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 September 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 October 31, 2001:
43,421,700 shares of beneficial interest, $0.01 par value.
SENIOR HOUSING PROPERTIES TRUST
FORM 10-Q
SEPTEMBER 30, 2001
INDEX
Page
PART I Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 1
Consolidated Statements of Income - Three and Nine Months Ended September 30, 2001 and 2000 2
Consolidated Statements of Cash Flows - Nine Months Ended September 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 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II Other Information
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
Certain Important Factors 17
Signatures
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
September 30, December 31,
2001 2000
-------------- ------------
(unaudited) (Note 2)
ASSETS
Real estate properties, at cost:
Land $ 60,060 $ 60,060
Buildings and improvements 537,805 533,335
--------- ---------
597,865 593,395
Less accumulated depreciation 121,428 106,681
--------- ---------
476,437 486,714
Cash and cash equivalents 8,084 515
Accounts receivable, net 39,133 3,166
Net investment in facilities' operations -- 29,046
Other assets 37,994 11,132
--------- ---------
$ 561,648 $ 530,573
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $ 31,000 $ 97,000
Mortgages payable 9,100 --
Prepaid and deferred rents 9,475 56
Security deposits 1,520 235
Distribution payable -- 7,775
Accounts payable and accrued expenses of facilities' operations 16,113 --
Other liabilities 7,185 3,197
--------- ---------
Total liabilities 74,393 108,263
Trust Preferred Securities (see Note 10) 27,394 --
Commitments and contingencies
Shareholders' equity:
Common shares of beneficial interest, $0.01 par value:
29,374,700 shares and 25,916,100 shares issued and
outstanding, respectively 294 259
Additional paid-in capital 487,056 444,638
Cumulative net income 49,781 38,673
Cumulative distributions (78,910) (62,323)
Unrealized gain on investment 1,640 1,063
--------- ---------
Total shareholders' equity 459,861 422,310
--------- ---------
$ 561,648 $ 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Rental income $ 11,087 $ 13,624 $ 33,302 $ 49,880
Facilities' operations 57,421 -- 170,681 --
Other real estate income -- 1,228 -- 1,228
Interest and other income 408 356 897 1,329
-------- -------- -------- --------
Total revenues 68,916 15,208 204,880 52,437
-------- -------- -------- --------
Expenses:
Interest 900 4,196 4,900 12,595
Distributions on Trust Preferred
Securities 687 -- 749 --
Depreciation 4,861 5,062 14,537 15,379
Facilities' operations 55,865 -- 166,230 --
General and administrative
- Recurring 1,081 1,576 3,189 4,391
- Related to foreclosures
and lease terminations -- -- 4,167 870
-------- -------- -------- --------
Total expenses 63,394 10,834 193,772 33,235
-------- -------- --------
Net income $ 5,522 $ 4,374 $ 11,108 $ 19,202
======== ======== ======== ========
Weighted average shares
outstanding 29,277 25,912 27,049 25,979
======== ======== ======== ========
Basic and diluted earnings per
share:
Net income $ 0.19 $ 0.17 $ 0.41 $ 0.74
======== ======== ======== ========
See accompanying notes
2
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine Months Ended September 30,
-------------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net income $ 11,108 $ 19,202
Adjustments to reconcile net income to cash provided by
operating activities:
Other real estate income -- (1,228)
Depreciation 14,537 15,379
Changes in assets and liabilities:
Other assets (23,291) 2,249
Accounts receivable, net 11,557 --
Prepaid and deferred rents 9,419 (700)
Security deposits 1,285 --
Accounts payable and accrued expenses of facilities' operations (3,197) --
Other liabilities (5,992) 2,297
--------- ---------
Cash provided by operating activities 15,426 37,199
--------- ---------
Cash flows from investing activities:
Proceeds from sale of real estate, net -- 12,178
Equipment purchases (1,861) (179)
Investment in facilities' operations -- (29,089)
--------- ---------
Cash used for investing activities (1,861) (17,090)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of Trust Preferred Securities 27,394 --
Repayments on borrowings (109,000) (22,000)
Proceeds from borrowings 43,000 23,000
Proceeds from issuance of mortgage debt 9,100 --
Proceeds from issuance of common shares, net 42,277 --
Deferred financing costs incurred (1,583) --
Distributions to shareholders (24,362) (31,172)
--------- ---------
Cash used for financing activities (13,174) (30,172)
--------- ---------
Increase (decrease) in cash and cash equivalents 391 (10,063)
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 $ 8,084 $ 7,028
========= =========
Supplemental cash flow information:
Interest paid $ 5,887 $ 12,602
========= =========
Non-cash investing activities resulting from settlements and restructuring
with bankruptcy tenants:
Real estate and related property received -- 15,224
Real estate and related property conveyed -- (13,570)
Mortgage conveyed, net of previous loan loss reserve -- (4,277)
Mortgages foreclosed -- (17,779)
Shares of HRPT Properties Trust received -- 6,500
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"),
is a Maryland real estate investment trust ("REIT"), which was organized on
December 16, 1998. At September 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 not being operated.
