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, 2001
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 8, 2001:
29,374,700 shares of beneficial interest, $0.01 par value.
SENIOR HOUSING PROPERTIES TRUST
FORM 10-Q
JUNE 30, 2001
INDEX
Page
PART I Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 1
Consolidated Statements of Income - Three and Six Months Ended June 30, 2001 and 2000 2
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II Other Information
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Certain Important Factors 16
Signatures
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
June 30, December 31,
2001 2000
----------- ------------
(unaudited) (Note 2)
ASSETS
Real estate properties, at cost:
Land $ 60,060 $ 60,060
Buildings and improvements 538,466 533,335
--------- ---------
598,526 593,395
Less accumulated depreciation 116,567 106,681
--------- ---------
481,959 486,714
Cash and cash equivalents 5,554 515
Accounts receivable, net 49,741 3,166
Net investment in facilities' operations -- 29,046
Other assets 20,442 11,132
--------- ---------
$ 557,696 $ 530,573
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $ 74,000 $ 97,000
Prepaid rent 8,520 56
Security deposits 1,520 235
Distribution payable -- 7,775
Accounts payable and accrued expenses of facilities' operations 15,575 --
Other liabilities 10,774 3,197
--------- ---------
Total liabilities 110,389 108,263
Mandatorily redeemable preferred securities of a subsidiary whose
sole assets are the Company's junior subordinated debentures due
2041 ("Trust Preferred Securities") 25,000 --
Commitments and contingencies
Shareholders' equity:
Common shares of beneficial interest, $0.01 par value:
25,917,600 shares issued and outstanding 259 259
Additional paid-in capital 444,656 444,638
Cumulative net income 44,259 38,673
Cumulative distributions (70,097) (62,323)
Unrealized gain on investment 3,230 1,063
--------- ---------
Total shareholders' equity 422,307 422,310
--------- ---------
$ 557,696 $ 530,573
========= =========
See accompanying notes
1
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share amounts)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
------------- --------------- ------------- ---------------
Revenues:
Rental income $ 11,084 $ 18,196 $ 22,215 $ 36,256
Facilities' operations 55,906 -- 113,260 --
Interest and other income 252 436 489 973
-------- -------- -------- --------
Total revenues 67,242 18,632 135,964 37,229
-------- -------- -------- --------
Expenses:
Interest 1,840 3,924 4,000 8,399
Distributions on Trust Preferred
Securities of subsidiary trust 62 -- 62 --
Depreciation 4,934 5,142 9,676 10,317
Facilities' operations 54,387 -- 110,365 --
General and administrative
- Recurring 1,063 1,428 2,108 2,815
- Related to foreclosures
and lease terminations 2,206 870 4,167 870
-------- -------- -------- --------
Total expenses 64,492 11,364 130,378 22,401
-------- -------- -------- --------
Net income $ 2,750 $ 7,268 $ 5,586 $ 14,828
======== ======== ======== ========
Weighted average shares
outstanding 25,917 26,002 25,917 26,002
======== ======== ======== ========
Basic and diluted earnings per
share:
Net income $ 0.11 $ 0.28 $ 0.22 $ 0.57
======== ======== ======== ========
See accompanying notes
2
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Six Months Ended June 30,
---------------------------------
2001 2000
----------- ----------
Cash flows from operating activities:
Net income $ 5,586 $ 14,828
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 9,676 10,317
Changes in assets and liabilities:
Other assets (5,005) (4,728)
Accounts receivable, net 949 --
Prepaid rent 8,464 (724)
Security deposits 1,285 --
Accounts payable and accrued expenses of facilities' operations (3,735) --
Other liabilities (2,425) 3,209
-------- --------
Cash provided by operating activities 14,795 22,902
-------- --------
Cash flows from investing activities:
Proceeds from sale of real estate, net -- 12,178
Equipment purchases (2,522) --
-------- --------
Cash (used for) provided by investing activities (2,522) 12,178
-------- --------
Cash flows from financing activities:
Issuance of trust preferred securities 25,000 --
Repayments on borrowings (45,000) (22,000)
Proceeds from borrowings 22,000 4,000
Deferred financing costs incurred (863) --
Distributions to shareholders (15,549) (23,401)
-------- --------
Cash used for financing activities (14,412) (41,401)
-------- --------
Decrease in cash and cash equivalents (2,139) (6,321)
Cash and cash equivalents at beginning of period 515 17,091
Cash and cash equivalents at facilities' operations, beginning of period 7,178 --
-------- --------
Cash and cash equivalents at end of period $ 5,554 $ 10,770
======== ========
Supplemental cash flow information:
Interest paid $ 4,874 $ 8,208
======== ========
See accompanying notes
3
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization
Senior Housing Properties Trust (together with its subsidiaries, the "Company"),
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 the Company (13,190,763 shares) to
HRPT shareholders. At June 30, 2001, the Company owned 86 properties in 23
states. Of these properties, 28 were leased to third party operators, 56 were
operated for the Company's account and two properties were closed.
Note 2. Interim Financial Statements
These quarterly financial statements 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, 2000, included in the Annual Report
on Form 10-K. In the opinion of management, all adjustments 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. The balance sheet at December 31, 2000, has been derived from the
December 31, 2000, audited financial statement.
