We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC.RMR. 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 and major renovation or repositioning activities at our senior living communities that we may request RMR to manage from time to time. See Note 11 for further information regarding our relationship, agreements and transactions with RMR.
We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, and, as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We do, however, lease certainour managed senior living communities to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated federal corporate income tax return and are subject to federal and state income taxes. Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state income taxes we incur despite our taxation as a REIT. Our current income tax expense (or benefit) fluctuates from period to period based primarily on the timing of our income, including gains on the disposition of properties or losses in a particular quarter. During the three months ended September 30, 2017March 31, 2022 and 2016,2021, we recognized income tax expense of $109$1,472 and $119, respectively, and during the nine months ended September 30, 2017 and 2016, we recognized income tax expense of $300 and $318,$238, respectively.
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):
Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and with our Annual Report.
OVERVIEW
We are a REIT that is organized under Maryland law. At September 30, 2017,law and which owns medical office and life science properties, senior living communities and other healthcare related properties throughout the United States. As of March 31, 2022, we wholly owned 435378 properties, (461 buildings)including seven closed senior living communities, located in 4236 states and Washington, D.C. At September 30, 2017,March 31, 2022, the undepreciated carryinggross 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 $8.5$6.8 billion. For
As of March 31, 2022, we owned a 20% equity interest in each of two unconsolidated joint ventures that own medical office and life science properties located in five states with an aggregate of approximately 2.2 million rentable square feet that was 98% leased with an average (by annualized rental income) remaining lease term of 6.6 years.
Our business is focused on healthcare related properties, including medical office and life science properties, senior living communities, wellness centers and other medical and healthcare related properties. We believe that the three months ended September 30, 2017, 97%healthcare sector and many of our NOI came from properties where a majoritytenants, managers and operators provide essential services across the United States. Due to restrictions intended to prevent the spread of the revenuesvirus that causes COVID-19, certain of our medical office and wellness center tenants, which include physician practices that had discontinued non-essential surgeries and procedures and fitness centers that had been ordered closed by state executive orders, experienced disruptions to their businesses. Our senior living community operators also experienced disruptions, including limitations on in-person tours and new admissions, and experienced challenges in attracting new residents to their communities in addition to experiencing increased expenses due to increased labor costs, including higher health benefits costs, and increased costs and consumption of supplies, including personal protective equipment.
We are paidclosely monitoring the impacts of the COVID-19 pandemic and the current inflationary market conditions on all aspects of our business, including, but not limited to, labor availability, wage inflation and cost pressures from supply chain disruptions and commodity price inflation in our residents’SHOP segment. We expect to continue to have elevated labor costs on a per resident basis.
We believe that we are well positioned to weather the present disruptions facing the real estate industry and, tenants’ private resources.in particular, the real estate healthcare industry, including senior living.
In the first quarter of 2021, following the holiday season, the reopening of economies and the easing of restrictions, the United States experienced peak numbers of COVID-19 infections. In some cases, certain states and municipalities again required the closure of certain business activities and imposed certain other restrictions. It is unclear whether the number of COVID-19 infections will further increase or amplify in the United States or elsewhere and, if so, what the impact of that would be on human health and safety, the economy, or our managers', operators' and tenants' businesses. As a result of these uncertainties, we are unable to determine what the ultimate impacts will be on our, our tenants', our managers', our operators' and other stakeholders' businesses, operations, financial results and financial position. For further information and risks relating to the COVID-19 pandemic and its aftermath on us and our business, see Part I, Item 1, "Business" and Part I, Item 1A, "Risk Factors" in our Annual Report.
PORTFOLIO OVERVIEW
The following tables present an overview of our portfolio (dollars in thousands, except investment per unit or square foot or unit data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of March 31, 2022 | | 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) | | Q1 2022 Revenues | | % of Q1 2022 Revenues | | Q1 2022 NOI (3) | | % of Q1 2022 NOI |
Office Portfolio (4) | | 104 | | | 8,724,331 | | | sq. ft. | | $ | 2,170,756 | | | 32.0 | % | | $ | 249 | | | $ | 54,997 | | | 17.7 | % | | $ | 31,550 | | | 75.1 | % |
SHOP | | 234 | | | 25,088 | | | units | | 4,190,563 | | | 61.7 | % | | $ | 167,035 | | | 245,448 | | | 79.0 | % | | 153 | | | 0.4 | % |
Triple net leased senior living communities | | 30 | | | 2,424 | | | units | | 252,906 | | | 3.7 | % | | $ | 104,334 | | | 6,470 | | | 2.1 | % | | 6,470 | | | 15.4 | % |
Wellness centers | | 10 | | | 812,000 | | | sq. ft. | | 178,110 | | | 2.6 | % | | $ | 219 | | | 3,818 | | | 1.2 | % | | 3,818 | | | 9.1 | % |
Total | | 378 | | | | | | | $ | 6,792,335 | | | 100.0 | % | | | | $ | 310,733 | | | 100.0 | % | | $ | 41,991 | | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Number of | | | | | | | | Investment per | | | % of | | | % of |
| | Number of | | Units or | | | | Carrying Value | | % of Total | | Unit or | | Q3 2017 | Q3 2017 | | Q3 2017 | Q3 2017 |
(As of September 30, 2017) | | Properties | | Square Feet | | | | of Investment (1) | | Investment | | Square Foot (2) | | Revenues | Revenues | | NOI (3) | NOI (3) |
Facility Type | | |
| | |
| | | | |
| | |
| | |
| | | | | |
| |
|
Independent living (4) | | 68 |
| | 16,452 |
| | | | $ | 2,373,413 |
| | 28.0 | % | | $ | 144,263 |
| | $ | 88,539 |
| 33.2 | % | | $ | 45,939 |
| 28.4 | % |
Assisted living (4) | | 197 |
| | 14,444 |
| | | | 2,121,398 |
| | 25.1 | % | | $ | 146,871 |
| | 73,213 |
| 27.5 | % | | 40,257 |
| 24.9 | % |
Skilled nursing facilities (4) | | 39 |
| | 4,131 |
| | | | 188,514 |
| | 2.2 | % | | $ | 45,634 |
| | 4,241 |
| 1.6 | % | | 4,241 |
| 2.6 | % |
Subtotal senior living communities | | 304 |
| | 35,027 |
| | | | 4,683,325 |
| | 55.3 | % | | $ | 133,706 |
| | 165,993 |
| 62.3 | % | | 90,437 |
| 55.9 | % |
MOBs (5) | | 121 |
| | 11,611,203 |
| | sq. ft. | | 3,602,819 |
| | 42.6 | % | | $ | 310 |
| | 96,116 |
| 36.0 | % | | 66,958 |
| 41.3 | % |
Wellness centers | | 10 |
| | 812,000 |
| | sq. ft. | | 178,172 |
| | 2.1 | % | | $ | 219 |
| | 4,570 |
| 1.7 | % | | 4,570 |
| 2.8 | % |
Total | | 435 |
| | |
| | | | $ | 8,464,316 |
| | 100.0 | % | | |
| | $ | 266,679 |
| 100.0 | % | | $ | 161,965 |
| 100.0 | % |
| | | | | | | | | | | | | | | | | | |
Tenant / Operator / Managed Properties | | |
| | |
| | | | |
| | |
| | |
| | | | | |
| |
|
| | | | | | | | | | | | | | | | | | |
Five Star | | 185 |
| | 20,187 |
| | | | $ | 2,326,945 |
| | 27.5 | % | | $ | 115,269 |
| | $ | 51,337 |
| 19.2 | % | | $ | 51,337 |
| 31.7 | % |
Sunrise / Marriott (6) | | 4 |
| | 1,619 |
| | | | 126,326 |
| | 1.5 | % | | $ | 78,027 |
| | 3,132 |
| 1.2 | % | | 3,132 |
| 1.9 | % |
Brookdale | | 18 |
| | 894 |
| | | | 69,669 |
| | 0.8 | % | | $ | 77,930 |
| | 1,810 |
| 0.7 | % | | 1,810 |
| 1.1 | % |
11 private senior living companies (combined) | | 29 |
| | 3,520 |
| | | | 569,006 |
| | 6.7 | % | | $ | 161,649 |
| | 11,383 |
| 4.3 | % | | 11,383 |
| 7.0 | % |
Subtotal triple net leased senior living communities | | 236 |
| | 26,220 |
| | | | 3,091,946 |
| | 36.5 | % | | $ | 117,923 |
| | 67,662 |
| 25.4 | % | | 67,662 |
| 41.7 | % |
Managed senior living communities (7) | | 68 |
| | 8,807 |
| | | | 1,591,379 |
| | 18.8 | % | | $ | 180,695 |
| | 98,331 |
| 36.9 | % | | 22,775 |
| 14.2 | % |
Subtotal senior living communities | | 304 |
| | 35,027 |
| | | | 4,683,325 |
| | 55.3 | % | | $ | 133,706 |
| | 165,993 |
| 62.3 | % | | 90,437 |
| 55.9 | % |
MOBs (5) | | 121 |
| | 11,611,203 |
| | sq. ft. | | 3,602,819 |
| | 42.6 | % | | $ | 310 |
| | 96,116 |
| 36.0 | % | | 66,958 |
| 41.3 | % |
Wellness centers | | 10 |
| | 812,000 |
| | sq. ft. | | 178,172 |
| | 2.1 | % | | $ | 219 |
| | 4,570 |
| 1.7 | % | | 4,570 |
| 2.8 | % |
Total | | 435 |
| | |
| | | | $ | 8,464,316 |
| | 100.0 | % | | |
| | $ | 266,679 |
| 100.0 | % | | $ | 161,965 |
| 100.0 | % |
| | | | | | | | | | | | | | |
| | Occupancy |
| | As of and For the Three Months Ended March 31, |
| | 2022 | | 2021 |
Office Portfolio (5) | | 89.3 | % | | 92.3 | % |
SHOP | | 73.0 | % | | 69.5 | % |
Triple net leased senior living communities (6)(7) | | 80.1 | % | | 76.4 | % |
Wellness centers (7) | | 100.0 | % | | 100.0 | % |
(1)Represents 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.
Tenant / Managed Property Operating Statistics(8)(2)Represents gross book value of real estate assets divided by number of rentable square feet or living units, as applicable, at March 31, 2022.
(3)We calculate our NOI on a consolidated basis and by reportable segment. Our definition of NOI and our reconciliation of net income (loss) to NOI are included below under the heading “Non-GAAP Financial Measures”. |
| | | | | | | | | | | | |
| | Rent Coverage | | Occupancy |
| | 2017 | | 2016 | | 2017 | | 2016 |
Five Star | | 1.16 | x | | 1.23 | x | | 83.0 | % | | 84.2 | % |
Sunrise / Marriott (6) | | 2.07 | x | | 1.94 | x | | 92.7 | % | | 90.3 | % |
Brookdale | | 2.44 | x | | 2.71 | x | | 83.2 | % | | 86.6 | % |
11 private senior living companies (combined) | | 1.23 | x | | 1.26 | x | | 88.5 | % | | 88.4 | % |
Subtotal triple net leased senior living communities | | 1.26 | x | | 1.33 | x | | 84.3 | % | | 85.3 | % |
Managed senior living communities (7) | | NA |
| | NA |
| | 86.3 | % | | 87.5 | % |
Subtotal senior living communities | | 1.26 | x | | 1.33 | x | | 84.8 | % | | 85.8 | % |
MOBs (5) | | NA |
| | NA |
| | 95.8 | % | | 95.9 | % |
Wellness centers | | 1.80 | x | | 1.90 | x | | 100.0 | % | | 100.0 | % |
Total | | 1.29 | x | | 1.36 | x | | |
| | |
(4)Our medical 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 medical office and life science property leases are full-service leases where we receive fixed rent from our tenants and no reimbursement for our property operating costs.
| |
(1) | Represents gross book value of real estate assets before depreciation and purchase price allocations, less impairment write downs, if any. |
| |
(2) | Represents carrying value of investment divided by number of living units or rentable square feet, as applicable, at September 30, 2017. |
| |
(3) | NOI(5)Medical office and life science property occupancy data is defined and calculated by reportable segment. Our definition of NOI and our reconciliation of net income to consolidated NOI are included below under the heading “Non-GAAP Financial Measures”. |
| |
(4) | Senior living communities are categorized by the type of living units which constitute a majority of the living units at the community. |
| |
(5) | These 121 MOB properties are comprised of 147 buildings. Our MOB 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 MOB leases are so-called "full-service" leases where we receive fixed rent from our tenants and no reimbursement for our property operating costs. |
| |
(6) | Marriott International, Inc. guarantees the lessee’s obligations under these leases. |
| |
(7) | These senior living communities are managed by Five Star. The occupancy for the 12 month period ended, or, if shorter, from the date of acquisitions through, September 30, 2017 was 86.1%. |
| |
(8) | Operating data for MOBs are presented as of September 30, 2017 and 2016 and includes (i) space being fitted out for occupancy and (ii) space which is leased but is not occupied or is being offered for sublease by tenants; operating data for other properties, tenants and managers are presented based upon the operating results provided by our tenants and managers for the 12 months ended June 30, 2017 and 2016, or the most recent prior period for which tenant operating results are made available to us. Rent coverage is calculated as operating cash flows from our tenants’ facility operations of our properties, before subordinated charges, if any, divided by rents payable to us. We have not independently verified tenant operating data. Excludes data for periods prior to our ownership of certain properties, as well as data for properties sold during the periods presented. |
The following tables set forth information regarding our lease expirations as of September 30, 2017 (dollars in thousands):March 31, 2022 and 2021 and includes (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.
(6)Excludes data for periods prior to our ownership of certain properties, data for properties sold or classified as held for sale, if any, and data for which there was a transfer of operations during the periods presented.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Percent of | | Cumulative |
| | Annualized Rental Income(1) (2) | | Total | | Percentage of |
| | Triple Net Leased | | | | | | | | Annualized | | Annualized |
| | Senior Living | | | | Wellness | | | | Rental Income | | Rental Income |
Year | | Communities | | MOBs | | Centers | | Total | | Expiring (2) | | Expiring (2) |
2017 | | $ | — |
| | $ | 8,950 |
| | $ | — |
| | $ | 8,950 |
| | 1.3 | % | | 1.3 | % |
2018 | | — |
| | 20,318 |
| | — |
| | 20,318 |
| | 3.0 | % | | 4.3 | % |
2019 | | 590 |
| | 42,292 |
| | — |
| | 42,882 |
| | 6.4 | % | | 10.7 | % |
2020 | | — |
| | 32,460 |
| | — |
| | 32,460 |
| | 4.8 | % | | 15.5 | % |
2021 | | 1,424 |
| | 22,359 |
| | — |
| | 23,783 |
| | 3.5 | % | | 19.0 | % |
2022 | | — |
| | 27,196 |
| | — |
| | 27,196 |
| | 4.1 | % | | 23.1 | % |
2023 | | 28,281 |
| | 12,141 |
| | 7,546 |
| | 47,968 |
| | 7.1 | % | | 30.2 | % |
2024 | | 69,005 |
| | 38,598 |
| | — |
| | 107,603 |
| | 16.1 | % | | 46.3 | % |
2025 | | — |
| | 12,862 |
| | — |
| | 12,862 |
| | 1.9 | % | | 48.2 | % |
Thereafter | | 181,965 |
| | 154,707 |
| | 10,550 |
| | 347,222 |
| | 51.8 | % | | 100.0 | % |
Total | | $ | 281,265 |
| | $ | 371,883 |
| | $ | 18,096 |
| | $ | 671,244 |
| | 100.0 | % | | |
Average remaining lease term(7)Operating data for triple net leased senior living communities MOBsleased to third party operators and wellness center properties (weightedcenters are presented based upon the operating results provided by annualized rental income): 8.2 years (2)
| |
(1) | Annualized rental income is rents pursuant to existing leases as of September 30, 2017, 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. Rental income amounts also include 100% of rental income as reported under GAAP from a property owned by a joint venture in which we own a 55% equity interest. |
| |
(2) | Excludes rent received from our managed senior living communities leased to our TRSs. If the NOI from our TRSs (three months ended September 30, 2017, annualized) were included in the foregoing table, the percent of total annualized rental income expiring in each of the following years would be: 2017 — 1.2%; 2018 — 2.7%; 2019 — 5.6%; 2020 — 4.3%; 2021 — 3.1%; 2022 — 3.6%; 2023 — 6.3%; 2024 — 14.1%; 2025 — 1.7%; and thereafter — 57.4%. In addition, if our leases to our TRSs using the terms of the management agreements for these communities were included in the foregoing table, the average remaining lease term for all properties (weighted by annualized rental income) would be 8.9 years. |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Percent of | | Cumulative |
| | | | | | | | | | Total | | Percentage of |
| | Number of Tenants (1) | | Number of | | Number of |
| | Senior Living | | | | Wellness | | | | Tenancies | | Tenancies |
Year | | Communities | | MOBs | | Centers | | Total | | Expiring (1) | | Expiring (1) |
2017 | | — |
| | 69 |
| | — |
| | 69 |
| | 10.2 | % | | 10.2 | % |
2018 | | — |
| | 89 |
| | — |
| | 89 |
| | 13.1 | % | | 23.3 | % |
2019 | | 1 |
| | 97 |
| | — |
| | 98 |
| | 14.5 | % | | 37.8 | % |
2020 | | — |
| | 91 |
| | — |
| | 91 |
| | 13.4 | % | | 51.2 | % |
2021 | | 1 |
| | 73 |
| | — |
| | 74 |
| | 10.9 | % | | 62.1 | % |
2022 | | — |
| | 79 |
| | — |
| | 79 |
| | 11.7 | % | | 73.8 | % |
2023 | | 2 |
| | 31 |
| | 1 |
| | 34 |
| | 5.0 | % | | 78.8 | % |
2024 | | 3 |
| | 34 |
| | — |
| | 37 |
| | 5.5 | % | | 84.3 | % |
2025 | | — |
| | 26 |
| | — |
| | 26 |
| | 3.7 | % | | 88.0 | % |
Thereafter | | 11 |
| | 69 |
| | 1 |
| | 81 |
| | 12.0 | % | | 100.0 | % |
Total | | 18 |
| | 658 |
| | 2 |
| | 678 |
| | 100.0 | % | | |
| |
(1) | Excludes our managed senior living communities leased to our TRSs. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Living Units or Square Feet with Leases Expiring |
| | Living Units (1) | | Square Feet (2) |
| | Triple Net | | | | | | | | | | | | | | |
| | Leased Senior | | Percent of | | Cumulative | | | | Wellness | | | | Percent of | | Cumulative |
| | Living | | Total Living | | Percentage of | | | | Centers | | | | Total | | Percent of |
| | Communities | | Units | | Living Units | | MOBs | | (Square | | Total Square | | Square Feet | | Total Square |
Year | | (Units) | | Expiring | | Expiring | | (Square Feet) | | Feet) | | Feet | | Expiring | | Feet Expiring |
2017 | | — |
| | — | % | | — | % | | 198,077 |
| | — |
| | 198,077 |
| | 1.7 | % | | 1.7 | % |
2018 | | — |
| | — | % | | — | % | | 698,609 |
| | — |
| | 698,609 |
| | 5.9 | % | | 7.6 | % |
2019 | | 175 |
| | 0.7 | % | | 0.7 | % | | 1,324,791 |
| | — |
| | 1,324,791 |
| | 11.1 | % | | 18.7 | % |
2020 | | — |
| | — | % | | 0.7 | % | | 1,453,739 |
| | — |
| | 1,453,739 |
| | 12.2 | % | | 30.9 | % |
2021 | | 361 |
| | 1.4 | % | | 2.1 | % | | 697,422 |
| | — |
| | 697,422 |
| | 5.8 | % | | 36.7 | % |
2022 | | — |
| | — | % | | 2.1 | % | | 1,055,166 |
| | — |
| | 1,055,166 |
| | 8.8 | % | | 45.5 | % |
2023 | | 2,263 |
| | 8.6 | % | | 10.7 | % | | 801,553 |
| | 354,000 |
| | 1,155,553 |
| | 9.7 | % | | 55.2 | % |
2024 | | 6,561 |
| | 25.0 | % | | 35.7 | % | | 1,461,589 |
| | — |
| | 1,461,589 |
| | 12.2 | % | | 67.4 | % |
2025 | | — |
| | — | % | | 35.7 | % | | 537,584 |
| | — |
| | 537,584 |
| | 4.5 | % | | 71.9 | % |
Thereafter | | 16,860 |
| | 64.3 | % | | 100.0 | % | | 2,894,849 |
| | 458,000 |
| | 3,352,849 |
| | 28.1 | % | | 100.0 | % |
Total | | 26,220 |
| | 100.0 | % | | | | 11,123,379 |
| | 812,000 |
| | 11,935,379 |
| | 100.0 | % | | |
| |
(1) | Excludes 8,806 living units from our managed senior living communities leased to our TRSs. If the number of living units included in our TRS leases using the terms of the management agreements for these communities were included in the foregoing table, the percent of total living units expiring in each of the following years 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%. |
| |
(2) | Includes 100% of square feet from a property owned by a joint venture in which we own a 55% equity interest. |
our tenants for the three months ended December 31, 2021 and 2020, or the most recent prior period for which tenant operating results are made available to us. We have not independently verified tenant operating data.
