UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 001-15319
SENIOR HOUSING PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 04-3445278
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
400 Centre Street, Newton, Massachusetts 02458
(Address of principal executive offices) (Zip Code)
617-796-8350
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of Common Shares outstanding at August 10, 2000:
25,916,100 shares of beneficial interest, $0.01 par value.
SENIOR HOUSING PROPERTIES TRUST
FORM 10-Q
JUNE 30, 2000
INDEX
Page
PART I Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 1
Consolidated Statements of Income - Three and Six Months Ended June 30, 2000 and 1999 2
Consolidated Statements of Cash Flows -Six Months Ended June 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II Other Information
Item 2. Changes in Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Certain Important Factors 13
Signatures 14
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
June 30, December 31,
2000 1999
----------- -----------
ASSETS
Real estate properties at cost (including properties leased to affiliates
with a cost of $20,422)
Land $ 69,126 $ 69,673
Buildings and improvements 624,066 639,066
--------- ---------
693,192 708,739
Accumulated depreciation (113,482) (108,709)
--------- ---------
579,710 600,030
Real estate mortgages receivable, net of loan loss reserve of $14,500 22,939 22,939
Cash and cash equivalents 10,770 17,091
Other assets 18,076 13,940
--------- ---------
$ 631,495 $ 654,000
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $ 182,000 $ 200,000
Deferred rents and other deferred revenues 25,991 26,715
Security deposits 15,235 15,235
Other liabilities 7,423 2,644
Shareholders' equity:
Common shares of beneficial interest, $0.01 par value:
50,000,000 shares authorized, 26,003,000 shares and 26,001,500
shares issued outstanding, respectively 260 260
Additional paid-in capital 444,524 444,511
Cumulative net loss (4,936) (19,764)
Distributions (39,002) (15,601)
--------- ---------
Total shareholder's equity 400,846 409,406
--------- ---------
$ 631,495 $ 654,000
========= =========
See accompanying notes
1
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- --------------------------
2000 1999 2000 1999
---------------------------- --------------------------
Revenues:
Rental income $18,196 $21,183 $36,256 $42,409
Interest and other income 436 1,439 973 2,881
------- ------- ------- -------
Total revenues 18,632 22,622 37,229 45,290
------- ------- ------- -------
Expenses:
Interest 3,924 5,016 8,399 9,992
Depreciation 5,142 5,600 10,317 11,207
General and administrative 2,298 1,145 3,685 2,259
------- ------- ------- -------
Total expenses 11,364 11,761 22,401 23,458
------- ------- ------- -------
Net income $ 7,268 $10,861 $14,828 $21,832
======= ======= ======= =======
Weighted average shares outstanding
(Note 2) 26,002 26,000 26,002 26,000
======= ======= ======= =======
Basic and diluted earnings per share data:
Net income $ 0.28 $ 0.42 $ 0.57 $ 0.84
======= ======= ======= =======
See accompanying notes
2
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Six Months Ended June 30,
----------------------------
2000 1999
-------- --------
Cash flows from operating activities:
Net income $ 14,828 $ 21,832
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation 10,317 11,207
Changes in assets and liabilities:
Other assets (4,728) 636
Deferred rents and other deferred revenues (724) (897)
Other liabilities 3,209 30
-------- --------
Cash provided by operating activities 22,902 32,808
-------- --------
Cash flows from investing activities:
Proceeds from sale of real estate 12,178 --
Repayments of mortgage loans -- 188
-------- --------
Cash provided by investing activities 12,178 188
-------- --------
Cash flows from financing activities:
Repayment of credit facility (22,000) --
Draws on credit facility 4,000
Owner's net distribution -- (32,967)
Distributions to shareholders (23,401) --
-------- --------
Cash used for financing activities (41,401) (32,967)
-------- --------
(Decrease) increase in cash and cash equivalents (6,321) 29
Cash and cash equivalents at beginning of period 17,091 139
-------- --------
Cash and cash equivalents at end of period $ 10,770 $ 168
======== ========
Supplemental cash flow information:
Cash paid for interest $ 8,208 $--
======== ========
See accompanying notes
3
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
Senior Housing Properties Trust ("Senior Housing"), a Maryland real estate
investment trust, was organized on December 16, 1998 as a 100% owned subsidiary
of HRPT Properties Trust ("HRPT").