Note 3. Summary of Significant Accounting Policies
BASIS OF PRESENTATION. In January and February 2000, two of the Company's larger
tenants, Mariner Post-Acute Network, Inc. ("Mariner") and Integrated Health
Services, Inc. ("IHS"), filed for bankruptcy. During 2000, the Company entered
settlements with these tenants pursuant to which the operations of nursing homes
were transferred from Mariner and IHS to the Company. Although the settlements
as approved by the Bankruptcy Courts in the Mariner and IHS cases have financial
effect as of July 1, 2000, the implementation of these settlements was subject
to material conditions subsequent, including the Company's obtaining health
regulatory licenses and Medicare and Medicaid provider contracts necessary to
operate these nursing homes. Because the majority of the licenses and provider
contracts had not been received prior to December 31, 2000, the Company reported
the results of these nursing home operations using the equity method of
accounting from July 1, 2000 through December 31, 2000. Working capital invested
in these nursing home operations was included in Net Investment in Facilities'
Operations in the Company's Consolidated Balance Sheets and net income from
these nursing homes was reported as Other Real Estate Income in the Company's
Consolidated Statements of Income.
4
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
During the first quarter of 2001, the Company obtained substantially all of the
healthcare regulatory licenses and Medicare and Medicaid provider agreements
necessary for these nursing home operations. Accordingly, the Company
consolidated the nursing home operations effective January 1, 2001. On a
proforma basis, assuming the nursing home operations had been consolidated with
the Company's other subsidiaries as of December 31, 2000, the consolidated
comparative balance sheets would have been (dollars in thousands):
June 30, December 31,
2001 2000
------------- ---------------
Assets
Real estate properties, at cost $598,526 $596,004
Less accumulated depreciation 116,567 106,891
-------- --------
481,959 489,113
Cash and cash equivalents 5,554 7,693
Accounts receivable, net 49,741 50,690
Other assets 20,442 12,367
-------- --------
$557,696 $559,863
======== ========
Liabilities and Shareholders' Equity
Bank notes payable $ 74,000 $ 97,000
Prepaid rent 8,520 56
Security deposits 1,520 235
Distribution payable -- 7,775
Accounts payable and accrued expenses of
facilities' operations 15,575 19,310
Other liabilities 10,774 13,177
Trust Preferred Securities 25,000 --
Total shareholders' equity 422,307 422,310
-------- --------
$557,696 $559,863
======== ========
EARNINGS PER COMMON SHARE. Earnings per common share is computed using the
weighted average number of shares outstanding during the period. The Company has
no common share equivalents, instruments convertible into common shares or other
dilutive instruments.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1998 and June 2000, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133") and SFAS No. 138 "Accounting for
Certain Derivative Instruments and Hedging Activities" ("FAS 138"), which are
effective for fiscal years beginning after June 15, 2000. These statements
require companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives will be reported in the statement of operations
or as a deferred item, depending on the use of the derivatives and whether they
qualify for hedge accounting. The key criterion for hedge accounting is that the
derivative must be highly effective in achieving offsetting changes in fair
value or cash flows of the hedged items during the term of the hedge. Effective
January 1, 2001, the Company adopted the provisions of FAS 133, as amended by
FAS 138. As required by its revolving bank credit facility, the Company
purchased an interest rate cap agreement on its current debt. At June 30, 2001,
the value of the agreement was zero and the adoption of FAS 133 has had no
effect on the Company's financial statements.
RECLASSIFICATIONS. Reclassifications have been made to the prior years'
financial statements to conform to the current year's presentation.
5
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 4. Comprehensive Income
The following is a reconciliation of net income to comprehensive income for the
three and six months ended June 30, 2001 and 2000 (dollars in thousands):
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- -----------------------------
2001 2000 2001 2000
-------------- -------------- ------------ ------------
Net income $ 2,750 $ 7,268 $ 5,586 $14,828
Other comprehensive income:
Change in unrealized gain on
investment 1,450 -- 2,167 --
------- ------- ------- -------
Comprehensive income $ 4,200 $ 7,268 $ 7,753 $14,828
======= ======= ======= =======
Note 5. Tenant Default
The Company previously leased a nursing facility to Sun Healthcare Group, Inc.
("Sun"), which was subleased to a regional operator in Washington State. Sun
filed for bankruptcy in October 1999. Sun and this subtenant both defaulted on
their rental obligations to the Company. The Company entered a new lease
directly with the regional operator during the second quarter of 2001, effective
as of March 1, 2001. The new lease arrangement with this regional operator
requires that accumulated rental arrearages be paid over two years with interest
and that current rent be paid at the rate of approximately $800,000 per year.
Note 6. Bankrupt Tenants
On June 22, 2000, Multicare, Inc., a non-consolidated subsidiary of Genesis
Health Ventures, Inc. ("Multicare"), filed for bankruptcy. Multicare leases one
property from the Company for annual rent of $1.5 million. As part of the
Company's settlement with IHS described in Note 3 above, IHS remained a tenant
for one property for annual rent of $1.2 million. IHS is currently in bankruptcy
proceedings and the continuation of this rental arrangement has been approved by
the Bankruptcy Court. As of July 31, 2001, both Multicare and IHS are current on
their rent obligations to the Company.
