | 5,437,266 |
| | 70 | % | | 5,309,552 |
| | 71 | % |
| | $ | 7,730,523 |
| | 100 | % | | $ | 7,456,940 |
| | 100 | % |
|
| | | | | | | | | | | | | | |
| | As of December 31, 2019 | | As of December 31, 2018 |
| | Gross Book Value of Real Estate Assets (1) | | % of Total | | Gross Book Value of Real Estate Assets (1) | | % of Total |
Five Star (2) | | $ | 2,286,951 |
| | 27.2 | % | | $ | 2,253,853 |
| | 26.7 | % |
All others (3) (4) | | 6,133,672 |
| | 72.8 | % | | 6,174,791 |
| | 73.3 | % |
| | $ | 8,420,623 |
| | 100.0 | % | | $ | 8,428,644 |
| | 100.0 | % |
| |
(1) | Represents the gross book value of real estate assets at cost plus certain acquisition costs, before depreciation and purchase price allocations, less impairment write downs, if any. Five Star also manages our managed senior living communities. The gross book value of real estate assets of $1,920,070 as of December 31, 2019 for those managed senior living communities is included in the "All others" category. |
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(2) | Includes gross book value of real estate assets of $50,951 classified as held for sale in our consolidated balance sheet as of December 31, 2019. |
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(3) | Includes gross book value of real estate assets of $213,416 and $3,752 classified as held for sale in our consolidated balance sheets as of December 31, 2019 and 2018, respectively. |
F- 19 |
| | | | | | | | | | | | | | |
| | Year Ended | | Year Ended |
| | December 31, 2019 | | December 31, 2018 |
| | Total Revenues(1) | | % of Total | | Total Revenues (1) | | % of Total |
Five Star | | $ | 137,898 |
| | 13.3 | % | | $ | 212,622 |
| | 19.0 | % |
All others | | 902,257 |
| | 86.7 | % | | 904,542 |
| | 81.0 | % |
| | $ | 1,040,155 |
| | 100.0 | % | | $ | 1,117,164 |
| | 100.0 | % |
| |
(1) | Five Star also manages our managed senior living communities. Our revenues of $433,597 and $416,523 for the years ended December 31, 2019 and 2018, respectively, from those communities are included in the “All others” category. |
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| | | | | | | | | | | | | | |
| | Year Ended | | Year Ended |
| | December 31, 2016 | | December 31, 2015 |
| | Total revenues | | % of Total | | Total revenues | | % of Total |
Five Star | | $ | 203,581 |
| | 19 | % | | $ | 196,919 |
| | 20 | % |
All others | | 854,441 |
| | 81 | % | | 801,854 |
| | 80 | % |
| | $ | 1,058,022 |
| | 100 | % | | $ | 998,773 |
| | 100 | % |
See Note 3 for further information on the effects of certain of our property acquisitions and dispositions on our leases with Five Star.
Our Senior Living Communities Managed by Five Star. Five Star managed 68, 6078, 76 and 4670 senior living communities for our account as of December 31, 2016, 20152019, 2018 and 2014,2017, respectively. We leaseAs of December 31, 2019, we leased most of our senior living communities that arewere managed by Five Star and include assisted living units or SNFs to our TRSs, and Five Star managesmanaged these communities pursuant to long term management agreements.
As of December 31, 2016,described above, pursuant to the Transaction Agreement, effective January 1, 2020, we owned 68 senior living communities that are managed by Five Star. During the year ended December 31, 2016, Five Star began managing forreplaced our account eight senior living communities we own with an aggregate 696 living units. Two of these communities, located in North Carolinalong term management and Alabama with a combined 263 living units, had previously been leased to unrelated third parties that defaulted on such leases. We acquired one of these communities, located in Georgia with 38 living units, in May 2016. Five of these communities, located in Georgia with a combined 395 living units, had previously been managed by affiliates of one of the unrelated third parties that defaulted on its lease referred to above. In December 2016, we terminated the in place management agreements for these communities and entered into new management agreements with Five Star to manage these five communities for our account. One of these new management agreements was added to one of our existing pooling agreements with Five Star andwith the remaining four new management agreements were addedNew Management Agreements, the terms of which are described above. We now lease all of our managed communities to our TRSs.
In December 2019, we acquired a new pooling agreement with Five Star. During the year ended December 31, 2016, we also sold a formerly managed memory care building169 unit Class A active adult rental community located in Florida.Plano, Texas for a purchase price of approximately $50.3 million, excluding closing costs. Five Star manages this property for our account. See Note 3 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K for further information regarding our acquisitions and dispositions.
On June 29, 2016, we and Five Star terminated three of our four then existing pooling agreements and entered into the 10 new pooling agreements that combine our AL Management Agreements for senior living communities. Our management agreement with Five Star for the part of our senior living community located in New York that is not subject to the requirements of New York healthcare licensing laws, as described elsewhere herein, and the management agreement for one of our assisted living communities located in California, are not currently included in any of our pooling agreements with Five Star. Pursuant to our AL Management Agreements and the new pooling agreements, Five Star receives:
a management fee equal to either 3% or 5% of the gross revenues realized at the applicable communities,
reimbursement for its direct costs and expenses related to such communities,
an annual incentive fee equal to either 35% or 20% of the annual net operating income of such communities remaining after we realize an annual minimum return equal to either 8% or 7% of our invested capital, or, in the case of 10 communities, a specified amount plus 7% of our invested capital since December 31, 2015, and
a fee for its management of capital expenditure projects equal to 3% of amounts funded by us.
Each of the new pooling agreements combines various calculations of revenues and expenses from the operations of the applicable communities covered by such agreement.
Under the new pooling agreements, the calculations of Five Star’s fees and of our annual minimum return related to our AL Management Agreement that became effective before May 2015 and had been pooled under one of the previously existing pooling agreements are generally the same as they were under the previously existing pooling agreements. However, for certain communities, the new pooling agreements reduced our annual minimum return to 7%, and also, with respect to 10 communities, reset our annual minimum return as of January 1, 2016 to specified amounts. For our AL Management Agreements that became effective from and after May 2015, the new pooling agreements increased the management fee we pay Five Star from 3% to 5% of the gross revenues realized at the applicable community, and changed the annual incentive fee we pay Five Star from 35% to 20% of the annual net operating income of the applicable community remaining after we realize our requisite annual minimum return.
We also have a pooling agreement with Five Star that combines our management agreements with Five Star for senior living communities consisting only of independent living units, or the IL Pooling Agreement.
Our management agreements with Five Star generally expire between 2030 and 2040, and are subject to automatic renewal for two consecutive 15 year terms, unless earlier terminated or timely notice of nonrenewal is delivered. These management agreements also generally provide that we and Five Star each have the option to terminate the agreements upon the acquisition by a person or group of more than 9.8% of the other’s voting stock and upon certain change in control events affecting the other party, as defined in the applicable agreements, including the adoption of any shareholder proposal (other than a precatory proposal) with respect to the other party, or the election to the board of directors or trustees, as applicable, of the other party of any individual, if such proposal or individual was not approved, nominated or appointed, as the case may be, by a majority of the other party’s board of directors or board of trustees, as applicable, in office immediately prior to the making of such proposal or the nomination or appointment of such individual.
We own a senior living community in New York with 310 living units, a part of which is managed by Five Star pursuant to a long term management agreement with us with respect to the senior living units at this community that are not subject to the requirements of New York healthcare licensing laws. The terms of this management agreement are substantially consistent with the terms of our other management agreements with Five Star for communities that include assisted living units, except that the management fee payable to Five Star is equal to 5% of the gross revenues realized at that part of the community and there is no incentive fee payable by us to Five Star. This management agreement expires on December 31, 2031.
In order to accommodate certain requirements of New York healthcare licensing laws, one of our TRSs subleases the part of this community that is subject to the requirements of those laws, to D&R Yonkers LLC, an entity which is owned by our President and Chief Operating Officer and Five Star’s chief financial officer and treasurer. Five Star manages this part of the community pursuant to a long term management agreement with D&R Yonkers LLC under which Five Star earns a management fee equal to 3% of the gross revenues realized at that part of the community and no incentive fee is payable to Five Star. D&R Yonkers LLC’s management agreement with Five Star expires on August 31, 2017, and is subject to renewal for nine consecutive five year terms, unless earlier terminated or timely notice of nonrenewal is delivered. We have entered into an indemnification agreement with the owners of D&R Yonkers LLC pursuant to which we have agreed to indemnify them for costs, losses and expenses they may sustain by reason of being a member, director or officer of D&R Yonkers LLC or in connection with any costs, losses or expenses under our TRS’s sublease with D&R Yonkers LLC or the management agreement between D&R Yonkers LLC and Five Star. Our transactions and balances with D&R Yonkers LLC are eliminated upon consolidation for accounting purposes and are not separately stated and do not appear in our consolidated financial statements.acquisition.
We incurred management fees of $11,918, $10,728$15,327, $14,426 and $9,765$14,080 for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively, with respect to the communities Five Star managed for us during such years. These amounts are included in property operating expenses or have been capitalized, as appropriate, in our consolidated financial statements.
The following table presents residents fees and services revenue disaggregated by the type of contract and payer:
|
| | | | |
Revenue from contracts with customers: | | Year Ended December 31, 2019 |
Basic housing and support services | | $ | 353,699 |
|
Medicare and Medicaid programs | | 31,324 |
|
Private pay and other third party payer SNF services | | 48,574 |
|
Total residents fees and services | | $ | 433,597 |
|
In addition to providing management services to us, Five Star also provides certain other services to residents at some of the senior living communities it manages for us, such as rehabilitation services. At senior living communities Five Star manages for us where Five Star provides rehabilitation services on an outpatient basis, the residents, third party payers or government programs pay Five Star for those rehabilitation services. At senior living communities Five Star manages for us where Five Star provides both inpatient and outpatient rehabilitation services, we generally pay Five Star for those rehabilitation services and charges for these services are included in amounts charged to residents, third party payers or government programs. We incurred fees of $5,920, $6,442 and $7,525 for the years ended December 31, 2019, 2018 and 2017, respectively, with respect to rehabilitation services Five Star provided at senior living communities it manages for us that are payable by us. These amounts are included in property operating expenses in our consolidated statements of comprehensive income.
See Note 3 for further information on the effects of certain of our property acquisitions and dispositions on our management agreements with Five Star.
income (loss).