During the three months ended September 30, 2017,March 31, 2022, we entered MOB lease renewals for 352,000 leasableinto new and renewal leases at our medical office and life science properties in our Office Portfolio segment as summarized in the following table (dollars and square feet and new leases for 50,000 leasable square feet. The weighted average annual rental rate for leases entered during the quarter was $24.61in thousands, except per square foot and these rental rates were, on a weighted average basis, 0.6% above previous rents charged for the same space. Average lease terms for leases entered during the third quarter of 2017 were 7.2 yearsamounts):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | New Leases | | Renewals | | Total |
Square feet leased during the quarter | | 120 | | | 81 | | | 201 | |
Weighted average rental rate change (by rentable square feet) | | 15.1 | % | | 0.5 | % | | 8.2 | % |
Weighted average lease term (years) (1) | | 9.9 | | | 4.1 | | | 7.4 | |
Total leasing costs and concession commitments (2) | | $ | 11,330 | | | $ | 1,208 | | | $ | 12,538 | |
Total leasing costs and concession commitments per square foot (2) | | $ | 94.34 | | | $ | 14.91 | | | $ | 62.35 | |
Total leasing costs and concession commitments per square foot per year (2) | | $ | 9.52 | | | $ | 3.62 | | | $ | 8.45 | |
(1)Weighted based on annualized rental income pursuant to existing leases as of September 30, 2017,March 31, 2022, including straight line rent adjustments and estimated recurring expense reimbursements, and excluding lease value amortization. Commitments
(2)Includes commitments made for tenant improvement costs, leasing commission costsexpenditures and concessions, for leases we entered during the third quartersuch as tenant improvements, leasing commissions, tenant reimbursements and free rent.
Lease Expiration Schedules
As of theMarch 31, 2022, lease term).
GENERAL INDUSTRY TRENDS
We believe 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 the United States over 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 to increase for the foreseeable future. Despite this trend, future economic downturns, softness in the 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 demographics could adversely affect the ability of seniors to afford the resident fees or entrance feesexpirations at our senior living communities.medical office and life science properties in our Office Portfolio segment are as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year | | Number of Tenants | | Square Feet Leased | | Percent of Total | | Cumulative Percent of Total | | Annualized Rental Income(1) | | | | | | | | Percent of Total | | Cumulative Percent of Total |
2022 | | 71 | | 758,676 | | | 9.7 | % | | 9.7 | % | | $ | 19,222 | | | | | | | | | 8.7 | % | | 8.7 | % |
2023 | | 46 | | 658,560 | | | 8.5 | % | | 18.2 | % | | 17,185 | | | | | | | | | 7.8 | % | | 16.5 | % |
2024 | | 73 | | 978,491 | | | 12.6 | % | | 30.8 | % | | 26,620 | | | | | | | | | 12.1 | % | | 28.6 | % |
2025 | | 67 | | 692,919 | | | 8.9 | % | | 39.7 | % | | 16,337 | | | | | | | | | 7.4 | % | | 36.0 | % |
2026 | | 63 | | 792,127 | | | 10.2 | % | | 49.9 | % | | 23,588 | | | | | | | | | 10.7 | % | | 46.7 | % |
2027 | | 51 | | 682,386 | | | 8.8 | % | | 58.7 | % | | 17,089 | | | | | | | | | 7.8 | % | | 54.5 | % |
2028 | | 31 | | 861,190 | | | 11.1 | % | | 69.8 | % | | 21,717 | | | | | | | | | 9.9 | % | | 64.4 | % |
2029 | | 32 | | 321,870 | | | 4.1 | % | | 73.9 | % | | 10,206 | | | | | | | | | 4.6 | % | | 69.0 | % |
2030 | | 18 | | 388,369 | | | 5.0 | % | | 78.9 | % | | 7,710 | | | | | | | | | 3.5 | % | | 72.5 | % |
2031 and thereafter | | 47 | | 1,653,451 | | | 21.1 | % | | 100.0 | % | | 60,586 | | | | | | | | | 27.5 | % | | 100.0 | % |
Total | | 499 | | 7,788,039 | | | 100.0 | % | | | | $ | 220,260 | | | | | | | | | 100.0 | % | | |
| | | | | | | | | | | | | | | | | | | | |
Weighted average remaining lease term (in years) | | 5.3 | | | | | | | 5.8 | | | | | | | | | | | |
The(1)Annualized rental income is based on rents pursuant to existing leases as of March 31, 2022, 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 advances which are increasing averageoffice and life spans are also causing some seniors to defer considering relocating toscience properties.
Lease expiration data for our triple net leased senior living communities but we doleased to third party operators and wellness centers has not believe this factor is sufficientbeen provided because there were no changes 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 resultedlease expiration schedules from recent development activity has increased competitive pressures on our tenants and manager, particularly in certain geographic markets where we own senior living communities, including Arizona, Georgia and Texas, and we expect these competitive challenges to continue for at least the next few years. These competitive challenges may prevent our tenants and manager 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 and expect to continue to do so in order that our communities may remain competitive with newer communities.
The senior living industry is subject to extensive and frequently changing federal, state and local laws and regulations. For further information regarding these laws and regulations, and possible legislative and regulatory changes, see "Impact of Government Reimbursement" elsewhere in this Quarterly Report as well asthose reported in our Annual Report.
Our MOBs have been impacted by at least two major industry trendsReport, except for the pasttransfer of operations of one senior living community previously managed by Five Star under our TRS structure to a third party operator in January 2022 for a 10 years which are continuing at this time and that have impacted our investment activities.year lease term expiring in 2031.
First, medical properties are being consolidated onto hospital campuses and/or under common ownership with hospitals. This has caused the number of free standing medical office buildings to decline. At the same time the number of medical office buildings on hospital campuses has increased and the number of multi-practice medical buildings that are anchor leased by hospital systems who employ doctors has increased.
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 MOBs may be considered biotech and life science properties.
RESULTS OF OPERATIONS (dollars and square feet in thousands, unless otherwise noted)
We have four operating segments, of which three are separate reporting segments.operate in, and report financial information for, the following two segments: Office Portfolio and SHOP. We aggregate our triple net leased senior living communities, our managed senior living communities and our MOBs into threeeach of these two reporting segments based on their similar operating and economic characteristics. The first reportingOur Office Portfolio segment includes triple netconsists of medical office properties leased senior living communities that provide short term and long term residential careto medical providers and other services for residentsmedical related businesses, as well as life science properties leased to biotech laboratories and with respect to which we receive rents from the operators. The second reportingother similar tenants. Our SHOP segment includesconsists of managed senior living communities that provide short term and long term residential living and, in some instances, care and other services for residents where we pay fees to managers to operate the operatorcommunities.
We also report “non-segment” operations, consisting of triple net leased senior living communities and wellness centers that are leased to manage the communities for our account. The third reporting segment includes MOBs where the tenants pay us rent. Our fourth segment includes all of our other operations, including certain properties that offer wellness, fitness and spa services to members and with respect toparty operators from which we receive rents, from operators, which we do not consider to be sufficiently material to constitute a separate reporting segment, and any other income or expenses that are not attributable to a specific reporting segment.
The following table summarizes the results of operations of each of our segments for the three months ended March 31, 2022 and 2021:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Revenues: | | |
| | |
| | |
| | |
|
Triple net leased senior living communities | | $ | 67,662 |
| | $ | 66,520 |
| | $ | 202,340 |
| | $ | 198,269 |
|
Managed senior living communities | | 98,331 |
| | 98,480 |
| | 294,816 |
| | 292,803 |
|
MOBs | | 96,116 |
| | 94,404 |
| | 285,413 |
| | 278,964 |
|
All other operations | | 4,570 |
| | 4,579 |
| | 13,684 |
| | 13,689 |
|
Total revenues | | $ | 266,679 |
| | $ | 263,983 |
| | $ | 796,253 |
| | $ | 783,725 |
|
| | | | | | | | |
Net income (loss) attributable to common shareholders: | | |
| | |
| | |
| | |
|
Triple net leased senior living communities | | $ | 46,378 |
| | $ | 38,327 |
| | $ | 125,407 |
| | $ | 117,621 |
|
Managed senior living communities | | 8,912 |
| | (1,612 | ) | | 17,413 |
| | 3,500 |
|
MOBs | | 27,056 |
| | 29,353 |
| | 83,877 |
| | 91,464 |
|
All other operations | | (47,932 | ) | | (38,165 | ) | | (144,087 | ) | | (114,176 | ) |
Net income attributable to common shareholders | | $ | 34,414 |
| | $ | 27,903 |
| | $ | 82,610 |
| | $ | 98,409 |
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Revenues: | | | | | | | | |
Office Portfolio | | $ | 54,997 | | | $ | 93,323 | | | | | |
SHOP | | 245,448 | | | 259,966 | | | | | |
Non-Segment | | 10,288 | | | 9,435 | | | | | |
Total revenues | | $ | 310,733 | | | $ | 362,724 | | | | | |
| | | | | | | | |
Net income (loss) attributable to common shareholders: | | | | | | | | |
Office Portfolio | | $ | 343,691 | | | $ | 22,709 | | | | | |
SHOP | | (35,873) | | | (25,414) | | | | | |
Non-Segment | | (67,395) | | | (64,800) | | | | | |
Net income (loss) attributable to common shareholders | | $ | 240,423 | | | $ | (67,505) | | | | | |
The following sections analyze and discuss the results of operations of each of our segments for the periods presented.
Three Months Ended September 30, 2017March 31, 2022 Compared to Three Months Ended September 30, 2016March 31, 2021 (dollars and square feet in thousands, except average monthly rate):
Unless otherwise indicated, references in this section to changes or comparisons of results, income or expenses refer to comparisons of the results for the three months ended September 30, 2017March 31, 2022 to the three months ended September 30, 2016.
Triple net leased senior living communities:
|
| | | | | | | | | | | | |
| | All Properties | | Comparable Properties (1) |
| | As of and for the Three Months | | As of and for the Three Months |
| | Ended September 30, | | Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Total properties | | 236 |
| | 234 |
| | 234 |
| | 234 |
|
# of units | | 26,220 |
| | 26,094 |
| | 26,094 |
| | 26,094 |
|
Tenant operating data (2) | | | | | | | | |
Occupancy | | 84.3 | % | | 85.3 | % | | 84.3 | % | | 85.3 | % |
Rent coverage | | 1.26 | x | | 1.33 | x | | 1.26 | x | | 1.33 | x |
| |
(1) | Consists of triple net leased senior living communities we have owned continuously since July 1, 2016 and excludes communities held for sale, if any. |
| |
(2) | All tenant operating data presented are based upon the operating results provided by our tenants for the 12 months ended June 30, 2017 and 2016 or the most recent prior period for which tenant operating results are made available to us. Rent coverage is calculated as 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 for properties sold during the periods presented. |
Triple net leased senior living communities, all properties:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
Rental income | | $ | 67,662 |
| | $ | 66,520 |
| | $ | 1,142 |
| | 1.7 | % |
Property operating expenses | | — |
| | (47 | ) | | (47 | ) | | (100.0 | )% |
Net operating income (NOI) | | 67,662 |
| | 66,473 |
| | 1,189 |
| | 1.8 | % |
| | | | | | | | |
Depreciation and amortization expense | | (20,629 | ) | | (19,727 | ) | | 902 |
| | 4.6 | % |
Impairment of assets | | — |
| | (2,191 | ) | | (2,191 | ) | | (100.0 | )% |
Operating income | | 47,033 |
| | 44,555 |
| | 2,478 |
| | 5.6 | % |
| | | | | | | | |
Interest expense | | (655 | ) | | (6,228 | ) | | (5,573 | ) | | (89.5 | )% |
Net income | | $ | 46,378 |
| | $ | 38,327 |
| | $ | 8,051 |
| | 21.0 | % |
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 such a comparison is generally consistent with the comparison of results for all our triple net leased senior living communities from quarter to quarter and a separate, comparable properties comparison is not meaningful.
Rental income. Rental income increased primarily due to rents from triple net leased senior living communities we acquired since July 1, 2016, and also due to increased rents resulting from our purchase of improvements since July 1, 2016. These increases were partially offset by reduced rental income resulting from our sale of one senior living community since July 1, 2016. Rental income includes non-cash straight line rent adjustments totaling $750 and $865 for the three months ended September 30, 2017 and 2016, respectively. Rental income increased year over year on a comparable property basis by $757, primarily as a result of our purchase of improvements at certain of these communities that we have owned continuously since July 1, 2016 and the resulting increased rent, pursuant to the terms of the applicable leases.
Property operating expenses. In the third quarter of 2016, we recorded $47 of property operating expenses related to bad debt reserves associated with a lease default at a triple net leased senior living community we acquired in 2015 which was previously leased to a third party private operator. In July 2016, we terminated this lease and entered a management agreement with Five Star to manage this community for our account under a TRS structure.
Net operating income. We typically incur minimal property operating expenses at these communities, as the majority of those expenses are paid by our tenants. NOI increased due to the increase in rental income and the decrease in property operating expenses described above. The reconciliation of NOI to net income for our triple net leased senior living communities segment is shown in the table above.March 31, 2021. Our definition of NOI and our reconciliation of net income (loss) to consolidated NOI and a description of why we believe NOI is an appropriate supplemental measure are included below under the heading “Non-GAAP Financial Measures.”
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 | | $ Change | | % Change |
NOI by segment: | | | | | | | | |
Office Portfolio | | $ | 31,550 | | | $ | 62,030 | | | $ | (30,480) | | | (49.1) | % |
SHOP | | 153 | | | 3,868 | | | (3,715) | | | (96.0) | % |
Non-Segment | | 10,288 | | | 9,435 | | | 853 | | | 9.0 | % |
Total NOI | | 41,991 | | | 75,333 | | | (33,342) | | | (44.3) | % |
| | | | | | | | |
Depreciation and amortization | | 57,259 | | | 66,153 | | | (8,894) | | | (13.4) | % |
General and administrative | | 7,285 | | | 7,542 | | | (257) | | | (3.4) | % |
Acquisition and certain other transaction related costs | | 928 | | | — | | | 928 | | | nm |
Impairment of assets | | — | | | (174) | | | 174 | | | (100.0) | % |
Gain (loss) on sale of properties | | 327,794 | | | (122) | | | 327,916 | | | nm |
Losses on equity securities, net | | (8,553) | | | (8,339) | | | (214) | | | 2.6 | % |
Interest and other income | | 395 | | | 2,835 | | | (2,440) | | | (86.1) | % |
Interest expense | | (57,131) | | | (60,091) | | | 2,960 | | | (4.9) | % |
| | | | | | | | |
Loss on modification or early extinguishment of debt | | (483) | | | (2,040) | | | 1,557 | | | (76.3) | % |
Income (loss) from continuing operations before income tax expense and equity in earnings of investees | | 238,541 | | | (65,945) | | | 304,486 | | | nm |
Income tax expense | | (1,472) | | | (238) | | | (1,234) | | | nm |
Equity in earnings of investees | | 3,354 | | | — | | | 3,354 | | | nm |
Net income (loss) | | 240,423 | | | (66,183) | | | 306,606 | | | nm |
Net income attributable to noncontrolling interest | | — | | | (1,322) | | | 1,322 | | | (100.0) | % |
Net income (loss) attributable to common shareholders | | $ | 240,423 | | | $ | (67,505) | | | $ | 307,928 | | | nm |
nm - not meaningful
DepreciationOffice Portfolio:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Comparable Properties (1) | | All Properties |
| | As of March 31, | | As of March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Total buildings | | 95 | | | 95 | | | 104 | | | 122 | |
Total square feet (2) | | 8,020 | | | 8,020 | | | 8,724 | | | 11,190 | |
Occupancy (3) | | 92.5 | % | | 92.8 | % | | 89.3 | % | | 92.3 | % |
(1)Consists of medical office and amortization expense. Depreciationlife science properties that we have owned and amortization expensewhich have been in service continuously since January 1, 2021; excludes properties classified as held for sale or out of service undergoing redevelopment, if any, and medical office and life science properties owned by unconsolidated joint ventures in each of which we own an equity interest.
(2)Prior periods exclude space remeasurements made subsequent to those periods.
(3)All property occupancy for medical office and life science properties includes (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. Comparable property occupancy excludes out of service assets undergoing redevelopment and medical office and life science properties owned by unconsolidated joint ventures in each of which we own an equity interest.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | Comparable (1) | | Non-Comparable | | |
| | Properties Results | | Properties Results | | Consolidated Properties Results |
| | | | | | $ | | % | | | | | | | | | | $ | | % |
| | 2022 | | 2021 | | Change | | Change | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
Rental income | | $ | 48,428 | | | $ | 48,123 | | | $ | 305 | | | 0.6 | % | | $ | 6,569 | | | $ | 45,200 | | | $ | 54,997 | | | $ | 93,323 | | | $ | (38,326) | | | (41.1) | % |
Property operating expenses | | (19,868) | | | (19,174) | | | 694 | | | 3.6 | % | | (3,579) | | | (12,119) | | | (23,447) | | | (31,293) | | | (7,846) | | | (25.1) | % |
NOI | | $ | 28,560 | | | $ | 28,949 | | | $ | (389) | | | (1.3) | % | | $ | 2,990 | | | $ | 33,081 | | | $ | 31,550 | | | $ | 62,030 | | | $ | (30,480) | | | (49.1) | % |
(1)Consists of medical office and life science properties that we have owned and which have been in service continuously since January 1, 2021; excludes properties classified as held for sale or out of service undergoing redevelopment, if any, and medical office and life science properties owned by unconsolidated joint ventures in each of which we own an equity interest.
Rental income. Rental income decreased primarily due to the deconsolidation of 11 medical office and life science properties currently owned by unconsolidated joint ventures in each of which we own a 20% equity interest and our disposition of five properties since January 1, 2021 and assets being taken out of service and/or undergoing redevelopment, partially offset by an increase in rental income at our comparable properties. Rental income increased at our comparable properties primarily as a resultdue to higher average rents achieved from our new and renewal leasing activity and increased parking revenue at certain of our acquisitionscomparable properties as certain states and our purchase of improvements since July 1, 2016.
Impairment of assets. Impairment of assets charges recorded in 2016 relatemunicipalities have eased restrictions related to the reduction ofCOVID-19 pandemic, tenants' employees have increasingly returned to the carrying value of a SNF that we sold during the third quarter of 2016 to its sale price less cost to sell.
Interest expense. Interestoffice and commercial activity has increased, partially offset by decreases in tax escalation income and other property operating expense relates to mortgage debts and capital leases secured byreimbursements at certain of our comparable properties.
Property operating expenses. Property operating expenses consist of real estate taxes, utility expenses, insurance, management fees, salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense and other direct costs of operating these communities.properties. The decrease in interest expenseproperty operating expenses is primarily due to the deconsolidation of 11 medical office and life science properties currently owned by unconsolidated joint ventures in each of which we own a 20% equity interest and our prepaymentdisposition of $320,379five properties since January 1, 2021 and assets being taken out of service and/or undergoing redevelopment, partially offset by an increase in aggregate principal amountproperty operating expenses at our comparable properties. Property operating expenses at our comparable properties increased primarily due to increases in utility expenses, landscaping expenses and other direct costs, partially offset by decreases in real estate taxes at certain of mortgage debts since July 1, 2016 with a weighted average annual interest rate of 6.7%, as well as regularly scheduled amortization of mortgage debts which secure these communities.our comparable properties.