On October 12, 1999, HRPT distributed 50.7% of its ownership in Senior Housing
to HRPT shareholders (the "Spin-Off"). Prior to the Spin-Off the properties and
mortgages were owned by HRPT. These consolidated financial statements are
presented as if Senior Housing was a separate legal entity from HRPT prior to
the Spin-Off, although no such entity existed until October 12, 1999.
At June 30, 2000, Senior Housing owned 78 properties and 12 mortgages receivable
in 26 states and operates in a single segment.
Note 2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION. Prior to the Spin-Off, Senior Housing, including its
properties and mortgages, were owned by HRPT, and transactions in those periods
have been presented on HRPT's historical basis. Prior to the Spin-Off
substantially all the rental income and mortgage interest income received by
HRPT from the tenants and mortgagors of Senior Housing was deposited in and
commingled with HRPT's general funds. Funds for capital investments and other
cash required by Senior Housing were provided by HRPT. Prior to September 1,
1999, interest expense was allocated based on HRPT's historical interest expense
as a percentage of HRPT's average historical costs of real estate investments.
General and administrative costs of HRPT for the periods prior to the Spin-Off
were allocated to Senior Housing based on HRPT's investment advisory agreement
formula and other costs were allocated based on historical costs as a percentage
of HRPT's average historical costs of real estate investments. In the opinion of
management, the methods for allocating interest and general and administrative
expenses were reasonable. It was not practicable to estimate additional costs
that would have been incurred by Senior Housing as a separate entity.
In December 1999 the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Accounting for Contingent Rent in Interim Financial Periods"
("SAB 101"). Senior Housing has adopted the provisions of SAB 101 prospectively
as of January 1, 2000. If Senior Housing had elected the adoption retroactively
to January 1, 1999, for the three and six months ended June 30, 1999, net income
would have been $10.1 million ($0.39/share) and $20.4 million ($0.78/share),
respectively. SAB 101 will have no impact on Senior Housing's annual results of
operations, rather the accounting changes required by SAB 101 are expected to,
in general, defer recognition of certain percentage rental income from the
first, second and third quarters to the fourth quarter within a fiscal year.
EARNINGS PER COMMON SHARE. Because Senior Housing's operations were included in
the consolidated financial statements of HRPT prior to the Spin-Off, there were
no shareholder equity accounts for Senior Housing prior to 1999. Common shares
outstanding of 26.0 million at October 12, 1999, have been included in the
earnings per share calculation as if the shares were outstanding for all periods
prior to October 12, 1999. Earnings per common share are computed using the
weighted average number of shares outstanding during the period. Senior Housing
has no common share equivalents, instruments convertible into common shares or
other dilutive instruments.
Note 3. Interim Financial Statements
The financial statements of Senior Housing have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 1999, included in the Annual Report
on Form 10-K. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for interim periods are not necessarily
indicative of the results that may be expected for the full year.
4
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Real Estate Properties
In February 2000 Senior Housing sold all of the properties that were leased to
The Frontier Group, Inc. ("Frontier"). Senior Housing's claims for rental
arrearages and breach of its lease obligations are pending in court. The amount
of net gain, if any, from the sale of the Frontier properties will depend upon
the outcome of these claims and is not expected to be material.
Note 5. Report of Tenants' Financial Condition
Two of Senior Housing larger tenants, Mariner Post-Acute Network, Inc.
("Mariner") and Integrated Health Services, Inc. ("IHS") have filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. Mariner filed in
January 2000 and IHS filed in February 2000.
In June 2000 Senior Housing's restructuring agreement with Mariner was approved
by the bankruptcy court. Full implementation of this restructuring transaction
is still contingent upon Senior Housing obtaining regulatory approval in the
states where these properties are located. This restructuring agreement provides
as follows:
o Mariner's lease obligations for all 26 properties are terminated.
o $15.0 million of cash, 1,000,000 common shares of HRPT and 100,000
shares of Senior Housing's common shares which secured Mariner's
obligations to be retained by Senior Housing.
o Senior Housing assumes operating responsibilities for 17 of the 26
properties. Ownership of five of these properties is transferred to
Mariner. The remaining four nursing homes are now subleased to two
private companies and Senior Housing is negotiating with these two
subtenants for their continued operation of those properties.
o Mariner continued to pay its contractual obligations to Senior Housing
until June 30, 2000.