Note 6.6. Business and Property Management Agreements with RMR LLC
We have no0 employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two2 agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which relates to the property level operations of our MOBs.medical office and life science properties. We also have a subsidiary level management agreement with RMR LLC related to one of our life science properties located in Boston, Massachusetts, which we entered in connection with the joint venture arrangement for that life science property. Under that agreement, our subsidiary pays RMR LLC certain business management fees directly, which fees are credited against the business management fees payable by us to RMR LLC. See Note 7 for further information regarding our relationship, agreements and transactions with RMR LLC.
Fees. Management Agreements with RMR LLC. Our management agreements with RMR LLC provide for an annual base management fee, an annual incentive management fee and property management and construction supervision fees, payable in cash:cash, among other terms:
Base Management Fee. The annual base management fee payable to RMR LLC by us for each applicable period is equal to the lesser of:
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• | Base Management Fee. The annual base management fee payable to RMR LLC by us for each applicable period is equal to the lesser of: |
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◦ | the sum of (a) 0.5% of the daily weighted average of the aggregate book value of our real estate assets owned by us or our subsidiaries as of October 12, 1999, or the Transferred Assets, plus (b) 0.7% of the average aggregate historical cost of our real estate investments excluding the Transferred Assets up to $250,000, plus (c) 0.5% of the average aggregate historical cost of our real estate investments excluding the Transferred Assets exceeding $250,000; and |
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◦ | the sum of (a) 0.7% of the average closing price per share of our common shares on the applicable stock exchange on which such shares are principally traded during such period, multiplied by the average number of our common shares outstanding during such period, plus the daily weighted average of the aggregate liquidation preference of each class of our preferred shares outstanding during such period, plus the daily weighted average of the aggregate principal amount of our consolidated indebtedness during such period, or, together, our Average Market Capitalization, up to $250,000, plus (b) 0.5% of our Average Market Capitalization exceeding $250,000. |
The average aggregate historical cost of our real estate investments includes our consolidated assets invested, directly or indirectly, in equity interests in or loans secured by real estate and personal property owned in connection with such real estate (including acquisition related costs and costs which may be allocated to intangibles or are unallocated), all before reserves for depreciation, amortization, impairment charges or bad debts or other similar non cash reserves.
Incentive Fee. The incentive fee which may be earned by RMR LLC for an annual period is calculated as follows:
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• | Incentive Management Fee. The incentive management fee which may be earned by RMR LLC for an annual period is calculated as follows: |
An amount, subject to a cap, based on the value of our outstanding common shares outstanding, equal to 12%12.0% of the product of:
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◦ | our equity market capitalization on the last trading day of the year immediately prior to the relevant three year measurement period, and |
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◦ | the amount (expressed as a percentage) by which the total returnsreturn per share, realized byas defined in the business management agreement and further described below, of our common shareholders (i.e., share price appreciation plus dividends) exceeds the total shareholder return of the SNL U.S. REIT Healthcare Index, (in each case subject to certain adjustments)or the benchmark return per share, for the relevant measurement period. |
The measurement periods are generally three year periods ending with the year for which the incentive fee is being calculated, with shorter periods applicable in the case
For purposes of the calculation of the incentive fee for 2015 (two years) and 2014 (one year).
The benchmark return per share is adjusted if our total return per share exceeds 12% per year in any measurement period and, generally, no incentive management fee is payable by us unlessof our total return percommon shareholders, share during theprice appreciation for a measurement period is positive.
The incentive management fee is subject to a cap equal todetermined by subtracting (1) the value of 1.5% of the numberclosing price of our common shares then outstanding multiplied byon Nasdaq on the last trading day of the year immediately before the first year of the applicable measurement period, or the initial share price, from (2) the average closing price of our common shares duringon the 10 consecutive trading days having the highest average closing prices during the final 30 trading days in the last year of the relevant measurement period.
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◦ | The calculation of the incentive management fee (including the determinations of our equity market capitalization, initial share price and the total return per share of our common shareholders) is subject to adjustments if additional common shares are issued, or if we repurchase our common shares, during the measurement period. |
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◦ | NaN incentive management fee is payable by us unless our total return per share during the measurement period is positive. |
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◦ | The measurement periods are three year periods ending with the year for which the incentive management fee is being calculated. |
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◦ | If our total return per share exceeds 12.0% per year in any measurement period, the benchmark return per share is adjusted to be the lesser of the total shareholder return of the SNL U.S. REIT Healthcare Index for such measurement period and 12.0% per year, or the adjusted benchmark return per share. In instances where the adjusted benchmark return per share applies, the incentive management fee will be reduced if our total return per share is between 200 basis points and 500 basis points below the SNL U.S. REIT Healthcare Index by a low return factor, as defined in the business management agreement, and there will be 0 incentive management fee paid if, in these instances, our total return per share is more than 500 basis points below the SNL U.S. REIT Healthcare Index. |
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◦ | The incentive management fee is subject to a cap. The cap is equal to the value of the number of our common shares which would, after issuance, represent 1.5% of the number of our common shares then outstanding multiplied by the average closing price of our common shares during the 10 consecutive trading days having the highest average closing prices during the final 30 trading days of the relevant measurement period. |
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◦ | Incentive management fees we paid to RMR LLC for any period may be subject to “clawback” if our financial statements for that period are restated due to material non-compliance with any financial reporting requirements under the securities laws as a result of the bad faith, fraud, willful misconduct or gross negligence of RMR LLC and the amount of the incentive management fee we paid was greater than the amount we would have paid based on the restated financial statements. |
If our financial statements are restated due to material non-compliance with any financial reporting requirements under the securities laws as a result of the bad faith, fraud, willful misconduct or gross negligence of RMR LLC, for one or more periods in respect of which RMR LLC received an incentive management fee, the incentive management fee payable with respect to periods for which there has been a restatement shall be recalculated by, and approved by a majority vote of, our Independent Trustees, and RMR LLC may be required to pay us an amount equal to the value in excess of that which RMR LLC would have received based upon the incentive management fee as recalculated, either in cash or our common shares.
Property Management and Construction Supervision Fees. The property management fees payable to RMR LLC by us for each applicable period are equal to 3% of gross collected rents and the construction supervision fees payable to RMR LLC by us for each applicable period are equal to 5% of construction costs.
Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $36,763, $34,949$27,399, $35,874 and $30,794$38,638 for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. The net business management fees we recognized are included in general and administrative expenses in our consolidated statements of comprehensive income (loss) for these periods. The net business management fees we recognized for the years ended December 31, 20162019, 2018 and 20152017 reflect a reduction of $2,974, and $1,743, respectively,for each of those years for the amortization of the liability we recorded in connection with, the Up-C Transaction,our investment in RMR Inc., as further described in Note 2 .7.
In accordance with the then applicable terms ofPursuant to our business management agreement we issued 68,983 of our common shares towith RMR LLC, in January 2019 and 2018, we paid RMR LLC an incentive management fee of $40,642 and $55,740 for the period from January 1, 2015 to Mayyears ended December 31, 2015,2018 and we issued 123,462 of our common shares2017, respectively. We did not recognize an incentive management fee payable to RMR LLC for the year ended December 31, 2014, in each case as payment for a part of2019. In calculating the base businessincentive management fee we recognized forpayable by us, our total shareholder return per share was adjusted in accordance with the applicable period. Beginning June 1, 2015, all management fees under our business management agreement are paidto reflect aggregate net increases in cash.
No incentive feethe number of our common shares outstanding as a result of certain share issuances and repurchases by us during the applicable three year measurement period. In addition, the calculation of our benchmark return per share was payable to RMR LLC under ouralso adjusted for these issuances and repurchases in accordance with the business management agreement forduring the years ended December 31, 2016, 2015 or 2014.applicable three year measurement period.
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• | Property Management and Construction Supervision Fees. The property management fees payable to RMR LLC by us for each applicable period are equal to 3.0% of gross collected rents and the construction supervision fees payable to RMR LLC by us for each applicable period are equal to 5.0% of construction costs. |
Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $10,585, $10,342$13,141, $12,214 and $8,259$10,919 for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. The net property management and construction supervision fees we recognized reflect a reduction of $797 for both the years ended December 31, 2019 and 2018 and $798 for the year ended December 31, 2017, for the amortization of the liability we recorded in connection with our investment in RMR Inc., as further described in Note 7. These amounts are included in property operating expenses or have been capitalized, as appropriate, in our consolidated financial statements.
Expense Reimbursement. We are generally responsible for all of our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. Our property level operating expenses are generally incorporated into rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. We reimbursed RMR LLC $9,061, $7,021 and $5,289 for property management related expenses for the years ended December 31, 2016, 2015 and 2014, respectively. These amounts are included in property operating expenses in our consolidated statements of comprehensive income for these periods. We are generally not responsible for payment of RMR LLC’sLLC's employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR LLCLLC's employees assigned to work exclusively or partly at our medical office and life science properties, our share of the wages, benefits and other related costs of RMR LLC's centralized accounting personnel, and our share of RMR LLC’sLLC's costs for providing our internal audit function.function, or as otherwise agreed. Our Audit Committee appoints our Director of Internal Audit and our Compensation Committee approves the costs of our internal audit function. The amounts recognized as expenseOur property level operating expenses are generally incorporated into the rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. We reimbursed RMR LLC $13,373, $11,891 and $9,993 for internal auditthese costs were $235, $256 and $278expenses for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. These amounts are included in property operating expenses or general and administrative expenses, as applicable, in our consolidated statements of comprehensive income (loss) for these periods.
Term. Our management agreements with RMR LLC have terms that end on December 31, 2036,2039, and automatically extend on December 31st of each year for an additional year, so that the terms of our management agreements thereafter end on the 20th anniversary of the date of the extension.
Termination Rights. We have the right to terminate one or both of our management agreements with RMR LLC: (1)(i) at any time on 60 days’days' written notice for convenience, (2)(ii) immediately on written notice for cause, as defined therein, (3)(iii) on written notice given within 60 days after the end of an applicable calendar year for a performance reason, as defined therein, and (4)(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 management agreements for good reason, as defined therein.
Termination Fee. If we terminate one1 or both of our management agreements with RMR LLC for convenience, or if RMR LLC terminates one1 or both of our 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 management agreement(s) for the term that was remaining prior to such termination, which, depending on the time of termination would be between 19 and 20 years. If we terminate one1 or both of our management agreements with RMR LLC for a performance reason, we have agreed to pay RMR LLC the termination fee calculated as described above, but assuming a 10 year term was remaining prior to the termination. We are not required to pay any termination fee if we terminate our management agreements with RMR LLC for cause or as a result of a change of control of RMR LLC.
Transition Services. RMR LLC has agreed to provide certain transition services to us for 120 days following an applicable termination by us or notice of termination by RMR LLC, including cooperating with us and using commercially reasonable efforts to facilitate the orderly transfer of the management and real estate investment services provided under our business management agreement and to facilitate the orderly transfer of the management of the managed properties under our property management agreement, as applicable.