Note 2. Interim Financial Statements
These unaudited 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 statements.
Note 3. Summary of Significant Accounting Policies
BASIS OF PRESENTATION. In January and February 2000, two of the Company's
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 these settlements
as approved by the Bankruptcy Courts had 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 as follows (dollars in thousands):
September 30, December 31,
2001 2000
------------- ------------
Assets
Real estate properties, at cost $597,865 $596,004
Less accumulated depreciation 121,428 106,891
-------- --------
476,437 489,113
Cash and cash equivalents 8,084 7,693
Accounts receivable, net 39,133 50,690
Other assets 37,994 12,367
-------- --------
$561,648 $559,863
======== ========
Liabilities and Shareholders' Equity
Bank notes payable $ 31,000 $ 97,000
Mortgages payable 9,100 --
Prepaid and deferred rents 9,475 56
Security deposits 1,520 235
Distribution payable -- 7,775
Accounts payable and accrued expenses of
facilities' operations 16,113 19,310
Other liabilities 7,185 13,177
Trust Preferred Securities 27,394 --
Total shareholders' equity 459,861 422,310
-------- --------
$561,648 $559,863
======== ========
On a proforma basis, assuming the nursing home operations had been consolidated
with the Company's other subsidiaries during the three and nine months ended
September 30, 2000, the consolidated comparative statements of income would have
been as follows (dollars in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ---------------------------------
2001 2000 2001 2000
------------- ------------- ----------- -----------
Revenues:
Rental income $ 11,087 $ 13,624 $ 33,302 $ 49,880
Facilities' operations 57,421 55,515 170,681 55,515
Interest and other income 408 356 897 1,329
-------- -------- -------- --------
Total revenues 68,916 69,495 204,880 106,724
-------- -------- -------- --------
Expenses:
Interest 900 4,196 4,900 12,595
Distributions on Trust Preferred
Securities of subsidiary trust 687 -- 749 --
Depreciation 4,861 5,062 14,537 15,379
Facilities' operations 55,865 54,287 166,230 54,287
General and administrative 1,081 1,576 7,356 5,261
-------- -------- -------- --------
Total expenses 63,394 65,121 193,772 87,522
-------- -------- --------
Net income $ 5,522 $ 4,374 $ 11,108 $ 19,202
======== ======== ======== ========
5
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 September 30,
2001, the value of the agreement was zero and the adoption of FAS 133 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.
Note 4. Comprehensive Income
The following is a reconciliation of net income to comprehensive income for the
three and nine months ended September 30, 2001 and 2000 (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income $ 5,522 $ 4,374 $11,108 $19,202
Other comprehensive income:
(Decrease) increase in
unrealized gain on investment (1,590) 625 577 625
------- ------- ------- -------
Comprehensive income $ 3,932 $ 4,999 $11,685 $19,827
======= ======= ======= =======
Note 5. Tenant Default
On September 6, 2001, the Company was notified by HEALTHSOUTH Corporation
("HEALTHSOUTH") that it intends to close one of the five healthcare facilities
which it leases, but that it expects to continue paying rent to the Company for
this facility through the remainder of the lease term. The Company has notified
HEALTHSOUTH that its closure of this facility is a default under its lease even
if the rent were to be continuously paid. The Company believes that the closure
of this facility may have a negative effect upon the value of this property. If
HEALTHSOUTH's default matures into an event of default under the lease, the
Company may have the right, among other actions, to assert a cross default under
the other leases with HEALTHSOUTH, to accelerate all rents due to the Company
from HEALTHSOUTH and to seek damages from HEALTHSOUTH. The Company does not know
how HEALTHSOUTH would respond to the exercise of any of these rights. The
Company has engaged counsel and is undertaking a dialogue with HEALTHSOUTH about
this matter, but the outcome of HEALTHSOUTH's action or of the present dialogue
cannot be predicted at this time.
6
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 6. Bankrupt Tenants
On June 22, 2000, Multicare, Inc., a non-consolidated subsidiary of Genesis
Health Ventures, Inc. ("Multicare"), filed for bankruptcy. On October 2, 2001,
Multicare emerged from 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 October 31, 2001, both Multicare and IHS are current on their rent
obligations to the Company.
Note 7. Unrealized Gain on Investment
As of September 30, 2001, the Company owned one million common shares of HRPT
Properties Trust, which are carried at fair market value in Other Assets. These
shares were received by the Company as part of its settlement with Mariner
described in Note 3 above. 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
The Company has two reportable segments; leasing and facility operations.
Revenues of the leasing segment are derived from rental agreements for
properties that are triple net leased to third party operators. Revenues of the
facility operations segment 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 nine months
ended September 30, 2001. Because the Company operated in only one segment until
January 1, 2001, a comparative table is not presented (dollars in thousands):
Three Months Ended September 30, 2001
-----------------------------------------------------------
Facilities'
Leasing Operations Unallocated Total
-----------------------------------------------------------
Revenues $11,087 $57,421 $408 $68,916
Interest expense -- -- 900 900
Distributions on Trust Preferred
Securities -- -- 687 687
Depreciation 3,284 1,577 -- 4,861
Facilities' operations -- 55,865 -- 55,865
General and administrative
- Recurring 1,081 -- -- 1,081
- Related to foreclosures and
lease terminations -- -- -- --
------------- -------------- -------------- ---------------
Net income (loss) $6,722 $(21) $(1,179) $5,522
============= ============== ============== ===============
7
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Nine Months Ended September 30, 2001
-----------------------------------------------------------
Facilities'
Leasing Operations Unallocated Total
-----------------------------------------------------------
Revenues $33,302 $170,681 $897 $204,880
Interest expense -- -- 4,900 4,900
Distributions on Trust Preferred
Securities -- -- 749 749
Depreciation 9,850 4,687 -- 14,537
Facilities' operations -- 166,230 -- 166,230
General and administrative
- Recurring 3,189 -- -- 3,189
- Related to foreclosures and
lease terminations -- -- 4,167 4,167
------------- -------------- -------------- ---------------
Net income (loss) $20,263 $(236) $(8,919) $11,108
============= ============== ============== ===============
Real estate investments $448,562 $149,303 -- $597,865
Accounts receivable, net 2,772 36,361 -- 39,133
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
(4.67% at September 30, 2001) is LIBOR plus a premium. The credit facility is
available for acquisitions, working capital and for general business purposes.
As of September 30, 2001, $31 million was outstanding and $239 million was
available for drawing under this credit facility.
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 (4.50% at September 30,
2001) 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.
Note 10. Trust Preferred Securities
In June and July 2001, SNH Capital Trust I (the "Issuer"), a wholly-owned
finance subsidiary of the Company, issued 1,095,750 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 $27.4
million. The Trust Preferred Securities represent an undivided beneficial
ownership interest in the assets of the Issuer. Proceeds from the issuance of
the 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 are being 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 their
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 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
8
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 of 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. On July 10, 2001, 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, were awarded to the Company's officers
and certain employees of REIT Management & Research LLC ("RMR"), the Company's
investment manager. The shares awarded to the Company's officers and employees
of RMR vest over a three-year period. 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 September 30, 2001, 1,270,300 of the Company's common shares remain
reserved for issuance under the Award Plan.
On July 3 and July 11, 2001, the Company issued a total of 3,445,000 common
shares of beneficial interest, in an underwritten public offering 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 August 21, 2001, the Company paid a distribution to shareholders of $0.30 per
share, or $8.8 million.
Note 12. Spin-Off Transaction
On September 21, 2001, one of the Company's subsidiaries, Five Star Quality
Care, Inc ("Five Star"), which conducts the operations of the 56 facilities
currently operated for the Company's account, filed a registration statement of
its common shares with the Securities and Exchange Commission. Five Star filed
this registration statement in anticipation of the Company distributing
substantially all of its share ownership of Five Star to the Company's
shareholders, resulting in Five Star becoming a separately listed public company
(the "Spin-Off"). After the Spin-Off, Five Star, which will not be a REIT, will
lease these 56 facilities. The Spin-Off is subject to Five Star's registration
statement being declared effective by the SEC and various other third party
approvals; however, the Company expects the Spin-Off to occur in December 2001.
Note 13. Announced Acquisition
On August 9, 2001, the Company entered an agreement to acquire 31 senior living
communities from Crestline Capital Corporation ("Crestline") for approximately
$600 million ("the Crestline Transaction"). 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 a subsidiary of
Marriott International, Inc. ("Marriott"). Because the senior living communities
involved in the Crestline Transaction are managed by, but not leased to,
Marriott, the Company must identify or create a tenant entity for these
properties in order to maintain its REIT status under applicable IRS rules.
After the Spin-Off described in Note 12 and upon completion of the Crestline
Transaction, Five Star will lease these facilities. The closing of this
acquisition is subject to Crestline's shareholders' approval and various other
third party approvals, but the Company expects it to occur in early 2002.
Note 14. 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
September 30, 2001, approximately $1.9 million received by IHS and Mariner since
July 1, 2000, which is due to the Company is included on the Company's
Consolidated
9
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Balance Sheets in Accounts Receivable. As of October 31, 2001, the Company has
collected all of this receivable and the balance due is zero.
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. The third party
contractor may manage the nursing home operations for the Company's account for
any extended transition period, usually up to three years, after which the
Company must sell or lease these foreclosed and repossessed operations. Messrs.
Martin and Portnoy organized FSQ, Inc. (formerly known as Five Star Quality
Care, Inc.) ("FSQ") to serve as an independent contractor to operate nursing
homes for the Company. After the Spin-Off, FSQ and Five Star will merge, Five
Star will lease the foreclosed and repossessed nursing home operations, and the
Company will no longer be at risk of selling or finding a new tenant for these
nursing homes.
Note 15. Subsequent Events
On October 1, 2001, the Company declared a distribution of $0.30 per share, or
$13 million, which will be paid to shareholders on or about November 27, 2001.
On October 9 and October 12, 2001 the Company issued a total of 14,047,000
common shares of beneficial interest, in an underwritten public offering for
gross proceeds of approximately $181.2 million. The proceeds received, net of
underwriting commissions and costs of issuance of $9.6 million, were applied to
reduce the Company's outstanding obligations under its revolving credit facility
to zero. The excess remaining cash is expected to be used for general business
purposes and for acquisitions, including the Crestline Transaction.