In July 2000 Senior Housing's restructuring agreement with IHS was approved by
the bankruptcy court. Full implementation of this restructuring transaction is
still contingent upon Senior Housing obtaining regulatory approval in the state
where these properties are located. This restructuring agreement provides as
follows:
o The lease for one property is amended to provide a new ten year term
at $1.2 million per year, effective January 1, 2000.
o Senior Housing's mortgage investment secured by one property is
cancelled and IHS will continue to own and operate the property.
o IHS's lease and mortgage obligations for 37 properties are terminated.
o IHS paid Senior Housing $600,000 per month for use and occupancy of
Senior Housing's properties from the date of IHS's bankruptcy filing
until June 30, 2000.
o IHS conveyed nine properties to Senior Housing which were previously
owned and operated by IHS.
o Senior Housing will assume operating responsibility for 41 properties,
effective July 1, 2000.
In addition, Horizon/CMS Corporation, a subsidiary of HEALTHSOUTH Corporation,
(together "HEALTHSOUTH") is a guarantor of the lease obligations for four
properties owned by Senior Housing and leased to IHS. HEALTHSOUTH in the process
of assuming operating responsibility for these four properties. Also HEALTHSOUTH
will lease and operate one property that was conveyed to Senior Housing by IHS.
Annual rents under these five leases total approximately $10.0 million.
The bankruptcy filings and restructuring agreements with Mariner and IHS are
expected to adversely impact Senior Housing's revenues and net income which may
be realized in the future by Senior Housing, at least on a short term basis. As
a result of the closing of these transactions, significant gains or losses may
result in the quarter ended September 30, 2000.
Subject to, and pending regulatory approval where these properties are located,
these properties being managed on behalf of Mariner and IHS by Five Star Quality
Care, Inc., an affiliate of Senior Housing.
5
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 22, 2000, Multicare, a non-consolidated subsidiary of Genesis Health
Ventures, Inc., a tenant that leases one property from Senior Housing filed
bankruptcy. SNH's annual rent from this property is $1.5 million. As of July 31,
2000, Multicare is current on its lease obligations to Senior Housing.
Note 6. Indebtedness
Senior Housing has a $350.0 million, three-year, interest only, bank credit
facility. The bank credit facility is secured by 18 properties, with a net book
value of $375.0 million at June 30, 2000, and matures in 2002. The interest rate
is LIBOR plus a premium (8.63% at June 30, 2000). The bank credit facility is
available for acquisitions, working capital and for general business purposes.
As of June 30, 2000, $182.0 million was outstanding and $168.0 million was
available under the credit facility.
Note 7. Shareholders' Equity
Senior Housing has reserved 1,300,000 shares of Senior Housing's common shares
under the terms of the 1999 Incentive Share Award Plan (the "Award Plan"). In
May 2000 the three Independent Trustees, as part of their annual fee, were each
granted 500 common shares from this plan. The shares granted to the Trustees
vest immediately. At June 30, 2000, 1,297,000 of Senior Housing's common shares
remain reserved for issuance under the Award Plan.
On August 1, 2000, pursuant to our incentive share award plan, our officers and
certain key employees of our advisor, REIT Management & Research Inc., received
grants aggregating 13,100 common shares valued at $8.625 per share, the closing
price of the common shares on the New York Stock Exchange on August 1, 2000. The
grants were made pursuant to the exemption from registration contained in
Section 4(2) of the Securities Act of 1933, as amended.
In May 2000 Senior Housing paid a distribution to shareholders of $0.30 per
share, or $7.8 million. In July 2000 Senior Housing declared a distribution of
$0.30 per share, or $7.8 million, which will be distributed to shareholders on
or about August 24, 2000.
In connection with the restructuring agreement with Mariner, Senior Housing
received 100,000 of its own common shares and, effective July 1, 2000, these
shares were cancelled.
Note 8. Subsequent Events
On July 27, 2000, Senior Housing entered an agreement to sell four independent
living properties leased to Brookdale Living Communities, Inc. for $123 million.
Senior Housing acquired these properties in December 1996 and May 1997 for an
investment of $101.9 million. Senior Housing expects to record a gain on sale of
approximately $26 million when the transaction closes on or before October 31,
2000. Proceeds from the sale will be applied against the bank credit facility.
6
SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion presents an analysis of the results of operations of
the properties and mortgages we owned for the three and six months ended June
30, 2000 and 1999. This discussion includes references to funds from operations.