Vendors. Pursuant to our management agreements with RMR LLC, RMR LLC may from time to time negotiate on our behalf with certain third party vendors and suppliers for the procurement of goods and services to us. As part of this arrangement, we may enter into agreements with RMR LLC and other companies to which RMR LLC providesor its subsidiaries provide management services for the purpose of obtaining more favorable terms from such vendors and suppliers.
Investment Opportunities. Under our business management agreement with RMR LLC, we acknowledge that RMR LLC may engage in other activities or businesses and act as the manager to any other person or entity (including other REITs) even though such person or entity has investment policies and objectives similar to ours and we are not entitled to preferential treatment in receiving information, recommendations and other services from RMR LLC.
Note 7.7. Related Person Transactions
Five Star.We have relationships and historical and continuing transactions with Five Star, wasRMR LLC, RMR Inc. and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our 100% owned subsidiary until we distributedTrustees or officers. RMR Inc. is the managing member of RMR LLC. The Chair of our Board and one of our Managing Trustees, Adam D. Portnoy, as the sole trustee of ABP Trust, is the controlling shareholder of RMR Inc. and is a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. Jennifer B. Clark, our other Managing Trustee, also serves as a managing director and the executive vice president, general counsel and secretary of RMR Inc. and an officer and employee of RMR LLC and each of our officers is also an officer and employee of RMR LLC. Certain of Five Star's officers are officers and employees of RMR LLC. Our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR LLC or its common sharessubsidiaries provide management services. Adam Portnoy serves as the chair of the boards of trustees or boards of directors of several of these public companies and as a managing director or managing trustee of these companies. Other officers of RMR LLC serve as managing trustees or managing directors of certain of these companies. In addition, officers of RMR LLC and RMR Inc. serve as our officers and officers of other companies to our shareholders in 2001.which RMR LLC or its subsidiaries provide management services.
Five Star. We are currently oneFive Star's largest stockholder. As of January 1, 2020, we owned 10,691,658 of Five Star’s largest stockholders, owning, asStar's common shares, or approximately 33.9% of Five Star's outstanding common shares. As of December 31, 2016, 4,235,0002019, Five Star common shares, or 8.5% of Five Star’s outstanding common shares. Five Star iswas our largest tenant and the manager of our managed senior living communities.
Pursuant to the Transaction Agreement, as of January 1, 2020, all of our senior living communities that Five Star operates are managed pursuant to the New Management Agreements. RMR LLC provides management services to both us and Five Star.
As of January 1, 2020, ABP Acquisition LLC, a subsidiary of ABP Trust, the controlling shareholder of RMR Inc., the managing member of RMR LLC, is controlled by our Managing Trustees, Adam Portnoy and Barry Portnoy. As of December 31, 2016, Adam Portnoy and Barry Portnoy beneficiallytogether with ABP Trust, owned an aggregate of 18,339,621 Five Star common shares, or 36.7%approximately 6.3% of Five Star’sStar's outstanding common shares. BarryAdam Portnoy is alsothe chair of the board of directors and a managing director of Five Star. Jennifer Clark is a managing director and the secretary of Five Star’sStar. Five Star's president and chief executive officer and executive vice president, chief financial officer and treasurer and senior vice president and general counsel are officers and employees of RMR LLC and Five Star’s chief financial officer and treasurer was formerly our Chief Financial Officer and Treasurer from 2007 through 2015.LLC.
In order to effect our distribution of Five Star common shares to our shareholders in 2001 and to govern our relations with Five Star thereafter, Five Star entered into agreements with us and others, including RMR LLC. Since then, we have entered into various leases, management agreements and other agreements with Five Star that include provisions that confirm and modify these undertakings. Among other things, these agreements provide that:
so long as we remain a REIT, Five Star may not waive the share ownership restrictions in its charter that prohibit any person or group from acquiring more than 9.8% (in value or number of shares, whichever is more restrictive) of the outstanding shares of any class of Five Star stock without our consent;
so long as Five Star is our tenant or manager, Five Star will not permit nor take any action that, in our reasonable judgment, might jeopardize our qualification for taxation as a REIT;
we have the right to terminate our leases and management agreements with Five Star upon the acquisition by a person or group of more than 9.8% of Five Star’sStar's voting stock or other change in control events, as defined therein affecting Five Star, as defined therein, including the adoption of any shareholder proposal (other than a precatory proposal) or the election to Five Star’sStar's board of directors of any individual, if such proposal or individual was not approved, nominated or appointed, as the case may be, by a majority of Five Star’sStar's directors in office immediately prior to the making of such proposal or the nomination or appointment of such individual; and
so long as Five Star is our tenant or manager or has a business management agreement with RMR LLC, Five Star will not acquire or finance any real estate of a type then owned or financed by us or any other company managed by RMR LLC without first giving us or such company managed by RMR LLC, as applicable, the opportunity to acquire or finance that real estate.
Our Senior Living Communities Leased or Managed by Five Star. As of December 31, 2016, 2015 and 2014, we leased 185, 177 and 181 senior living communities to Five Star, respectively, pursuant to five leases, and Five Star managed 68, 60 and 46 senior living communities for our account, respectively. On June 29, 2016, we entered into a transaction agreement and related agreements with Five Star, pursuant to which, among other things, we purchased seven senior living communities from Five Star and simultaneously leased these communities back to Five Star under a new long term lease agreement, terminated three of our four then existing pooling agreements that combined certain of our AL Management Agreements, and we entered into 10 new pooling agreements with Five Star. See Note 5 for further information regarding our leases, management agreements and pooling agreements and the June 29, 2016 transaction agreement with Five Star.
From 2014 to 2016, in addition to the June 2016 transaction agreement referenced above, we added various senior living communities that we acquired to our leases and management agreements with Five Star. Acquired senior living communities that were added to certain of our leases with Five Star resulted in increases in the annual rent payable to us by Five Star pursuant to those leases. During this period, we and Five Star also sold various senior living communities that had been leased to or managed by Five Star. Senior living communities we sold that had been leased by Five Star were removed from the applicable leases, which resulted in decreases in the annual rent payable to us by Five Star pursuant to those leases. Further, during this period, we purchased from Five Star various capital improvements that Five Star made to our leased senior living communities, which resulted in increases in the annual rent payable to us by Five Star pursuant to the applicable leases.
See Notes 3 and 5 for further information regarding our relationship,relationships, agreements and transactions with Five Star.
Tender Offer for Five Star Shares. In connection with the proposed acquisition of up to 18,000,000 Five Star common shares by ABP Acquisition LLC, an entity indirectly owned by our Managing Trustees, on October 2, 2016, we entered into a consent agreement with Adam Portnoy, Barry Portnoy, ABP Trust and ABP Acquisition LLC, or together, the ABP Parties, which was approved by our Board of Trustees (with Adam Portnoy and Barry Portnoy abstaining), pursuant to which we: (1) consented to the Five Star board of directors’ grant of exceptions to the ownership restrictions set forth in Five Star’s charter that allowed the ABP Parties and certain related persons to acquire and own, in aggregate, up to 38% of the issued and outstanding Five Star common shares and (2) waived any default or event of default under any lease, management or other agreement between or among us and Five Star, or any of its or our subsidiaries, arising or resulting from the grant of such exceptions or the acquisition by the ABP Parties, in aggregate, of up to 18,000,000 Five Star common shares. On November 10, 2016, ABP Acquisition LLC completed the acquisition of 17,999,999 Five Star common shares at a purchase price of $3.00 per share pursuant to a tender offer.
D&R Yonkers LLC. In order to accommodate certain requirements of New York healthcare licensing laws, one of our TRSs subleases the part of our senior living community located in Yonkers, New York that is subject to the requirements of those laws, to D&R Yonkers LLC, an entity which is owned by our President and Chief Operating Officer and Five Star’s chief financial officer and treasurer. Five Star manages this part of the community pursuant to a long term management agreement with D&R Yonkers LLC. See Note 5 for further information regarding our relationship, agreements and transactions with D&R Yonkers LLC and Five Star.
Our Manager, RMR LLC. We have two2 agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which relates to the property level operations of our MOBs.medical office and life science properties. See Note 6 for further information regarding our management agreements with RMR LLC.
We have relationships and historical and continuing transactions with RMR LLC, RMR Inc. and others related to them. RMR LLC is a subsidiary of RMR Inc. One of our Managing Trustees, Adam Portnoy, is a managing director, president and chief executive officer and controlling shareholder (through ABP Trust) of RMR Inc. and an officer of RMR LLC. Our other Managing Trustee, Barry Portnoy, is a managing director, officer and controlling shareholder (through ABP Trust) of RMR Inc. and an officer of RMR LLC. ABP Trust is owned by Adam Portnoy and Barry Portnoy. Adam Portnoy and Barry Portnoy also own class A membership units of RMR LLC (through ABP Trust). Each of our executive officers is also an officer of RMR LLC. Our Independent Trustees also serve as independent directors or independent trustees of other companies to which RMR LLC or its affiliates provide management services. Barry Portnoy serves as a managing director or managing trustee of all of the public companies to which RMR LLC or its affiliates provide management services and Adam Portnoy serves as a managing trustee of a majority of those companies. In addition, officers of RMR LLC and RMR Inc. serve as our officers and officers of other companies to which RMR LLC or its affiliates provide management services. See Note 6 for further information regarding our relationship with RMR LLC.
Leases with RMR LLC. We lease office space to RMR LLC in certain of our properties for RMR LLC’sLLC's property management offices. Pursuant to our lease agreements with RMR LLC, weWe recognized rental income from RMR LLC for leased office space of $242, $204$256, $228 and $0$331 for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. Our office space leases with RMR LLC are terminable by RMR LLC if our management agreements with RMR LLC are terminated.