Note 7. Unrealized Gain on Investment
As of June 30, 2001, the Company owned one million HRPT common shares, which are
carried at fair market value in Other Assets. The Unrealized Gain On Investment
shown on the balance sheets represents the difference between their market
prices on the date they were received ($6.50 per share) and the market values on
the dates of these balance sheets.
Note 8. Segment Information
As a result of transactions with bankrupt former tenants and the Company's
receipt of the applicable licenses and contracts to operate the facilities
discussed in Note 3, the Company now has two reportable segments; leasing and
facility operations. Revenues of the leasing activities are derived from rental
agreements for properties that are triple net leased to third party operators.
Revenues of the facility operations are derived from services provided to
patients at the healthcare facilities operated for the Company's account.
Performance is measured based on the return on investments for the leased
properties and on contribution margin of the facilities' operations. The
following table is a summary of these reportable segments as of and for the
three and six months ended
6
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
June 30, 2001. Because the Company only operated in one segment for the three
and six months ended June 30, 2000, a comparative table is not presented
(dollars in thousands):
Three Months Ended June 30, 2001
------------------------------------------------------
Facilities'
Leasing Operations Unallocated Total
------------------------------------------------------
Revenues $ 11,084 $ 55,906 $ 252 $ 67,242
Interest expense -- -- 1,840 1,840
Distributions on Trust Preferred
Securities -- -- 62 62
Depreciation 3,284 1,650 -- 4,934
Facilities' operations -- 54,387 -- 54,387
General administrative
- Recurring 1,063 -- -- 1,063
- Related to foreclosures and
lease terminations -- -- 2,206 2,206
--------- --------- --------- ---------
Net income (loss) $ 6,737 $ (131) $ (3,856) $ 2,750
========= ========= ========= =========
Six Months Ended June 30, 2001
------------------------------------------------------
Facilities'
Leasing Operations Unallocated Total
------------------------------------------------------
Revenues $ 22,215 $ 113,260 $ 489 $ 135,964
Interest expense -- -- 4,000 4,000
Distributions on Trust Preferred
Securities -- -- 62 62
Depreciation 6,566 3,110 -- 9,676
Facilities' operations -- 110,365 -- 110,365
General administrative
- Recurring 2,108 -- -- 2,108
- Related to foreclosures and
lease terminations -- -- 4,167 4,167
--------- --------- --------- ---------
Net income (loss) $ 13,541 $ (215) $ (7,740) $ 5,586
========= ========= ========= =========
Real estate investments $ 448,562 $ 149,694 $ 598,256
Cash 781 4,773 5,554
Accounts receivable, net 2,076 47,665 49,741
Other assets 14,853 5,589 20,442
Note 9. Indebtedness
The Company has a $270 million, interest only, revolving, secured bank credit
facility. The credit facility matures in September 2002. The interest rate is
LIBOR plus a premium (5.87% at June 30, 2001). The credit facility is available
for acquisitions, working capital and for general business purposes. As of June
30, 2001, $74 million was outstanding and $196 million was available for drawing
under the credit facility.
Note 10. Manditorily Redeemable Preferred Securities of a Subsidiary Trust Whose
Sole Assets are the Company's Junior Subordinated Debentures Due 2041
In June 2001, SNH Capital Trust I (the "Issuer"), a wholly-owned finance
subsidiary of the Company, issued 1,000,000 shares of 10.125% quarterly income
preferred securities (the "Trust Preferred Securities"), with a liquidation
preference of $25 per share, for a total liquidation amount of $25 million. The
Trust Preferred Securities represent an undivided beneficial ownership interest
in the assets of the Issuer. Proceeds from the issuance of the
7
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Trust Preferred Securities were used to acquire 10.125% junior subordinated
debentures (the "Debentures") due June 15, 2041 issued by the Company. The
Issuer exists solely to issue the Trust Preferred Securities and its own common
securities and acquire and hold the Debentures, which are its sole assets. The
Company owns all of the common securities of the Issuer. The net proceeds from
the sale of the Trust Preferred Securities and the Debentures were applied to
reduce the Company's outstanding obligations under its revolving bank credit
facility. The underwriting commissions and other costs will be deferred and
amortized over the 40 year life of the Trust Preferred Securities and the
Debentures. The Company can redeem the Debentures for their liquidation value
before the maturity in whole or in part on or after June 15, 2006. The Issuer
will redeem all of the outstanding Trust Preferred Securities when the
Debentures are repaid at maturity. In addition, if the Company redeems any
Debentures before their maturity, the Issuer will use the cash it receives on
the redemption of the Debentures to redeem, on a proportionate basis, the Trust
Preferred Securities and its common securities.