10
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 nine months ended September 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
plus anticipated percentage rents. We consider FFO to be an appropriate measure
of performance for an equity real estate investment trust ("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 September 30, 2001, Compared to Three Months Ended September
30, 2000
The increases in total revenues and total expenses for the three months ended
September 30, 2001, compared to the three months ended September 30, 2000, are
primarily the result of the accounting for facilities' operations. During the
2001 period, the facilities' operations were consolidated with us and revenues
and expenses were separately stated. During the third quarter of 2000, we
accounted for the facilities' operations under the equity method and the net
operating income (revenues less expenses) was included in revenues.
For the three months ended September 30, 2001, compared to the three months
ended September 30, 2000, rental income decreased to $11.1 million from $13.6
million. This decrease is primarily due to the sale of four properties in
October 2000.
With regard to facilities' operations, our net operating income, calculated as
Facilities' Operations Revenues less Facilities' Operations Expenses, for the
three months ended September 30, 2001, has increased $328,000 from the same
period in 2000. In the third quarter of 2000, our net operating income was
presented as Other Real Estate Income. The table below shows these comparable
results of operations (dollars in thousands):
Three Months Ended September 30,
--------------------------------
2001 2000
------------------- ----------------
Facilities' operations revenues $57,421 $55,515
Facilities' operations expenses 55,865 54,287
------------------- ----------------
Net $ 1,556 $ 1,228
=================== ================
The increase in revenues of $1.9 million, or 3.4%, from the third quarter of
2000 is due primarily to an increase in the average daily rate at our
facilities. The increase in expenses of $1.6 million, or 2.9%, from the three
months ended September 30, 2000 to the same period in 2001 is due primarily to
general increases in payroll and general and administrative costs. Since
September 2000, we have closed two facilities. However, the occupancy percentage
for the third quarter of 2001 at the remaining facilities increased from the
third quarter of 2000 and offset the expected decrease in census as a result of
the closings.
Interest expense was $3.3 million lower in the three months ended September 30,
2001 compared to the same period in 2000 because the average balance outstanding
and the weighted average interest rates on our credit facility were lower during
the 2001 period. The decrease in interest expense was partially offset by
distributions on the trust preferred securities issued in 2001, the proceeds of
which were used to reduce our credit facility balance. Depreciation expense
decreased in 2001 by $201,000 due to the sale of four properties in October 2000
and a reduction in asset values as a result of impairment losses recorded in
2000, offset by depreciation related to equipment purchases made since September
30, 2000. Recurring general and administrative expense decreased by $495,000
primarily due to the impact of the sale of four properties in October 2000.
11
SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Net income was $5.5 million ($0.19 per share) in the three months ended
September 30, 2001, as compared to $4.4 million ($0.17 per share) in the three
months ended September 30, 2000. This increase in net income is primarily the
consequence of the changes in revenues and expenses discussed above.
FFO for the three months ended September 30, 2001, was $11.3 million compared to
$10.2 million for the same period in 2000. The increase of $1.1 million is due
to the changes in rental income, facilities' operations and interest expense
discussed above. Cash flows provided by operating activities and cash available
for distribution may not necessarily equal FFO as cash flows are affected by
factors not included in the FFO calculation, such as changes in assets and
liabilities.
Nine Months Ended September 30, 2001, Compared to Nine Months Ended September
30, 2000
The increases in total revenues and total expenses for the nine months ended
September 30, 2001, compared to the nine months ended September 30, 2000, are
primarily the result of the accounting for facilities' operations and the fact
that we operated the facilities during the full 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. In the third quarter
of 2000, we accounted for the facilities' operations under the equity method.
For the nine months ended September 30, 2001, the facilities' operations were
consolidated with us.
For the nine months ended September 30, 2001, compared to the nine months ended
September 30, 2000, rental income decreased to $33.3 million from $49.9 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.
Interest expense was $7.7 million lower in the nine months ended September 30,
2001 compared to the same period in 2000 because the average balance outstanding
and the weighted average interest rates on our credit facility were lower during
the 2001 period. The decrease in interest expense was partially offset by
distributions on the trust preferred securities issued in 2001, the proceeds of
which were used to reduce our credit facility balance. Depreciation expense
decreased in the nine months ended September 30, 2001 by $842,000 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,
offset by depreciation related to equipment purchases made since September 30,
2000. Recurring general and administrative expense decreased by $1.2 million
primarily due to the impact of the sale of properties in 2000. During the nine
months ended September 30, 2001, we incurred nonrecurring general and
administrative costs totaling approximately $4.2 million in connection with the
establishment of operating systems for foreclosed and repossessed properties.
Net income was $11.1 million ($0.41 per share) in the nine months ended
September 30, 2001, as compared to $19.2 million ($0.74 per share) in the nine
months ended September 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 nine months ended September 30, 2001, was $32.3 million compared to
$37.6 million for the same period in 2000. The decrease of $5.3 million is due
to the factors discussed above. Cash flows provided by operating activities and
cash available for distribution may not necessarily equal FFO because cash flows
are affected by factors not included in the FFO 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 (4.67% per annum at September 30, 2001) is LIBOR plus a
premium. 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 September
30, 2001, there was $31 million drawn under this facility and $239 million
available for borrowing. At October 31, 2001, there was zero drawn under this
facility and $270 million available for borrowing.
12
SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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 October 31, 2001, $246.6
million was available to be used under this effective shelf registration
statement.
In June and July 2001, SNH Capital Trust I, a wholly-owned finance subsidiary of
the Company, issued 1,095,750 shares of 10.125% quarterly income preferred
securities with a liquidation preference of $25 per share, for a total
liquidation amount of $27.4 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 to acquire and hold the 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.
In July 2001, we issued 3,445,000 common shares of beneficial interest, raising
net proceeds of $42.3 million. These net proceeds received were used to repay
some of our debt outstanding under our revolving bank credit facility.
In July 2001, we obtained mortgage financing of $9.1 million secured by two of
our properties in Michigan. The mortgages require interest (4.50% at October 31,
2001) 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; approximately $170
million of new indebtedness to be placed by Crestline before closing and which
we may assume at closing; approximately $140 million of available cash from our
issuance of common shares in October 2001 after we paid down our revolving
credit facility to zero; 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.
In October 2001, we issued a total of 14,047,000 common shares of beneficial
interest, raising net proceeds of approximately $171.6 million. The net proceeds
were applied to reduce our outstanding obligations under our revolving bank
credit facility to zero. The excess remaining cash is expected to be used to
reduce the amount of borrowings necessary to close the Crestline transaction, if
it occurs. Until we close the Crestline transaction or otherwise invest the
excess proceeds in a similar transaction, there will be a period when we will
have a substantial balance of cash on hand. During this period, our per share
earnings and FFO may be less than what we have realized historically.
At September 30, 2001, we had cash and cash equivalents of $8.1 million. On
October 31, 2001, we had cash and cash equivalents of $141.7 million.
For the nine months ended September 30, 2001 and 2000: cash provided by
operating activities was $15.4 million and $37.2 million, respectively; cash
used for investing activities was $1.9 million and $17.1 million, respectively;
and cash used for financing activities was $13.2 million and $30.2 million,
respectively. The working capital required for our operations, including our
facilities' operations, has been provided by our operations and by drawings
under our revolving 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 $13 million, or
$0.30 per share, for the quarter ended September 30, 2001, which we will pay on
or about November 27, 2001.
13
SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Impact of Inflation
Inflation might have both positive and negative impacts upon us. 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
resident and patient revenues at our facilities. Offsetting these benefits,
inflation might cause our costs of equity and debt capital to increase and wages
and other operating costs at our 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. An increase in operating costs at facilities
we own and lease may adversely effect our tenants' abilities to pay our rent. In
periods of rapid inflation, nursing home operating costs usually increase faster
than revenues and this fact has an adverse impact upon us. 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 operating costs at our leased properties, we
generally require our tenants to guarantee our rent. 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,
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 seasonal 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 how
this exposure is managed in the near future. If the Crestline transaction closes
with the financing currently identified, our exposure to fluctuations in
interest rates will increase. At September 30, 2001, we had $27.4 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 $274,000.
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 September 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 September 30, 2001, and discounted cash flow analysis, a hypothetical
immediate one percentage point change in interest rates would change the fair
value of $27.4 million of our fixed rate debentures by approximately $2.4
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. For example, a discounted cash
14
SENIOR HOUSING PROPERTIES TRUST
Item 3. Quantitative and Qualitative Disclosures About Market Risk (continued)
flow analysis of a one percent change in interest rates calculated only to the
par prepayment option date for our trust preferred securities would change the
value of those securities by $1.1 million.
Because interest on our revolving credit facility and our mortgage debt is at a
floating rate, changes in interest rates will not affect the value of either of
them. However, changes in interest rates will affect our operating results. For
example, the interest rate payable on our revolving credit facility of $31
million at September 30, 2001, was 4.67% per annum, and an immediate 10% change
in that interest rate, or 46.7 basis points, would increase or decrease our
costs by approximately $144,770 annually:
Impact of Changes in Interest Rates
(dollars in thousands)
Interest Rate Outstanding Total Interest
Per Year Debt Expense Per Year
--------------- -------------- ---------------------
At September 30, 2001 4.67% $31,000 $1,448
10% increase 5.14% $31,000 $1,593
10% reduction 4.20% $31,000 $1,303
The interest rate payable on our mortgage debt of $9.1 million at September 30,
2001, was 4.50% per annum, and an immediate 10% change in that interest rate, or
45.0 basis points, would increase or decrease our costs by approximately $40,950
annually:
Impact of Changes in Interest Rates
(dollars in thousands)
Interest Rate Outstanding Total Interest
Per Year Debt Expense Per Year
--------------- -------------- ---------------------
At September 30, 2001 4.50% $9,100 $410
10% increase 4.95% $9,100 $451
10% reduction 4.05% $9,100 $369
The foregoing tables present a so-called "shock" analysis, which assumes that
the interest rate change by 10% 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. Our floating rate borrowings under our revolving
credit facility are subject to interest at LIBOR plus a premium. Our mortgages
are subject to interest at prime less a discount. Accordingly, we are vulnerable
to changes in U.S. dollar based short-term rates, specifically LIBOR and prime.
During the past year, short-term U.S. dollar based interest rates have
decreased. 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.
15
SENIOR HOUSING PROPERTIES TRUST
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
On July 10, 2001, pursuant to our incentive share award plan, our officers and
certain key employees of our investment manager, REIT Management & Research,
LLC, 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. The grants were made pursuant to an exemption from registration
contained in section 4(2) of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Stock Purchase Agreement among Senior Housing Properties Trust,
SNH\CSL Properties Trust, Crestline Capital Corporation and CSL
Group, Inc., dated August 9, 2001 (Incorporated by reference to
Registrant's Current Report on Form 8-K filed October 1, 2001,
File No. 333-69846)
12.1 Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K:
Current Report on Form 8-K, filed August 10, 2001, reporting Item
5 information.
16
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, THE
POSSIBILITY OF A SPIN-OFF TO CREATE A SEPARATE PUBLIC COMPANY, OUR ABILITY TO
SUCCESSFULLY OPERATE NURSING HOMES, OUR ACTIONS WITH REGARD TO HEALTHSOUTH, 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, OUR ABILITY 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. FOR EXAMPLE, WE MAY BE UNABLE TO SUCCESSFULLY COMPLETE THE PROPOSED
CRESTLINE ACQUISITION, TO COMPLETE THE SPIN-OFF, 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"), As 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.
17
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: November 2, 2001
By: /s/John R. Hoadley
John R. Hoadley
Treasurer and Chief Financial Officer
Dated: November 2, 2001