Share Awards to RMR LLC Employees. We have historically granted share awards to certain RMR LLC employees under our equity compensation plans. During the years ended December 31, 2016, 2015 and 2014, As described in Note 4, we awardedaward shares to our officers and other employees of RMR LLC annual share grants of 79,650, 84,000 and 81,700 of our common shares, respectively, valued at $1,724, $1,321 and $1,750, respectively, based upon the closing price of our common shares on the applicable stock exchange on which our common shares were listed on the dates of grant. Oneannually. Generally, one fifth of these awards vestedvest on the applicable grant datesdate and one fifth vests on each of the next four anniversaries of the grant dates. In certain instances, we may accelerate the vesting of an award, such as in connection with the award holder's retirement as an officer of us or an officer or employee of RMR LLC. These awards to RMR LLC employees are in addition to the share awards granted to Adam Portnoy and Barry Portnoy asour Managing Trustees, as Trustee compensation, and the fees we paid to RMR LLC. On September 26, 2016See Note 4 for information regarding our share awards and September 30, 2016,activity as well as certain share purchases we purchased an aggregate of 17,667 and 1,563, respectively. of our common shares valued at $23.53 and $22.71, respectively, per common share, the closing price of our common shares on The NASDAQ Stock Market LLC, or the Nasdaq, on the days these shares were purchased, from certain employees of RMR LLC in satisfaction of tax withholding and payment obligationsmade in connection with the vesting of awards of our common shares. In September 2015, we purchased an aggregate of 13,113 of our common shares valued at $16.19 per common share the closing price of our common shares on the New York Stock Exchange on that day, from certain employees of RMR LLC in satisfaction ofaward recipients satisfying tax withholding and payment obligations in connection withobligation on vesting share awards.
RMR Inc. On July 1, 2019, we sold all of the vesting of awards of our common shares.
Acquisition of Interest in RMR LLC. On June 5, 2015, we and three other REITs to which RMR LLC provides management services - Government Properties Income Trust, or GOV, Hospitality Properties Trust and SIR, or GOV, HPT and SIR, collectively, the Other REITs - participated in a transaction, or the Up-C Transaction, by which we and the Other REITs each acquired2,637,408 shares of class A common stock of RMR Inc. The Up-C Transaction was completedthat we owned in an underwritten public offering at a price to the public of $40.00 per share pursuant to a transactionthe underwriting agreement by and among
us, RMR LLC, its then sole member, ABP Trust, and RMR Inc. and similar transaction agreements that each Other REIT entered into with, certain other REITs managed by RMR LLC ABP Trust and RMR Inc. As part of the Up-C Transaction and concurrently with entering into the transaction agreements, on June 5, 2015, among other things:
We contributed to 2,345,000 of our common shares and $13,967 in cash to RMR Inc. and RMR Inc. issued 5,272,787 shares of its class A common stock to us.
We agreed to distribute approximately half of the shares ofthat also sold their class A common stock of RMR Inc. issued to us in the Up-C Transaction to our shareholders as a special distribution.offering, and the underwriters named therein. We received net proceeds of $98,557 from this sale, after deducting the underwriting discounts and commissions and other offering expenses.
We entered into amended and restated business and property management agreements with RMR LLC which, among other things, amended the term, termination and termination fee provisions of those agreements. See Note 6 for further information regarding our management agreements with RMR LLC.
We entered into a registration rights agreement with RMR Inc. covering the shares of class A common stock of RMR Inc. issued to us in the Up-C Transaction, pursuant to whichAIC. Until its dissolution on February 13, 2020, we, received demand and piggyback registration rights, subject to certain limitations.
We entered into a lock up and registration rights agreement with ABP Trust, Adam Portnoy and Barry Portnoy pursuant to which they agreed not to transfer the 2,345,000 of our common shares ABP Trust received in the Up-C Transaction for a 10 year period ending on June 5, 2025 and we granted them certain registration rights, subject, in each case, to certain exceptions.
Each Other REIT participated in the Up-C Transaction in a similar manner. After giving effect to the Up-C Transaction, RMR LLC became a subsidiary of RMR Inc. and RMR Inc. became the managing member of RMR LLC.
Pursuant to the transaction agreements for the Up-C Transaction, on December 14, 2015, we distributed 2,635,379 shares of class A common stock of RMR Inc. to our shareholders as a special distribution, which represented approximately half of the shares of class A common stock of RMR Inc. issued to us in the Up-C Transaction; each Other REIT also distributed approximately half of the shares of class A common stock of RMR Inc. issued to it in the Up-C Transaction to its respective shareholders. RMR Inc. facilitated these distributions by filing a registration statement with the SEC to register the shares of class A common stock of RMR Inc. being distributed and by listing those shares on the Nasdaq. In connection with this distribution, we recognized a non cash loss of $38,437 in the fourth quarter of 2015 as a result of the closing price of the class A common stock of RMR Inc. being lower than our carrying amount per share on the distribution date. See Notes 2 and 9 for information regarding the fair value of our investment in RMR Inc. as of December 31, 2016.
Through their ownership of class A common stock of RMR Inc., class B-1 common stock of RMR Inc., class B-2 common stock of RMR Inc. and class A membership units of RMR LLC, as of December 31, 2016, Adam Portnoy and Barry Portnoy in aggregate hold, directly and indirectly, a 51.9% economic interest in RMR LLC and control 91.5% of the voting power of outstanding capital stock of RMR Inc. We currently hold 2,637,408 shares of class A common stock of RMR Inc.
SIR.On January 29, 2015, we purchased from SIR entities owning 23 MOBs, or the CCIT MOBs, that SIR acquired when its subsidiary merged with CCIT. Our purchase price for these 23 MOBs was $532,000, including a purchase price adjustment of $7,677 and our assumption of $29,995 of mortgage debts, but excluding working capital. In April 2015, SIR paid us $1,316 to settle certain working capital activity for the 23 MOBs as of the sale date. See Note 3 for further information regarding our purchase of the CCIT MOBs.
Our Managing Trustees, Adam Portnoy and Barry Portnoy, are also managing trustees of SIR and of GOV, which is SIR’s largest shareholder. Two of our Independent Trustees also serve as independent trustees of GOV and one of our Independent Trustees also serves as an independent trustee of SIR. RMR LLC provides management services to us, SIR and GOV.
AIC. We, ABP Trust, Five Star and four4 other companies to which RMR LLC provides management services currently ownowned AIC an Indiana insurance company, in equal amounts and are parties to an amended and restated shareholders agreement regarding AIC. Allamounts. Certain of our Trustees and all of thecertain directors or trustees and directors of the other AIC shareholders currently serveserved on the board of directors of AIC. RMR LLC provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC. Pursuant to this agreement, AIC pays RMR LLC a service fee equal to 3% of the total annual net earned premiums payable under then active policies issued or underwritten by AIC or by a vendor or an agent of AIC onuntil its behalf or in furtherance of AIC’s business.dissolution.
We and the other AIC shareholders participatehistorically participated in a combined property insurance program arranged and insured or reinsured in part by AIC.AIC; we also had a one year standalone insurance policy that provided coverage for one of our life science properties located in Boston, Massachusetts that is owned in our joint venture arrangement, which we obtained as a part of this insurance program. We (including our consolidated joint venture) paid aggregate annual premiums, including taxes and fees, of $3,607, $2,785$4,413, $2,433 and $3,118$3,607 in connection with this insurance program for the policy years endingended June 30, 2019, 2018 and 2017, 2016 and 2015, respectively, which amount for the current policy year endingrespectively. The policies under that program expired on June 30, 2017, which amount may be adjusted2019, and we and the other AIC shareholders elected not to renew the AIC property insurance program; we have instead purchased standalone property insurance coverage with unrelated third party insurance providers.
On February 13, 2020, AIC was dissolved and in connection with its dissolution, we and each other AIC shareholder received an initial liquidating distribution of $9,000 from time to time as we acquire and dispose of properties that are includedAIC in this insurance program.December 2019.
As of December 31, 20162019, 2018 and 2015,2017, our investment in AIC had a carrying value of $7,116$298, $8,632 and $6,827,$8,185, respectively. These amounts are included in other assets in our consolidated balance sheets. We recognized income of $137, $20$400, $516, and $87$608 related to our investment in AIC for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. These amounts are presented as equity in earnings of an investee in our consolidated statements of comprehensive income (loss). Our other comprehensive income (loss) includes our proportionate part of unrealized gains (losses) on securities which arewere owned and held for sale by AIC of $152, $(20)$91, $(68) and $2$462 related to our investment in AIC for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively.
Directors’RMR LLC historically provided management and Officers’administrative services to AIC for a fee equal to 3.0% of the total premiums paid for insurance arranged by AIC. As a result of the property insurance program having been discontinued, AIC has not occurred fees payable to RMR LLC since that time.
Directors' and Officers' Liability Insurance. We, RMR Inc., RMR LLC and certain other companies to which RMR LLC providesor its subsidiaries provide management services, including Five Star, participate in a combined directors’directors' and officers’officers' liability insurance policy. ThisThe current combined policy expires in September 2018.2020. We paid aggregate premiums of $142, $472$167, $253 and $736$255 in 2016, 20152019, 2018 and 2014,2017, respectively, for these policies.