The Company has guaranteed the payments of distributions, redemption amounts and
liquidation payments due on the Trust Preferred Securities to the extent the
Issuer has funds available for the payments (the "Guarantee"). The obligations
of the Company under the Guarantee are subordinate to its obligations to its
other creditors to the same extent as the Debentures. The Trust Preferred
Securities are shown as "Mandatorily Redeemable Preferred Securities of a
Subsidiary Trust Whose Sole Assets are the Junior Subordinated Debentures Due
2041" in the Company's consolidated balance sheets. The Company's obligations
relating to the Trust Preferred Securities include obligations to make payments
on the Debentures and obligations under the related junior subordinated
indenture (as supplemented by the supplemental indenture) of the Company, the
Guarantee and the amended and restated trust agreement of the Issuer. Taken
together, these obligations represent a full and unconditional guarantee of
amounts under the Trust Preferred Securities.
Note 11. Shareholders' Equity
The Company has reserved 1,300,000 shares of the Company's common shares under
the terms of the 1999 Incentive Share Award Plan (the "Award Plan"). In May
2001, the three Independent Trustees, as part of their annual fee, were each
granted 500 common shares under the Award Plan . The shares granted to the
Independent Trustees vested immediately. The grants were made pursuant to the
exemption from registration contained in Section 4(2) of the Securities Act of
1933, as amended. At June 30, 2001, 1,295,500 of the Company's common shares
remain reserved for issuance under the Award Plan.
On May 20, 2001, the Company paid a distribution to shareholders of $0.30 per
share, or $7.8 million.
Note 12. Contingencies
A substantial majority of the revenues at the nursing homes now operated for the
Company's account is received from the federal Medicare program and from various
state Medicaid programs. Until the Company received the required licenses and
contracts to operate these nursing homes, billings for patients at these
facilities were made through Mariner and IHS as licensees, respectively. As of
June 30, 2001, approximately $6.7 million received by IHS and Mariner since July
1, 2000, which is due to the Company is included on the Company's Consolidated
Balance Sheets in Accounts Receivable. The Company believes these funds will be
paid by Mariner and IHS pursuant to their contractual obligations approved by
the Bankruptcy Courts. However, IHS and Mariner remain in bankruptcy proceedings
and their record keeping and payment processing has not always been timely.
Eight nursing homes delivered to the Company by IHS in 2000 were not previously
owned or mortgaged by the Company. These properties were transferred to the
Company by IHS as partial compensation for its defaults under leases and
mortgages. Because these properties were not owned or mortgaged by the Company
they do not constitute foreclosure property under Internal Revenue Code ("IRC")
provisions which permit REITs to operate
8
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
nursing homes. To comply with laws applicable to REITs, these nursing homes were
operated during 2000 by corporations which were 99% beneficially owned by the
Company and 1% beneficially owned by the Company's Managing Trustees, Barry M.
Portnoy and Gerard M. Martin, who also controlled 100% of the voting power of
these corporations. On January 1, 2001, the laws concerning the Company's
ability to own and operate these properties changed and the Company purchased
Messrs. Portnoy and Martin's ownership interests in these entities. The Company
has applied for an Internal Revenue Service ruling in order to clarify its
ability to continue operating these properties which were received as
compensation for losses it suffered as a result of IHS' bankruptcy. If this
ruling is denied, the Company may have to lease or sell these properties with
possible adverse financial consequences.
Under IRC laws applicable to REITs, after a 90 day transition period, the
Company is required to engage a third party contractor to manage the nursing
home operations which it acquired from Mariner and IHS. Also, under IRC laws
applicable to REITs, the Company may continue to operate nursing homes which are
categorized as "foreclosure properties" for up to three years (subject to
extensions in certain circumstances). Messrs. Martin and Portnoy organized Five
Star Quality Care, Inc. ("Five Star") to serve as an independent contractor to
operate nursing homes for the Company. If Five Star is unable to continue
managing these nursing homes, the Company may be unable to find a qualified
operator to assume these management responsibilities, and, in those
circumstances, the Company may lose its IRC status as a REIT or otherwise suffer
adverse financial consequences. Similarly, if the Company is unable to sell or
lease these properties to a financially qualified operator within applicable
time periods, the Company may suffer adverse financial consequences.
Note 13. Subsequent Events
On July 3 and July 11, 2001, the Company issued a total of 3,445,000 common
shares of beneficial interest, for gross proceeds of approximately $44.8
million. The proceeds received net of underwriting commissions and costs of
issuance of $2.5 million were applied to reduce the Company's outstanding
obligations under its revolving credit facility.
On July 9, 2001, the Company declared a distribution of $0.30 per share, or $7.8
million, which will be paid to shareholders on or about August 21, 2001.
On July 10, 2001, pursuant to the Award Plan, the Company's officers and certain
key employees of the Company's advisor, REIT Management & Research Inc.,
received grants aggregating 12,100 common shares valued at $13.02 per share, the
closing price of the common shares on the New York Stock Exchange on July 10,
2001. The grants were made pursuant to the exemption from registration contained
in Section 4(2) of the Securities Act of 1933, as amended.
On July 11, 2001, the Issuer sold 95,750 Trust Preferred Securities for $2.4
million which was invested in Company Debentures pursuant to the underwriters'
exercise of an over-allotment option which had been granted pursuant to the
transaction described in Note 10 above.