Funds from operations, or "FFO", as defined in the white paper on funds from
operations which was approved by the Board of Governors of the National
Association of Real Estate Investment Trusts ("NAREIT") in March 1995 and as
clarified from time to time, is net income computed in accordance with Generally
Accepted Accounting Principles ("GAAP"), before extraordinary items, plus
depreciation and amortization and after adjustment for unconsolidated
partnerships and joint ventures. We consider FFO to be an appropriate measure of
performance for an equity REIT, along with cash flow from operating activities,
financing activities and investing activities, because it provides investors
with an indication of an equity REIT's ability to incur and service debt, make
capital expenditures, pay distributions and fund other cash needs. We compute
FFO in accordance with the standards established by NAREIT adjusted for the
impact of Staff Accounting Bulletin No. 101, "Accounting for Contingent Rent in
Interim Financial Periods", issued by the Securities and Exchange Commission in
December 1999, and for non cash items, which may not be comparable to FFO
reported by other REITs that define the term differently. FFO does not represent
cash generated by operating activities in accordance with GAAP and should not be
considered as an alternative to net income, determined in accordance with GAAP,
as an indication of financial performance or the cash flow from operating
activities, determined in accordance with GAAP, or as a measure of liquidity.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Versus 1999
For the three months ended June 30, 2000, compared to the three months ended
June 30, 1999, total revenues decreased by $4.0 million, total expenses
decreased by $397,000 and net income decreased by $3.6 million. Revenues
decreased because no rent was received from three properties sold by Senior
Housing and because reduced rent and interest was accrued from the properties
pursuant to the restructuring agreements with Mariner and IHS described below.
Total expenses decreased due to a decrease in interest expense of $1.1 million
and depreciation expense of $458,000 offset by an increase in general and
administrative expenses of $1.2 million. The decrease in interest expense is
primarily due to lower interest expense actually incurred during 2000 as
compared to HRPT's allocated interest expense in 1999. The decrease in
depreciation expense is primarily due to the write down for the impairment of
assets at December 31, 1999, and the sale of three properties in February 2000.
General and administrative expenses increased due to costs related to the
restructuring agreements with IHS and Mariner. Net income was $7.3 million and
$10.9 million for the three months ended June 30, 2000 and 1999, respectively.
Two of Senior Housing larger tenants, Mariner and IHS have filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. Mariner filed in January 2000 and
IHS filed in February 2000.
In June 2000 Senior Housing's restructuring agreement with Mariner was approved
by the bankruptcy court. The full implementation of this restructuring
transaction is still contingent upon Senior Housing obtaining regulatory
approval in the states where these properties are located. The restructuring
agreement provides as follows:
o Mariner's lease obligations for all 26 properties are terminated.
o $15.0 million of cash, 1,000,000 common shares of HRPT and 100,000
shares of Senior Housing's common shares which secured Mariner's
obligations to be retained by Senior Housing.
o Senior Housing assumes operating responsibilities for 17 of the 26
properties. Ownership of five of these properties is transferred to
Mariner. The remaining four nursing homes are now subleased to two
private companies and Senior Housing is negotiating with these two
subtenants for their continued operation of those properties.
o Mariner continued to pay its contractual obligations to Senior Housing
until June 30, 2000.
7
SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -continued
In July 2000 Senior Housing's restructuring agreement with IHS was approved by
the bankruptcy court. This restructuring transaction is still contingent upon
Senior Housing obtaining regulatory approval in the states where these
properties are located. This restructuring agreement provides as follows:
o The lease for one property is amended to provide a new ten year term
at $1.2 million per year, effective January 1, 2000.
o Senior Housing's mortgage investment secured by one property is
cancelled and IHS will continue to own and operate the property.
o IHS's lease and mortgage obligations for 37 properties are terminated.
o IHS paid Senior Housing $600,000 per month for use and occupancy of
Senior Housing's properties from the date of IHS's bankruptcy filing
through June 30, 2000.
o IHS conveyed nine properties to Senior Housing which were previously
owned and operated by IHS.
o Senior Housing will assume operating responsibility for 41 properties,
effective July 1, 2000.
In addition HEALTHSOUTH Corporation is a guarantor of the lease obligations for
four properties owned by Senior Housing and leased to IHS. HEALTHSOUTH is in the
process of assuming operating responsibility for these four properties. Also
HEALTHSOUTH will lease and operate one additional property that was conveyed to
Senior Housing by IHS. Annual rents under these five leases total approximately
$10.0 million.
The bankruptcy filings and restructuring agreements with Mariner and IHS are
expected to adversely impact Senior Housing's revenues and net income which may
be realized in the future by Senior Housing, at least on a short term basis. As
a result of the closing of these transactions, gains or losses may result in the
quarter ended September 30, 2000.
Subject to, and pending regulatory approval where the properties are located,
these properties are being managed on behalf of Mariner and IHS by Five Star
Quality Care, Inc., an affiliate of Senior Housing.
FFO for the three months ended June 30, 2000 was $13.2 million, or $0.51 per
share, compared to $16.5 million, or $0.63 per share for the same period in
1999. The decrease of $3.3 million is due mainly to the factors discussed above.
Cash flow provided by operating activities and cash available for distribution
may not necessarily equal funds from operations as cash flow is affected by
other factors not included in the funds from operations calculation, such as
changes in assets and liabilities.
Six Months Ended June 30, 2000 Compared to June 30, 1999
For the six months ended June 30, 2000, compared to the six months ended June
30, 1999, total revenues decreased by $8.0 million, total expenses decreased by
$1.1 million and net income decreased by $7.0 million. Revenues decreased
because rent from three properties sold by Senior Housing and because reduced
rent and interest was accrued from the properties pursuant to the restructuring
agreements described previously. Total expenses decreased due to a decrease in
interest expense of $1.6 million and depreciation expense of $890,000 offset by
an increase in general and administrative expenses of $1.4 million. The decrease
in interest expense is primarily due to lower interest expense actually incurred
during 2000 as compared to HRPT's allocated interest expense in 1999. The
decrease in depreciation expense is primarily due to the write down for the
impairment of assets at December 31, 1999, and the sale of three properties in
February 2000. General and administrative expenses increased due to costs
related to the restructuring agreements with IHS and Mariner. Net income was
$14.8 million and $21.8 million for the six months ended June 30, 2000 and 1999,
respectively.
FFO for the six months ended June 30, 2000 was $26.5 million or $1.02 per share,
compared to $33.0 million, or $1.27 per share for the same period in 1999. The
decrease of $6.5 million is due mainly to the factors discussed above. Cash flow
provided by operating activities and cash available for distribution may not
necessarily equal funds from operations as cash flow is affected by other
factors not included in the funds from operations calculation, such as changes
in assets and liabilities.
8
SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -continued
LIQUIDITY AND CAPITAL RESOURCES
We have a $350 million, three-year, interest only, bank credit facility secured
by first mortgages on 18 properties. The interest rate is LIBOR plus a premium
per annum. The bank credit facility is available for acquisitions, working
capital and for general business purposes. We have the ability to repay and
redraw amounts under this bank credit facility until its maturity in 2002. Our
bank credit facility documentation has customary representations, warranties,
covenants and event of default provisions. We currently have $182 million
outstanding and $168 million available for borrowing under this credit facility.
At June 30, 2000, we had cash and cash equivalents of $10.8 million. For the six
months ended June 30, 2000 and 1999, cash flows provided by operating activities
were $22.9 million and $32.8 million, respectively; cash flows provided by
investing activities were $12.2 million and $188,000 respectively; and cash used
for financing activities and distributions to shareholders was $41.4 million and
$33.0 million, respectively. We expect that our current cash, cash equivalents,
future cash flows from operating activities and availability under our bank
credit facility will be sufficient to meet our short-term and long-term working
capital requirements, including the distribution of $7.8 million, or $0.30 per
share, for the quarter ended on June 30, 2000, which we will pay on or about
August 24, 2000.
Total assets decreased by $22.5 million from $654.0 million as of December 31,
1999, to $631.5 million as of June 30, 2000. The decrease is primarily due to
depreciation on real estate properties, distributions to shareholders and the
sale of three properties in February 2000.
On July 27, 2000, Senior Housing entered an agreement to sell four independent
living properties leased to Brookdale Living Communities, Inc. for $123 million.
Senior Housing acquired these properties in December 1996 and May 1997 for an
investment of $101.9 million. Senior Housing expects to record a gain on sale of
approximately $26 million when the transaction closes on or before October 31,
2000. Proceeds from the sale will be applied against the bank credit facility.
Year 2000
We experienced no disruptions in our information and non-information technology
systems and incurred no costs with respect to year 2000 issues. We are not aware
of any material problems resulting from year 2000 issues by our systems, the
systems of our tenants or their material vendors, or our material vendors; but
we will continue to monitor these systems throughout the year to ensure that any
late year 2000 issues that may arise are addressed promptly.
Impact of Inflation
Inflation might have both positive and negative impacts upon our business.
Inflation might cause the value of our real estate investments to increase.
Similarly, in an inflationary environment, the percentage rents which we receive
based upon a percentage of our tenants' revenues should increase. Offsetting
these benefits, inflation might cause our costs of equity and debt capital to
increase. To mitigate the adverse impact of increased costs of debt capital in
the event of material inflation we may purchase interest rate cap agreements.
The decision to enter into these agreements will be based on the amount of
floating rate debt outstanding and our belief that material interest rate
increases are likely to occur. We do not believe inflation in the U.S. economy
during the next few years will have any material effect on our business;
however, we are now studying the impact that wage inflation may have on the
results of operations which we may realize from properties formerly operated by
Mariner and IHS as these operations are assumed by us effective July 1, 2000.
9
SENIOR HOUSING PROPERTIES TRUST
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market changes in interest rates. Because interest on all our
outstanding debt is at a floating rate, changes in interest rates will not
affect the value of our outstanding debt instruments. However, changes in
interest rates will affect our operating results. For example, the interest rate
payable on our outstanding indebtedness of $182.0 million at June 30, 2000, was
8.63% per annum. An immediate 10% change in that interest rate or 86.3 basis
points, would increase or decrease our costs by approximately $1.6 million, or
$0.06 per share per year:
Impact of Changes in Interest Rates
(dollars in thousands)
Total
Interest Rate Outstanding Interest
Per Year Debt Expense Per
Year
--------------- -------------- ---------------
At June 30, 2000 8.63% $182,000 $15,707
10% reduction 7.77% 182,000 14,141
10% increase 9.49% 182,000 17,272
The foregoing table presents a so-called "shock" analysis, which assumes that
the interest rate change by 10%, or 86.3 basis points, is in effect for a whole
year. If interest rates were to change gradually over one year, the impact would
be less.
We borrow in U.S. dollars and all of our current borrowings are subject to
interest at LIBOR plus a premium. Accordingly, we are vulnerable to changes in
U.S. dollar based short-term rates, specifically LIBOR.
During the past few years, short-term U.S. dollar based interest rates have
tended to rise. We are unable to predict the direction or amount of interest
rate changes during the next year. We have purchased an interest rate cap
agreement on all our current debt to protect against rate increases of LIBOR
above 8%. However, we may incur additional debt at floating or fixed rates in
the future which would increase our exposure to market changes in interest
rates.
At June 30, 2000 we owned real estate mortgages receivable with a carrying value
of $22.9 million. When comparable term market interest rates decline, the value
of these receivables increases; when comparable term market interest rates rise,
the value of these receivables declines. Using discounted cash flow analyses, at
a weighted average estimated per year market rate for June 30, 2000 of 10.75%,
the estimated fair value of our mortgage receivables was $23.7 million. An
immediate 10% change in the market rate of interest, or 108 basis points,
applicable to our mortgage receivables at June 30, 2000, would affect the fair
value of those receivables as follows:
Carrying Value
Interest of Mortgages Estimated
Rate Per Year Receivable Fair Value
-------------- ----------------- ---------------
(dollars in thousands)
Estimated market 10.75% $22,939 $23,722
10% reduction 9.68% 22,939 25,256
10% increase 11.83% 22,939 22,328
If the market rate changes occurred gradually over time, the effect of these
changes would be realized gradually. Because our mortgages receivable are fixed
rate instruments, changes in market interest rates will have no effect on our
operating results unless these receivables are sold.
The interest rate changes that affect the valuations of our mortgages are U.S.
dollar long-term rates for corporate obligations of companies with ratings
similar to our mortgagors. Substantially all of our outstanding mortgage
receivables have been cancelled by implementations of the restructuring
agreements with Mariner and IHS effective July 1, 2000.
10
SENIOR HOUSING PROPERTIES TRUST
Part II. Other Information
Item 2. Changes in Securities
On May 11, 2000, pursuant to our incentive share award plan, our three
independent trustees each received a grant of 500 (total 1,500) common shares of
beneficial interest, par value $0.01 per share, valued at $9.00 per share, the
closing price of the common shares on the New York Stock Exchange on May 11,
2000. The grants were made pursuant to an exemption from registration contained
in section 4(2) of the Securities Act of 1933, as amended. In connection with
the restructuring agreement with Mariner, Senior Housing received 100,000 of its
own common shares and, effective July 1, 2000, these shares were cancelled.
On August 1, 2000, pursuant to our incentive share award plan, our officers and
certain key employees of our advisor, REIT Management & Research Inc., received
grants aggregating 13,100 common shares valued at $8.625 per share, the closing
price of the common shares on the New York Stock Exchange on August 1, 2000. The
grants were made pursuant to the exemption from registration contained in
Section 4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of matters to a vote of Security Holders
At our regular annual meeting of shareholders held on May 11, 2000, Dr. Bruce M.
Gans, M.D. and Mr. Barry M. Portnoy were re-elected trustees (24,739,583 shares
voted for and votes with respect to 199,517 shares withheld for Dr. Gans and
24,735,922 shares voted for and votes with respect to 203,178 shares withheld
for Mr. Portnoy). The term of Dr. Gans and Mr. Portnoy will extend until our
annual meeting of shareholders in 2003. Messrs. John L. Harrington, Gerard M.
Martin and Arthur G. Koumantzelis continue to serve as trustees with terms
expiring in 2001, 2001, and 2002, respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Order of the United States Bankruptcy Court for the
District of Delaware, dated May 10, 2000, in re:
Mariner Post-Acute Network, Inc., a Delaware
Corporation, and affiliates, Debtors.
10.2 Letter Agreement, dated as of June 30, 2000, amending
Settlement Agreement dated as of March 20, 2000,
among Senior Housing Properties Trust, SPTMNR
Properties Trust, Five Star Quality Care, Inc.,
SHOPCO-AZ, LLC, SHOPCO-CA, LLC, SHOPCO-COLORADO, LLC,
SHOPCO-WI, LLC, Mariner Post-Acute Network, Inc.,
Grancare, Inc., AMS Properties, Inc. and GCI Health
Care Centers, Inc.
10.3 Interim Management Agreement, dated as of July 1,
2000, among Mariner Post-Acute Network, Inc., AMS
Properties, Inc., GCI Health Care Centers, Inc.,
SHOPCO-AZ, LLC, SHOPCO-CA, LLC, SHOPCO-COLORADO, LLC,
SHOPCO-WI, LLC and Five Star Quality Care, Inc.
10.4 Order of the United States Bankruptcy Court for the
District of Delaware, dated July 7, 2000, in re:
Integrated Health Services, Inc., et al., Debtors.
10.5 Amendment to Settlement Agreement, dated as of June
29, 2000, among Integrated Health Services, Inc.,
Community Inc., Community Care of America, Inc., ECA
Holdings, Inc., Community Care of Nebraska, Inc.,
W.S.T. Care, Inc., Quality Care of Lyons, Inc., CCA
Acquisition I, Inc., Marietta/SCC, Inc.,
Glenwood/SCC, Inc., Dublin/SCC, Inc., College
Park/SCC, Inc., IHS Acquisition No. 108, Inc., IHS
Acquisition No. 112, Inc., IHS Acquisition No. 113,
Inc., IHS Acquisition No. 135, Inc., IHS Acquisition
No. 148, Inc., IHS Acquisition No. 152, Inc., IHS
Acquisition No. 153, Inc., IHS Acquisition No. 154,
Inc., IHS Acquisition No. 155, Inc., IHS Acquisition
No. 175, Inc., Integrated Health Services at
Grandview Care Center, Inc., ECA Properties, Inc.,
CCA of Midwest, Inc., Quality Care of Columbus, Inc.,
Senior Housing Properties Trust, SPTIHS Properties
Trust, HRES1 Properties Trust, HRES2 Properties
Trust, SHOPCO-COLORADO, LLC, SHOPCO-CT, LLC,
SHOPCO-GA, LLC, SHOPCO-IA, LLC, SHOPCO-KS, LLC,
SHOPCO-MA, LLC, SHOPCO-MI, LLC, SHOPCO-
11
MO, LLC, SHOPCO-NE, LLC, SHOPCO-WY, LLC,
SNH-Nebraska, Inc., SNH-Iowa, Inc.,
SNH-Massachusetts, Inc., SNH-Michigan, Inc., Advisors
Healthcare Group, Inc. and Five Star Quality Care,
Inc.