Note 8. Indebtedness
Our principal debt obligations at At December 31, 2016 were: (1)2019 and 2018, our outstanding borrowings under our $1,000,000 unsecured revolving credit facility; (2) six public issuancesindebtedness consisted of senior unsecured notes, including: (a) $400,000 principal amount at an annual interest rate of 3.25% due 2019, (b) $200,000 principal amount at an annual interest rate of 6.75% due 2020, (c) $300,000 principal amount at an annual interest rate of 6.75% due 2021, (d) $250,000 principal amount at an annual interest rate of 4.75% due 2024, (e) $350,000 principal amount at an annual interest rate of 5.625% due 2042 and (f) $250,000 principal amount at an annual interest rate of 6.25% due 2046; (3) our $350,000 principal amount term loan due 2020; (4) our $200,000 principal amount term loan due 2022; and (5) $1,109,807 aggregate principal amount of mortgages (excluding premiums, discounts and net debt issuance costs) secured by 43 of our properties (45 buildings) with maturity dates between 2017 and 2043. The 43 mortgaged properties (45 buildings) had a carrying value (before accumulated depreciation) of $1,618,222 at December 31, 2016. We also had two properties subject to capital leases with lease obligations totaling $11,466 at December 31, 2016; these two properties had a carrying value (before accumulated depreciation) of $36,084 at December 31, 2016, and the capital leases expire in 2026.following:
In February 2016, we issued $250,000 of 6.25% senior unsecured notes due 2046. We used the net proceeds of this offering to repay in part the then outstanding amount under our revolving credit facility and for general business purposes. |
| | | | | | | | | | |
| | | | Principal Balance as of December 31, |
Unsecured Floating Rate Debt (1) | | Maturity | | 2019 | | 2018 |
Revolving credit facility (2) | | January 2022 | | $ | 537,500 |
| | $ | 139,000 |
|
Unsecured term loan (3) | | January 2020 | | — |
| | 350,000 |
|
Unsecured term loan | | June 2020 | | 250,000 |
| | — |
|
Unsecured term loan | | September 2022 | | 200,000 |
| | 200,000 |
|
Total unsecured floating rate debt | | | | $ | 987,500 |
| | $ | 689,000 |
|
| |
(1) | As of December 31, 2019 and 2018, the unamortized net debt issuance costs on certain of these debts were $1,259 and $1,714, respectively. |
| |
(2) | Outstanding borrowings under our $1,000,000 unsecured revolving credit facility. |
| |
(3) | We prepaid this term loan in December 2019. |
In July 2016, we entered into loan agreements and obtained an aggregate $620,000 secured debt financing that matures in August 2026. These loans are secured by one MOB (two buildings) located in Massachusetts and require interest to be paid at a weighted average fixed annual interest rate of 3.53%. We used the net proceeds from these loans to repay, in part, the then outstanding amount under our revolving credit facility and for general business purposes. The loan agreements contain customary covenants and provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default. |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | December 31, 2019 | | December 31, 2018 |
Senior Unsecured Notes (1) | | Coupon | | Maturity | | Face Amount | | Unamortized Discount | | Face Amount | | Unamortized Discount |
Senior unsecured notes | | 3.250 | % | | May 2019 | | $ | — |
| | $ | — |
| | $ | 400,000 |
| | $ | 19 |
|
Senior unsecured notes | | 6.750 | % | | April 2020 | | 200,000 |
| | 59 |
| | 200,000 |
| | 274 |
|
Senior unsecured notes | | 6.750 | % | | December 2021 | | 300,000 |
| | 1,024 |
| | 300,000 |
| | 1,558 |
|
Senior unsecured notes | | 4.750 | % | | May 2024 | | 250,000 |
| | 342 |
| | 250,000 |
| | 421 |
|
Senior unsecured notes | | 4.750 | % | | February 2028 | | 500,000 |
| | 6,857 |
| | 500,000 |
| | 7,702 |
|
Senior unsecured notes | | 5.625 | % | | August 2042 | | 350,000 |
| | — |
| | 350,000 |
| | — |
|
Senior unsecured notes | | 6.250 | % | | February 2046 | | 250,000 |
| | — |
| | 250,000 |
| | — |
|
Total senior unsecured notes | | | | | | $ | 1,850,000 |
| | $ | 8,282 |
| | $ | 2,250,000 |
| | $ | 9,974 |
|
| |
(1) | As of December 31, 2019 and 2018, the unamortized net debt issuance costs on certain of these notes were $21,037 and $23,081, respectively. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Principal Balance as of December 31, | | | | | | Number of Properties as Collateral | | Net Book Value of Collateral as of December 31, |
| | | | | | | |
Secured and Other Debt | | 2019 (1) | | 2018 (1) | | Interest Rate | | Maturity | | At December 31, 2019 | | 2019 | | 2018 |
Mortgage note (2) | | $ | — |
| | $ | 42,618 |
| | 3.79 | % | | July 2019 | | — |
| | $ | — |
| | $ | 61,199 |
|
Mortgage note (3) | | 1,426 |
| | 2,037 |
| | 7.49 | % | | January 2022 | | 1 |
| | 11,469 |
| | 14,602 |
|
Mortgage note | | 12,513 |
| | 13,146 |
| | 6.28 | % | | July 2022 | | 1 |
| | 23,662 |
| | 24,064 |
|
Mortgage note | | 10,958 |
| | 11,180 |
| | 4.85 | % | | October 2022 | | 1 |
| | 20,139 |
| | 20,602 |
|
Mortgage note | | 16,131 |
| | 16,441 |
| | 5.75 | % | | October 2022 | | 2 |
| | 19,751 |
| | 20,342 |
|
Mortgage note | | 16,056 |
| | 16,442 |
| | 6.64 | % | | June 2023 | | 1 |
| | 22,854 |
| | 20,538 |
|
Mortgage notes (4) | | 620,000 |
| | 620,000 |
| | 3.53 | % | | August 2026 | | 1 |
| | 724,715 |
| | 745,079 |
|
Mortgage note (3) (5) | | 1,589 |
| | 1,983 |
| | 6.25 | % | | March 2026 | | 1 |
| | 4,226 |
| | 4,402 |
|
Mortgage note | | 10,688 |
| | 10,901 |
| | 4.44 | % | | July 2043 | | 1 |
| | 13,756 |
| | 13,816 |
|
Capital Leases | | 8,874 |
| | 9,832 |
| | 7.70 | % | | April 2026 | | 2 |
| | 18,432 |
| | 17,970 |
|
Total secured | | $ | 698,235 |
| | $ | 744,580 |
| | | | | | 11 |
| | $ | 859,004 |
| | $ | 942,614 |
|
| |
(1) | The principal balances are the amounts stated in the contracts. In accordance with GAAP, our carrying values and recorded interest expense may be different because of market conditions at the time we assumed certain of these debts. As of December 31, 2019 and 2018, the unamortized net premiums and debt issuance costs on certain of these mortgages were $506 and $394, respectively. |
| |
(2) | We prepaid this debt in May 2019. |
| |
(3) | The properties encumbered by these mortgages were classified as held for sale as of December 31, 2019. The associated mortgages, along with $25 of unamortized net debt issuance costs, are included in liabilities of properties held for sale in our consolidated balance sheets as of December 31, 2019. |
| |
(4) | The property encumbered by these mortgages is owned in a joint venture arrangement in which we own a 55% equity interest. The principal amounts listed in the table for these debts have not been adjusted to reflect the equity interests in the joint venture that we do not own. |
| |
(5) | We prepaid this debt in February 2020. |
We have a $1,000,000 revolving credit facility that is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is January 15, 20182022, and, subject to ourthe payment of an extension fee and meeting other conditions, we have anthe option to extend the stated maturity date byof the facility for an additional year to January 15, 2019.year. Our revolving credit facility provides that we can borrow, repay and re-borrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. Our revolving credit facility requires annual interest to be paid on borrowings at the rate of LIBOR plus a premium which was 130of 120 basis points as of December 31, 2016, plusper annum, and a facility fee of 3025 basis points per annum on the total amount of lending commitments. Bothcommitments under the facility. The interest rate premium and the facility fee are each subject to adjustment based upon changes to our credit ratings. The facility also includes a feature pursuant to which in certain circumstances maximum borrowings under the facility may be increased to up to $2,000,000.
As of December 31, 20162019, the annual interest rate payable on borrowings under our revolving credit facility was 2.0%2.8%. The weighted average annual interest rates for borrowings under our revolving credit facility were 1.8%3.4%, 1.5%3.0% and 1.4%2.4% for the years ended December 31, 20162019, 20152018 and 2014,2017, respectively. As of December 31, 20162019, we had $327,000$537,500 outstanding and $673,000$462,500 available for borrowing, and as of February 24, 2017,28, 2020, we had $378,000$593,000 outstanding and $622,000$407,000 available for borrowing under our revolving credit facility. We incurred interest expense and other associated costs related to our revolving credit facility of $11,235, $9,252 and 3,094 for the years ended December 31, 2016, 2015 and 2014, respectively. Our revolving credit facility includes an accordion feature pursuant to which maximum borrowings under the facility may be increased to up to $1,500,000 in certain circumstances.
We have a $200,000$250,000 term loan which we borrowed in 2015. This term loanthat matures in September 2022June 2020 and is prepayable without penalty beginning September 29, 2017.at any time. Subject to the satisfaction of certain conditions, including the payment of an extension fee, we have the option to extend the maturity date by six months. We obtained this term loan in December 2019. This term loan requires annual interest to be paid at the rate of LIBOR plus a premium of 180125 basis points that is subject to adjustment based upon changes to our credit ratings. At December 31, 20162019, the annual interest rate payable foron amounts outstanding under this term loan was 2.6%2.9%. The weighted average annual interest rate for amounts outstanding under this term loan was 2.3%2.9% for the year ended December 31, 2016,2019.
We used the net proceeds from our $250,000 term loan, together with proceeds from our dispositions, borrowings under our revolving credit facility and 2.0%cash on hand, to prepay in full our $350,000 senior unsecured term loan that was scheduled to mature on January 15, 2020. The interest rate on the new term loan is LIBOR plus 125 basis points. As a result of this prepayment, we recorded a loss on early extinguishment of debt of $27 for the period from September 28, 2015 (the day we entered into theyear ended December 31, 2019.
We also have a $200,000 term loan agreement)that matures in September 2022 and is prepayable without penalty at any time. This term loan requires annual interest to be paid at the rate of LIBOR plus a premium of 135 basis points that is subject to adjustment based upon changes to our credit ratings. At December 31, 2015. We incurred2019, the annual interest expense and other associated costs related torate payable on amounts outstanding under this term loan of $4,645was 3.2%. The weighted average annual interest rate for amounts outstanding under this term loan was 3.7%, 3.4% and $1,0612.7% and for the years ended December 31, 20162019, 2018 and December 31, 2015,2017, respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $400,000 in certain circumstances.
Interest on our senior unsecured notes are payable either semi-annually or quarterly in arrears; however, no principal repayments are due until maturity. Required monthly payments on our mortgages include principal and interest. Payments under our capital leases are due monthly. We include amortization of capital lease assets in depreciation and amortization expense.
We also have a $350,000 term loan, which we borrowed in 2014. This term loan matures in January 2020 and is prepayable without penalty at any time. This term loan requires annual interest to be paid at LIBOR plus a premium of 140 basis points that is subject to adjustment based upon changes to our credit ratings. At December 31, 2016, the annual interest rate payable on amounts outstanding under this term loan was 2.0%. The weighted average annual interest rate for amounts outstanding under this term loan was 1.9% and 1.6% for the years ended December 31, 2016 and 2015, respectively, and 1.6% for the period from May 30, 2014 (the day we entered into this term loan agreement) to December 31, 2014. We incurred interest expense and other associated costs related to this term loan of $6,721 and $5,686, and $3,263 for the years ended December 31, 2016, 2015 and 2014, respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances.
Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our revolving credit facility and term loan agreements, a change of control of us, as defined, which includes RMR LLC ceasing to act as our business manager and property manager. Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements also contain a number of covenants, including covenants that restrict our ability to incur debts, and generally require us to maintain certain financial ratios, and our revolving credit facility and term loan agreements restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements at December 31, 20162019.
In January 2016,February 2018, we issued $500,000 of 4.75% senior unsecured notes due 2028. We used the net proceeds of this offering to reduce amounts outstanding under our revolving credit facility.
In February 2018, in connection with our acquisition of 1 senior living community, we assumed a $16,748 mortgage note with an annual interest rate of 6.64% and a maturity date in June 2023.
In March 2018, in connection with our acquisition of 1 medical office property, we assumed a $11,050 mortgage note with an annual interest rate of 4.44% and a maturity date in July 2043.
In June 2018, in connection with our acquisition of 2 senior living communities, we assumed a $16,588 mortgage note with an annual interest rate of 5.75% and a maturity date in October 2022.