On July 12, 2001, the Company obtained mortgage financing secured by two of its
properties in Michigan, which are operated for the Company's own account, for a
total of $9.1 million. The mortgages require interest to be paid monthly at
prime less a discount. These mortgages mature in July 2002, but the Company has
an option to extend these mortgages for an additional 12 months.
On August 9, the Company entered an agreement to acquire 31 senior living
communities from Crestline Capital Corporation for approximately $600 million.
These communities contain 7,487 living units, a majority of which are
independent living apartments. All of these communities are managed under long
term contracts by Marriott International, Inc. Because these communities are
managed by, but not leased to, Marriott, the Company announced its intention to
identify or create a tenant entity in order to maintain its REIT status under
applicable IRS rules. The closing of this acquisition is expected to occur in
early 2002.
9
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 our results of operations for
the three and six months ended June 30, 2001 and 2000. This discussion includes
references to Funds from Operations ("FFO"). FFO is net income computed in
accordance with Generally Accepted Accounting Principles ("GAAP"), before
extraordinary and non-recurring items, plus depreciation and amortization and
expected percentage rents. 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. The way we
calculate FFO may not be comparable to FFO reported by other REITs that define
the term differently. For example, we do not include proceeds of land sales in
FFO although some REITs do, and we add expected percentage rent to FFO in
certain periods although some REITs do not. 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, as a measure of liquidity.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001, Compared to Three Months Ended June 30, 2000
The increases in total revenues and total expenses for the three months ended
June 30, 2001, compared to the three months ended June 30, 2000, are primarily
the result of the accounting for facilities' operations which, during the 2001
period were operated for our account. During the second quarter of 2000, we
owned only properties leased to third parties and mortgage investments and
therefore we only had rental and interest income and expenses related to
investments in leased and mortgaged properties.
For the three months ended June 30, 2001, compared to the three months ended
June 30, 2000, rental income decreased to $11.1 million from $18.2 million. This
decrease is primarily due to the sale of seven properties in 2000 and the tenant
bankruptcies and the settlements which terminated leases and assigned operations
to us or our nominees.
Interest expense was $2.1 million lower in 2001 compared to 2000 because the
average balance outstanding and the weighted average interest rates on our
credit facility were lower during the 2001 period. Depreciation expense
decreased in 2001 by $208,000 due to the sale of seven properties in 2000, a
reduction in asset values as a result of impairment losses recorded in 2000 and
the net effect of the assets disposed of versus the assets acquired from our
bankrupt former tenants. Recurring general and administrative expense decreased
by $365,000 primarily due to the impact of the sale of properties in 2000.
During the second quarter of 2001, we incurred nonrecurring general and
administrative costs totaling approximately $2.2 million in connection with the
establishment of operating systems for foreclosed properties. Similar types of
start-up charges are not expected hereafter.
10
SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The following chart summarizes changes to our portfolio of leased properties and
to our rental revenues resulting from property sales, tenant bankruptcies and
the settlements during the three months ended June 30, 2001, and the comparable
period in 2000:
Three Months Ended June 30,
(dollars in thousands)
2001 2000
-------------------------------- -------------------------------
No. of No. of
Tenant Properties Revenues Properties Revenues
------ ---------- -------- ---------- --------
Marriott International, Inc. 14 $ 7,013 14 $ 7,012
Brookdale Living Communities, Inc. -- -- 4 2,766
Genesis Health Ventures, Inc.
/Multicare Companies, Inc. 1 368 1 364
Two private company tenants 2 173 2 175
Sun Healthcare Group, Inc.:
- One subtenant 1 217 1 171
Mariner Post-Acute Network, Inc. -- -- 26(1) 3,906
- Two subtenants 4 495 -- --
Integrated Health Services, Inc. 1 300 39(1) 3,802
HEALTHSOUTH Corporation 5 2,518
-------------------------------- -------------------------------
Totals 28 $11,084 87 $18,196
-------------------------------- -------------------------------
<FN>
(1)Some of the Mariner and IHS facilities that were leased in 2000 are now
being operated for our account.
</FN>
With regard to facilities' operations, there are no comparative results to the
second quarter of 2000 since no facilities were operated for our account during
the earlier period. However, our net operating income, calculated as Facilities'
Operations Revenues less Facilities' Operations Expenses has increased from the
first quarter of 2001 and the fourth quarter of 2000 by $143,000 and $227,000,
respectively. In the fourth quarter of 2000, our net operating income was
presented as Other Real Estate Income. The table below shows these comparable
results of the operations (dollars in thousands):
Three Months Ended
----------------------------------------------------------------------
June 30, 2001 March 31, 2001 December 31, 2000
------------------- ------------------- ------------------------
Facilities' operations revenues $55,906 $57,354 $58,944
Facilities' operations expenses 54,387 55,978 57,652
------------------- ------------------- ------------------------
Net $1,519 $1,376 $1,292
=================== =================== ========================
The decreases in net patient revenues and patient operating expenses are
primarily due to the closing of one nursing home during the fourth quarter of
2000 and one nursing home at the end of the first quarter of 2001.
Net income was $2.8 million ($0.11 per share) in the three months ended June 30,
2001, as compared to $7.3 million ($0.28 per share) in the three months ended
June 30, 2000. This decrease in net income is primarily the consequence of the
changes in revenues and expenses resulting from the tenant bankruptcies,
settlements and sales of properties in 2000.
FFO for the three months ended June 30, 2001, was $10.8 million compared to $14
million for the same period in 2000. The decrease of $3.2 million is due to the
factors discussed above. Cash flows provided by operating activities and cash
available for distribution may not necessarily equal funds from operations as
cash flows are affected by factors not included in the funds from operations
calculation, such as changes in assets and liabilities.
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SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Six Months Ended June 30, 2001, Compared to Six Months Ended June 30, 2000
The increases in total revenues and total expenses for the six months ended June
30, 2001, compared to the six months ended June 30, 2000, are primarily the
result of the accounting for facilities' operations which were operated for our
account during the 2001 period. During the first half of 2000, we owned only
properties leased to third parties and mortgage investments and therefore we had
only rental and interest income and expenses related to investments in leased
and mortgaged properties.
For the six months ended June 30, 2001, compared to the six months ended June
30, 2000, rental income decreased to $22.2 million from $36.3 million. This
decrease is primarily due to the sale of seven properties in 2000 and the tenant
bankruptcies and the settlements which terminated leases and assigned operations
to us or our nominees.
Interest expense was $4.4 million lower in 2001 compared to 2000 because the
average balance outstanding and the weighted average interest rates on our
credit facility were lower during the 2001 period. Depreciation expense
decreased in 2001 by $641,000 due to the sale of seven properties in 2000, a
reduction in asset values as a result of impairment losses recorded in 2000 and
the net effect of the assets disposed of versus the assets acquired in the
settlement with our bankrupt former tenants. Recurring general and
administrative expense decreased by $707,000 primarily due to the impact of the
sale of properties in 2000. During the first six months of 2001, we incurred
nonrecurring general and administrative costs totaling approximately $4.2 in
connection with the establishment of operating systems for foreclosed
properties; similar types of facilities operations start-up charges are not
expected hereafter.
Net income was $5.6 million ($0.22 per share) in the six months ended June 30,
2001, as compared to $14.8 million ($0.57 per share) in the six months ended
June 30, 2000. This decrease in net income is primarily the consequence of the
changes in revenues and expenses resulting from the tenant bankruptcies,
settlements and sales of properties in 2000.
FFO for the six months ended June 30, 2001, was $21 million compared to $27.4
million for the same period in 2000. The decrease of $6.4 million is due to the
factors discussed above. Cash flows provided by operating activities and cash
available for distribution may not necessarily equal funds from operations
because cash flows are affected by factors not included in the funds from
operations calculation, such as changes in assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES
We have a $270 million, interest only, secured, revolving bank credit facility.
The interest rate is LIBOR plus a premium (5.87% per annum at June 30, 2001).
The credit facility is available for acquisitions, working capital and for
general business purposes. We have the ability to repay and redraw amounts under
this credit facility until its maturity in September 2002. At June 30, 2001,
there was $74 million drawn under this facility and $196 million available for
borrowing. At August 1, 2001 there was $29 million drawn under this facility and
$241 million was available for borrowing.
On May 21, 2001, our shelf registration statement for the issuance of up to $500
million of equity and debt securities was declared effective by the SEC. An
effective shelf registration enables us to raise capital on an expedited basis
by filing a prospectus supplement with the SEC. At August 1, 2001, $428 million
was available to be used under this effective shelf registration statement.
In June 2001, SNH Capital Trust I, a wholly-owned finance subsidiary of the
Company, issued 1,000,000 shares of 10.125% quarterly income preferred
securities with a liquidation preference of $25 per share, for a total
liquidation amount of $25 million. An additional 95,750 of these preferred
securities were issued in July 2001, to cover over-allotments, for a total
liquidation value of approximately $2.4 million. The preferred securities
represent an undivided beneficial ownership interest in the assets of SNH
Capital Trust I. Proceeds from the issuance of the preferred securities were
used to acquire our 10.125% junior subordinated debentures due June 15, 2041.
SNH Capital Trust I exists solely to issue the preferred securities and its own
common securities and acquire and hold the
12
SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
debentures, which are its only assets. We used the net proceeds from the sale of
the debentures to repay some of our debt outstanding under our revolving bank
credit facility.
Subsequent to June 30, 2001, we issued 3,445,000 common shares of beneficial
interest, raising net proceeds of approximately $42.3 million. These net
proceeds received were used to repay some of our debt outstanding under our
revolving credit facility.
Subsequent to June 30, 2001, we obtained mortgage financing of $9.1 million
secured by two of our properties in Michigan, which are operated for our own
account. The mortgages require interest to be paid monthly at prime less a
discount. These mortgages mature in July 2002, but we have the option to extend
these mortgages for an additional 12 months.
On August 9, 2001, we entered an agreement with Crestline Capital Corporation to
acquire all of the capital stock of a Crestline subsidiary which owns 31 senior
living communities with 7,487 living units. The purchase price is approximately
$600 million and this acquisition is expected to close in early 2002. Available
funding for this acquisition has been identified as follows: approximately $235
million of existing Crestline debt which may be assumed; about $150 million of
new indebtedness to be placed by Crestline before closing and which we may
assume at closing; and the balance by drawings under our existing bank credit
facility. We also have the option to pay up to $25 million of this purchase
price with an unsecured, two year note to Crestline at 10% per annum. Some of
the Crestline debt which we will assume, the note to Crestline and our bank
credit facility may be prepaid. Although we believe we have identified available
capital sufficient to fund this acquisition, we are now considering financing
alternatives which may provide longer term capital for this purchase; and some
alternative long term capital may be raised before or after this acquisition is
closed.
At June 30, 2001, we had cash and cash equivalents of $5.6 million. For the six
months ended June 30, 2001 and 2000: cash provided by operating activities was
$14.8 million and $22.9 million, respectively; cash (used for) provided by
investing activities was $(2.5) million and $12.2 million, respectively; and
cash used for financing activities was $14.4 million and $41.4 million,
respectively. The working capital required for our operations, including our
facilities' operations, has been provided by our operations and by drawings
under our bank credit facility. We believe that our current cash, cash
equivalents, future cash from operating activities and availability under our
credit facility will be sufficient to meet our short-term and long-term capital
requirements, including the distribution to shareholders of $7.8 million, or
$0.30 per share, for the quarter ended June 30, 2001, which we will pay on or
about August 21, 2001.
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. In
an inflationary environment, the percentage rents which we receive based upon a
percentage of our tenants' revenues should increase. Similarly, inflation may
tend to increase patient revenues and Medicare and Medicaid rates at the
facilities which are operated for our account. Offsetting these benefits,
inflation might cause our costs of equity and debt capital to increase and wages
and other operating costs at the operated facilities to increase. An increase in
our capital costs or in our operating costs will result in decreased earnings
unless it is offset by increased revenues. In periods of rapid inflation,
nursing home operating costs usually increase faster than revenues and this fact
has an adverse impact upon operating income. We do not believe it will be
possible to eliminate the adverse impact of rapid inflation upon the results of
the facilities' operations conducted for our account. To mitigate the adverse
impact of increased costs of debt capital in the event of material inflation, we
have purchased an interest rate cap agreement and we may enter into similar
interest rate hedge arrangements in the future. The decision to enter into these
arrangements was and will be based on the amount of our floating rate debt
outstanding, our belief that material interest rate increases are likely to
occur and upon requirements of our borrowing arrangements.
Seasonality
Nursing home operations have historically reflected modest seasonality. During
calendar fourth quarter holiday periods nursing home patients are sometimes
discharged to join in family celebrations and admission decisions are often
deferred. The first quarter of each calendar year usually coincides with
increased illness among nursing home residents which can result in increased
costs or discharges to hospitals. As a result of these factors and others,
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SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
nursing home operations sometimes produce greater earnings in the second and
third quarters of each calendar year and lesser earnings in the fourth and first
calendar quarters. We do not expect these seasonal differences to have any
impact upon the ability of our tenants to pay our rent. We do not expect these
seasonal differences to have a material impact on the financial results at the
nursing homes operated for our account, but such seasonable differences may be
noticeable.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market changes in interest rates. We manage our exposure to
this market risk through our monitoring of available financing alternatives. Our
strategy to manage exposure to changes in interest rates is unchanged from
December 31, 2000. Furthermore, we do not foresee any significant changes in our
exposure to fluctuations in interest rates or in how this exposure is managed in
the near future. At June 30, 2001, we had $25 million of the Trust Preferred
Securities outstanding, the dividends of which are dependent upon our making
required payments on our 10.125% junior subordinated debentures due 2041. No
principal repayments are due on the debentures until maturity. If the debentures
were to be refinanced at interest rates which are one percentage point higher,
our per annum interest cost would increase $250,000.
Our trust preferred securities are listed on the New York Stock Exchange and
their market value is principally determined by supply and demand factors. The
market price, if any, of our debentures as of June 30, 2001, may be sensitive to
changes in interest rates. Typically, if market rates of interest increase, the
current market price of a fixed rate obligation will decrease. Conversely, if
market rates of interest decrease, the current market price of a fixed rate
obligation will typically increase. Based on the balance outstanding at June 30,
2001, and discounted cash flow analysis, a hypothetical immediate one percentage
point change in interest rates would change the fair value of $25 million of our
fixed rate debentures by approximately $2.2 million.
Our debentures have provisions that allow us to make repayments earlier than the
stated maturity date. These prepayment rights may afford us the opportunity to
mitigate the risk of refinancing at maturity at high rates by refinancing at
lower rates prior to maturity. Our ability to prepay the debentures at par will
also effect the change in the fair value of the debentures which would result
from a change in interest rates.
Because interest on our revolving credit facility is at a floating rate, changes
in interest rates will not affect the value of our revolving credit facility.
However, changes in interest rates will affect our operating results. For
example, the interest rate payable on our revolving credit facility of $74
million at June 30, 2001, was 5.87% per annum, and an immediate 10% change in
that interest rate, or 58.7 basis points, would increase or decrease our costs
by approximately $434,380, or $0.02 per share annually:
Impact of Changes in Interest Rates
(dollars in thousands)
Interest Rate Outstanding Total Interest
Per Year Debt Expense Per Year
------------- ----------- ----------------
At June 30, 2001 5.87% $74,000 $4,344
10% reduction 5.28% $74,000 $3,907
10% increase 6.46% $74,000 $4,780
The foregoing table presents a so-called "shock" analysis, which assumes that
the interest rate change by 10%, or 58.7 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. All of our floating rate borrowings under our bank
revolver 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 year, short-term U.S. dollar based interest rates have
fluctuated. We are unable to predict the direction or amount of interest rate
changes during the next year. As required by our revolving bank credit facility,
we have purchased an interest rate cap agreement for a notional amount of $200
million to protect against LIBOR increases above 8% through December 10, 2001.
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.
14
SENIOR HOUSING PROPERTIES TRUST
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
On May 10, 2001, 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 $12.20 per share, the
closing price of our common shares on the New York Stock Exchange on May 10,
2000. On July 10, 2001, pursuant to our incentive share award plan, our officers
and certain key employees of our advisor, REIT Management & Research, Inc.,
received grants aggregating 12,100 common shares valued at $13.02 per share, the
closing price of our common shares on the New York Stock Exchange on July 10,
2001. All of these grants were made pursuant to an 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 10, 2001, John L.
Harrington and Gerard M. Martin were re-elected trustees (24,854,914 shares
voted for and 56,636 shares voted against with respect to Mr. Harrington and
24,855,361 shares voted for and 56,188 shares voted against with respect to Mr.
Martin). The term of Messrs. Harrington and Martin will extend until our annual
meeting of shareholders in 2004. Messrs. Arthur G. Koumantzelis, Barry M.
Portnoy and Dr. Bruce M. Gans, M.D. continue to serve as trustees with terms
expiring in 2002, 2003 and 2003, respectively.
Item 5. Other Information
Ratio of Earnings to Fixed Charges - Our consolidated ratios of earnings to
fixed charges for the six months ended June 30, 2001 and June 30, 2000 are 2.38x
and 2.77x, respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Junior Subordinated Indenture between Senior Housing Properties Trust
and State Street Bank and Trust Company as trustee dated June 21, 2001.
4.2 Supplemental Indenture No. 1 by and between Senior Housing Properties
Trust and State Street Bank and Trust Company dated June 21, 2001.
4.3 Amended and Restated Trust Agreement among SNH Capital Trust Holdings as
sponsor, State Street Bank and Trust Company as property trustee and the
regular trustees named therein relating to SNH Capital Trust I dated
June 21, 2001.
4.4 Guarantee Agreement between Senior Housing Properties Trust and State
Street Bank and Trust Company as trustee dated June 21, 2001.
4.5 Agreement as to Expenses and Liabilities between Senior Housing
Properties Trust and SNH Capital Trust I dated June 21, 2001.
12.1 Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated May 16, 2001, reporting Item 5
information, including Unaudited Pro Forma Condensed Consolidated
Statement of Income for the year ended December 31, 2000.
Current Report on Form 8-K, dated June 11, 2001, reporting Item 5
information.
Current Report on Form 8-K, dated June 18, 2001, reporting Item 5 and
Item 7 information.
Current Report on Form 8-K, dated June 27, 2001, reporting Item 5 and
Item 7 information.
15
SENIOR HOUSING PROPERTIES TRUST
CERTAIN IMPORTANT FACTORS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD LOOKING STATEMENTS
INCLUDE REFERENCES TO OUR PROPOSED ACQUISITION OF SENIOR LIVING COMMUNITIES, OUR
ABILITY TO SUCCESSFULLY OPERATE NURSING HOMES, OUR ABILITY TO CONTINUE OPERATING
NURSING HOMES AND REMAIN A REIT AND TO PAY DISTRIBUTIONS, OUR ABILITY TO
GENERATE SUFFICIENT REVENUES TO MEET OUR OPERATING EXPENSES, TO PAY INTEREST AND
TO MAKE DISTRIBUTIONS, THE IMPACT OF SEASONAL FACTORS ON OUR BUSINESS AND OTHER
MATTERS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR CURRENT BELIEFS AND
EXPECTATIONS, BUT THEY ARE NOT GUARANTEED. WE MAY BE UNABLE TO SUCCESSFULLY
COMPLETE OUR PROPOSED ACQUISITION, TO OPERATE NURSING HOMES IN A FINANCIALLY
SUCCESSFUL MANNER, TO CONTINUE TO QUALIFY AS A REIT OR TO MAKE FUTURE
DISTRIBUTIONS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE UPON OUR
FORWARD LOOKING STATEMENTS.
THE ARTICLES OF AMENDMENT AND RESTATEMENT ESTABLISHING SENIOR HOUSING PROPERTIES
TRUST, DATED SEPTEMBER 20, 1999 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 OF TRUST AS
TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND 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.
16
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, Chief Operating Officer and
Chief Financial Officer
Dated: August 10, 2001
By: /s/John R. Hoadley
John R. Hoadley
Controller and Chief Accounting Officer
Dated: August 10, 2001
17