Net operating income. The change in NOI reflects the net changes in rental income and property operating expenses described above.
SHOP:
Managed senior living communities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Comparable Properties (1) | | All Properties |
| | As of and For the Three Months | | As of and For the Three Months |
| | Ended March 31, | | Ended March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Total properties | | 120 | | | 120 | | | 234 | | | 235 | |
Number of units | | 17,899 | | | 17,899 | | | 25,088 | | | 26,963 | |
Occupancy | | 74.1 | % | | 72.7 | % | | 73.0 | % | | 69.5 | % |
Average monthly rate (2) | | $ | 4,084 | | | $ | 4,051 | | | $ | 4,472 | | | $ | 4,623 | |
|
| | | | | | | | | | | | | | | | |
| | All Properties | | Comparable Properties (1) |
| | As of and for the Three Months | | As of and for the Three Months |
| | Ended September 30, | | Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Total properties | | 68 |
| | 68 |
| | 62 |
| | 62 |
|
# of units | | 8,807 |
| | 8,797 |
| | 8,242 |
| | 8,242 |
|
Occupancy | | 85.8 | % | | 86.7 | % | | 86.0 | % | | 86.9 | % |
Average monthly rate (2) | | $ | 4,243 |
| | $ | 4,208 |
| | $ | 4,268 |
| | $ | 4,223 |
|
| |
(1) | (1)Consists of managed senior living communities owned and managed by the same operator continuously since July 1, 2016 and excludes communities classified as held for sale, if any. |
| |
(2) | 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. |
Managed senior living communities all properties: that we have owned and which have been operated by the same operator continuously since January 1, 2021; excludes communities classified as held for sale or closed, if any.
(2)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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | Comparable (1) | | Non-Comparable | | |
| | Properties Results | | Properties Results | | Consolidated Properties Results |
| | | | | | $ | | % | | | | | | | | | | $ | | % |
| | 2022 | | 2021 | | Change | | Change | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
Residents fees and services | | $ | 162,540 | | | $ | 185,317 | | | $ | (22,777) | | | (12.3) | % | | $ | 82,908 | | | $ | 74,649 | | | $ | 245,448 | | | $ | 259,966 | | | $ | (14,518) | | | (5.6) | % |
Property operating expenses | | (153,055) | | | (174,960) | | | (21,905) | | | (12.5) | % | | (92,240) | | | (81,138) | | | (245,295) | | | (256,098) | | | (10,803) | | | (4.2) | % |
NOI | | $ | 9,485 | | | $ | 10,357 | | | $ | (872) | | | (8.4) | % | | $ | (9,332) | | | $ | (6,489) | | | $ | 153 | | | $ | 3,868 | | | $ | (3,715) | | | (96.0) | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
Residents fees and services | | $ | 98,331 |
| | $ | 98,480 |
| | $ | (149 | ) | | (0.2 | )% |
Property operating expenses | | (75,556 | ) | | (74,763 | ) | | 793 |
| | 1.1 | % |
Net operating income (NOI) | | 22,775 |
| | 23,717 |
| | (942 | ) | | (4.0 | )% |
| | | | | | | | |
Depreciation and amortization expense | | (12,691 | ) | | (20,747 | ) | | (8,056 | ) | | (38.8 | )% |
Impairment of assets | | — |
| | (2,394 | ) | | (2,394 | ) | | (100.0 | )% |
Operating income | | 10,084 |
| | 576 |
| | 9,508 |
| | 1,650.7 | % |
| | | | | | | | |
Interest expense | | (1,172 | ) | | (2,104 | ) | | (932 | ) | | (44.3 | )% |
Loss on early extinguishment of debt | | — |
| | (84 | ) | | (84 | ) | | (100.0 | )% |
Net income (loss) | | $ | 8,912 |
| | $ | (1,612 | ) | | $ | 10,524 |
| | (652.9 | )% |
(1)Consists of senior living communities that we have owned and which have been operated by the same operator continuously since January 1, 2021; excludes communities classified as held for sale or closed, if any.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 and related fees are accrued. Residents fees and services decreased primarily due to a decline in occupancy forthe closure of skilled nursing units at certain of our comparable properties during the three months ended SeptemberJune 30, 2017 compared2021. Additionally, residents fees and services decreased due to the three months ended September 30, 2016,our closure of one property since January 1, 2021. Decreases to residents fees and services were partially offset by an increaseincreases in occupancy and average monthly rates during these periods.rate 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, management fees, cleaning expense and other direct costs of operating these communities. Property operating expenses increaseddecreased primarily due to increased salaries and benefit costs associated with increased staffing required as a resultthe closure of the hurricanes that occurred in the southeastern United States and Texas in the third quarter of 2017, as well as increased real estate taxesskilled nursing units at certain of these communities.
Netour comparable properties during the three months ended June 30, 2021. Additionally, property operating income. NOIexpenses decreased due to the increases inour closure of one property since January 1, 2021. Decreases to property operating expenses as well as the decrease in residents fees and services 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 net income to consolidated NOI 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 related to in place resident agreements assumed upon the acquisition of a community. Depreciation and amortization expense decreased as a result of certain of our in place resident agreements becoming fully amortized since July 1, 2016,were partially offset by an increase in depreciation expense due to our purchase of improvements since July 1, 2016.
Impairment of assets. Impairment of assets charges recorded in 2016 relate to the reduction of the carrying value of a senior living community that we sold in December 2016 to its estimated fair value less cost 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 of $97,255 in aggregate principal amount of mortgage debts since July 1, 2016 with a weighted average annual interest rate of 6.0%, as well as regularly scheduled amortization of mortgage debts which secure these communities.
Loss on early extinguishment of debt. We recognized a loss on early extinguishment of debt in connection with our prepayment of mortgage debts during the third quarter of 2016.
Managed senior living communities, comparable properties (managed senior living communities owned and managed by the same operator continuously since July 1, 2016 excluding communities classified as held for sale, if any):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
Residents fees and services | | $ | 92,790 |
| | $ | 92,742 |
| | $ | 48 |
| | 0.1 | % |
Property operating expenses | | (70,879 | ) | | (69,961 | ) | | 918 |
| | 1.3 | % |
Net operating income (NOI) | | 21,911 |
| | 22,781 |
| | (870 | ) | | (3.8 | )% |
| | | | | | | | |
Depreciation and amortization expense | | (11,040 | ) | | (16,965 | ) | | (5,925 | ) | | (34.9 | )% |
Operating income | | 10,871 |
| | 5,816 |
| | 5,055 |
| | 86.9 | % |
| | | | | | | | |
Interest expense | | (697 | ) | | (1,624 | ) | | (927 | ) | | (57.1 | )% |
Loss on early extinguishment of debt | | — |
| | (84 | ) | | (84 | ) | | (100.0 | )% |
Net income | | $ | 10,174 |
| | $ | 4,108 |
| | $ | 6,066 |
| | 147.7 | % |
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 and related fees are accrued. Residents fees and services increased modestly year over yearlabor costs on a comparable propertyper resident basis primarily duefor both permanent and agency labor. We expect to an increase in average monthly rates, partially offset bycontinue to have elevated labor costs on a decline in occupancy.per resident basis.
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 increased primarily due to increased salaries and benefit costs associated with increased staffing required as a result of the hurricanes that occurred in the southeastern United States and Texas in the third quarter of 2017, as well as increased real estate taxes at certain of these communities.
Net operating income. The decreasechange in NOI reflects the net changes in residents fees and services and property operating expenses described above. The reconciliation
Non-Segment(1):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Comparable Properties (2) | | All Properties |
| | As of and For the Three Months Ended March 31, | | As of and For the Three Months Ended March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Total properties: | | | | | | | | |
Triple net leased senior living communities | | 29 | | | 29 | | | 30 | | | 29 | |
Wellness centers | | 10 | | | 10 | | | 10 | | | 10 | |
Rent coverage: | | | | | | | | |
Triple net leased senior living communities (3) | | 1.21 | x | | 1.48 | x | | 1.21 | x | | 1.48 | x |
Wellness centers (3) | | 1.12 | x | | 0.91 | x | | 1.12 | x | | 0.91 | x |
(1)Non-segment operations consists of NOI to net income forall of our managedother operations, including certain senior living communities leased to third party operators and wellness centers, which segment comparable properties, is shown in the table above. Our definition of NOIwe do not consider to be sufficiently material to constitute a separate reporting segment, and our reconciliation of netany other income to consolidated NOIor expenses that 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 related to in place resident agreements assumed upon the acquisition of a community. Depreciation and amortization expense decreased as a result of certain of our in place resident agreements becoming fully amortized since July 1, 2016, partially offset by an increase in depreciation expense due to our purchase of improvements since July 1, 2016.
Interest expense. Interest expense relates to mortgage debts secured by certain of these communities. The decrease in interest expense is due to our prepayment of $97,255 in aggregate principal amount of mortgage debts since July 1, 2016 with a weighted average annual interest rate of 6.0%, as well as regularly scheduled amortization of mortgage debts which secure these communities.
Loss on early extinguishment of debt. We recognized a loss on early extinguishment of debt in connection with our prepayment of mortgage debts during the third quarter of 2016.
MOBs:
|
| | | | | | | | | | | | |
| | All Properties | | Comparable Properties (1) |
| | As of and for the Three Months | | As of and for the Three Months |
| | Ended September 30, | | Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Total properties | | 121 |
| | 119 |
| | 118 |
| | 118 |
|
Total buildings | | 147 |
| | 145 |
| | 144 |
| | 144 |
|
Total square feet (2) | | 11,611 |
| | 11,401 |
| | 11,340 |
| | 11,335 |
|
Occupancy (3) | | 95.8 | % | | 95.9 | % | | 95.7 | % | | 96.4 | % |
| |
(1) | Consists of MOBs we have owned continuously since July 1, 2016, includes our MOB (two buildings) that is owned in a joint venture arrangement and excludes properties classified as held for sale, if any. |
| |
(2) | Prior periods exclude space re-measurements made subsequent to those periods. |
| |
(3) | MOB occupancy includes (i) space being fitted out for occupancy and (ii) space which is leased but is not occupied or is being offered for sublease by tenants. |
MOBs, all properties:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
Rental income | | $ | 96,116 |
| | $ | 94,404 |
| | $ | 1,712 |
| | 1.8 | % |
Property operating expenses | | (29,158 | ) | | (28,537 | ) | | 621 |
| | 2.2 | % |
Net operating income (NOI) | | 66,958 |
| | 65,867 |
| | 1,091 |
| | 1.7 | % |
| | | | | | | | |
Depreciation and amortization expense | | (32,351 | ) | | (30,922 | ) | | 1,429 |
| | 4.6 | % |
Impairment of assets | | — |
| | 7 |
| | (7 | ) | | (100.0 | )% |
Operating income | | 34,607 |
| | 34,952 |
| | (345 | ) | | (1.0 | )% |
| | | | | | | | |
Interest expense | | (6,172 | ) | | (5,599 | ) | | 573 |
| | 10.2 | % |
Net income | | 28,435 |
| | 29,353 |
| | (918 | ) | | (3.1 | )% |
Net income attributable to noncontrolling interest | | (1,379 | ) | | — |
| | 1,379 |
| | 100.0 | % |
Net income attributable to common shareholders | | $ | 27,056 |
| | $ | 29,353 |
| | $ | (2,297 | ) | | (7.8 | )% |
Rental income.Rental income increased primarily due to rents from the MOBs we acquired since July 1, 2016, as well as certain changes at our comparable MOB properties discussed below. Rental income includes non-cash straight line rent adjustments totaling $2,733 and $3,290 and net amortization of approximately $1,297 and $1,181 of above and below market lease adjustments for the three months ended September 30, 2017 and 2016, 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 due to our acquisitions since July 1, 2016, as well as certain changes at our comparable MOB properties discussed below.
Net operating income. NOI increased due to the increased rental income described above, partially offset by the increases in 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 net income to consolidated NOI are included below under the heading “Non-GAAP Financial Measures.”
Depreciation and amortization expense. Depreciation and amortization expense increased primarily due to acquisitions as well as increases in the amortization of leasing costs, depreciation expense on fixed assets and amortization of acquired in place real estate leases that we amortize over the respective lease terms.
Impairment of assets. We recorded a reversal of impairment charges previously recorded of $7 in the third quarter of 2016 to adjust the carrying value of four MOBs that we sold in the third quarter of 2016 to their sales prices less costs to sell.
Interest expense. Interest expense relates to mortgage debts secured by certain of these properties. 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 3.5%, partially offset by our prepayment of $19,386 in aggregate principal amount of mortgage debt since July 1, 2016 with an annual interest rate of 6.1%, as well as the regularly scheduled amortization of mortgage debts which secure these properties.
Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest represents the net income attributable to a sovereign investorspecific reporting segment.
(2)Comparable properties consists of properties that owns 45% of one of our MOBs (two buildings) through the joint venture agreement we entered in March 2017.
MOBs, comparable properties (MOBs we have owned and which have been leased to the same operator continuously since JulyJanuary 1, 2016, includes our MOB (two buildings) that is owned in a joint venture arrangement and2021; excludes properties classified as held for sale, if any):any.
(3)All tenant operating data presented is based upon the operating results provided by our tenants for the 12 months ended December 31, 2021 and 2020 or the most recent prior period for which tenant operating results are available to us. 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, if any, or for which there was a transfer of operations during the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | Comparable (1) | | Non-Comparable | | |
| | Properties Results | | Properties Results | | Consolidated Properties Results |
| | | | | | $ | | % | | | | | | | | | | $ | | % |
| | 2022 | | 2021 | | Change | | Change | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
Rental income | | $ | 10,092 | | | $ | 9,435 | | | $ | 657 | | | 7.0 | % | | $ | 196 | | | $ | — | | | $ | 10,288 | | | $ | 9,435 | | | $ | 853 | | | 9.0 | % |
NOI | | $ | 10,092 | | | $ | 9,435 | | | $ | 657 | | | 7.0 | % | | $ | 196 | | | $ | — | | | $ | 10,288 | | | $ | 9,435 | | | $ | 853 | | | 9.0 | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
Rental income | | $ | 94,526 |
| | 94,306 |
| | $ | 220 |
| | 0.2 | % |
Property operating expenses | | (28,574 | ) | | (28,379 | ) | | 195 |
| | 0.7 | % |
Net operating income (NOI) | | 65,952 |
| | 65,927 |
| | 25 |
| | 0.0 | % |
| | | | | | | | |
Depreciation and amortization expense | | (31,567 | ) | | (30,922 | ) | | 645 |
| | 2.1 | % |
Operating income | | 34,385 |
| | 35,005 |
| | (620 | ) | | (1.8 | )% |
| | | | | | | | |
Interest expense | | (6,171 | ) | | (5,599 | ) | | 572 |
| | 10.2 | % |
Net income | | 28,214 |
| | 29,406 |
| | (1,192 | ) | | (4.1 | )% |
Net income attributable to noncontrolling interest | | (1,379 | ) | | — |
| | 1,379 |
| | 100.0 | % |
Net income attributable to common shareholders | | $ | 26,835 |
| | $ | 29,406 |
| | $ | (2,571 | ) | | (8.7 | )% |
(1)Consists of properties that we have owned and which have been leased to the same operator continuously since January 1, 2021; excludes properties classified as held for sale, if any.
Rental income. Rental income increased primarily due to an increase in rental income at our comparable properties, the transfer of one senior living community we own from reimbursable expensesmanaged senior living communities to triple net leased senior living communities, and increased rents resulting from our purchase of improvements at certain of these properties.our comparable properties since January 1, 2021. Rental income includes non-cash straight line rent adjustments totaling $2,632 and $3,304 and net amortizationincreased at our comparable properties primarily due to higher cash rents received from a tenant that previously defaulted under leases for six of approximately $1,301 and $1,181 of above and below market lease adjustments forour wellness centers during the three months ended September 30, 2017March 31, 2022. We have elected to recognize rental income from this previously defaulted tenant as rent payments are received. In February 2022, the leases for these six wellness centers were amended and 2016, respectively.a portion of the rent due to us was deferred.
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 as the result of an increase in utility expense at certain of these properties and increases in other direct costs of operating these properties.
Net operating income. The change in NOI reflects the net changes in rental income and property operating expenses described above. The reconciliation of NOI
Consolidated:
References to net income for our MOB segment for comparable properties is shownchanges in the table above. Our definitionincome and expense categories below relate to the comparison of NOI and our reconciliation of net income to consolidated NOI are included below under the heading “Non-GAAP Financial Measures.”
Depreciation and amortization expense. Depreciation and amortization expense increased primarily due to an increase in the amortization of leasing costs and depreciation expense on fixed assets acquired since July 1, 2016, partially offset by a reduction in amortization of acquired in place real estate leases that we amortize over the respective lease terms.
Interest expense. Interest expense relates to mortgage debts secured by certain of these properties. 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 3.5%, partially offset by our prepayment of $19,386 in aggregate principal amount of mortgage debt since July 1, 2016 with an annual interest rate of 6.1%, as well as the regularly scheduled amortization of mortgage debts which secure these properties.
Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest represents the net income attributable to a sovereign investor that owns 45% of one of our MOBs (two buildings) through the joint venture agreement we entered in March 2017.
All other operations(1):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
Rental income | | $ | 4,570 |
| | $ | 4,579 |
| | $ | (9 | ) | | (0.2 | )% |
| | | | | | | | |
Expenses: | | | | | | | | |
|
Depreciation and amortization | | (948 | ) | | (948 | ) | | — |
| | — | % |
General and administrative | | (19,883 | ) | | (12,107 | ) | | 7,776 |
| | 64.2 | % |
Acquisition and certain other transaction related costs | | — |
| | (824 | ) | | (824 | ) | | (100.0 | )% |
Total expenses | | (20,831 | ) | | (13,879 | ) | | 6,952 |
| | 50.1 | % |
| | | | | | | | |
Operating loss | | (16,261 | ) | | (9,300 | ) | | 6,961 |
| | 74.8 | % |
| | | | | | | | |
Dividend income | | 659 |
| | 659 |
| | — |
| | — | % |
Interest and other income | | 128 |
| | 89 |
| | 39 |
| | 43.8 | % |
Interest expense | | (32,106 | ) | | (29,507 | ) | | 2,599 |
| | 8.8 | % |
Loss on early extinguishment of debt | | (274 | ) | | — |
| | 274 |
| | 100.0 | % |
Loss before income tax expense and equity in earnings of an investee | | (47,854 | ) | | (38,059 | ) | | 9,795 |
| | 25.7 | % |
Income tax expense | | (109 | ) | | (119 | ) | | (10 | ) | | (8.4 | )% |
Equity in earnings of an investee | | 31 |
| | 13 |
| | 18 |
| | 138.5 | % |
Net loss | | $ | (47,932 | ) | | $ | (38,165 | ) | | $ | 9,767 |
| | 25.6 | % |
| |
(1) | All other operations includes all of our other operations, including certain properties that offer wellness, fitness and spa services to members, 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. Rental income includes non-cash straight line rent of approximately $138 and $137results for the three months ended September 30, 2017 and 2016, respectively. Rental income also includes net amortization of approximately $55 of acquired real estate leases and obligations for each ofMarch 31, 2022, compared to the three months ended September 30, 2017 and 2016.March 31, 2021.
Depreciation and amortization expense.Depreciation and amortization expense remained consistent asdecreased primarily due to the deconsolidation of 11 medical office and life science properties owned by unconsolidated joint ventures in each of which we had no acquisitions orown a 20% equity interest, our disposition of five properties and certain depreciable assets becoming fully depreciated since January 1, 2021. Decreases to depreciation and amortization expense were partially offset by the purchase of capital expenditures in this segmentimprovements at certain of our properties since JulyJanuary 1, 2016. We depreciate our long lived wellness center assets on a straight line basis.2021.