In May 2019, we redeemed at par all of our outstanding 3.25% senior notes due 2019 for a redemption price equal to the principal amount of $400,000, plus accrued and unpaid interest of $6,500. We funded this redemption with cash on hand and borrowings under our revolving credit facility.
Also in May 2019, we prepaid, at par plus accrued interest, a $6,115 mortgage note secured by one4 of our propertiessenior living communities with an outstanding principal balance of approximately $42,211, a maturity date in April 2016July 2019 and an annual interest rate of 5.97%3.79%. As a result of this prepayment, we recorded a loss on early extinguishment of debt of $17 for the year ended December 31, 2019. We prepaid this mortgage using cash on hand and borrowings under our revolving credit facility.
In April 2016,February 2020, we prepaid, at par plus accrued interest, an $18,000a mortgage note secured by one1 of our propertiessenior living communities with an outstanding principal balance of approximately $1,554, a maturity date in July 2016March 2026 and an annual interest rate of 4.65%6.25%. We prepaid this mortgage using cash on hand and borrowings under our revolving credit facility.
In July 2016,January 2018, we prepaid, at par plus accrued interest, an $11,871a mortgage note secured by one of our properties with a maturity date in November 2016 and an annual interest rate of 6.25%. In September 2016, we prepaid, at par plus accrued interest, two mortgage notes secured by two properties with an aggregate principal balance of $79,957, maturity dates in November 2016 and a weighted average annual interest rate of 5.92%. In October 2016, we prepaid, at par plus prepayment premiums and accrued interest, mortgage notes secured by eight properties with an aggregate principal balance of $42,542, maturity dates in May 2017 and a weighted average annual interest rate of 6.54%. In December 2016, we prepaid, at par plus accrued interest, one mortgage note secured by one1 of our properties with an outstanding principal balance of approximately $5,428,$4,338, a maturity date in March 2017September 2043 and an annual interest rate of 5.86%4.4%. In July 2018, we prepaid, at par plus accrued interest, mortgage notes secured by 12 of our properties with an aggregate outstanding principal balance of approximately $90,602, maturity dates in October 2018 and a weighted average annual interest rate of 5.0%. In September 2018, we prepaid, at par plus accrued interest, a mortgage note secured by 1 of our properties with an outstanding principal balance of approximately $6,325, a maturity date in January 2019 and an annual interest rate of 4.7%. As a result of these prepayments, we recognized a net loss on early extinguishment of debt of $526 for the year ended December 31, 2016.
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 obtained 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 these senior living communities in May and September 2015 and financed the acquisition using cash on hand, borrowings under our revolving credit facility and the assumption of approximately $151,477 of mortgage debts with a weighted average annual interest rate of 4.57%. These mortgages have maturity dates from October 2018 through July 2019. We determined the fair value of the assumed mortgage debts using a market approach based upon Level 3 inputs (significant other unobservable inputs) in the fair value hierarchy provided by the Fair Value Topic of the Codification.
In connection with two of the 23 MOBs we acquired in January 2015, as further discussed in Note 3 above, we assumed $29,955 of mortgage debts which we recorded at their aggregate fair value of $31,029. These two assumed mortgage debts 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 mortgages using a market approach based upon Level 3 inputs (significant other unobservable inputs) in the fair value hierarchy provided by the Fair Value Topic of the Codification.
In November 2015, we prepaid all $250,000 of our 4.30% senior unsecured notes due January 2016. As a result, we recognized a loss on early extinguishment of debt of $175$22 for the year ended December 31, 2015.2018. We prepaid these mortgages using cash on hand and borrowings under our revolving credit facility.
In February 2015,April 2017, we repaidprepaid, at maturitypar plus accrued interest, a mortgage that encumbered onenote secured by 17 of our properties that had awith an outstanding principal balance of $29,227approximately $277,837 plus an aggregate premium of $5,449, a maturity date in September 2019 and an annual interest rate of 6.02%6.71%. In April 2015,May 2017, we prepaid, at par plus accrued interest, a mortgage that encumbered onenote secured by 1 of our properties that had awith an outstanding principal balance of $6,274approximately $10,579, a maturity date in August 2017 and an annual interest rate of 5.81%6.15%. In May 2015,June 2017, we prepaid, four mortgages encumbering fourat par plus accrued interest, a mortgage note secured by 1 of our properties with an aggregateoutstanding principal balance of $15,077 andapproximately $8,807, a weighted average annual interest rate of 5.70%. In June 2015, we repaid at maturity a mortgage encumbering one property with a principal balance of $4,867date in August 2037 and an annual interest rate of 5.65%5.95%. Also in June 2015,In December 2017, we prepaid, at par plus accrued interest, a mortgage encumbering one propertynote secured by 1 of our properties with aan outstanding principal balance of $4,351approximately $8,403, a maturity date in April 2018 and an annual interest rate of 5.81%. In October 2015, we prepaid two mortgages encumbering one property with a principal balance of $52,000 and a weighted average annual interest rate of 5.64%6.73%. As a result of these prepayments, we recognized lossesrecorded a loss on early extinguishment of debt of $290$7,627 for the year ended December 31, 2015.
At December 31, 20162017. We prepaid these mortgages using cash on hand and 2015, our outstanding senior unsecured notes and secured debt consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | December 31, 2016 | | December 31, 2015 |
Senior Unsecured Notes | | Coupon | | Maturity | | Face Amount | | Unamortized Discount | | Face Amount | | Unamortized Discount |
Senior unsecured notes | | 3.250 | % | | 2019 | | $ | 400,000 |
| | $ | 138 |
| | $ | 400,000 |
| | $ | 197 |
|
Senior unsecured notes | | 6.750 | % | | 2020 | | 200,000 |
| | 703 |
| | 200,000 |
| | 918 |
|
Senior unsecured notes | | 6.750 | % | | 2021 | | 300,000 |
| | 2,627 |
| | 300,000 |
| | 3,161 |
|
Senior unsecured notes | | 4.750 | % | | 2024 | | 250,000 |
| | 579 |
| | 250,000 |
| | 658 |
|
Senior unsecured notes | | 5.625 | % | | 2042 | | 350,000 |
| | — |
| | 350,000 |
| | — |
|
Senior unsecured notes | | 6.250 | % | | 2046 | | 250,000 |
| | — |
| | — |
| | — |
|
Total senior unsecured notes | | | | | | $ | 1,750,000 |
| | $ | 4,047 |
| | $ | 1,500,000 |
| | $ | 4,934 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Principal Balance as of | | | | | | Number of Properties as Collateral | | Net Book Value of Collateral as of |
| | December 31, | | | | | | | December 31, |
Secured and Other Debt | | 2016(1) | | 2015(1) | | Interest Rate | | Maturity | | At December 31, 2016 | | 2016 | | 2015 |
Mortgage(2) | | $ | — |
| | $ | 6,115 |
| | 5.97 | % | | Apr 16 | | — |
| | $ | — |
| | $ | 9,291 |
|
Mortgage(2) | | — |
| | 18,000 |
| | 4.65 | % | | Jul 16 | | — |
| | — |
| | 36,783 |
|
Mortgages(2) | | — |
| | 82,070 |
| | 5.92 | % | | Nov 16 | | — |
| | — |
| | 146,236 |
|
Mortgage(2) | | — |
| | 11,989 |
| | 6.25 | % | | Nov 16 | | — |
| | — |
| | 20,700 |
|
Mortgage(2) | | — |
| | 5,524 |
| | 5.86 | % | | Mar 17 | | — |
| | — |
| | 10,710 |
|
Mortgages(2) | | — |
| | 43,549 |
| | 6.54 | % | | May 17 | | — |
| | — |
| | 52,561 |
|
Mortgage | | 10,653 |
| | 10,861 |
| | 6.15 | % | | Aug 17 | | 1 |
| | 14,162 |
| | 14,487 |
|
Mortgage | | 8,686 |
| | 8,948 |
| | 6.73 | % | | Apr 18 | | 1 |
| | 10,656 |
| | 10,891 |
|
Mortgages | | 12,772 |
| | 12,976 |
| | 6.31 | % | | Oct 18 | | 1 |
| | 16,827 |
| | 17,184 |
|
Mortgage | | 12,061 |
| | 12,250 |
| | 6.24 | % | | Oct 18 | | 1 |
| | 15,453 |
| | 15,798 |
|
Mortgages | | 69,953 |
| | 72,062 |
| | 4.47 | % | | Oct 18 | | 10 |
| | 180,933 |
| | 185,666 |
|
Mortgage | | 6,565 |
| | 6,692 |
| | 4.69 | % | | Jan 19 | | 1 |
| | 9,687 |
| | 9,952 |
|
Mortgages | | 44,462 |
| | 45,327 |
| | 3.79 | % | | Jul 19 | | 4 |
| | 64,154 |
| | 65,551 |
|
Mortgage | | 279,505 |
| | 284,138 |
| | 6.71 | % | | Sep 19 | | 17 |
| | 235,068 |
| | 238,488 |
|
Mortgages | | 3,128 |
| | 3,616 |
| | 7.49 | % | | Jan 22 | | 1 |
| | 15,360 |
| | 15,775 |
|
Mortgage | | 14,300 |
| | 14,825 |
| | 6.28 | % | | Jul 22 | | 1 |
| | 24,834 |
| | 25,371 |
|
Mortgage | | 11,594 |
| | 11,787 |
| | 4.85 | % | | Oct 22 | | 1 |
| | 21,529 |
| | 21,992 |
|
Mortgages(3) | | 620,000 |
| | — |
| | 3.53 | % | | Aug 26 | | 1 |
| | 785,805 |
| | — |
|
Mortgage | | 2,819 |
| | 3,246 |
| | 6.25 | % | | Feb 33 | | 1 |
| | 4,267 |
| | 4,374 |
|
Mortgage | | 8,882 |
| | 9,047 |
| | 5.95 | % | | Aug 37 | | 1 |
| | 8,656 |
| | 8,650 |
|
Mortgage | | 4,427 |
| | 4,512 |
| | 4.38 | % | | Sep 43 | | 1 |
| | 7,202 |
| | 7,305 |
|
Capital Leases | | 11,466 |
| | 12,156 |
| | 7.70 | % | | Apr 26 | | 2 |
| | 18,968 |
| | 19,400 |
|
Total secured and other debt | | $ | 1,121,273 |
| | $ | 679,690 |
| | | | | | 45 |
| | $ | 1,433,561 |
| | $ | 937,165 |
|
| |
(1) | The principal balances are the amounts stated in the contracts. In accordance with GAAP, our carrying values and recorded interest expense may be different because of market conditions at the time we assumed certain of these debts. As of December 31, 2016 and 2015, the unamortized net premiums and debt issuance costs on certain of these mortgages were $3,624 and $395, respectively. |
| |
(2) | In 2016, we repaid these debts. |
| |
(3) | In July 2016, we entered into loan agreements and obtained an aggregate $620,000 secured debt financing that matures in August 2026. These loans are secured by one MOB (two buildings). |
Interest on our senior unsecured notes are payable either semi‑annually or quarterly in arrears; however, no principal repayments are due until maturity. Required monthly payments on our mortgages include principal and interest. Paymentsborrowings under our capital leases are due monthly. We include amortization of capital lease assets in depreciation and amortization expense.revolving credit facility.