10.6 Management and Servicing Agreement, dated as of July
10, 2000, among Integrated Health Services, Inc., ECA
Holdings, Inc., ECA Properties, Inc., Community Care
of Nebraska, Inc., W.S.T. Care, Inc., Quality Care of
Lyons, Inc., Integrated Health Services at Grandview
Care Center, Inc., Quality Care of Columbus, Inc.,
Marietta/SCC, Inc., Glenwood/SCC, Inc., Dublin/SCC,
Inc., College Park/SCC, Inc., IHS Acquisition No.
112, Inc., IHS Acquisition No. 113, Inc., IHS
Acquisition No. 175, Inc., Senior Housing Properties
Trust, Five Star Quality Care, Inc., SHOPCO-COLORADO,
LLC, SHOPCO-CT, LLC, SHOPCO-GA, LLC, SHOPCO-IA, LLC,
SHOPCO-KS, LLC, SHOPCO-MI, LLC, SHOPCO-MO, LLC,
SHOPCO-NE, LLC, SHOPCO-WY, LLC and Advisors
Healthcare Group, Inc.
10.7 Amended and Restated Lease Agreement, dated as of
January 1, 2000, between HRES1 Properties Trust and
IHS Acquisition 135, Inc.
10.8 Guaranty, dated as of January 1, 2000, made by
Integrated Health Services, Inc. in favor of HRES1
Properties Trust.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated July 1, 2000, relating to (i)
the Company's settlements with Mariner Post-Acute Networks, Inc.
and its subsidiaries, and with Integrated Health Services, Inc.
and its subsidiaries, and (ii) the management of certain of the
Company's properties by Five Star Quality Care, Inc. (Item 5).
12
SENIOR HOUSING PROPERTIES TRUST
CERTAIN IMPORTANT FACTORS
This Quarterly Report on Form 10-Q contains statements which constitute
forward-looking statements within the meaning of the Securities Exchange Act of
1934, as amended. Those statements appear in a number of places on this Form
10-Q and include statements regarding our beliefs, intent or expectation
concerning projections, plans, future events and performance. The estimates,
assumptions and statements, such as those relating to, our ability to operate
and stabilize operations at the Mariner and IHS properties, our ability to
successfully negotiate with Mariner's subtenants and our ability to make future
distributions, depend upon various factors over some of which we have limited or
no control. Readers are cautioned that any such forward looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those stated or implied in the
forward looking statements. Material changes could occur as a result of numerous
factors. Those factors include, without limitation, our ability to successfully
operate the Mariner and IHS properties whose operations we assume, the status of
the economy, status of the capital markets (including prevailing interest
rates), compliance with the changes to regulations within the healthcare
industry, competition in both the real estate and healthcare industries, changes
to federal, state, and local legislation and other factors. We cannot predict
the impact of these factors, if any. However, these factors could cause our
actual results for subsequent periods to be different from those stated,
implied, estimated or assumed in this discussion and analysis of our financial
condition and results of operations. We believe that our estimates and
assumptions are reasonable at this time. The information contained in this Form
10-Q, including the information under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations", identifies other
important factors that could cause differences.
THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING THE COMPANY, A COPY
OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY
FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF
MARYLAND, PROVIDES THAT THE NAME "SENIOR HOUSING PROPERTIES TRUST" REFERS TO THE
TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR
PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE
COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY
OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH US, 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.
13
SENIOR HOUSING PROPERTIES TRUST
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 PROPERTIES TRUST
By: /s/ David J. Hegarty
David J. Hegarty
President and Chief Operating Officer
Dated: August 10, 2000
By: /s/ Ajay Saini
Ajay Saini
Treasurer and Chief Financial Officer
Dated: August 10, 2000
14