General andadministrative expense.expense. General and administrative expense consists of fees paid to RMR LLC under our business management agreements,agreement, legal and accounting fees, fees and expenses of our Trustees, equity compensation expense and other costs relating to our status as a publicly ownedtraded company. General and administrative expense increaseddecreased primarily due to an increasea decrease in our base business management fees expense as a result of $8,136, including $8,022 of estimated business management incentive fees that we recognizedlower consolidated indebtedness and lower trading prices for the three months ended September 30, 2017 that may become payable in 2018 due to our outperformance of the SNL U.S. REIT Healthcare Index during the applicable measurement period. This increase was partially offset by decreases in equity compensation expense and legal fees incurredcommon shares during the three months ended September 30, 2017.March 31, 2022 compared to the three months ended March 31, 2021.
Acquisition and certain other transaction related costs. AcquisitionFor the three months ended March 31, 2022, acquisition and certain other transaction related costs include legal and diligenceprimarily represent costs incurred in connection with our acquisition, disposition and operations transition activities that we expensed under GAAP. We had no acquisitions, dispositions or operations transitions that required costs to be expensed under GAAP during the third quarter of 2017.
Dividend income. Dividend income consists of dividends received from our investment in RMR Inc.
Interest and other income. The increase in interest and other income is primarily due to increased investable cash on hand.
Interest expense. Interest expense increased primarily due to increased borrowings under our revolving credit facility, as well as an increase in LIBOR rates, resulting in an increase in interest expense on our revolving credit facility and term loans.
Loss on early extinguishment of debt. We recorded loss on early extinguishment of debt in August 2017 in connection with the amendmentsrelated to the agreements governing our revolving credit facility and our $200,000 term loan.
Income tax expense. Income tax expense primarily reflects state income taxes payable in certain jurisdictions.
Equity in earnings of an investee. Equity in earnings of an investee represents our proportionate share of earnings from AIC.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016 (dollars in thousands, except average monthly rate):
Unless otherwise indicated, references in this section to changes or comparisons of results, income or expenses refer to comparisons of the results for the nine months ended September 30, 2017 to the nine months ended September 30, 2016.
Triple net leased senior living communities:
|
| | | | | | | | | | | | |
| | All Properties | | Comparable Properties (1) |
| | As of and for the Nine Months | | As of and for the Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Total properties | | 236 |
| | 234 |
| | 227 |
| | 227 |
|
# of units | | 26,220 |
| | 26,094 |
| | 25,549 |
| | 25,549 |
|
Tenant operating data (2) | | | | | | | | |
Occupancy | | 84.3 | % | | 85.3 | % | | 84.3 | % | | 85.3 | % |
Rent coverage | | 1.26 | x | | 1.33 | x | | 1.26 | x | | 1.33 | x |
| |
(1) | Consists of triple net leased senior living communities we have owned continuously since January 1, 2016 and excludes communities held for sale, if any. |
| |
(2) | All tenant operating data presented are based upon the operating results provided by our tenants for the 12 months ended June 30, 2017 and 2016 or the most recent prior period for which tenant operating results are made available to us. Rent coverage is calculated as 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 ownershiptransition of certain properties, as well as for properties sold during the periods presented. |
Triple net leased senior living communities all properties:
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
Rental income | | $ | 202,340 |
| | $ | 198,269 |
| | $ | 4,071 |
| | 2.1 | % |
Property operating expenses | | — |
| | (833 | ) | | (833 | ) | | (100.0 | )% |
Net operating income (NOI) | | 202,340 |
| | 197,436 |
| | 4,904 |
| | 2.5 | % |
| | | | | | | | |
Depreciation and amortization expense | | (61,434 | ) | | (58,401 | ) | | 3,033 |
| | 5.2 | % |
Impairment of assets | | — |
| | (6,583 | ) | | (6,583 | ) | | (100.0 | )% |
Operating income | | 140,906 |
| | 132,452 |
| | 8,454 |
| | 6.4 | % |
| | | | | | | | |
Interest expense | | (8,205 | ) | | (18,892 | ) | | (10,687 | ) | | (56.6 | )% |
Loss on early extinguishment of debt | | (7,294 | ) | | — |
| | 7,294 |
| | 100.0 | % |
Gain on sale of properties | | — |
| | 4,061 |
| | (4,061 | ) | | (100.0 | )% |
Net income | | $ | 125,407 |
| | $ | 117,621 |
| | $ | 7,786 |
| | 6.6 | % |
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 such a comparison is generally consistent with the comparison of results for all our triple net leased senior living communities from quarter to quarter and a separate, comparable properties comparison is not meaningful.
Rental income. Rental income increased primarily due to rents from triple net leased senior living communities we acquired since January 1, 2016, and also due to increased rents resulting from our purchase of improvements since January 1, 2016. These increases were partially offset by reduced rental income resulting from our sales of two senior living communities since January 1, 2016. Rental income includes non-cash straight line rent adjustments totaling $2,304 and $3,184 for the nine months ended September 30, 2017 and 2016, respectively. Rental income increased year over year on a comparable property basis by $2,180, primarily as a result of our purchase of improvements at certain of these communities that we have owned continuously since January 1, 2016 and the resulting increased rent, pursuant to the terms of the applicable leases.
Property operating expenses. In the nine months ended September 30, 2016, we recorded $833 of property operating expenses related to bad debt reserves associated with lease defaults at two triple net leased senior living communities we acquired in 2015 which were previously leased tonew third party private operators. In 2016, we terminated these leases and entered management agreements with Five Star to manage the communities for our account under TRS structures.managers.
Net operating income. We typically incur minimal property operating expenses at these communities, as the majority of those expenses are paid by our tenants. NOI increased due to the increase in rental income and decrease in property operating expenses 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 net income to consolidated NOI 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 purchase of improvements since January 1, 2016.
Impairment of assets. Impairment of assetsFor information about our asset impairment charges, recorded in 2016 relate to writing off acquired lease intangible assets associated with the two communities where the tenants defaulted on their leases as discussed above, as well as the reduction of the carrying value of a SNF that we sold during the third quarter of 2016 to its sale price less cost to sell.
Interest expense. Interest expense relates to mortgage debts and capital leases secured by certain of these communities. The decrease in interest expense is duesee Note 3 to our prepaymentconsolidated financial statements included in Part IV, Item 15 of $320,379 in aggregate principal amount of mortgage debts since January 1, 2016 with a weighted average annual interest rate of 6.7%, as well as regularly scheduled amortization of mortgage debts which secure these communities.our Annual Report.
Loss on early extinguishment of debt. We recognized a loss on early extinguishment of debt in connection with our prepayment of a mortgage debt in April 2017.
Gain (loss) on sale of properties. Gain (loss) on sale of properties is the net result of our sale of one SNF in June 2016.
Managed senior living communities:
|
| | | | | | | | | | | | | | | | |
| | All Properties | | Comparable Properties (1) |
| | As of and for the Nine Months | | As of and for the Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Total properties | | 68 |
| | 68 |
| | 60 |
| | 60 |
|
# of units | | 8,807 |
| | 8,797 |
| | 8,104 |
| | 8,104 |
|
Occupancy | | 85.8 | % | | 87.2 | % | | 86.1 | % | | 87.2 | % |
Average monthly rate (2) | | $ | 4,287 |
| | $ | 4,251 |
| | $ | 4,316 |
| | $ | 4,258 |
|
| |
(1) | Consists of managed senior living communities owned and managed by the same operator continuously since January 1, 2016 and excludes communities classified as held for sale, if any. |
| |
(2) | 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. |
Managed senior living communities, all properties:
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
Residents fees and services | | $ | 294,816 |
| | $ | 292,803 |
| | $ | 2,013 |
| | 0.7 | % |
Property operating expenses | | (224,585 | ) | | (218,582 | ) | | 6,003 |
| | 2.7 | % |
Net operating income (NOI) | | 70,231 |
| | 74,221 |
| | (3,990 | ) | | (5.4 | )% |
| | | | | | | | |
Depreciation and amortization expense | | (49,295 | ) | | (60,905 | ) | | (11,610 | ) | | (19.1 | )% |
Impairment of assets | | — |
| | (2,394 | ) | | (2,394 | ) | | (100.0 | )% |
Operating income | | 20,936 |
| | 10,922 |
| | 10,014 |
| | 91.7 | % |
| | | | | | | | |
Interest expense | | (3,523 | ) | | (7,332 | ) | | (3,809 | ) | | (52.0 | )% |
Loss on early extinguishment of debt | | — |
| | (90 | ) | | (90 | ) | | (100.0 | )% |
Net income | | $ | 17,413 |
| | $ | 3,500 |
| | $ | 13,913 |
| | 397.5 | % |
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 and related fees are accrued. Residents fees and services 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, 2016, as well as an increase in average monthly rates, partially offset by a decline 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 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, 2016, increased salaries and benefit costs associated with increased staffing required as a result of the hurricanes that occurred in the southeastern United States and Texas in the third quarter of 2017, increased real estate taxes at certain of these communities and increased management fees as a result of the modifications made to our management and pooling arrangements with Five Star that took effect on July 1, 2016.
Net operating income. NOI decreased due to the increases in property operating expenses, partially offset by the increase in residents fees and services 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 net income to consolidated NOI 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 related to in place resident agreements assumed upon the acquisition of a community. Depreciation and amortization expense decreased as a result of certain of our in place resident agreements becoming fully amortized since January 1, 2016, partially offset by an increase in depreciation expense due to acquisitionsproperties during the three months ended March 31, 2022 and 2021. The gain on sale of properties during the three months ended March 31, 2022 reflects our purchasesale of improvements since January 1, 2016.
Impairment of assets. Impairment of assets charges recorded in 2016 relate to the reduction of the carrying value of a senior living community that we sold in December 2016 to its estimated fair value less cost to sell.
Interest expense. Interest expense relates to mortgage debts secured by certain of these communities. The decrease in interest expense is due10 medical office and life science properties to our prepayment10 medical office and life science properties joint venture in which we retained a 20% equity interest. For further information regarding gain (loss) on sale of $103,370 in aggregate principal amount of mortgage debts since January 1, 2016 with a weighted average annual interest rate of 6.0%, as well as regularly scheduled amortization of mortgage debts which secure these communities.
Loss on early extinguishment of debt. We recognized a loss on early extinguishment of debt in connection with our prepayment of mortgage debts during 2016.
Managed senior living communities, comparable properties, (managed senior living communities owned and managed by the same operator continuously since January 1, 2016 excluding communities classified as held for sale, if any):
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
Residents fees and services | | $ | 274,186 |
| | $ | 274,808 |
| | $ | (622 | ) | | (0.2 | )% |
Property operating expenses | | (207,152 | ) | | (204,183 | ) | | 2,969 |
| | 1.5 | % |
Net operating income (NOI) | | 67,034 |
| | 70,625 |
| | (3,591 | ) | | (5.1 | )% |
| | | | | | | | |
Depreciation and amortization expense | | (40,476 | ) | | (48,851 | ) | | (8,375 | ) | | (17.1 | )% |
Operating income | | 26,558 |
| | 21,774 |
| | 4,784 |
| | 22.0 | % |
| | | | | | | | |
Interest expense | | (1,677 | ) | | (5,624 | ) | | (3,947 | ) | | (70.2 | )% |
Loss on early extinguishment of debt | | — |
| | (90 | ) | | (90 | ) | | (100.0 | )% |
Net income | | $ | 24,881 |
| | $ | 16,060 |
| | $ | 8,821 |
| | 54.9 | % |
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 and related fees are accrued. Residents fees and services decreased year over year on a comparable property basis primarily due to a decline in occupancy, partially offset by an increase in average monthly rates.
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 increased primarily due to increased salaries and benefit costs associated with increased staffing required as a result of the hurricanes that occurred in the southeastern United States and Texas in the third quarter of 2017, as well as increases in real estate taxes, utility expense, insurance expense and management fees as a result of the modifications made see Note 2 to our managementcondensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and pooling arrangements with Five Star that took effectNote 3 to our consolidated financial statements included in Part IV, Item 15 of our Annual Report.
Losses on July 1, 2016.
Net operating income. The decrease in NOI reflectsequity securities, net. Losses on equity securities, net, represent the net changes in residents fees and services and property operating expenses described above. The reconciliation of NOIunrealized losses 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 net income to consolidated NOI 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 related to in place resident agreements assumed upon the acquisition of a
community. Depreciation and amortization expense decreased as a result of certain of our in place resident agreements becoming fully amortized since January 1, 2016, partially offset by an increase in depreciation expense due to our purchase of improvements since January 1, 2016.
Interest expense. Interest expense relates to mortgage debts secured by certain of these communities. The decrease in interest expense is due to our prepayment of $103,370 in aggregate principal amount of mortgage debts since January 1, 2016 with a weighted average annual interest rate of 6.0%, as well as regularly scheduled amortization of mortgage debts which secure these communities.
Loss on early extinguishment of debt. We recognized a loss on early extinguishment of debt in connection with our prepayment of mortgage debts during 2016.
MOBs:
|
| | | | | | | | | | | | |
| | All Properties | | Comparable Properties (1) |
| | As of and for the Nine Months | | As of and for the Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Total properties | | 121 |
| | 119 |
| | 116 |
| | 116 |
|
Total buildings | | 147 |
| | 145 |
| | 140 |
| | 140 |
|
Total square feet (2) | | 11,611 |
| | 11,401 |
| | 11,046 |
| | 11,041 |
|
Occupancy (3) | | 95.8 | % | | 95.9 | % | | 95.6 | % | | 96.3 | % |
| |
(1) | Consists of MOBs we have owned continuously since January 1, 2016, includes our MOB (two buildings) that is owned in a joint venture arrangement and excludes properties classified as held for sale, if any. |
| |
(2) | Prior periods exclude space re-measurements made subsequent to those periods. |
| |
(3) | MOB occupancy includes (i) space being fitted out for occupancy and (ii) space which is leased but is not occupied or is being offered for sublease by tenants. |
MOBs, all properties:
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
Rental income | | $ | 285,413 |
| | $ | 278,964 |
| | $ | 6,449 |
| | 2.3 | % |
Property operating expenses | | (83,980 | ) | | (79,361 | ) | | 4,619 |
| | 5.8 | % |
Net operating income (NOI) | | 201,433 |
| | 199,603 |
| | 1,830 |
| | 0.9 | % |
| | | | | | | | |
Depreciation and amortization expense | | (95,890 | ) | | (92,788 | ) | | 3,102 |
| | 3.3 | % |
Impairment of assets | | — |
| | (7,953 | ) | | (7,953 | ) | | (100.0 | )% |
Operating income | | 105,543 |
| | 98,862 |
| | 6,681 |
| | 6.8 | % |
| | | | | | | | |
Interest expense | | (18,742 | ) | | (7,398 | ) | | 11,344 |
| | 153.3 | % |
Loss on early extinguishment of debt | | (59 | ) | | — |
| | 59 |
| | 100.0 | % |
Net income | | 86,742 |
| | 91,464 |
| | (4,722 | ) | | (5.2 | )% |
Net income attributable to noncontrolling interest | | (2,865 | ) | | — |
| | 2,865 |
| | 100.0 | % |
Net income attributable to common shareholders | | $ | 83,877 |
| | $ | 91,464 |
| | $ | (7,587 | ) | | (8.3 | )% |
Rental income.Rental income increased primarily due to rents from the MOBs we acquired since January 1, 2016, as well as certain changes at our comparable MOB properties discussed below. Rental income includes non-cash straight line rent adjustments totaling $7,769 and $10,002 and net amortization of approximately $3,797 and $3,629 of above and below market lease adjustments for the nine months ended September 30, 2017 and 2016, 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 due to our acquisitions since January 1, 2016, as well as certain changes at our comparable MOB properties 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 net income to consolidated NOI are included below under the heading “Non-GAAP Financial Measures.”
Depreciation and amortization expense. Depreciation and amortization expense increased primarily due to an increase in the amortization of leasing costs and depreciation expense on fixed assets and an increase in amortization of acquired in place real estate leases that we amortize over the respective lease terms.
Impairment of assets. Impairment of assets for the nine months ended September 30, 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 or estimated fair values
less costs to sell.
Interest expense. Interest expense relates to mortgage debts secured by certain of these properties. 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 3.5%, partially offset by our prepayment of $37,386 in aggregate principal amount of mortgage debt since January 1, 2016 with an annual interest rate of 5.4%, as well as the regularly scheduled amortization of mortgage debts which secure these properties.
Loss on early extinguishment of debt. We recognized a net loss on early extinguishment of debt in connection with our prepayment of two mortgage debts during the second quarter of 2017.
Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest represents the net income attributable to a sovereign investor that owns 45% of one of our MOBs (two buildings) through the joint venture agreement we entered in March 2017.
MOBs, comparable properties (MOBs we have owned continuously since January 1, 2016, includes our MOB (two buildings) that is owned in a joint venture arrangement and excludes properties classified as held for sale, if any):
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
Rental income | | $ | 273,516 |
| | 271,623 |
| | $ | 1,893 |
| | 0.7 | % |
Property operating expenses | | (81,268 | ) | | (77,792 | ) | | 3,476 |
| | 4.5 | % |
Net operating income (NOI) | | 192,248 |
| | 193,831 |
| | (1,583 | ) | | (0.8 | )% |
| | | | | | | | |
Depreciation and amortization expense | | (92,587 | ) | | (90,891 | ) | | 1,696 |
| | 1.9 | % |
Operating income | | 99,661 |
| | 102,940 |
| | (3,279 | ) | | (3.2 | )% |
| | | | | | | | |
Interest expense | | (18,742 | ) | | (7,397 | ) | | 11,345 |
| | 153.4 | % |
Loss on early extinguishment of debt | | (59 | ) | | — |
| | 59 |
| | 100.0 | % |
Net income | | 80,860 |
| | 95,543 |
| | (14,683 | ) | | (15.4 | )% |
Net income attributable to noncontrolling interest | | (2,865 | ) | | — |
| | 2,865 |
| | 100.0 | % |
Net income attributable to common shareholders | | $ | 77,995 |
| | $ | 95,543 |
| | $ | (17,548 | ) | | (18.4 | )% |
Rental income. Rental income increased primarily due to an increase in tax escalation income and other reimbursable expenses and increased rents from leasing activity at certain of these properties. Rental income includes non-cash straight line rent adjustments totaling $6,788 and $9,637 and net amortization of approximately $3,689 and $3,303 of above and below market lease adjustments for the nine months ended September 30, 2017 and 2016, 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 as the result of increases in real estate taxes at certain of these properties and other direct costs of operating these properties.
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 net income to consolidated NOI 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 acquired since January 1, 2016, partially offset by a reduction in amortization of acquired in place real estate leases that we amortize over the respective lease terms.
Interest expense. Interest expense relates to mortgage debts secured by certain of these properties. 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 3.5%, partially offset by our prepayment of $37,386 in aggregate principal amount of mortgage debt since January 1, 2016 with an annual interest rate of 5.4%, as well as the regularly scheduled amortization of mortgage debts which secure these properties.
Loss on early extinguishment of debt. We recognized a net loss on early extinguishment of debt in connection with our prepayment of mortgage debts during the nine months ended September 30, 2017.
Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest represents the net income attributable to a sovereign investor that owns 45% of one of our MOBs (two buildings) through the joint venture agreement we entered in March 2017.
All other operations(1):
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change | | % Change |
Rental income | | $ | 13,684 |
| | $ | 13,689 |
| | $ | (5 | ) | | (0.0 | )% |
| | | | | | | | |
Expenses: | | | | | | | | |
|
Depreciation and amortization | | (2,844 | ) | | (2,844 | ) | | — |
| | — |
|
General and administrative | | (57,889 | ) | | (34,931 | ) | | 22,958 |
| | 65.7 | % |
Acquisition and certain other transaction related costs | | (292 | ) | | (1,443 | ) | | (1,151 | ) | | (79.8 | )% |
Impairment of assets | | (5,082 | ) | | — |
| | 5,082 |
| | 100.0 | % |
Total expenses | | (66,107 | ) | | (39,218 | ) | | 26,889 |
| | 68.6 | % |
| | | | | | | | |
Operating loss | | (52,423 | ) | | (25,529 | ) | | 26,894 |
| | 105.3 | % |
| | | | | | | | |
Dividend income | | 1,978 |
| | 1,449 |
| | 529 |
| | 36.5 | % |
Interest and other income | | 323 |
| | 330 |
| | (7 | ) | | (2.1 | )% |
Interest expense | | (93,924 | ) | | (90,215 | ) | | 3,709 |
| | 4.1 | % |
Loss on early extinguishment of debt | | (274 | ) | | — |
| | 274 |
| | 100.0 | % |
Loss before income tax expense and equity in earnings of an investee | | (144,320 | ) | | (113,965 | ) | | 30,355 |
| | 26.6 | % |
Income tax expense | | (300 | ) | | (318 | ) | | (18 | ) | | (5.7 | )% |
Equity in earnings of an investee | | 533 |
| | 107 |
| | 426 |
| | 398.1 | % |
Net loss | | $ | (144,087 | ) | | $ | (114,176 | ) | | $ | 29,911 |
| | 26.2 | % |
| |
(1) | All other operations includes all of our other operations, including certain properties that offer wellness, fitness and spa services to members, 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. Rental income includes non-cash straight line rent of approximately $412 for each of the nine months ended September 30, 2017 and 2016, respectively. Rental income also includes net amortization of approximately $166 of acquired real estate leases and obligations for each of the nine months ended September 30, 2017 and 2016.
Depreciation and amortization expense. Depreciation and amortization expense remained consistent as we had no acquisitions or capital expenditures in this segment since January 1, 2016. We depreciate our long lived wellness center assets on a straight line basis.
General andadministrative expense. General and administrative expense consists of fees paid to RMR LLC under our business management agreements, legal and accounting fees, fees and expenses of our Trustees, equity compensation expense and other costs relating to our status as a publicly owned company. General and administrative expense increased primarily due to an increase in our business management fees of $23,757, including $22,048 of estimated business management incentive fees that we recognized for the nine months ended September 30, 2017 that may become payable in 2018 due to our outperformance of the SNL U.S. REIT Healthcare Index during the applicable measurement period.
Acquisition and certain other transaction related costs. Acquisition and certain other transaction related costs include legal and diligence costs incurred in connection with our acquisition, disposition and operations transition activities that we expensed under GAAP.
Impairment of assets: During the nine months ended September 30, 2017, we recorded a $5,082 loss on impairment to reduce the carrying value ofadjust our investment in Five Star sharesAlerisLife to its estimated fair value due to the market value of this investment being significantly below our carrying value for an extended period.
Dividend income. Dividend income consists of dividends received fromvalue. For further information regarding our investment in RMR Inc.AlerisLife, see Note 5 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Interest and other income. The decrease in interest and other income is primarily due to decreased investable cash on hand.$199 of funds we received from the U.S. government pursuant to the CARES Act during the three months ended March 31, 2022 compared to $2,433 received during the three months ended March 31, 2021.
Interest expense.Interest expense increaseddecreased primarily due to the deconsolidation of the debt secured by one life science property owned by our issuanceBoston life science property joint venture in which we own a 20% equity interest. Additionally, interest expense decreased due to our redemption in June 2021 of $250,000all $300,000 of 6.25%our 6.75% senior unsecured notes due 20462021 and our prepayment in February 2016, as well as2021 of our $200,000 term loan. These decreases were partially offset by an increase in LIBOR rates, resulting in an increase in interest expense onaverage borrowings under our revolving credit facility and term loans, partially offset by decreased borrowingsour issuance in February 2021 of $500,000 aggregate principal amount of our 4.375% senior notes due 2031 and an increase in the interest rate premium under our revolving credit facility.
Loss on modification or early extinguishment of debt. We recorded a loss on modification or early extinguishment of debt in August 2017connection with the amendment to our credit agreement during the three months ended March 31, 2022. We also recorded a loss in connection with the amendments to our credit agreement and the agreementsagreement governing our revolving credit facilitypreviously existing $200,000 term loan and our prepayment of our $200,000 term loan.loan during the three months ended March 31, 2021.
Income tax expense. expense. Income tax expense primarily reflectsis the result of operating income we earned in certain jurisdictions where we are subject to state income taxes payable in certain jurisdictions.taxes.
Equity in earnings of an investee.investees. Equity in earnings of an investee representsinvestees is the change in the fair value of our proportionate share of earnings from AIC.investments in our joint ventures.
Non-GAAP Financial Measures (dollars in thousands, except per share amounts)
We provide below calculationspresent certain "non-GAAP financial measures" within the meaning of ourapplicable rules of the Securities and Exchange Commission, or SEC, including 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, and NOI for the three and nine months ended September 30, 2017March 31, 2022 and 2016. These measures should be considered in conjunction with net income, net income attributable to common shareholders and operating income as presented in our condensed consolidated statements of comprehensive income.2021. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) or net income (loss) attributable to common shareholders or operating income as indicators of our operating performance or as measures of our liquidity. Other REITsThese measures should be considered in conjunction with net income (loss) and real estate companies may calculate FFO, Normalized FFO or NOI differently than we do.
Funds From Operations and Normalized Funds From Operations
We calculate FFO and Normalized FFO as shown below. FFO 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 calculatedas presented in accordance with GAAP, excluding any gain or loss on saleour condensed consolidated statements of properties and impairment of real estate assets, plus real estate depreciation and amortization and the difference between netcomprehensive income attributable to common shareholders and FFO attributable to noncontrolling interest, as well as certain other adjustments currently not applicable to us. Our calculation of Normalized FFO differs from NAREIT’s definition of FFO because we 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 be payable when all contingencies for determining such fees are known at the end of the calendar year, and we exclude acquisition and certain other transaction related costs expensed under GAAP such as legal and professional fees associated with our acquisition and disposition activities, gains and losses on early extinguishment of debt, if any, and Normalized FFO from noncontrolling interest, net of FFO, if any.(loss). We consider FFO and Normalized FFOthese 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 and operating income.shareholders. We believe that FFO and Normalized FFOthese measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization, expense, FFO and Normalized FFOthey may facilitate a comparison of our operating performance between periods and with other REITs. FFOREITs and, in the case of NOI, reflecting only those income and expense items that are generated and incurred at the property level may help both investors and management to understand the operations of 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, which is net income (loss) attributable to common shareholders, calculated in accordance with GAAP, excluding any gain or loss on sale of properties, equity in earnings or losses of unconsolidated joint ventures, loss on impairment of real estate assets, gains or losses on equity securities, net, if any, including adjustments to reflect our proportionate share of FFO of our equity method investment in AlerisLife and our proportionate share of FFO from our unconsolidated joint ventures, plus real estate depreciation and amortization of consolidated properties and minus FFO adjustments attributable to noncontrolling interest, as well as certain other adjustments currently not applicable to us. In calculating Normalized FFO attributable to common shareholders, we adjust for the items shown below including similar adjustments for our unconsolidated joint ventures, if any. FFO attributable to common shareholders and Normalized FFO attributable to common 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 the agreements governing 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 three and nine months ended September 30, 2017March 31, 2022 and 20162021 and reconciliations of net income (loss) attributable to common shareholders, the most directly comparable financial measure under GAAP reported in our condensed 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.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income attributable to common shareholders | | $ | 34,414 |
| | $ | 27,903 |
| | $ | 82,610 |
| | $ | 98,409 |
|
Depreciation and amortization expense | | 66,619 |
| | 72,344 |
| | 209,463 |
| | 214,938 |
|
Noncontrolling interest's share of net FFO adjustments | | (5,305 | ) | | — |
| | (11,066 | ) | | — |
|
Gain on sale of properties | | — |
| | — |
| | — |
| | (4,061 | ) |
Impairment of assets | | — |
| | 4,578 |
| | 5,082 |
| | 16,930 |
|
FFO | | 95,728 |
| | 104,825 |
| | 286,089 |
| | 326,216 |
|
| | | | | | | | |
Estimated business management incentive fees (1) | | 8,022 |
| | — |
| | 22,048 |
| | — |
|
Acquisition and certain other transaction related costs | | — |
| | 824 |
| | 292 |
| | 1,443 |
|
Loss on early extinguishment of debt | | 274 |
| | 84 |
| | 7,627 |
| | 90 |
|
Normalized FFO | | $ | 104,024 |
| | $ | 105,733 |
| | $ | 316,056 |
| | $ | 327,749 |
|
| | | | | | | | |
Weighted average common shares outstanding (basic) | | 237,421 |
| | 237,347 |
| | 237,404 |
| | 237,329 |
|
Weighted average common shares outstanding (diluted) | | 237,460 |
| | 237,396 |
| | 237,445 |
| | 237,369 |
|
| | | | | | | | |
Per common share data (basic and diluted): | | | | | | | | |
Net income attributable to common shareholders | | $ | 0.14 |
| | $ | 0.12 |
| | $ | 0.35 |
| | $ | 0.41 |
|
FFO | | $ | 0.40 |
| | $ | 0.44 |
| | $ | 1.20 |
| | $ | 1.37 |
|
Normalized FFO | | $ | 0.44 |
| | $ | 0.45 |
| | $ | 1.33 |
| | $ | 1.38 |
|
Distributions declared per common share | | $ | 0.39 |
| | $ | 0.39 |
| | $ | 1.17 |
| | $ | 1.17 |
|
| |
(1) | Incentive fees under our business management agreement are payable after the end of each calendar year, are calculated based on common share total return, as defined, and are included in general and administrative expense in our condensed consolidated statements of comprehensive income. In calculating net income attributable to common shareholders in accordance with GAAP, we recognize estimated business management incentive fee expense, if any, in the first, second and third quarters. Although we recognize this expense, if any, in the first, second and third quarters for purposes of calculating net income attributable to common shareholders, we do not include these amounts in the calculation of Normalized FFO until the fourth quarter, when the amount of the business management incentive fee expense for the calendar year, if any, is determined. |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Net income (loss) attributable to common shareholders | | $ | 240,423 | | | $ | (67,505) | | | | | |
Depreciation and amortization | | 57,259 | | | 66,153 | | | | | |
(Gain) loss on sale of properties | | (327,794) | | | 122 | | | | | |
Impairment of assets | | — | | | (174) | | | | | |
Losses on equity securities, net | | 8,553 | | | 8,339 | | | | | |
FFO adjustments attributable to noncontrolling interest | | — | | | (5,273) | | | | | |
Equity in earnings of unconsolidated joint ventures | | (3,354) | | | — | | | | | |
Share of FFO from unconsolidated joint ventures | | 3,675 | | | — | | | | | |
Adjustments to reflect our share of FFO attributable to an equity method investment | | (1,932) | | | 2,036 | | | | | |
FFO attributable to common shareholders | | (23,170) | | | 3,698 | | | | | |
| | | | | | | | |
| | | | | | | | |
Acquisition and certain other transaction related costs | | 928 | | | — | | | | | |
| | | | | | | | |
| | | | | | | | |
Loss on modification or early extinguishment of debt | | 483 | | | 2,040 | | | | | |
Adjustments to reflect our share of Normalized FFO attributable to an equity method investment | | (142) | | | 85 | | | | | |
Normalized FFO attributable to common shareholders | | $ | (21,901) | | | $ | 5,823 | | | | | |
| | | | | | | | |
Weighted average common shares outstanding (basic) | | 238,149 | | | 237,834 | | | | | |
Weighted average common shares outstanding (diluted) | | 238,198 | | | 237,834 | | | | | |
| | | | | | | | |
Per common share data (basic and diluted): | | | | | | | | |
Net income (loss) attributable to common shareholders | | $ | 1.01 | | | $ | (0.28) | | | | | |
FFO attributable to common shareholders | | $ | (0.10) | | | $ | 0.02 | | | | | |
Normalized FFO attributable to common shareholders | | $ | (0.09) | | | $ | 0.02 | | | | | |
Distributions declared | | $ | 0.01 | | | $ | 0.01 | | | | | |
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 that we record 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 widecompany-wide property level performance,performance. Other real estate companies and REITs may calculate NOI differently than 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.do.
The calculation of NOI by reportable segment is included above in this Item 2. The following table includes the reconciliation of net income (loss) to NOI for the three and nine months ended September 30, 2017March 31, 2022 and 2016.2021.
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Reconciliation of Net Income (Loss) to NOI: | | | | | | | | |
Net income (loss) | | $ | 240,423 | | | $ | (66,183) | | | | | |
| | | | | | | | |
Equity in earnings of investees | | (3,354) | | | — | | | | | |
Income tax expense | | 1,472 | | | 238 | | | | | |
Income (loss) from continuing operations before income tax expense and equity in earnings of investees | | 238,541 | | | (65,945) | | | | | |
Loss on modification or early extinguishment of debt | | 483 | | | 2,040 | | | | | |
| | | | | | | | |
Interest expense | | 57,131 | | | 60,091 | | | | | |
Interest and other income | | (395) | | | (2,835) | | | | | |
Losses on equity securities, net | | 8,553 | | | 8,339 | | | | | |
(Gain) loss on sale of properties | | (327,794) | | | 122 | | | | | |
Impairment of assets | | — | | | (174) | | | | | |
Acquisition and certain other transaction related costs | | 928 | | | — | | | | | |
General and administrative | | 7,285 | | | 7,542 | | | | | |
Depreciation and amortization | | 57,259 | | | 66,153 | | | | | |
Total NOI | | $ | 41,991 | | | $ | 75,333 | | | | | |
| | | | | | | | |
Office Portfolio NOI | | $ | 31,550 | | | $ | 62,030 | | | | | |
SHOP NOI | | 153 | | | 3,868 | | | | | |
Non-Segment NOI | | 10,288 | | | 9,435 | | | | | |
Total NOI | | $ | 41,991 | | | $ | 75,333 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Reconciliation of Net Income to NOI: | | |
| | |
| | |
| | |
|
Net income | | $ | 35,793 |
| | $ | 27,903 |
| | $ | 85,475 |
| | $ | 98,409 |
|
Gain on sale of properties | | — |
| | — |
| | — |
| | (4,061 | ) |
Income before gain on sale of properties | | 35,793 |
| | 27,903 |
| | 85,475 |
| | 94,348 |
|
| | | | | | | | |
Equity in earnings of an investee | | (31 | ) | | (13 | ) | | (533 | ) | | (107 | ) |
Income tax expense | | 109 |
| | 119 |
| | 300 |
| | 318 |
|
Income from continuing operations before income tax expense and equity in earnings of an investee | | 35,871 |
| | 28,009 |
|
| 85,242 |
|
| 94,559 |
|
Loss on early extinguishment of debt | | 274 |
| | 84 |
| | 7,627 |
| | 90 |
|
Interest expense | | 40,105 |
| | 43,438 |
| | 124,394 |
| | 123,837 |
|
Interest and other income | | (128 | ) | | (89 | ) | | (323 | ) | | (330 | ) |
Dividend income | | (659 | ) | | (659 | ) | | (1,978 | ) | | (1,449 | ) |
| | | | | | | | |
Operating income | | 75,463 |
| | 70,783 |
| | 214,962 |
| | 216,707 |
|
| | | | | | | | |
Impairment of assets | | — |
| | 4,578 |
| | 5,082 |
| | 16,930 |
|
Acquisition and certain other transaction related costs | | — |
| | 824 |
| | 292 |
| | 1,443 |
|
General and administrative expense | | 19,883 |
| | 12,107 |
| | 57,889 |
| | 34,931 |
|
Depreciation and amortization expense | | 66,619 |
| | 72,344 |
| | 209,463 |
| | 214,938 |
|
Total NOI | | $ | 161,965 |
| | $ | 160,636 |
| | $ | 487,688 |
| | $ | 484,949 |
|
| | | | | | | | |
Triple net leased communities NOI | | $ | 67,662 |
| | $ | 66,473 |
| | $ | 202,340 |
| | $ | 197,436 |
|
Managed communities NOI | | 22,775 |
| | 23,717 |
| | 70,231 |
| | 74,221 |
|
MOB NOI | | 66,958 |
| | 65,867 |
| | 201,433 |
| | 199,603 |
|
All other operations NOI | | 4,570 |
| | 4,579 |
| | 13,684 |
| | 13,689 |
|
Total NOI | | $ | 161,965 |
| | $ | 160,636 |
| | $ | 487,688 |
| | $ | 484,949 |
|
| | | | | | | | |
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 from our leased properties, residents fees and services revenues from our managed communities, and borrowings under our revolving credit facility.facility and proceeds from the disposition of certain properties. 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 receive rents from our tenants, including in light of the COVID-19 pandemic and its impact on our tenants' businesses;
•our ability to maintain or increase the occupancy of, and the rental rates at, our properties;properties, particularly at our senior living communities;
•our abilityand our managers' abilities to control operating expenses and capital expenses at our properties;properties, including increased operating expenses that we may incur in response to inflation, supply chain challenges or in response to the COVID-19 pandemic; and
•our manager's ability to operate our managed senior living communities so asmanagers' abilities to maintain or increase our returns;returns from our managed senior living communities.
In March 2021, we borrowed $800.0 million under our revolving credit facility as a precautionary measure to increase our cash position and
preserve financial flexibility in light of continued uncertainties related to the COVID-19 pandemic. In February 2022, we repaid $100.0 million of this borrowing to reduce the borrowing capacity under our revolving credit facility to $700.0 million pursuant to the February 2022 amendment to our credit agreement. In addition, in February 2022, we exercised our option to extend the maturity date of our revolving credit facility by one year to January 2024. Pursuant to our credit agreement, the borrowing capacity under our revolving credit facility will be reduced to $586.4 million as of January 2023 and as such, further repayment of our revolving credit facility may be required. Although we have taken steps to enhance our ability to purchasemaintain sufficient liquidity, a protracted negative impact on the economy or the industries in which our properties and businesses operate resulting from the COVID-19 pandemic, inflation or other economic, market or industry conditions may cause further increased pressure on our ability to satisfy financial and other covenants. We may fail to satisfy covenants and conditions under our credit agreement or fail to satisfy our public debt covenants. As of March 31, 2022, our ratio of consolidated income available for debt service to debt service was below the 1.5x incurrence requirement under our revolving credit facility and our public debt covenants as the effects of the COVID-19 pandemic continued to adversely impact our operations. We are unable to incur additional debt until this ratio is at or above 1.5x on a pro forma basis. For additional responses and measures taken relating to the COVID-19 pandemic, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in our Annual Report.
In January 2022, we entered into a joint venture with two unrelated third party institutional investors for 10 medical office and life science properties we owned for aggregate proceeds, before closing costs and other adjustments, of $653.3 million. The investors acquired 41% and 39% equity interests in the joint venture and we retained a 20% equity interest in the joint venture. The investment amounts are based upon a property valuation of approximately $702.5 million, less approximately $456.6 million of secured debt on the properties incurred by this joint venture. The net proceeds of $643.9 million, which produceinclude working capital prorations and formation costs, are included in restricted cash in our condensed consolidated balance sheet as of March 31, 2022 pursuant to the terms of our credit agreement. Effective as of the date of the sale, we deconsolidated these properties and we account for this joint venture using the equity method of accounting under the fair value option.
The measures we have taken to enhance our ability to maintain sufficient liquidity may not sufficiently offset the decrease in cash flows from operations and capital investments we make, in excesswhich case our liquidity would be negatively impacted.
The following is a summary of our costsources and uses of acquisition capital andcash flows for the related property operating expenses.periods presented, as reflected in our condensed consolidated statements of cash flows (dollars in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
Cash and cash equivalents and restricted cash at beginning of period | | $ | 1,016,945 | | | $ | 90,849 | |
Net cash provided by (used in): | | | | |
Operating activities | | (7,264) | | | 34,822 | |
Investing activities | | 588,353 | | | (35,303) | |
Financing activities | | (106,038) | | | 1,079,637 | |
Cash and cash equivalents and restricted cash at end of period | | $ | 1,491,996 | | | $ | 1,170,005 | |
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 changesmonthly and we receive percentage rents from certain of our senior living community tenants monthly, quarterly or annually.
The change in cash flows for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 were as follows: (1) cash provided by operating activities decreased to $324.4 million in 2017 from $342.4 million in 2016; (2) cash used for investing activities decreased to $123.9 million in 2017 from $231.8 million in 2016; and (3) cash used for financing activities increased to $203.3 million in 2017 from $107.5 million in 2016.
The decrease in cash(used in) provided by operating activities for the ninethree months ended September 30, 2017March 31, 2022 compared to the prior yearperiod was primarily due to the continued impact of the COVID-19 pandemic and wage inflation in the senior living communities in our SHOP segment, along with reduced NOI as a result of an increase in restricted cash balances associated with ourthe deconsolidation of joint venture arrangementproperties during 2021 and 2022 and dispositions of properties during 2021. Additionally, we had increased working capital needs in 2022 as compared to 2021, specifically related to our senior living communities. We also paid more interest on our debt in 2022 as compared to 2021. As noted elsewhere in this Quarterly Report on Form 10-Q, the transition of the management of the 107 senior living communities from Five Star to other third party managers was completed as of September 30, 2017 which was established in 2017,December 31, 2021 and we have closed the remaining senior living community that we and Five Star agreed to transition and are assessing opportunities to redevelop that property.
Specifically as well as a decreaseit relates to our SHOP segment, we face and may continue to face issues with labor availability and wage inflation along with cost pressures from supply chain disruptions and commodity price inflation.
Our Investing Liquidity and Resources
The change in cash generated from operating income in 2017. Cash used forprovided by (used in) investing activities decreased in 2017for the three months ended March 31, 2022 compared to the prior period was primarily due to higher acquisition activityproceeds from our sale of 10 medical office and life science properties to our 10 medical office and life science properties joint venture in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2017,which we retained a 20% equity interest, partially offset by less proceeds from the sale of real estate properties during the nine months ended September 30, 2016, and increased funding foran increase in real estate improvements in the 2022 period compared to the 2021 period.
The following is a summary of capital expenditures, development, redevelopment and other activities for the periods presented (dollars in thousands):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Office Portfolio segment capital expenditures: | | | | | | | | |
Lease related costs (1) | | $ | 6,759 | | | $ | 8,358 | | | | | |
Building improvements (2) | | 585 | | | 2,176 | | | | | |
SHOP segment fixed assets and capital improvements | | 20,328 | | | 22,530 | | | | | |
Recurring capital expenditures | | $ | 27,672 | | | $ | 33,064 | | | | | |
| | | | | | | | |
Development, redevelopment and other activities - Office Portfolio segment (3) | | $ | 16,617 | | | $ | 12,718 | | | | | |
Development, redevelopment and other activities - SHOP segment (3) | | 16,114 | | | 6,092 | | | | | |
Total development, redevelopment and other activities | | $ | 32,731 | | | $ | 18,810 | | | | | |
(1)Office Portfolio segment lease related costs generally include capital expenditures to improve tenants' space or amounts paid directly to tenants to improve their space and other leasing related costs, such as brokerage commissions and tenant inducements.
(2)Office Portfolio segment building improvements generally include expenditures to replace obsolete building components that extend the useful life of existing assets or other improvements to increase the marketability of the property.
(3)Development, redevelopment and other activities generally include capital expenditures that reposition a property or result in new sources of revenue.
We plan to continue investing capital in our properties, including redevelopment projects, to better position these properties in their respective markets in order to increase our returns in future years. In 2022, we expect to incur capital expenditures in excess of 2021 levels, up to the $400.0 million limit allowed pursuant to our credit agreement.
As of March 31, 2022, we had estimated unspent leasing related obligations at our triple net leased senior living communities and our medical office and life science properties of approximately $62.5 million, of which we expect to spend approximately $44.7 million during the 2017 period. next 12 months. We expect to fund these obligations using operating cash flows we generate as rental income from our leased properties, residents fees and services revenues from our managed communities, cash on hand, proceeds from the contributions of certain of our properties to investors in our joint ventures and proceeds from the disposition of certain properties.
We are currently in the process of redeveloping five properties in our Office Portfolio. Our redevelopments in Lexington, MA, Decatur, GA and Tempe, AZ are currently expected to be completed in the second half of 2022. Our redevelopments at our properties in Irving, TX and Washington, D.C. are expected to be completed in 2023 and 2025, respectively. We have entered into a new ten year lease for the entire building at the Lexington, MA property at a rental rate that is 46% higher than the prior rental rate for the same space. Additionally, in January 2022, we entered into a new 11 year lease for the entire building at the Tempe, AZ property at a rental rate that is 20% higher than the prior rental rate for the same space. We are also currently reviewing strategic alternatives at a property in our Office Portfolio located in Silver Springs, MD, including opportunities to redevelop this property. We continue to assess opportunities to redevelop other properties in our portfolio. These redevelopment projects may require significant capital expenditures and time to complete.
As noted above, our ability to make capital investments is currently limited pursuant to our credit agreement. Additionally, due to supply chain disruptions and inflation, the capital investments we plan to make may be delayed or cost more than we expect. For further information regarding our acquisitions and dispositions, see Note 2 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our Financing Liquidity and Resources
The increasechange in cash used for(used in) provided by financing activities for the ninethree months ended September 30, 2017March 31, 2022 compared to the prior yearperiod was primarily due primarily to the repayment of certain mortgage debts in 2017, partially offset by the proceeds from our 2016 issuance of senior unsecured notes and secured debt, proceeds from the joint venture arrangement entered in 2017 and higher net borrowings under our revolving credit facility in 2017 compared to net repayments of borrowings under our revolving credit facility in the prior year.
Our Investment2022 period compared to our full drawdown of our revolving credit facility and Financing Liquidity and Resources
net proceeds from our issuance in February 2021 of $500.0 million aggregate principal amount of our 4.375% senior notes in the 2021 period, partially offset by our repayment in February 2021 of our $200.0 million term loan. Additionally, we did not pay distributions during the 2022 period related to our noncontrolling interest in our Boston life science property joint venture that we deconsolidated in 2021.
As of September 30, 2017,March 31, 2022, we had $28.9$732.1 million of cash and cash equivalents and $529.0 million available to borrowwere fully drawn under our revolving credit facility. We typically use cash balances, borrowings under our revolving credit facility, net proceeds from offerings of debt or equity securities, net proceeds from the disposition of assets and the cash flows from our operations to fund our operations, debt repayments, distributions, property acquisitions, investments, capital expenditures and other general business purposes.
In order to fund acquisitionsinvestments and to meet cash needs that may result from timing differences between our receipt of rents and our desire or need to make distributions or pay operating or capital expenses, we maintain a $1.0 billion unsecured revolving credit facility. In August 2017, we amended the agreement governingThe maturity date of our revolving credit facility. As a result of the amendment, thefacility is January 15, 2024. Our revolving credit facility generally 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. At March 31, 2022, our revolving credit facility required interest rate payableto be paid on borrowings underat the facility was reduced from LIBORannual rate of 3.0%, plus a premium of 130 basis points per annum to LIBOR plus a premium of 120 basis points per annum, and the facility fee was reduced fromof 30 basis points per annum to 25 basis points per annum on the total amount of lending commitments under the facility. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. AlsoOn March 31, 2021, we borrowed $800.0 million under our revolving credit facility as a resultprecautionary measure to increase our cash position and preserve financial flexibility in light of the amendment, the stated maturity date of the facility was extended from January 15, 2018 to January 15, 2022, and subjectcontinued uncertainties related to the paymentCOVID-19 pandemic. In February 2022, we repaid $100.0 million of an extension feethis borrowing to reduce the borrowing capacity under our revolving credit facility to $700.0 million pursuant to the February 2022 amendment to our credit agreement. Pursuant to our credit agreement, the borrowing capacity under our revolving credit facility will be reduced to $586.4 million as of January 2023 and meeting other conditions,as such, further repayment of our revolving credit facility may be required. Also in February 2022, we have anexercised our option to extend the maturity date of thisour revolving credit facility for an additional year. Theby one year to January 2024. As of March 31, 2022 and April 29, 2022, we were fully drawn under our revolving credit facility.
In February 2022, we and our lenders amended our credit agreement. Pursuant to the amendment:
•the waiver of the fixed charge coverage ratio covenant included in our credit agreement has been extended through December 31, 2022;
•the revolving credit facility also includes a feature pursuantcommitments have been reduced from $800.0 million to which$700.0 million;
•we have the ability to fund $400.0 million of capital expenditures per year and we are restricted in certain circumstances maximum borrowings may be increasedour ability to up to $2.0 billion. We can borrow, repay and re-borrow funds availableacquire real property as defined in our credit agreement;
•the interest rate premium under our revolving credit facility until maturity,increased by 15 basis points; and no principal repayment is due until maturity. As
•certain covenants and restrictions on distributions to common shareholders, share repurchases, capital expenditures, acquiring additional properties and incurring additional indebtedness (in each case subject to various exceptions), and the minimum liquidity requirement of September 30, 2017,$200.0 million will remain in place during the annual interest rate required on borrowings under our revolving credit facility was 2.4%. As of September 30, 2017 and November 8, 2017, we had $471.0 million and $485.0 million outstanding under our revolving credit facility, respectively.Amendment Period.
WhenGenerally, 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 expand our existing joint venture arrangements or to participate in additional 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 haveDuring the three months ended March 31, 2022, we paid a $350.0 million unsecured term loan that matures on January 15, 2020. This term loan includes a feature under which maximum borrowings may be increased to up to $700.0 million in certain circumstances. This term loan requires interest to be paid at the rate of LIBOR plus a premium (currently 140 basis points per annum) that is subject to adjustment based upon changesquarterly cash distribution to our credit ratings. Asshareholders totaling approximately $2.4 million using existing cash balances. On April 14, 2022, we declared a quarterly distribution payable to common shareholders of September 30, 2017, the annual interest rate payablerecord on amounts outstanding under this term loan was 2.6%.
We also have a $200.0 million unsecured term loan that matures on September 28, 2022. This term loan includes a feature under which maximum borrowings may be increased to up to $400.0 million in certain circumstances. In August 2017, we amended the agreement governing this term loan. As a result of the amendment, the interest rate payable on borrowings under the facility was reduced from LIBOR plus a premium of 180 basis points per annum to LIBOR plus a premium of 135 basis points per annum,
subject to adjustment based upon changes to our credit ratings. As of September 30, 2017, the annual interest rate payable on amounts outstanding under this term loan was 2.6%.
In March 2017, we entered a joint venture with a sovereign investor for one of our MOBs (two buildings) located in Boston, Massachusetts. The investor contributed approximately $260.9 million for a 45% equity interestApril 25, 2022 in the joint venture, and we retained the remaining 55% equity interest in the joint venture. Net proceeds that we received from this transaction wereamount of $0.01 per share, or approximately $255.8 million, after transaction costs. We used the proceeds from this transaction to repay a portion of the amounts outstanding under our revolving credit facility.
In April 2017, we prepaid a mortgage note secured by 17 of our properties with an outstanding principal balance of approximately $277.8 million plus a premium of $5.4 million plus accrued interest, a maturity date in September 2019 and an annual interest rate of 6.71%. In May 2017, we prepaid, at par plus accrued interest, a mortgage note secured by one of our properties with an outstanding principal balance of approximately $10.6 million, a maturity date in August 2017 and an annual interest rate of 6.15%. In June 2017, we prepaid, at par plus accrued interest, a mortgage note secured by one of our properties with an outstanding principal balance of approximately $8.8 million, a maturity date in August 2037 and an annual interest rate of 5.95%. We funded these prepayments with cash on hand and borrowings under our revolving credit facility.
In January 2017, we acquired one MOB (one building) located in Kansas with approximately 117,000 square feet for approximately $15.1 million, excluding closing costs. In July 2017, we acquired one MOB (one building) located in Maryland with approximately 59,000 square feet for a purchase price of approximately $16.2 million, excluding closing costs. We funded these acquisitions with cash on hand and borrowings under our revolving credit facility.
In October 2017, we acquired two MOBs (two buildings) located in Minnesota and North Carolina with a total of approximately 255,000 square feet for an aggregate purchase price of approximately $38.7 million, excluding closing costs. We funded these acquisitions with cash on hand and borrowings under our revolving credit facility.
In August and October 2017, we entered agreements to acquire two MOBs (two buildings) located in California and Kansas with a total of approximately 302,000 square feet for an aggregate purchase price of approximately $71.1 million, excluding closing costs.$2.4 million. We expect to fund these acquisitions withpay this distribution on or about May 19, 2022 using cash on hand and borrowings under our revolving credit facility. These acquisitions are subject to conditions; accordingly, these acquisitions may not occur, may be delayed orhand. For further information regarding the terms may change.distribution we paid
In November 2017, we entered a transaction agreement with Five Star pursuant to which we agreed to acquire six senior living communities from Five Star. The aggregate purchase price for these six senior living communities is approximately $104.0 million, including our assumption of approximately $33.7 million of mortgage debt securing certain of these senior living communities with a weighted average annual interest rate of 6.2% and excluding closing costs. We expect to fund these acquisitions with the assumption of mortgage debt described in the prior sentence, cash on hand and borrowings under our revolving credit facility. These acquisitions are subject to conditions; accordingly, we may not acquire these senior living communities, these acquisitions may be delayed or the terms may change. Seeduring 2022, see Note 107 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
During the three and nine months ended September 30, 2017, we invested $14.7 million and $41.2 million in revenue producing capital improvements at certain of our triple net leased senior living communities, and, as a result, annual rent payable to us increased or will increase by approximately $1.2 million and $3.3 million, respectively, pursuant to the terms of the applicable leases. We used cash on hand to fund these purchases.
During the three and nine months ended September 30, 2017 and 2016, amounts capitalized for leasing costs and building improvements at our MOBs and capital expenditures at our managed senior living communities were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
MOB tenant improvements (1) | | $ | 1,951 |
| | $ | 2,652 |
| | $ | 5,791 |
| | $ | 4,784 |
|
MOB leasing costs (2) | | 2,826 |
| | 1,220 |
| | 6,024 |
| | 3,042 |
|
MOB building improvements (3) | | 4,444 |
| | 3,816 |
| | 9,704 |
| | 10,552 |
|
Managed senior living communities capital improvements | | 2,739 |
| | 4,542 |
| | 9,675 |
| | 10,790 |
|
Development, redevelopment and other activities (4) | | 4,590 |
| | 7,362 |
| | 21,612 |
| | 24,668 |
|
Total capital expenditures | | $ | 16,550 |
| | $ | 19,592 |
| | $ | 52,806 |
| | $ | 53,836 |
|
| |
(1) | MOB tenant improvements generally include capital expenditures to improve tenants’ space or amounts paid directly to tenants to improve their space. |
| |
(2) | MOB leasing costs generally include leasing related costs, such as brokerage commissions and tenant inducements. |
| |
(3) | MOB building improvements generally include capital expenditures to replace obsolete building components and capital expenditures that extend the useful life of existing assets. |
| |
(4) | Development, redevelopment and other activities generally include (i) capital expenditures that are identified at the time of acquisition of a property and incurred within a short period thereafter and (ii) capital expenditure projects that reposition a property or result in new sources of revenues. |
During the three months ended September 30, 2017, 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 quarter | | 50 |
| | 352 |
| | 402 |
|
Total leasing costs and concession commitments (1) | | $ | 2,928 |
| | $ | 4,030 |
| | $ | 6,958 |
|
Total leasing costs and concession commitments per square foot (1) | | $ | 58.04 |
| | $ | 11.45 |
| | $ | 17.29 |
|
Weighted average lease term (years) (2) | | 9.7 |
| | 6.7 |
| | 7.2 |
|
Total leasing costs and concession commitments per square foot per year (1) | | $ | 6.01 |
| | $ | 1.71 |
| | $ | 2.40 |
|
| |
(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 September 30, 2017, including straight line rent adjustments and estimated recurring expense reimbursements and excluding lease value amortization. |
We funded or expect to fund the foregoing capital commitments at our MOBs using cash on hand and borrowings under our revolving credit facility.
As of September 30, 2017, we have estimated unspent leasing related obligations at our triple net leased senior living communities and our MOBs of approximately $21.6 million.
On February 21, 2017, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92.6 million, that was declared on January 13, 2017 and was payable to shareholders of record on January 23, 2017. On May 18, 2017, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92.6 million, that was declared on April 11, 2017 and was payable to shareholders of record on April 21, 2017. On August 17, 2017, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92.6 million, that was declared on July 12, 2017 and was payable to shareholders of record on July 24, 2017. We funded these distributions using cash on hand and borrowings under our revolving credit facility.
On October 12, 2017, we declared a regular quarterly distribution payable to common shareholders of record on October 23, 2017 of $0.39 per share, or approximately $92.7 million. We expect to pay this distribution on or about November 16, 2017 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.due, subject to limitations on debt offerings in agreements governing our debt. Our ability to complete, and the costs associated with, future debt or equity transactions depends primarily upon credit market conditions and our then creditworthiness. We have no control over market conditions. Our credit and debt ratings, which were most recently downgraded in February 2022, 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 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. It is uncertain what the duration and severity of the COVID-19 pandemic and its economic impact will be. A protracted negative impact on the economy or the industries in which our properties and businesses operate resulting from the COVID-19 pandemic, inflation or other economic, market or industry conditions may have various negative consequences including a decline in financing availability and increased costs for financing. Further, those conditions could also disrupt capital markets and limit our access to financing from public sources, particularly if the global financial markets experience significant disruptions.
In April 2022, we prepaid a mortgage note secured by one of our medical office properties with an outstanding principal balance of approximately $10.9 million, a maturity date in July 2022 and an annual interest rate of 6.28%. We prepaid this mortgage using cash on hand. Our next significant debt maturity does not occur until our revolving credit facility becomes due in January 2024.
OurIn February 2022, Moody's Investors Service downgraded our senior unsecured debt rating from B1 to B3, our 9.75% senior notes due 2025 rating from Ba3 to B2 and our 4.375% senior notes due 2031 rating from Ba3 to B2.
For further information regarding our outstanding debt, see Note 4 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Except for the limitations in the amendments to our credit agreement described above, our strategy related to property acquisitions and dispositions is materially unchanged from that disclosed in our Annual Report. We continue to explore and evaluate for possible acquisition additional properties primarily for income and secondarily for appreciation potential; however, we cannot be sure that we will reach any agreement to acquire such properties, or that if we do
reach any such agreement, that we will complete any acquisitions. Generally, we identify properties for sale based on changes in market conditions in the area where the property is located, our expectations regarding the property's future financial performance, our expectation regarding lease renewals, our plans with regard to particular properties or alternative opportunities we may wish to pursue. Our plans for particular properties and other strategic considerations may cause us to change our acquisition and disposition strategies, and we may do so at any time and without shareholder approval.
Off Balance Sheet Arrangements
As of September 30, 2017, we had no off balance sheet arrangements that have had Further, those plans may be further impacted by the COVID-19 pandemic, inflation or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenuesother economic, market or expenses, results of operations, liquidity, capital expenditures or capital resources.
industry conditions.
Debt Covenants
Our principal debt obligations at September 30, 2017March 31, 2022 were: (1) outstanding borrowings under our $1.0 billion$700.0 million revolving credit facility; (2) six public issuances$2.9 billion outstanding principal amount 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 2042notes; 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) $806.4$62.0 million aggregate principal amount of mortgage notes (excluding premiums, discounts and net debt issuance costs) secured by 24six properties. For further information regarding our indebtedness, see Note 4 to our condensed consolidated financial statements included in Part I, Item 1 of our properties (25 buildings) with maturity dates between 2018 and 2043. We also have two properties encumbered by capital leases with lease obligations totaling $10.9 million at September 30, 2017; the capital leases expire in 2026. We had $471.0 million outstanding under our revolving credit facility as of September 30, 2017. this Quarterly Report on Form 10-Q.
Our senior unsecured notes are governed by our senior unsecured notes indentures and their supplements. Our revolving credit facility and term loan agreementsagreement 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,agreement, a change of control of us, as defined, which includes RMR LLC ceasing to act as our business and property manager. Our senior unsecured notes indentures and their supplements and our revolving credit facility and term loan agreementsagreement 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 agreementsagreement contains covenants whichthat restrict our ability to make distributions to our shareholders in certain circumstances. As of September 30, 2017,March 31, 2022, our ratio of consolidated income available for debt service to debt service was below the 1.5x incurrence requirement under our revolving credit facility and our public debt covenants as the effects of the COVID-19 pandemic, inflation and other economic, market or industry conditions continued to adversely impact our operations. We are unable to incur additional debt until this ratio is at or above 1.5x on a pro forma basis, and as such, prior to falling below the 1.5x incurrence requirement, we borrowed $800.0 million under our revolving credit facility as a precautionary measure to increase our cash position and preserve financial flexibility. The proceeds from this borrowing may be used for general business purposes. In February 2022, we repaid $100.0 million of this borrowing to reduce the borrowing
capacity under our revolving credit facility to $700.0 million pursuant to the February 2022 amendment to our credit agreement. As of March 31, 2022, we believe we were in compliance with all of the other covenants under our senior unsecured notes indentures and their supplements, our revolving credit facility and term loan agreementsagreement and our other debt obligations.
Although we have taken steps to enhance our ability to maintain sufficient liquidity, as noted elsewhere in this Quarterly Report on Form 10-Q, a protracted negative impact on the economy or the industries in which our properties and businesses operate resulting from the COVID-19 pandemic, inflation and other economic, market or industry conditions may cause increased pressure on our ability to satisfy financial and other covenants. Continued availability of borrowings under our revolving credit facility is subject to our satisfying certain financial covenants and other credit facility conditions. If our operating results and financial condition are significantly negatively impacted by the economic conditions or otherwise, we may fail to satisfy covenants and conditions under our credit agreement or fail to satisfy our public debt covenants. Further, if we believe we will not be able to satisfy our financial or other covenants, we will seek waivers, amendments, or in the case of our public debt covenants, borrow any undrawn amounts which may become available under our revolving credit facility prior to any covenant violation, consistent with our approach in March 2021, which may lead to increased costs and interest rates, additional restrictive covenants or other lender protections. We cannot assure that we would be able to obtain these waivers or amendments or repay the related debt facilities when due, or that there will be any amounts available to borrow under our revolving credit facility, which may result in an event of default under the agreements governing our debt or the potential acceleration of our outstanding debt.
Neither our senior unsecured notes indentures and their supplements, nor our revolving credit facility and term loan agreements,agreement, contain provisions for acceleration which could be triggered by our debt ratings. However, under our revolving credit facility and term loan agreements,agreement, our senior unsecured debt ratings are used to determine the fees and interest rates we pay. Accordingly, iffollowing our debt ratings are downgraded,downgrades, our interest expense and related costs under our credit agreement has increased. See "—Our Financing Liquidity and Resources" above for information regarding recent downgrades of our issuer credit rating and senior unsecured debt rating that resulted in a change in the interest rate premiums under our revolving credit facility and term loan agreements would increase.
facility.
Our senior unsecured notes indentures and their supplements contain cross default provisions to any other debts of more than $20.0 million ($50.0 million or more in the case of our senior unsecured notes indentureindentures and supplementsupplements entered in February 2016)2016, February 2018, June 2020 and February 2021). Similarly, our revolving credit facility and term loan agreements haveagreement has 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 $620.0 million secured debt financing we obtained in July 2016related to our Boston life science property 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. We no longer include this $620.0 million of secured debt financing in our condensed consolidated balance sheet following the deconsolidation of the net assets of this joint venture; however, we continue to provide certain guaranties on this debt. The debt secured by the properties included in our 10 medical office and life science properties joint venture in which we own a 20% equity interest is guaranteed by this joint venture.
Supplemental Guarantor Information
On May 28, 2020, we issued $1.0 billion of our 9.75% senior notes due 2025. On February 3, 2021, we issued $500.0 million of our 4.375% senior notes due 2031. As of March 31, 2022, all $1.0 billion of our 9.75% senior notes due 2025 and all $500.0 million of our 4.375% senior notes due 2031 were fully and unconditionally guaranteed, on a joint and several basis and on a senior unsecured basis, by all of our subsidiaries, except for certain excluded subsidiaries, including pledged subsidiaries under our credit agreement. The notes and the guarantees are effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness, respectively, to the extent of the value of the collateral securing such secured indebtedness, and are structurally subordinated to all indebtedness and other liabilities and any preferred equity of any of our subsidiaries that do not guarantee the notes. Our remaining $1.35 billion of senior unsecured notes do not have the benefit of any guarantees as of March 31, 2022.
A subsidiary guarantor's guarantee of our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031, as applicable, and all other obligations of such subsidiary guarantor under the indenture governing the notes will automatically terminate and such subsidiary guarantor will automatically be released from all of its obligations under such subsidiary guarantee and the indenture under certain circumstances, including on or after the date (a) the notes have an investment grade rating from two rating agencies and one of such investment grade ratings is a mid-BBB investment grade rating and (b) no default or event of default has occurred and is continuing under the indenture. Our non-guarantor subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due on our 9.75% senior notes due 2025 or our 4.375% senior notes due 2031 or the respective guarantees, or to make any funds available therefor, whether by dividend, distribution, loan or other payments. The rights of holders of our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031, as applicable, to benefit from any of the assets of our non-guarantor subsidiaries are subject to the prior satisfaction of claims of those subsidiaries' creditors and any preferred equity holders. As a result, our 9.75% senior notes due
2025 and our 4.375% senior notes due 2031 and the respective guarantees are structurally subordinated to all indebtedness, guarantees and other liabilities of our subsidiaries that do not guarantee our 9.75% senior notes due 2025 and our 4.375% senior notes due 2031, including guarantees of other indebtedness of ours, payment obligations under lease agreements, trade payables and preferred equity.
The following tables present summarized financial information for guarantor entities and issuer, on a combined basis after eliminating (i) intercompany transactions and balances among the guarantor entities and (ii) equity in earnings from, and any investments in, any subsidiary that is a non-guarantor (dollars in thousands):
| | | | | | | | | | | | | | |
| | | | |
| | March 31, 2022 | | December 31, 2021 |
Real estate properties, net | | $ | 3,831,645 | | | $ | 3,822,547 | |
Other assets, net | | 1,960,063 | | | 1,424,994 | |
Total assets | | $ | 5,791,708 | | | $ | 5,247,541 | |
| | | | |
Indebtedness, net | | $ | 3,514,788 | | | $ | 3,613,447 | |
Other liabilities | | 277,441 | | | 259,670 | |
Total liabilities | | $ | 3,792,229 | | | $ | 3,873,117 | |
| | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, 2022 | | |
| | | | | | | | |
Revenues | | | | | | $ | 271,060 | | | |
Expenses | | | | | | 307,497 | | | |
Loss from continuing operations | | | | | | (97,986) | | | |
Net loss | | | | | | (96,104) | | | |
| | | | | | | | |
Related Person Transactions
We have relationships and historical and continuing transactions with RMR, LLC, RMR Inc., AlerisLife (including Five Star, AICStar) 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 management agreements with RMR LLC; RMR Inc. is the managing member of RMR LLC; ABP Trust, which is owned by our Managing Trustees, is the controlling shareholder of RMR Inc.; and we own 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 provides management services and which may have trustees, directors and officers who are also trustees, directors or officers of us, RMR LLC or RMR Inc., including: Five Star, which is our former subsidiary and largest tenant and the
manager of our managed senior living communities and of which we own 8.5% of its outstanding common stock and our Managing Trustees beneficially own, directly and indirectly, 36.7% of its outstanding common stock; and AIC, of which we, ABP Trust, Five Star 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.
For further information about these and other such relationships and related person transactions, see Notes 9, 10 11 and 1211 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our Annual Report, our definitive Proxy Statement for our 20172022 Annual Meeting of Shareholders and our other filings with the Securities and Exchange Commission, or SEC. In addition, see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC and copies of certain of our agreements with these related persons, including our business and property management agreements with RMR LLC, our various agreements with Five Star and our shareholders agreement with AIC and its six other shareholders, are available as exhibits to our filings with the SEC and accessible at the SEC’s website, www.sec.gov. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its affiliatessubsidiaries provide management services.
Impact of Government Reimbursement
For the ninethree months ended September 30, 2017, approximately 97%March 31, 2022, substantially all of our NOI was generated from properties where a majority of the revenues are derived from our tenants’tenants' and residents’residents' private resources, and the remaining 3%a small amount of our NOI was generated from properties where a majority of the revenues are derived from Medicare and Medicaid payments. Nonetheless, we own, and our tenants, managers and manageroperators operate, facilities in many states that participate in federal and state healthcare payment programs, including the federal Medicare and state Medicaid programs and other federal and state healthcare payment programs. Also, some of our MOBmedical office and life science property tenants participate in federal Medicare and state Medicaid programs and other government healthcare payment programs.
On September 13, 2017, membersDuring the three months ended March 31, 2022, we recognized $0.2 million in interest and other income in our condensed consolidated statement of the U.S. Congress introduced the Graham-Cassidy-Heller-Johnson bill, or GCHJ, with the announced intentioncomprehensive income (loss) related to repeal and replace major provisions of the Patient Protection and Affordable Care Act, or the ACA. Although it is unclear whether GCHJ will ultimately become law, attempts to repeal or to repeal and replace the ACA will likely continue. In addition, on October 12, 2017, President Trump signed an executive order directing 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 the same day, the Trump Administration also announced that it would stop paying what are known as cost sharing reduction subsidies to issuers of qualified health plansreceived under the ACA. 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 or the tenants and managers of our properties.
On September 20, 2017, the Centers for Medicare & Medicaid Services, or CMS, through its Innovation Center, issued a request for information seeking reactions from stakeholders regarding new approaches to promote patient centered care and test market driven reforms intended to empower Medicare and Medicaid beneficiaries as consumers, provide price transparency, increase choices and competition to improve quality, reduce cost and improve outcomes. In particular, CMS indicated that the Innovation Center is interested in testing models in eight focus areas, including increased participation in advanced alternative payment models; consumer directed care and market based innovation models; state based and local innovation, including Medicaid focused models; and program integrity models. CMS is accepting responses to its information request through November 20, 2017.
On August 24, 2017, the U.S. Department of Health and Human Services, Office of Inspector General, or OIG, issued an early alert regarding preliminary results of its ongoing review of potential abuse or neglect of Medicare beneficiaries in SNFs. As a result of the review, which is part of the ongoing efforts of the OIG to detect and combat elder abuse, the OIG concluded that CMS has inadequate procedures to ensure that incidents of potential abuse or neglect of beneficiaries residing in SNFs are identified and reported. The OIG provided suggestions for immediate actions that CMS can take to ensure better protection of beneficiaries. It is unclear what policy changes or oversight efforts CMS will undertake as a result of this early alert.
Because of shifting policy priorities, the current and projected federal budget deficit, other federal spending priorities and challenging fiscal conditions in some states, there have been numerous recent legislative and regulatory actions or proposed actions with respect to federal Medicare rates, state Medicaid rates and federal payments to states for Medicaid programs. We cannot currently predict the type and magnitude of the potential Medicare and Medicaid policy changes, rate changes or other changes that may 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 to our future financial results.
CARES Act.
For more information regarding the government healthcare funding and regulation of our business, please see the section captioned “Business-Government“Business—Government Regulation and Reimbursement” in our Annual Report and the section captioned “Impact“Management's Discussion and Analysis of Financial Condition and Results of Operations—Impact of Government Reimbursement” in our Annual Report and in Part I, Item 2Report.
Item 3. 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. Our strategy to manage exposure to changes in interest rates has not materially changed since December 31, 2016.2021. 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 September 30, 2017,March 31, 2022, our outstanding fixed rate debt included the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Annual | | Annual | | | | |
| | Principal | | Interest | | Interest | | | | Interest |
Debt | | Balance (1) | | Rate (1) | | Expense | | Maturity | | Payments Due |
Senior unsecured notes | | $ | 250,000 | | | 4.750 | % | | $ | 11,875 | | | 2024 | | Semi-Annually |
Senior unsecured notes | | 1,000,000 | | | 9.750 | % | | 97,500 | | | 2025 | | Semi-Annually |
Senior unsecured notes | | 500,000 | | | 4.750 | % | | 23,750 | | | 2028 | | Semi-Annually |
Senior unsecured notes | | 500,000 | | | 4.375 | % | | 21,875 | | | 2031 | | Semi-Annually |
Senior unsecured notes | | 350,000 | | | 5.625 | % | | 19,688 | | | 2042 | | Quarterly |
Senior unsecured notes | | 250,000 | | | 6.250 | % | | 15,625 | | | 2046 | | Quarterly |
Mortgage note (2) | | 10,934 | | | 6.280 | % | | 687 | | | 2022 | | Monthly |
Mortgage note | | 10,416 | | | 4.850 | % | | 505 | | | 2022 | | Monthly |
Mortgage note | | 15,363 | | | 5.750 | % | | 883 | | | 2022 | | Monthly |
Mortgage note | | 15,085 | | | 6.640 | % | | 1,002 | | | 2023 | | Monthly |
Mortgage note | | 10,178 | | | 4.444 | % | | 452 | | | 2043 | | Monthly |
| | $ | 2,911,976 | | | | | $ | 193,842 | | | | | |
|
| | | | | | | | | | | | | | | |
| | | | 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 |
Mortgage notes (2) | | 620,000 |
| | 3.53 | % | | 21,886 |
| | 2026 | | Monthly |
Mortgage notes | | 68,307 |
| | 4.47 | % | | 3,053 |
| | 2018 | | Monthly |
Mortgage notes | | 43,788 |
| | 3.79 | % | | 1,660 |
| | 2019 | | Monthly |
Mortgage note | | 13,884 |
| | 6.28 | % | | 872 |
| | 2022 | | Monthly |
Mortgage notes | | 12,609 |
| | 6.31 | % | | 796 |
| | 2018 | | Monthly |
Mortgage notes | | 11,911 |
| | 6.24 | % | | 743 |
| | 2018 | | Monthly |
Mortgage note | | 11,444 |
| | 4.85 | % | | 555 |
| | 2022 | | Monthly |
Mortgage note | | 8,476 |
| | 6.73 | % | | 570 |
| | 2018 | | Monthly |
Mortgage note | | 6,465 |
| | 4.69 | % | | 303 |
| | 2019 | | Monthly |
Mortgage note | | 4,361 |
| | 4.38 | % | | 191 |
| | 2043 | | Monthly |
Mortgage notes | | 2,738 |
| | 7.49 | % | | 205 |
| | 2022 | | Monthly |
Mortgage note | | 2,435 |
| | 6.25 | % | | 152 |
| | 2033 | | Monthly |
| | $ | 2,556,418 |
| | | | $ | 124,941 |
| | | | |
(1)The principal balances and interest rates are 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 certain of these debts. This table does not include obligations under finance leases. | |
(1) | The principal balances and interest rates are 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. |
| |
(2) | The property encumbered by these mortgages is subject to a joint venture arrangement. No principal payments are due on these mortgages until maturity. |
(2)We prepaid this mortgage in April 2022.
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 $25.6$29.1 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 September 30, 2017,March 31, 2022, and discounted cash flows 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 $48.8$1.4 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 debtsdebt 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 September 30, 2017,March 31, 2022, our floating rate debt obligations consisted of our $1.0 billion revolving credit facility under which we had $471.0$700.0 million outstanding our $350.0 million term loan and our $200.0 million term loan. In August 2017, we amended the agreement governingunder our revolving credit facility. As a result of the amendment, among other things, the stated maturity date of theOur revolving credit facility was extended frommatures in January 15, 2018 to January 15, 2022, and subject to the payment of an extension fee and meeting other conditions, we have an option to extend the maturity date of the facility for an additional year. No2024. Generally, 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 million term loan matures on January 15, 2020, and our $200.0 million term loan matures on September 28, 2022. Our $350.0 million term loan and our $200.0 million term loan are prepayable without penalty at any time.
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 premiumsa premium that areis 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 September 30, 2017March 31, 2022 (dollars in thousands except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Impact of Changes in Interest Rates |
| | | | Outstanding | | Total Interest | | Annual Earnings |
| | Interest Rate (1) | | Floating Rate Debt | | Expense Per Year | | Per Share Impact (2) |
At March 31, 2022 | | 3.00 | % | | $ | 700,000 | | | $ | 21,000 | | | $ | 0.09 | |
One percentage point increase | | 4.00 | % | | $ | 700,000 | | | $ | 28,000 | | | $ | 0.12 | |
|
| | | | | | | | | | | | | | | |
| | Impact of Changes in Interest Rates |
| | | | Outstanding | | Total Interest | | Annual Earnings |
| | Interest Rate (1) | | Floating Rate Debt | | Expense Per Year | | per Share Impact (2) |
At September 30, 2017 | | 2.51 | % | | $ | 1,021,000 |
| | $ | 25,627 |
| | $ | (0.11 | ) |
100 basis point increase | | 3.51 | % | | $ | 1,021,000 |
| | $ | 35,837 |
| | $ | (0.15 | ) |
| |
(1) | Weighted based on the respective interest rates and outstanding borrowings(1)Interest rate under our credit facility and term loans as of September 30, 2017. |
| |
(2) | Based on weighted average number of shares outstanding (diluted) for the nine months ended September 30, 2017. |
The following table presents the impact a 100 basis point increase in interest rates would have on our annual floating rate interest expense as of September 30, 2017 if we were fully drawn on our revolving credit facility and our term loan remainedas of March 31, 2022.
(2)Based on weighted average number of shares outstanding (dollars in thousands except per share amounts):
|
| | | | | | | | | | | | | | | |
| | Impact of Changes in Interest Rates |
| | | | Outstanding | | Total Interest | | Annual Earnings |
| | Interest Rate (1) | | Floating Rate Debt | | Expense Per Year | | per Share Impact (2) |
At September 30, 2017 | | 2.47 | % | | $ | 1,550,000 |
| | $ | 38,285 |
| | $ | (0.16 | ) |
100 basis point increase | | 3.47 | % | | $ | 1,550,000 |
| | $ | 53,785 |
| | $ | (0.23 | ) |
| |
(1) | Weighted based on the respective interest rates and outstanding borrowings under our credit facility (assuming fully drawn) and term loans as of September 30, 2017. |
| |
(2) | Based on weighted average number of shares outstanding (diluted) for the nine months ended September 30, 2017. |
(diluted) for the three months ended March 31, 2022.
The foregoing tables showtable shows 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 outstanding amount of our borrowings outstanding under our revolving credit facility or other floating rate debt.
LIBOR Phase Out
Although we have no present plans
LIBOR has phased out for new contracts and it is currently expected to do so,be phased out for pre-existing contracts by June 30, 2023. We are required to pay interest on borrowings under our revolving credit facility at floating rates based on LIBOR and interest we may pay on any future debt that we may incur may also require that we pay interest based upon LIBOR. In September 2021, we amended our credit agreement to set forth the mechanics for establishing a replacement benchmark rate under our revolving credit facility at such time as LIBOR is no longer available to calculate interest payable on amounts outstanding thereunder. Despite this amendment, we cannot be sure that any changes to the determination of interest under our agreement will approximate the current calculation in the future enter into hedge arrangements to mitigateaccordance with LIBOR. We cannot be sure what standard, if any, will replace LIBOR, and any alternative interest rate index that may replace LIBOR may result in our exposure to changes in interest rates.paying increased interest.
Item 4. Controls and Procedures.
As of the end of the period covered by this report,Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our Managing Trustees, our President and Chief OperatingExecutive Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Managing Trustees, our President and Chief OperatingExecutive 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 September 30, 2017March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
WARNING CONCERNING FORWARD LOOKING STATEMENTS
Warning Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q 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”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “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 Quarterly Report on Form 10-Q relate to various aspects of our business, including:
•The duration and severity of the COVID-19 pandemic and its impact on us and our managers' and other operators' and tenants' businesses,
•The ability of our senior living community managers to minimize negative economic impacts, including the current inflationary conditions and supply chain challenges, on our senior living communities and to manage them profitably and increase our returns,
•Our belief that we are well positioned to weather the present disruptions facing the real estate industry and, in particular, the real estate healthcare industry, including the senior living industry,
•Our belief that the healthcare sector and many of our tenants and managers and other operators provide essential services across the United States and the implication that our and our tenants' and managers' and other operators' businesses will remain open to provide such essential services,
•Our expectations regarding the quality and future performance of the new third party managers of the senior living communities we transitioned from Five Star during 2021,
•Whether the aging U.S. population and increasing life spans of seniors will increase the demand for senior living communities and other medical and healthcare related properties and healthcare services,
•Our ability to retain our existing tenants, attract new tenants and maintain or increase current rental rates on terms as favorable to us as our prior leases,
•The credit qualities of our tenants,
•Our ability to compete for tenancies and acquisitions effectively,
•Our expectation that our redevelopment projects will be completed on budget and by the estimated completion dates,
•Our acquisitions and sales of properties,
•Our closures and repositioning of senior living communities,
•The impact of increasing labor costs and shortages and commodity and other price inflation due to supply chain challenges or other market conditions,
•Our ability to raise debt or equity capital,
•Our ability to complete dispositions,
•The future availability of borrowings under our revolving credit facility,
•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,
•Whether we may contribute additional properties to our joint ventures and receive proceeds from the other investors in our joint ventures in connection with any such contributions or enter into new joint venture arrangements,
•Our 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 RMR,
•Our qualification for taxation as a REIT, and
•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, FFO attributable to common shareholders, Normalized FFO attributable to common shareholders, NOI, cash flows, liquidity and prospects include, but are not limited to:
•The impacts of the COVID-19 pandemic on us and our managers and other operators and tenants,
•The impacts of economic conditions and the capital markets on us and our managers and other operators and tenants,
•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 maintain our qualification for taxation as a REIT for U.S. federal income tax purposes,
•Competition within the healthcare and real estate industries, particularly in those markets in which our properties are located,
•Actual and potential conflicts of interest with our related parties, including our Managing Trustees, AlerisLife (including Five Star), RMR and others affiliated with them, and
•Acts of terrorism, outbreaks of pandemics, including the COVID-19 pandemic, or other manmade or natural disasters beyond our control.
For example:
•Under the current economic conditions for the industries in which our properties and businesses operate, our managers and other operators and tenants may not be able to profitably operate their businesses at our properties, our tenants may become unable or unwilling to pay their rent obligations to us, or our senior living community managers may be unable to generate our minimum returns for sustained periods as a result of the COVID-19 pandemic or otherwise. Additionally, if we default under our credit facility or other debt obligations, we may be required to repay our outstanding borrowings and other debt. Further, although we have taken steps to enhance our ability to maintain sufficient liquidity, unanticipated events may require us to expend amounts not currently planned,
•Our senior living community managers and other operators may experience operating and financial challenges resulting from a number of factors, some of which are beyond their control, and which challenges impact our operating results, including, but not limited to:
•Fluctuations in occupancy,
•Competition within the senior living and other health and wellness related service businesses,
•Older adults delaying or forgoing moving into senior living communities or purchasing health and wellness services,
•Increased labor costs, decreased labor availability and staffing turnover at our senior living communities or increases in costs paid for goods and services, due in part to supply chain constraints and commodity price inflation,
•The availability and increases in cost of general and professional liability insurance coverage,
•Medicare or Medicaid policies and regulations, as well as federal, state, local, and industry-regulated licensure, certification and inspection laws, regulations and standards that could affect our senior living community managers' services or impose requirements, costs and administrative burdens that may reduce our managers' ability to profitably operate their businesses,
•Imposition of civil, criminal and administrative penalties resulting from any noncompliance with healthcare laws and regulations at our senior living communities, including suspension of or non-payment for new admission or the loss or suspension of accreditation, licenses or certificates of need, among other things, and
•Exposure to litigation and regulatory and government proceedings due to the nature of the senior living and other health and wellness related service businesses.
•We own a significant number of AlerisLife common shares and we expect to own these shares for the foreseeable future. However, we may sell some or all of our AlerisLife common shares, or our ownership interest in AlerisLife may otherwise be diluted in the future,
•Our current cash distribution rate to common shareholders is $0.01 per share per quarter, or $0.04 per share per year, due to the operating challenges and other economic impacts resulting from the COVID-19 pandemic. 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 FFO, requirements to maintain our qualification for taxation as a REIT, limitations in the agreements governing our debt, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance, our expected needs for and availability of cash to pay our obligations 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,
•Our ability to make future distributions to our shareholders and to make payments of principal and interest on our debt 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 when they become due or to maintain our current rate of distributions on our common shares and future distributions may be reduced or eliminated,
•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,
•Subject to limitations on acquisitions in agreements governing our debt, we plan to selectively sell certain properties from time to time to fund future acquisitions, manage leverage and strategically update, rebalance and reposition our investment portfolio, which we refer to as our capital recycling program. 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, any updating, rebalancing or repositioning of our portfolio may not result in the benefits we expect, and properties we may sell may be at prices that are less than expected and less than their carrying values,
•Contingencies in our acquisition and sale agreements that we may enter may not be satisfied and any acquisitions and sales pursuant to such agreements and any related management arrangements we may expect to enter may not occur, may be delayed or the terms of such transactions or arrangements may change,
•The capital investments we are making at our senior living communities and our plan to invest significant additional capital in 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, or these capital investments may be delayed or may cost more than expected due to supply chain disruptions, market inflation, labor shortages or other conditions,
•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, and potential leasing arrangements related to our redevelopment projects may not materialize,
•We may spend more for capital expenditures or redevelopment projects than we currently expect,
•Our existing joint ventures and any additional joint ventures we may enter into in the future may not be successful,
•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. In addition, we may incur significant costs to reposition or re-lease a vacant property for a new operator and vacancies may reduce the value of the property,
•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 are currently generally limited in making acquisitions pursuant to our credit agreement. In addition, even after these restrictions expire, 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, we may not realize the returns we expect on any properties we acquire,
•Rents that we receive from our properties may decline upon renewals or expirations of our leases because of changing market conditions or otherwise,
•Although we have obtained a waiver from compliance with the fixed charge coverage ratio covenant included in our credit agreement through December 2022, if our operating results and financial condition are further adversely impacted by current economic conditions or otherwise, we may fail to comply with the terms of the waiver and other requirements under our credit agreement, and we may also fail to satisfy certain financial requirements under the agreements governing our public debt. For example, our ratio of consolidated income available for debt service to debt service was below the 1.5x incurrence requirement under our credit agreement and our public debt covenants as of March 31, 2022, and we cannot be certain how long this ratio will remain below 1.5x. We are unable to incur additional debt until this ratio is at or above 1.5x on a pro forma basis, but we are not required to repay outstanding debt as a result of failure to comply with this financial requirement. We are currently fully drawn under our revolving credit facility and could also be required to repay our outstanding debt in the event of non-compliance with certain other requirements of our credit agreement or the agreements governing our public debt. We may therefore experience future liquidity constraints, as we are currently unable to incur additional debt under our credit agreement or otherwise for failure to comply with the requirements of our credit agreement and the agreements governing our public debt, and we will be limited to our cash on hand or be forced to raise additional sources of capital or take other measures to maintain adequate liquidity,
•Actual costs under our revolving credit facility or other floating rate debt will be higher than the stated rates because of fees and expenses associated with such debt,
•The premiums used to determine the interest rate payable on our revolving credit facility and the facility fee payable on our revolving credit facility are based on our credit ratings, which are subject to change,
•For the three months ended March 31, 2022, substantially all of 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 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 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. If the government fails to pay us or our managers or other operators amounts due to us or them because of government defaults, shutdowns, budgetary constraints or otherwise, we and they may be significantly negatively impacted,
•Circumstances that adversely affect the ability of seniors or their families to pay for our managers' or other operators' services, such as economic downturns, weak housing market conditions, higher levels of unemployment among our residents' family members, lower levels of consumer confidence, inflation, stock market volatility and/or changes in demographics generally could affect the profitability of our senior living communities,
•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,
•We expect that we will benefit from RMR's Environmental, Social and Governance, or ESG, program and initiatives. However, we may not realize the benefits we expect from such program and initiatives and we or RMR may not succeed in meeting existing or future standards regarding ESG,
•We believe that our relationships with our related parties, including AlerisLife (including Five Star) and RMR 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
•The business and property management agreements between us and RMR have continuing 20 year 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.
Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as the COVID-19 pandemic and its aftermath, new legislation or regulations affecting our business or the businesses of our managers or other operators or tenants, changes in our managers' or other operators' or tenants' revenues or costs, worsening or lack of improvement of the financial condition or changes in our managers' or other operators' or tenants' financial conditions, deficiencies in operations by a manager or other operator of one or more of our senior living communities, acts of terrorism, war or other hostilities, pandemics, natural disasters, climate change and climate related events or changes in capital markets or the economy generally.
The information contained elsewhere in this Quarterly Report on Form 10-Q or in our other filings with the 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 Liability
The Amended and Restated Declaration of Trust establishing Diversified Healthcare 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 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.
PART II. Other Information
THIS QUARTERLY REPORT ON FORM 10-Q 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”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE”, “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:
OUR POLICIES AND PLANS REGARDING INVESTMENTS, FINANCINGS AND DISPOSITIONS,
OUR ABILITY TO RETAIN OUR EXISTING TENANTS, ATTRACT NEW TENANTS AND MAINTAIN OR INCREASE CURRENT RENTAL RATES,
THE CREDIT QUALITIES OF OUR TENANTS,
OUR ABILITY TO COMPETE FOR ACQUISITIONS AND TENANCIES EFFECTIVELY,
OUR ACQUISITIONS AND SALES OF PROPERTIES,
THE ABILITY OF THE MANAGER OF OUR MANAGED SENIOR LIVING COMMUNITIES TO MAINTAIN AND INCREASE OCCUPANCY, REVENUES AND OPERATING INCOME AT THOSE COMMUNITIES,
OUR ABILITY TO PAY DISTRIBUTIONS TO OUR SHAREHOLDERS AND THE AMOUNT OF SUCH DISTRIBUTIONS,
OUR ABILITY TO RAISE DEBT OR EQUITY CAPITAL,
THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY,
OUR 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 OWNERSHIP OF RMR INC.,
OUR EXPECTATION THAT WE BENEFIT FROM OUR OWNERSHIP OF AIC AND FROM OUR PARTICIPATION IN INSURANCE PROGRAMS ARRANGED BY AIC,
OUR QUALIFICATION FOR TAXATION AS A REIT,
OUR BELIEF THAT THE AGING U.S. POPULATION AND INCREASING LIFE SPANS OF SENIORS WILL INCREASE THE DEMAND FOR SENIOR LIVING SERVICES,
OUR BELIEF THAT 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, FFO, NORMALIZED FFO, NOI, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:
THE IMPACT OF CONDITIONS AND CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR TENANTS AND MANAGERS,
THE IMPACT OF THE ACA, INCLUDING CURRENT PROPOSALS TO REPEAL OR 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, RMR LLC, RMR INC., AIC AND OTHERS AFFILIATED WITH THEM,
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:
CHANGES IN MEDICARE OR MEDICAID POLICIES, INCLUDING THOSE THAT MAY RESULT FROM THE ACA, INCLUDING CURRENT PROPOSALS TO REPEAL OR 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,
THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON FIVE STAR AND ITS RESIDENTS AND OTHER CUSTOMERS,
COMPETITION WITHIN THE SENIOR LIVING SERVICES BUSINESS,
INCREASES IN INSURANCE AND TORT LIABILITY COSTS,
INCREASES IN COMPLIANCE COSTS, AND
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 ON ITS RENT OBLIGATIONS TO US,
IF FIVE STAR FAILS TO PROVIDE QUALITY SERVICES AT SENIOR LIVING COMMUNITIES THAT WE OWN, OUR INCOME FROM THESE COMMUNITIES MAY BE ADVERSELY AFFECTED,
IN RESPONSE TO COMPETITIVE PRESSURES RESULTING FROM RECENT AND EXPECTED NEW SUPPLY OF SENIOR LIVING COMMUNITIES, WE HAVE BEEN INVESTING IN IMPROVEMENTS TO OUR EXISTING SENIOR LIVING COMMUNITIES. OUR COMMUNITIES MAY FAIL TO BE COMPETITIVE AND THEY MAY FAIL TO ATTRACT RESIDENTS, DESPITE OUR CAPITAL INVESTMENTS,
OUR OTHER 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,
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 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 THEIR 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,
RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE BECAUSE OF CHANGING MARKET CONDITIONS OR OTHERWISE,
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 HAVE ENTERED AN AGREEMENT TO ACQUIRE SIX SENIOR LIVING COMMUNITIES FROM FIVE STAR FOR APPROXIMATELY $104.0 MILLION, INCLUDING OUR ASSUMPTION OF APPROXIMATELY $33.7 MILLION OF MORTGAGE DEBT AND EXCLUDING CLOSING COSTS, AND WE EXPECT TO ENTER MANAGEMENT AND POOLING ARRANGEMENTS WITH FIVE STAR FOR FIVE STAR TO MANAGE THESE SENIOR LIVING COMMUNITIES FOR US. THESE ACQUISITIONS ARE SUBJECT TO CONDITIONS. THESE CONDITIONS MAY NOT BE MET AND THESE ACQUISITIONS AND RELATED MANAGEMENT AND POOLING ARRANGEMENTS MAY NOT OCCUR, MAY BE DELAYED BEYOND THE FIRST QUARTER OF 2018 OR THEIR TERMS MAY CHANGE,
WE EXPECT TO ENTER INTO ADDITIONAL LEASE OR 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 LEASES, MANAGEMENT ARRANGEMENTS OR OTHER TRANSACTIONS WITH FIVE STAR,
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,
ACTUAL COSTS UNDER OUR REVOLVING CREDIT FACILITY OR OTHER FLOATING RATE CREDIT FACILITIES WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF FEES AND EXPENSES ASSOCIATED WITH SUCH FACILITIES,
THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY AND TERM LOANS MAY BE INCREASED TO UP TO $3.1 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 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. 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 THREE MONTHS ENDED SEPTEMBER 30, 2017, APPROXIMATELY 97% OF 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 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 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,
CIRCUMSTANCES THAT ADVERSELY AFFECT THE ABILITY OF SENIORS OR THEIR FAMILIES TO PAY FOR OUR TENANTS' AND MANAGER'S 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,
AS OF SEPTEMBER 30, 2017, WE HAD ESTIMATED UNSPENT LEASING RELATED OBLIGATIONS OF $21.6 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,
WE MAY NOT BE ABLE TO SELL PROPERTIES THAT WE DETERMINE TO OFFER FOR SALE ON TERMS ACCEPTABLE TO US OR OTHERWISE,
WE BELIEVE THAT OUR RELATIONSHIPS WITH OUR RELATED PARTIES, INCLUDING FIVE STAR, RMR LLC, RMR INC., ABP TRUST, AIC 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,
RMR INC. MAY REDUCE THE AMOUNT OF ITS DISTRIBUTIONS TO ITS SHAREHOLDERS, INCLUDING US,
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 AND PROPERTY MANAGEMENT AGREEMENTS BETWEEN US AND RMR LLC HAVE CONTINUING 20 YEAR 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.
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 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.
THE INFORMATION CONTAINED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OUR ANNUAL REPORT OR IN OUR OTHER FILINGS WITH THE 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 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 LIABILITY
THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING 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.
PART II. Other Information
Item 1A. Risk Factors.
There have been no material changes to risk factors from those we previously disclosed in our Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer purchases of equity securities. The following table provides information about our purchases of our equity
securities during the quarter ended September 30, 2017:March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
March 2022 | | 1,698 | | | $ | 3.20 | | | — | | | $ | — | |
| | | | | | | | |
Total | | 1,698 | | | $ | 3.20 | | | — | | | $ | — | |
|
| | | | | | | | | | | | | | |
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 |
September 2017 | | 16,654 |
| | $ | 19.85 |
| | — |
| | $ | — |
|
Total | | 16,654 |
| | $ | 19.85 |
| | — |
| | $ | — |
|
(1) TheseThis common share withholdingswithholding and purchases werepurchase was made to satisfy tax withholding and payment obligations of certaina former employee of RMR LLC employees in connection with the vesting of prior 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 the Nasdaq on the purchase date.
Item 5. Other Information.
On November 8, 2017, we entered a transaction agreement with Five Star pursuant to which we agreed to acquire six senior living communities from Five Star. We will enter management and pooling agreements with Five Star as we acquire these communities for Five Star to manage these senior living communities for us. The aggregate purchase price for these six senior living communities is approximately $104.0 million, including our assumption of approximately $33.7 million of mortgage debt securing certain of these senior living communities and excluding closing costs. The transaction agreement includes certain conditions to our acquisitions of these senior living communities, including receipt of any applicable lender and regulatory approvals. We expect to complete these acquisitions as third party approvals are received between now and the end of the first quarter of 2018; however, the conditions to our acquisitions of these senior living communities may not be met and some or all of these acquisitions and related management and pooling arrangements may not occur, may be delayed or the terms may change.
The management agreements we and Five Star will enter in connection with our acquisitions of these senior living communities will be combined pursuant to two new pooling agreements to be entered between us and Five Star. The first new pooling agreement will combine the management agreements for five of these senior living communities. Pursuant to the terms of the management and pooling agreements to be entered for these five senior living communities, we will pay Five Star a management fee equal to 5% of the gross revenues realized at these communities plus reimbursement for Five Star’s direct costs and expenses related to its operation of these communities, as well as an annual incentive fee equal to 20% of the annual NOI of these communities remaining after we realize an annual minimum return equal to 7% of our invested capital for these senior living communities. The second new pooling agreement will include one management agreement for a senior living community that is subject to an ongoing construction, expansion and development project. The terms of the management and pooling agreements to be entered for this senior living community will be substantially the same as the terms of the management and pooling agreements for the other five senior living communities, except that our annual minimum return on invested capital related to the ongoing construction, expansion and development project at this community will be an amount equal to the interest rate then applicable to borrowings under our revolving credit facility plus 2% per annum. This amount of minimum return will apply until the earlier of 12 months after a certificate of occupancy is issued with respect to the project and the third anniversary of our acquisition of this community; thereafter, the amount of annual minimum return on invested capital related to this project will be 7% of our invested capital. Also pursuant to the terms of the management and pooling agreements to be entered for these six senior living communities, we will pay Five Star a fee for its management of capital expenditure projects at these senior living communities equal to 3% of amounts funded by us. The terms of these management and pooling agreements will expire in 2041 and will be subject to automatic renewals, unless earlier terminated or timely notices of nonrenewal are delivered.
Also on November 8, 2017, we entered an amendment to our preexisting pooling agreements with Five Star, among other things, to provide that, with respect to our right to terminate all of the management agreements covered by a preexisting pooling
agreement if we do not receive our annual minimum return under such agreement in each of three consecutive years, the commencement year for the measurement period for determining whether the specified annual minimum return under the applicable pooling agreement has been achieved will be 2017.
The foregoing descriptions of the transaction agreement and the amendment to our preexisting pooling agreements with Five Star are not complete and are qualified in their entirety by reference to the full text of those documents and all exhibits and schedules thereto, copies of which are filed with this Quarterly Report on Form 10-Q as Exhibits 10.2 and 10.3.
We have relationships and historical and continuing transactions with Five Star. For information regarding these relationships and transactions, see Notes 10, 11 and 12 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our Annual Report, our definitive Proxy Statement for our 2017 Annual Meeting of Shareholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC and copies of certain of our agreements with these related persons, including our various agreements with Five Star, are available as exhibits to our filings with the SEC and accessible at the SEC’s website, www.sec.gov.
|
| | | | | | | |
Exhibit
Number | | Description |
3.1 | | |
3.2 | | |
3.3 | | |
3.4 | | |
3.5 | | |
4.1 | | |
4.2 | | |
4.3 | | |
4.4 | | |
4.5 | | |
4.6 | | |
4.74.4 | | |
4.84.5 | | |
4.94.6 | | |
4.104.7 | | |
|
10.1 | | |
10.1 | | |
10.222.1 | | |
10.331.1 | | |
12.1 | | |
31.1 | | |
31.2 | | |
31.332.1 | | |
31.4 | | |
32.1 | | |
101.1101.INS | | The following materials fromXBRL Instance Document - the Company’s Quarterly Report on Form 10-Q forinstance document does not appear in the quarter ended September 30, 2017 formatted inInteractive Data File because its XBRL (eXtensible Business Reporting Language): (i)tags are embedded within the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes to these financial statements, tagged as blocks of text and in detail.Inline XBRL document. |
101.SCH | | XBRL 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.) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | | | |
| SENIOR HOUSING PROPERTIESDIVERSIFIED HEALTHCARE TRUST |
| |
| |
| By: | /s/ David J. HegartyJennifer F. Francis |
| | David J. HegartyJennifer F. Francis |
| | President and Chief OperatingExecutive Officer |
| |
Dated: November 9, 2017May 3, 2022 | |
| |
| |
| By: | /s/ Richard W. Siedel, Jr. |
| | Richard W. Siedel, Jr. |
| | Chief Financial Officer and Treasurer |
| | (principal financial and accounting officer) |
| |
Dated: November 9, 2017May 3, 2022 | |