Required principal payments on our outstanding debt as of December 31, 2016,2019, are as follows:
|
| | | | | |
Year | | Principal Payment |
| |
2020 | | $ | 453,799 |
| |
2021 | | 304,097 |
| |
2022 | | 776,872 |
| |
2023 | | 16,673 |
| |
2024 | | 252,110 |
| |
Thereafter | | 1,732,184 |
| (1) |
|
| | | | |
2017 | | $ | 22,085 |
|
2018 | | $ | 436,768 |
|
2019 | | $ | 720,919 |
|
2020 | | $ | 553,080 |
|
2021 | | $ | 303,327 |
|
Thereafter | | $ | 1,712,094 |
|
(1) The carrying value of our total debt outstanding as of December 31, 2019, including unamortized debt issuance costs, premiums and discounts was $3,504,651.
Note 9.9. Fair Value of Assets and Liabilities
The following table presents certain of our assets that are measured at fair value on a recurring basis at December 31, 20162019, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset or liability.asset.
|
| | | | | | | | | | | | | | | | |
| | | | | | | | Significant |
| | Total as of | | Quoted Prices in Active | | Significant Other | | Unobservable |
| | December 31, | | Markets for Identical | | Observable Inputs | | Inputs |
Description | | 2016 | | Assets (Level 1) | | (Level 2) | | (Level 3) |
Recurring Fair Value Measurements | | | | | | | | |
Assets: | | | | | | | | |
Investments in available for sale securities (1) | | $ | 115,612 |
| | $ | 115,612 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | | | | | | | Significant |
| | | | Quoted Prices in Active | | Significant Other | | Unobservable |
| | | | Markets for Identical | | Observable Inputs | | Inputs |
Description | | Total | | Assets (Level 1) | | (Level 2) | | (Level 3) |
Recurring Fair Value Measurements Assets: | | | | | | | | |
Investment in Five Star (1) | | $ | 1,571 |
| | $ | 1,571 |
| | $ | — |
| | $ | — |
|
Non-Recurring Fair Value Measurements Assets: | | | | | | | | |
Real estate properties held for sale (2) | | $ | 88,656 |
| | $ | — |
| | $ | 88,656 |
| | $ | — |
|
Real estate properties at fair value (3) | | $ | 106,850 |
| | $ | — |
| | $ | — |
| | $ | 106,850 |
|
| |
(1) | Our investments in available for sale securities include our 4,235,000The 423,500 Five Star common shares and our 2,637,408 shareswe owned as of RMR Inc. class A common stock. The fair values of these shares are based upon quoted prices at December 31, 20162019 are included in active marketsinvestments in equity securities in our consolidated balance sheets, and are reported at fair value, which is based on quoted market prices (Level 1 inputs). In performingOur adjusted cost basis for these shares was $6,353 as of December 31, 2019. During the year ended December 31, 2019, we recorded an unrealized loss of $462, which is included in gains and losses on equity securities, net in our periodic evaluationconsolidated statements of other than temporary impairmentcomprehensive income (loss), to adjust the carrying value of our investment in Five Star common shares to their fair value. See Note 7 for the fourth quarter of 2016, we determined, based on the length of time and the extent to which the market value offurther information about our investment in Five Star investment was belowStar. |
| |
(2) | We have assets in our carrying value,consolidated balance sheets that the decline inare measured at fair value was other than temporary aton a nonrecurring basis. During the year ended December 31, 2016. Accordingly,2019, we recorded a $2,795 loss on impairment charges of $16,977 to reduce the carrying value of our Five Star investment14 medical office properties that are classified as held for sale to itstheir estimated sales price, less estimated costs to sell of $2,141, based on purchase and sale agreements that we have entered into with third party buyers for these medical office properties of $71,121. We also recorded impairment charges of $4,984 to reduce the carrying value of 2 senior living communities that are classified as held for sale to their estimated sales price, less estimated costs to sell of $515, based on purchase and sale agreements that we have entered into with third party buyers for these senior living communities of $17,535. See Note 3 for further information about impairment charges and these and other properties we have classified as held for sale. |
| |
(3) | We recorded impairment charges of $51,797 to reduce the carrying value of 7 senior living communities to their estimated fair value duringof $106,850 based on third party offers. The valuation techniques and significant unobservable inputs used in the fourth quartervaluation of 2016. Our adjusted cost basis for our Five Star shares is $11,435this property are considered Level 3 inputs as of December 31, 2016. The cost basis for our RMR Inc. shares is $69,826 as of December 31, 2016. The unrealized gain of $34,352 for our RMR Inc. shares as of December 31, 2016 is includeddefined in cumulative other comprehensive income (loss) in our consolidated balance sheets.the fair value hierarchy under GAAP. |
In addition to the assets described in the table above, our financial instruments at December 31, 20162019 and December 31, 20152018 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, term loans, senior unsecured notes, secured debt and capital leases and other unsecured obligations and liabilities. The fair values of these financial instruments approximated their carrying values in our consolidated financial statements as of such dates, except as follows:
| | | | As of December 31, 2016 | | As of December 31, 2015 | | As of December 31, 2019 | | As of December 31, 2018 |
Description | | Carrying Amount (1) | | Estimated Fair Value | | Carrying Amount (1) | | Estimated Fair Value | | Carrying Amount (1) | | Estimated Fair Value | | Carrying Amount (1) | | Estimated Fair Value |
Senior unsecured notes | | $ | 1,722,758 |
| | $ | 1,755,715 |
| | $ | 1,478,536 |
| | $ | 1,548,613 |
| | $ | 1,820,681 |
| | $ | 1,890,386 |
| | $ | 2,216,945 |
| | $ | 2,138,202 |
|
Secured debt (2) | | 1,106,183 |
| | 1,090,515 |
| | 667,138 |
| | 712,459 |
| |
Secured debt (2) (3) | | | 697,729 |
| | 697,142 |
| | 744,186 |
| | 723,003 |
|
| | $ | 2,828,941 |
| | $ | 2,846,230 |
| | $ | 2,145,674 |
| | $ | 2,261,072 |
| | $ | 2,518,410 |
| | $ | 2,587,528 |
| | $ | 2,961,131 |
| | $ | 2,861,205 |
|
| |
(1) | Includes unamortized debt issuance costs, premiums and discounts. |
| |
(2) | We assumed certain of these secured debts in connection with our acquisitionsacquisition of certain properties. We recorded the assumed mortgage debtsnotes at estimated fair value on the date of acquisition and we are amortizing the fair value adjustments, if any, to interest expense over the respective terms of the mortgage debtsnotes to reduceadjust interest expense to the estimated market interest rates as of the date of acquisition. |
| |
(3) | Includes $3,015 of principal mortgage obligations and $25 of unamortized debt issuance costs for properties classified as held for sale as of December 31, 2019. These debts are included in liabilities of properties held for sale in our consolidated balance sheets as of December 31, 2019. |
We estimated the fair valuevalues of our two2 issuances of senior unsecured notes due 2042 and 2046 based on the closing price of our common shares trading on the Nasdaq (a Level(Level 1 input) as of December 31, 2016.2019. We estimated the fair values of our four4 issuances of senior unsecured notes due 2019, 2020, 2021, 2024 and 20242028 using an average of the bid and ask price on Nasdaq on or about December 31, 20162019 (Level 2 inputs as defined in the fair value hierarchy under GAAP). We estimated the fair values of our secured debts by using discounted cash flows analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair valuevalues may differ materially from the actual fair value.values.
Realized and unrealized gains and losses for our equity securities for the years ended December 31, 2019 and 2018 were as follows:
|
| | | | | | | | |
| | For the Year Ended December 31, |
| | 2019 | | 2018 |
Realized gains and losses on equity securities sold (1) | | $ | (41,436 | ) | | $ | — |
|
Unrealized gains and losses on equity securities held | | (462 | ) | | (20,724 | ) |
Losses on equity securities, net | | $ | (41,898 | ) | | $ | (20,724 | ) |
| |
(1) | See Note 7 for further information about our former investment in RMR Inc. |
Note 10. Noncontrolling Interest
In March 2017, we entered a joint venture arrangement with a sovereign investor for 1 of our life science properties located in Boston, Massachusetts. The investor contributed approximately $261,009 for a 45% equity interest in the joint venture, and we retained the remaining 55% equity interest in the joint venture. Net proceeds from this transaction were approximately $255,931, after transaction costs. We determined that this entity is a VIE and that we control the activities that most significantly impact the economic performance of this entity; we therefore continue to consolidate this property in our financial statements.
We recognized a noncontrolling interest in our consolidated balance sheets of approximately $181,859 as of completion of the transaction, which was equal to 45% of the aggregate carrying value of the total equity of the property immediately prior to the transaction. The difference between the net proceeds received from this transaction and the noncontrolling interest recognized, which was approximately $74,072, was reflected as an increase in additional paid in capital in our consolidated balance sheets. The portion of the joint venture's net income and comprehensive income not attributable to us, or $5,356 and $5,542 for the years ended December 31, 2019 and 2018, respectively, is reported as noncontrolling interest in our consolidated statements of comprehensive income (loss). We made aggregate cash distributions to our joint venture partner of $21,583 and $21,022 for the years ended December 31, 2019 and 2018, respectively, which are reflected as a decrease in total equity attributable to noncontrolling interest in our consolidated balance sheets. As of December 31, 2019, this joint venture held real estate assets with an aggregate net book value of $724,715, subject to mortgage debts of $620,000.
In assessing whether we have a controlling interest in this joint venture arrangement and are required to consolidate the accounts of the joint venture entity, we considered the members' rights to residual gains and obligations to absorb losses, which activities most significantly impact the economic performance of the entity and which member has the power to direct those activities.
Note 10.11. Segment Reporting
In connection with the Restructuring Transaction, we determined to redefine our reportable segments to better reflect our current operating environment. As of December 31, 2016,2019, we have four operating segments,report under the following 2 segments: Office Portfolio and SHOP. Our Office Portfolio segment consists of which three are separate reporting segments. We aggregate our triple netmedical office properties leased senior living communities, ourto medical providers and other medical related businesses, as well as life science properties leased to biotech laboratories and other similar tenants. Our SHOP segment consists of managed senior living communities that provide short term and long term residential care and other services for residents where we pay fees to the operator to manage the communities for our MOBs into three reporting segments, based on their similar operating and economic characteristics. The first reportingaccount. In addition, our SHOP segment includes triple net leased senior living communities that provide short term and long term residential care and other services for residents. The second reporting segment includes managedresidents and from which we received rents from Five Star until January 1, 2020. Pursuant to the Restructuring Transaction, effective January 1, 2020, our previously existing master leases and management and pooling agreements with Five Star were terminated and replaced with the New Management Agreements for all of our senior living communities that provide short term and long term residential care and other servicesoperated by Five Star. Prior periods have been recast to reflect these reportable segments for residents. The third reporting segment includes MOBs. Our fourth segment includes all of our other operations, including certain properties that offer wellness, fitness and spa services to members, which we do not consider to be sufficiently material to constitute a separate reporting segment.
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2016 |
| | Triple Net Leased Senior Living Communities | | Managed Senior Living Communities | | MOBs | | All Other Operations | | Consolidated |
Revenues: | | |
| | |
| | |
| | |
| | |
|
Rental income | | $ | 275,697 |
| | $ | — |
| | $ | 372,233 |
| | $ | 18,270 |
| | $ | 666,200 |
|
Residents fees and services | | — |
| | 391,822 |
| | — |
| | — |
| | 391,822 |
|
Total revenues | | 275,697 |
| | 391,822 |
| | 372,233 |
| | 18,270 |
| | 1,058,022 |
|
| | | | | | | | | | |
Expenses: | | |
| | |
| | |
| | |
| | |
|
Property operating expenses | | 833 |
| | 293,195 |
| | 105,762 |
| | — |
| | 399,790 |
|
Depreciation and amortization | | 78,361 |
| | 81,482 |
| | 124,196 |
| | 3,792 |
| | 287,831 |
|
General and administrative | | — |
| | — |
| | — |
| | 46,559 |
| | 46,559 |
|
Acquisition and certain other transaction related costs | | — |
| | — |
| | — |
| | 2,085 |
| | 2,085 |
|
Impairment of assets | | 6,583 |
| | 2,174 |
| | 7,122 |
| | 2,795 |
| | 18,674 |
|
Total expenses | | 85,777 |
| | 376,851 |
| | 237,080 |
| | 55,231 |
| | 754,939 |
|
| | | | | | | | | | |
Operating income (loss) | | 189,920 |
| | 14,971 |
| | 135,153 |
| | (36,961 | ) | | 303,083 |
|
| | | | | | | | | | |
Dividend income | | — |
| | — |
| | — |
| | 2,108 |
| | 2,108 |
|
Interest and other income | | — |
| | — |
| | — |
| | 430 |
| | 430 |
|
Interest expense | | (24,795 | ) | | (8,540 | ) | | (13,852 | ) | | (120,387 | ) | | (167,574 | ) |
Loss on early extinguishment of debt | | (467 | ) | | (59 | ) | | — |
| | — |
| | (526 | ) |
Income (loss) before income tax expense and equity in earnings of an investee | | 164,658 |
| | 6,372 |
| | 121,301 |
| | (154,810 | ) | | 137,521 |
|
Income tax expense | | — |
| | — |
| | — |
| | (424 | ) | | (424 | ) |
Equity in earnings of an investee | | — |
| | — |
| | — |
| | 137 |
| | 137 |
|
Income (loss) before gain on sale of properties | | 164,658 |
| | 6,372 |
| | 121,301 |
| | (155,097 | ) | | 137,234 |
|
Gain on sale of properties | | 4,061 |
| | — |
| | — |
| | — |
| | 4,061 |
|
Net income (loss) | | $ | 168,719 |
| | $ | 6,372 |
| | $ | 121,301 |
| | $ | (155,097 | ) | | $ | 141,295 |
|
| | | | | | | | | | |
| | As of December 31, 2016 |
| | Triple Net Leased Senior Living Communities | | Managed Senior Living Communities | | MOBs | | All Other Operations | | Consolidated |
Total assets | | $ | 2,289,045 |
| | $ | 1,260,032 |
| | $ | 3,333,141 |
| | $ | 345,536 |
| | $ | 7,227,754 |
|
| | | | For the Year Ended December 31, 2015 | | For the Year Ended December 31, 2019 |
| | Triple Net Leased Senior Living Communities | | Managed Senior Living Communities | | MOBs | | All Other Operations | | Consolidated | | Office Portfolio | | SHOP | | Non-Segment | | Consolidated |
Revenues: | | | | | | | | | | | | | | | | | | |
Rental income | | $ | 256,035 |
| | $ | — |
| | $ | 356,586 |
| | $ | 18,278 |
| | $ | 630,899 |
| | $ | 405,016 |
| | $ | 137,898 |
| | $ | 63,644 |
| | $ | 606,558 |
|
Residents fees and services | | — |
| | 367,874 |
| | — |
| | — |
| | 367,874 |
| | — |
| | 433,597 |
| | — |
| | 433,597 |
|
Total revenues | | 256,035 |
| | 367,874 |
| | 356,586 |
| | 18,278 |
| | 998,773 |
| | 405,016 |
| | 571,495 |
| | 63,644 |
| | 1,040,155 |
|
| | | | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | | | |
Property operating expenses | | — |
| | 278,242 |
| | 99,337 |
| | — |
| | 377,579 |
| | 132,348 |
| | 356,722 |
| | — |
| | 489,070 |
|
Depreciation | | 70,417 |
| | 60,600 |
| | 122,974 |
| | 3,792 |
| | 257,783 |
| |
Depreciation and amortization | | | 137,611 |
| | 132,637 |
| | 18,777 |
| | 289,025 |
|
General and administrative | | — |
| | — |
| | — |
| | 42,830 |
| | 42,830 |
| | — |
| | — |
| | 37,028 |
| | 37,028 |
|
Acquisition related costs | | — |
| | — |
| | — |
| | 6,853 |
| | 6,853 |
| |
Acquisition and certain other transaction related costs | | | — |
| | — |
| | 13,102 |
| | 13,102 |
|
Impairment of assets | | 194 |
| | — |
| | — |
| | — |
| | 194 |
| | 43,035 |
| | 65,822 |
| | 6,344 |
| | 115,201 |
|
Total expenses | | 70,611 |
| | 338,842 |
| | 222,311 |
| | 53,475 |
| | 685,239 |
| | 312,994 |
| | 555,181 |
| | 75,251 |
| | 943,426 |
|
| | | | | | | | | | | | | | | | | | |
Operating income (loss) | | 185,424 |
| | 29,032 |
| | 134,275 |
| | (35,197 | ) | | 313,534 |
| |
| | | | | | | | | | | |
Gain on sale of properties | | | 6,617 |
| | 15,207 |
| | 17,872 |
| | 39,696 |
|
Dividend income | | — |
| | — |
| | — |
| | 2,773 |
| | 2,773 |
| | — |
| | — |
| | 1,846 |
| | 1,846 |
|
Gains and losses on equity securities, net | | | — |
| | — |
| | (41,898 | ) | | (41,898 | ) |
Interest and other income | | — |
| | — |
| | — |
| | 379 |
| | 379 |
| | — |
| | — |
| | 941 |
| | 941 |
|
Interest expense | | (25,015 | ) | | (9,973 | ) | | (6,214 | ) | | (109,679 | ) | | (150,881 | ) | | (24,399 | ) | | (3,058 | ) | | (152,655 | ) | | (180,112 | ) |
Loss on distribution to common shareholders of RMR common stock | | — |
| | — |
| | — |
| | (38,437 | ) | | (38,437 | ) | |
Loss on early extinguishment of debt | | (6 | ) | | (34 | ) | | (250 | ) | | (1,604 | ) | | (1,894 | ) | | — |
| | (17 | ) | | (27 | ) | | (44 | ) |
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee | | 160,403 |
| | 19,025 |
| | 127,811 |
| | (181,765 | ) | | 125,474 |
| | 74,240 |
| | 28,446 |
| | (185,528 | ) | | (82,842 | ) |
Income tax expense | | — |
| | — |
| | — |
| | (574 | ) | | (574 | ) | | — |
| | — |
| | (436 | ) | | (436 | ) |
Equity in earnings of an investee | | — |
| | — |
| | — |
| | 20 |
| | 20 |
| | — |
| | — |
| | 400 |
| | 400 |
|
Income (loss) from continuing operations | | 160,403 |
| | 19,025 |
| | 127,811 |
| | (182,319 | ) | | 124,920 |
| |
Discontinued Operations: | | | | | | | | | | | |
Loss from discontinued operations | | — |
| | — |
| | (350 | ) | | — |
| | (350 | ) | |
Loss on impairment of assets from discontinued operations | | — |
| | — |
| | (602 | ) | | — |
| | (602 | ) | |
Net income (loss) | | $ | 160,403 |
| | $ | 19,025 |
| | $ | 126,859 |
| | $ | (182,319 | ) | | $ | 123,968 |
| | 74,240 |
| | 28,446 |
| | (185,564 | ) | | (82,878 | ) |
Net income attributable to noncontrolling interest | | | (5,356 | ) | | — |
| | — |
| | (5,356 | ) |
Net income (loss) attributable to common shareholders | | | $ | 68,884 |
| | $ | 28,446 |
| | $ | (185,564 | ) | | $ | (88,234 | ) |
| | | | | | | | | | | | | | | | | | |
| | As of December 31, 2015 | | As of December 31, 2019 |
| | Triple Net Leased Senior Living Communities | | Managed Senior Living Communities | | MOBs | | All Other Operations | | Consolidated | | Office Portfolio | | SHOP | | Non-Segment | | Consolidated |
Total assets | | $ | 2,251,212 |
| | $ | 1,260,425 |
| | $ | 3,362,214 |
| | $ | 286,239 |
| | $ | 7,160,090 |
| | $ | 3,165,577 |
| | $ | 3,044,989 |
| | $ | 443,260 |
| | $ | 6,653,826 |
|
A reconciliation of our effective tax rate and the U.S. federal statutory income tax rate is as follows:
Deferred income tax balances reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities onin our consolidated balance sheets and the amounts used for income tax purposes and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Significant components of our deferred tax assets and liabilities are as follows:
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):
Analysis of the carrying amount of real estate and equipment and accumulated depreciation during the period: