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 March 31, 2002
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 of incorporation) (IRS Employer 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 May 1, 2002:
58,422,200 shares of beneficial interest, $0.01 par value.
SENIOR HOUSING PROPERTIES TRUST
FORM 10-Q
MARCH 31, 2002
INDEX
Page
PART I Financial Information
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 1
Consolidated Statements of Income - Three Months Ended March 31, 2002 and 2001 2
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2002 and 2001 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II Other Information
Item 6. Certain Important Factors 14
Exhibits and Reports on Form 8-K 15
Signatures 16
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
March 31, December 31,
2002 2001
------------ -------------
(unaudited) (audited)
ASSETS
Real estate properties, at cost:
Land $ 140,719 $ 59,308
Buildings and improvements 1,030,076 533,891
----------- -----------
1,170,795 593,199
Less accumulated depreciation 101,287 124,252
----------- -----------
1,069,508 468,947
Cash and cash equivalents 4,320 352,026
Restricted cash 14,700 10,201
Other assets 26,518 36,129
----------- -----------
$ 1,115,046 $ 867,303
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank credit facility $ 22,000 $--
Senior notes, net of discount 243,642 243,607
Mortgages, other debt and capital leases 33,143 9,100
Prepaid rent 7,340 7,114
Security deposits 1,520 1,520
Other liabilities 11,158 3,944
Trust preferred securities 27,394 27,394
Commitments and contingencies
Shareholders' equity:
Common shares of beneficial interest, $0.01 par
value: 58,422,200 and 43,421,700 shares issued
and outstanding, respectively 584 434
Additional paid-in capital 853,415 658,348
Cumulative net income 67,311 55,691
Cumulative distributions (154,963) (141,936)
Unrealized gain on investments 2,502 2,087
----------- -----------
Total shareholders' equity 768,849 574,624
----------- -----------
$ 1,115,046 $ 867,303
=========== ===========
See accompanying notes
1
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share amounts)
(unaudited)
Three Months Ended March 31,
-------------------------------
2002 2001
----------- ----------
Revenues:
Rental income $26,535 $11,131
FF&E reserve income 1,664 --
Facilities' operations -- 57,354
Interest and other income 508 237
------- -------
Total revenues 28,707 68,722
------- -------
Expenses:
Interest 7,382 2,160
Depreciation 7,148 4,742
Facilities' operations -- 55,978
General and administrative
-Recurring 1,854 1,045
-Related to foreclosures and lease terminations -- 1,961
------- -------
Total 16,384 65,886
------- -------
Income before distributions on trust preferred securities 12,323 2,836
Distributions on trust preferred securities 703 --
------- -------
Net income $11,620 $ 2,836
======= =======
Weighted average shares outstanding 50,255 25,916
======= =======
Basic and diluted earnings per share:
Net income $ 0.23 $ 0.11
======= =======
See accompanying notes
2
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Three Months Ended March 31,
-------------------------------
2002 2001
--------- -----------
Cash flows from operating activities:
Net income $ 11,620 $ 2,836
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation expense 7,148 4,742
Amortization of deferred finance costs and discounts 222 --
FF&E reserve income (1,664) --
Changes in assets and liabilities:
Other assets 3,098 (6,536)
Prepaid rent 226 7,625
Other liabilities 4,783 (2,874)
--------- ---------
Cash provided by operating activities 25,433 5,793
--------- ---------
Cash flows from investing activities:
Security deposits -- 900
Real estate acquisition (551,683) --
Equipment purchases -- (893)
--------- ---------
Cash (used for) provided by investing activities (551,683) 7
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common shares, net 195,210 --
Proceeds from borrowings on credit facility 230,000 13,000
Repayments of credit facility (208,000) (5,000)
Repayment of assumed debt (25,000) --
Deferred finance costs (639) --
Distributions to shareholders (13,027) (7,775)
--------- ---------
Cash provided by financing activities 178,544 225
--------- ---------
(Decrease) increase in cash and cash equivalents (347,706) 6,025
Cash and cash equivalents at beginning of period 352,026 515
Cash and cash equivalents at facilities' operations, beginning of period -- 7,178
--------- ---------
Cash and cash equivalents at end of period $ 4,320 $ 13,718
========= =========
Supplemental cash flow information:
Cash paid for interest $ 1,816 $ 2,892
Non-cash investing and financing activities:
Debt assumed in the Crestline Transaction 49,055 --
Real estate acquired in a property exchange (43,308) --
Real estate disposed of in a property exchange, net 43,308 --
Deposits into FF&E reserve 1,464 --
Purchases of fixed assets with FF&E reserve (1,027) --
See accompanying notes
3
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization
Senior Housing Properties Trust (the "Company") is a Maryland real estate
investment trust. At March 31, 2002, the Company owned 111 properties in 28
states all of which were leased.
These unaudited quarterly financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements and should be read in
conjunction with the audited consolidated financial statements for the year
ended December 31, 2001, 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.
Note 2. Spin-Off of Five Star Quality Care, Inc. ("Five Star")
On December 31, 2001, the Company distributed substantially all of its ownership
of Five Star, one of its wholly-owned subsidiaries which operated facilities
prior to that date for the Company's account, to the Company's shareholders (the
"Five Star Spin-Off"). At the time of the Five Star Spin-Off, the Company
entered a lease with Five Star for 55 facilities. Prior to the Five Star
Spin-Off, the Company recognized facilities' operations revenues and facilities'
operations expenses on a consolidated basis as well as rental income from third
parties. Subsequent to the Five Star Spin-Off, the Company recognizes only
rental income.
Note 3. Summary of Significant Accounting Policies
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 2001, the Financial Accounting Standards Board
(the "FASB") issued SFAS No. 142 "Goodwill and Other Intangible Assets" ("FAS
142") and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"). The Company adopted FAS 142 and FAS 144 on January 1, 2002,
which had no effect on the Company's financial position or results of
operations.
DEFERRED PERCENTAGE RENTS. The Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101") generally requires us to recognize
percentage rental income received for the first, second and third quarters in
the fourth quarter. Percentage rent deferred for the three months ended March
31, 2002 and 2001, was $753,000 and $692,000, respectively.
RECLASSIFICATIONS. Reclassifications have been made to the prior year's
financial statements to conform to the current year's presentation.
Note 4. Real Estate Properties
On January 2, 2002, a tenant, HEALTHSOUTH Corporation ("HEALTHSOUTH"), settled a
non-monetary default with the Company by exchanging properties. The Company
delivered to HEALTHSOUTH title to five nursing homes which HEALTHSOUTH leased
from the Company. In exchange, HEALTHSOUTH delivered to the Company title to two
rehabilitation hospitals which HEALTHSOUTH leases from the Company. As part of
this settlement, HEALTHSOUTH's lease was extended to December 2011, from January
2006, and the annual rent was reduced from $10.3 million to $8.7 million. The
Company's investment in the two new properties is $43.3 million, which was the
net book value of the properties given up at the time of the exchange, and no
gain or loss was realized.
4
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
On January 11, 2002, the Company acquired 31 senior living communities for
$600.0 million, funded by cash on hand, borrowings under the Company's revolving
bank credit facility and the assumption of certain liabilities (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. and are
leased to Five Star. The initial lease term to Five Star extends to December
2017, minimum rent is $63.0 million per year and percentage rent will be due,
starting in 2003, in amounts equal to five percent (5%) of net patient revenues
at each facility in excess of net patient revenues at such facility in 2002. In
addition, a varying percentage of gross revenues each year is required to be
paid as rent to the Company and escrowed for future capital expenditures at the
leased facilities. This additional rent is recorded as FF&E reserve income on
the Company's Consolidated Statements of Income and the cash escrow balance is
recorded in Restricted Cash on the Company's Consolidated Balance Sheets.
Note 5. Comprehensive Income
The following is a reconciliation of net income to comprehensive income for the
three months ended March 31, 2002 and 2001 (dollars in thousands):
Three Months Ended March 31,
----------------------------
2002 2001
--------- ---------
Net income $11,620 $2,836
Other comprehensive income:
Change in unrealized gain on investments 415 717
--------- ---------
Comprehensive income $12,035 $3,553
========= =========
Note 6. Unrealized Gain on Investments
As of March 31, 2002, the Company owned one million HRPT Properties Trust
("HRPT") common shares and 35,000 shares of Five Star, which are carried at fair
market value in Other Assets. The Unrealized Gain On Investments shown on the
Consolidated Balance Sheets represents the difference between HRPT's and Five
Star's quoted market prices on the date they were received or acquired ($6.50
and $7.26 per share, respectively) and on March 31, 2002 ($9.00 and $7.32 per
share, respectively).
Note 7. Segment Information
After the Five Star Spin-Off, the Company has one reportable segment, leasing.
During 2001, the Company had two reportable segments, leasing and facilities'
operations. The following table is a summary of these reportable segments as of
and for the period ended March 31, 2001. Because the Company only operated in
one segment for the three months ended March 31, 2002, a comparative table is
not presented (dollars in thousands):
5
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Three Months Ended March 31, 2001
----------------------------------------- --------------
Facilities'
Leasing Operations Unallocated Total
--------------------------------------------------------
Revenues $ 11,131 $ 57,354 $ 237 $ 68,722
Interest expense -- -- 2,160 2,160
Depreciation 3,282 1,460 -- 4,742
Facilities' operations -- 55,978 -- 55,978
General administrative
- Recurring 1,045 -- -- 1,045
- Related to foreclosures and
lease terminations -- -- 1,961 1,961
--------- --------- --------- ---------
Net income $ 6,804 (84) $ (3,884) $ 2,836
========= ========= ========= =========
Real estate properties, at cost $ 448,562 $ 148,335 -- $ 596,897
Note 8. Indebtedness and Capital Lease Obligations
The Company has a $270.0 million, interest only, revolving, secured bank credit
facility. The revolving bank credit facility matures in September 2002. The
interest rate (3.9% at March 31, 2002) is LIBOR plus a premium. The revolving
bank credit facility is available for acquisitions, working capital and for
general business purposes. As of March 31, 2002, $22.0 million was outstanding
and $248.0 million was available for drawing under the revolving bank credit
facility.
At March 31, 2002, the Company had outstanding $245.0 million of senior
unsecured notes due in 2012. The notes carry interest at a fixed rate of 8.625%
per annum, payable semi-annually in arrears. No principal payments are due until
maturity. The notes were issued at a discount; the unamortized balance of the
discount at March 31, 2002 was $1.4 million.
The Company's mortgages, other debt and capital leases totaled $33.1 million at
March 31, 2002. This debt consists of $9.1 million of mortgages due in July 2003
secured by two properties, $14.7 million of bonds due in December 2027 secured
by one property and capital lease obligations of $9.3 million affecting two
properties leased to May 2016.
Note 9. Commitments and Contingencies
In connection with obtaining regulatory approval for the acquisition and lease
of one of the senior living properties acquired in the Crestline Transaction,
the Company provided a guaranty and a security interest in that property for
certain prepaid service obligations to residents; and the Company is
contingently liable in the event the tenant or operator of this property fails
to provide these future services.
Note 10. Shareholders' Equity
On February 19, 2002, the Company issued 15,000,000 common shares of beneficial
interest, in an underwritten public offering for gross proceeds of $205.8
million. The proceeds received, net of underwriting commissions and costs of
issuance of approximately $10.6 million, were applied to reduce the Company's
outstanding borrowings under its revolving bank credit facility, which had been
drawn in connection with the Crestline Transaction, and to repay the $25.0
million purchase note assumed as part of the Crestline Transaction.
On February 21, 2002, the Company paid a distribution to shareholders of $0.30
per share, or $13.0 million. On April 8, 2002, the Company declared a
distribution of $0.31 per share, or $18.1 million, which will be paid to
shareholders on or about May 21, 2002.
6
SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion presents an analysis of our results of operations for
the three months ended March 31, 2002 and 2001. This discussion includes
references to funds from operations, or FFO, and cash available for
distribution, or CAD. We compute FFO as net income plus depreciation,
amortization and non-recurring items. We compute CAD as FFO plus non-cash
expenses (including amortization of deferred finance costs and administrative
expenses to be settled in our common shares) and straight line rent adjustments
less FF&E reserve income. In calculating FFO and CAD, we also add percentage
rents deferred pursuant to SAB 101 described in Note 3 to our financial
statements. We consider FFO and CAD to be appropriate measures of performance
for a REIT, along with cash flow from operating activities, financing activities
and investing activities, because they provide investors with an indication of
an equity REIT's operating performance and its ability to incur and service
debt, make capital expenditures, pay distributions and fund other cash needs.
Our method of computing FFO and CAD may not be comparable to FFO or CAD reported
by other REITs that define the terms differently. Our FFO and CAD are important
factors considered by our Board of Trustees in determining the amount of our
distributions to shareholders. FFO and CAD do not represent cash generated by
operating activities in accordance with generally accepted accounting
principles, or GAAP, and should not be considered as alternatives to net income
or cash flow from operating activities as measures of financial performance or
liquidity.
The following discussion should be read in conjunction with our Annual Report on
Form 10-K.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002, Compared to Three Months Ended March 31, 2001
Total revenues for the three months ended March 31, 2002, were $28.7 million,
compared to total revenues of $68.7 million for the three months ended March 31,
2001. Included in total revenues for the year ended December 31, 2001, are
revenues from facilities' operations of $57.4 million. During 2001, Five Star,
one of our wholly-owned subsidiaries, operated facilities for our account. On
December 31, 2001, we distributed substantially all of our ownership of Five
Star to our shareholders and Five Star became a separate public company. In
connection with the Five Star Spin-Off, Five Star leased facilities from us and
retained all of the facilities' operations which it previously conducted for us;
and, as a result, after the Five Star Spin-Off, we do not have facilities'
operations revenues or expenses.
Rental income for the three months ended March 31, 2002, was $26.5 million
compared to rental income of $11.1 million for the three months ended March 31,
2001, an increase of $15.4 million. This increase is due to our acquisition and
lease of 31 properties on January 11, 2002, for annual rent of $63.0 million and
our lease to Five Star of 55 facilities, which had been previously operated for
our account for annual rent of $7.0 million. This increase was slightly offset
by a decrease in rental income due to lowered annual rent from $10.3 million to
$8.7 million effective January 2, 2002, for one tenant as described in Note 4 to
the accompanying financial statements.
FF&E reserve income for the three months ended March 31, 2002, was $1.7 million
compared to zero for the three months ended March 31, 2001. The lease for the 31
properties acquired in January 2002 requires a varying percentage of gross
revenues be paid to us as additional rent which is escrowed for future capital
expenditures at these leased facilities.
Total expenses for the three months ended March 31, 2002, were $16.4 million,
compared to total expenses of $65.9 million for the three months ended March 31,
2001, a decrease of $49.5 million. Total expenses for the year ended March 31,
2001, include expenses of $56.0 million from facilities' operations. Subsequent
to the Five Star Spin-Off, we no longer have any facilities' operations
expenses.
7
SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Interest expense for the three months ended March 31, 2002, was $7.4 million
compared to interest expense for the three months ended March 31, 2001, of $2.2
million, an increase of $5.2 million. This increase was primarily due to our
issuance of $245.0 million of 8 5/8% senior unsecured notes in December 2001 and
our assumption of debt in connection with the Crestline Transaction. The
increase was offset somewhat by a decrease in the weighted average interest rate
on our revolving bank credit facility.
Depreciation expense for the three months ended March 31, 2002, was $7.1 million
compared to depreciation expense for the three months ended March 31, 2001, of
$4.7 million, an increase of $2.4 million. Recurring general and administrative
expense for the three months ended March 31, 2002, was $1.9 million compared to
recurring general and administrative expense for the three months ended March
31, 2001, of $1.0 million, an increase of $900,000. These increases were
primarily due to our acquisition of 31 properties in January 2002. During the
three months ended March 31, 2001, we incurred nonrecurring general and
administrative costs totaling approximately $2.0 million. These costs were
incurred in connection with the establishment of operating systems for
foreclosed and repossessed properties, which systems were distributed in the
Five Star Spin-Off.
Distributions on trust preferred securities for the three months ended March 31,
2002 were $703,000 compared to zero for the three months ended March 31, 2001.
The increase is due to our issuance of the trust preferred securities in June
and July 2001.
Net income was $11.6 million, or $0.23 per share, for the three months ended
March 31, 2002, compared to $2.8 million, or $0.11 per share, for the three
months ended March 31, 2001, an increase of $8.8 million, or $0.12 per share.
This increase is primarily the consequence of the net changes in revenues and
expenses resulting from the Crestline Transaction and the Five Star Spin-Off and
the issuance of senior notes and trust preferred securities in 2001, as
described above, and the increase in weighted average number of shares
outstanding between the 2001 and 2002 periods. FFO for the three months ended
March 31, 2002, was $19.5 million compared to $10.3 million for the three months
ended March 31, 2001. CAD for the three months ended March 31, 2002, was $18.4
million compared to $10.2 million for the three months ended March 31, 2001. The
increase in FFO of $9.3 million and in CAD of $8.2 million is due primarily to
the same factors impacting the increase in net income.
FFO and CAD for the three months ended March 31, 2002 and 2001, were derived as
follows:
2002 2001
--------------- ---------------
Net income $ 11,620 $ 2,836
Add: Depreciation 7,148 4,742
Deferred percentage rents 753 692
Other non-cash items -- 32
General and administrative expenses related
to foreclosures and lease terminations -- 1,961
--------------- ---------------
FFO $ 19,521 $ 10,263
=============== ===============
FFO $ 19,521 $ 10,263
Add: Amortization of deferred finance costs and
other non-cash items 272 --
Straight line rent adjustments 242 (100)
Less: FF&E reserve income (1,664) --
--------------- ---------------
CAD $ 18,371 $ 10,163
=============== ===============
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SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had a $270.0 million, interest only, secured, revolving
bank credit facility. The interest rate is LIBOR plus a premium (3.9% per annum
at March 31, 2002). This revolving bank credit facility is available for
acquisitions, working capital and for general business purposes. We have the
ability to repay and redraw amounts under this revolving bank credit facility
until its maturity in September 2002. At March 31, 2002, $22.0 million was
outstanding and $248.0 million was available for borrowing under this revolving
bank credit facility.
On January 11, 2002 we acquired 31 senior living communities with 7,487 living
units. The purchase price was $600.0 million and the total acquisition cost,
after closing costs and purchase price adjustments, was $606.5 million. The
funding for this acquisition was as follows: $24.1 million of assumed debt; a
$25.0 million purchase note; approximately $350.0 million of available cash; and
the balance by borrowings under our revolving bank credit facility. The purchase
note and a portion of the borrowings under our revolving bank credit facility
were repaid with the proceeds of our issuance of common shares in February 2002
as described below.
On January 30, 2002, our shelf registration statement for the issuance of up to
$2.0 billion of equity and debt securities was declared effective by the SEC. As
of March 31, 2002, $1.8 billion was available under this effective shelf
registration statement. An effective shelf registration statement allows us to
issue public securities on an expedited basis, but it does not assure that there
will be buyers for such securities.
In February 2002, we issued 15,000,000 common shares of beneficial interest,
raising net proceeds of $195.2 million. These net proceeds were used to repay
the $25.0 million purchase note related to the Crestline Transaction and the
remainder was used to repay a portion of our borrowings outstanding under our
revolving bank credit facility.
At March 31, 2002, we had cash and cash equivalents of $4.3 million. For the
three months ended March 31, 2002 and 2001: cash provided by operating
activities was $25.4 million and $5.8 million, respectively; cash (used for)
provided by investing activities was ($551.7 million) and $7,000, respectively;
and cash provided by financing activities was $178.5 million and $225,000,
respectively. The working capital required for our operations was provided by
our rental income 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 revolving bank credit facility will be
sufficient to meet our short-term and long-term capital requirements, including
the distribution to shareholders of $18.1 million, or $0.31 per share, for the
quarter ended March 31, 2002, which we will pay on or about May 21, 2002. We
also believe that our revolving bank credit facility will be available to
temporarily fund acquisitions. We are currently negotiating for a new revolving
bank credit facility which we expect to be effective when or before our current
revolving bank credit facility expires in September 2002. To the extent we make
acquisitions, we expect to repay borrowings under our revolving bank credit
facility with new long term debt or equity issuances. We believe long term debt
or equity issuances will be available to us, but we can provide no assurance
that they will be.
Debt Instruments and Covenants
Our principal debt obligations at March 31, 2002, were our revolving bank credit
facility and our $245.0 million of publicly held unsecured debt. Our revolving
bank credit facility is secured by 14 properties leased to Marriott. Our public
debt is governed by an indenture. This indenture and our credit agreement
contain a number of financial ratio covenants which generally restrict our
ability to incur debts, including debts secured by mortgages on our properties
in excess of calculated amounts, require us to maintain a minimum net worth, as
defined, restrict our ability to make distributions under certain circumstances
and require us to maintain other ratios, as defined. Our trust preferred
securities are governed by an indenture of trust which is generally less
restrictive than the indenture governing our public debt and the terms of our
revolving bank credit facility. During the period from our incurrence of these
9
SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
debts through March 31, 2002, we were in compliance with all of our covenants
under our indentures and our credit agreement.
None of our indentures, our revolving bank credit facility or our other debts
contain provisions for acceleration or otherwise which could be triggered by our
debt ratings; however, we expect that the interest rate payable under the new
revolving bank credit facility which we are now negotiating may change as our
debt ratings change. Our public senior debt indenture contains a cross default
provision to any other debts equal to or in excess of $10.0 million; and
similarly, a default on any of our public indentures would constitute a default
on our bank credit agreement. As of March 31, 2002, we have no commercial paper,
derivatives, swaps, hedges, joint ventures or partnerships.
Related Party Transactions
In addition to the transactions described under the heading "Related Party
Transactions" in Item 7 (Management's Discussion and Analysis of Financial
Condition and Results of Operations) in our Annual Report on Form 10-K, we have
entered into leases with Five Star, including the lease entered into in
connection with the Crestline Transaction. Five Star is our largest tenant.
Until December 31, 2001, Five Star was our wholly-owned subsidiary. Four of our
five trustees are also directors of Five Star, including Messrs. Portnoy and
Martin who are our managing trustees and managing directors of Five Star. The
fifth Five Star director was formerly also one of our trustees. RMR provides
some shared services to Five Star and acts as our investment manager. In the
future, we may do additional business with Five Star. We believe that our
current leases with Five Star are on reasonable commercial terms. However,
because of the historical and continuing relationships which we have, these
continuing and possibly expanded business relations may not be considered arms
length and may not be on the same or as favorable terms as we might enter with
third parties with whom we did not have such relationships.
10
SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Seasonality
Nursing home and assisted living operations have historically reflected modest
seasonality. During calendar fourth quarter holiday periods residents at such
facilities 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 residents which can result in increased
costs or discharges to hospitals. As a result of these factors and others, these
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.
11
SENIOR HOUSING PROPERTIES TRUST
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, 2001. Other than as described below, we do not foresee any
significant changes in our exposure to fluctuations in interest rates or in how
we manage this exposure in the near future.
At March 31, 2002, our outstanding debt included $245.0 million of 8 5/8% senior
unsecured notes due 2012. The interest on these notes is payable semi-annually.
No principal payments are due under these notes until maturity. Because these
notes bear interest at fixed rates, changes in market interest rates during the
term of this debt will not affect our operating results. If at maturity these
notes are refinanced at interest rates which are 10% higher than the current
coupon rate, our per annum interest cost would increase by approximately $2.1
million. Changes in the interest rate also affect the fair value of our debt
obligations; increases in market interest rates decrease the fair value of our
fixed rate debt, while decreases in market interest rates increase the fair
value of our fixed rate debt. Based on the balances outstanding as of March 31,
2002, a hypothetical immediate one percentage point decrease in interest rates
would increase the fair value of our fixed rate senior unsecured notes by
approximately $16.9 million. We are allowed to make prepayments on these senior
notes at par plus a make whole premium, as defined. These prepayment rights may
afford us the opportunity to mitigate the risk of refinancing at maturity at
higher rates by refinancing prior to maturity, but such mitigation would itself
be reduced by the prepayment premium.
At March 31, 2002, we had $27.4 million of 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 10% higher, our per annum interest
cost would increase $277,000. 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
March 31, 2002, 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 March 31, 2002, and discounted cash flow analysis
through the maturity date of the trust preferred securities, a hypothetical
immediate one percentage point decrease in interest rates would increase the
fair value of our fixed rate debentures by approximately $2.9 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 higher rates by refinancing at
lower rates prior to maturity. Our ability to prepay the debentures at par
beginning June 15, 2006 will also effect the change in the fair value of the
debentures which would result from a change in interest rates. For example,
discounted cash flow analysis of a one percentage point decrease in interest
rates calculated from April 30, 2002 only to the par prepayment option date for
our trust preferred securities would increase the value of those securities by
$962,000.
Our revolving bank credit facility bears interest at floating rates and matures
in September 2002. As of March 31, 2002, we had $22.0 million outstanding and
$248.0 million available for drawing under our revolving bank credit facility.
Our revolving bank credit facility is available for acquisitions, working
capital and for general business purposes. Our exposure to fluctuations in
interest rates may increase in the future if we incur debt to fund acquisitions
or otherwise. A change in interest rates would not affect the value of this
floating rate debt but would affect our operating results. For example, the
interest rate payable on our outstanding indebtedness of $22.0 million at March
31, 2002, was 3.9% per annum. An immediate 10% change in that interest rate, or
39.0 basis points, would increase or decrease our costs by approximately
$86,000, or $0.01 per share, per year:
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SENIOR HOUSING PROPERTIES TRUST
Item 3. Quantitative and Qualitative Disclosures About Market Risk (continued)
Impact of Changes in Interest Rates
(dollars in thousands)
Total
Interest
Interest Rate Outstanding Expense Per
Per Year Debt Year
------------- ----------- -----------
At March 31, 2002 3.90% $22,000 $858
10% reduction 3.51% $22,000 $772
10% increase 4.29% $22,000 $944
The foregoing statements and table present a so-called "shock" analysis, which
assumes that the interest rate change of 10% is in effect for a whole year. If
interest rates were to change gradually over one year, the impact would be
gradual and the impact during the year in which the change occurred would be
less.
We borrow in U.S. dollars. Our floating rate borrowings under our revolving bank
credit facility are subject to interest at LIBOR plus a premium. We also have
two mortgage obligations totaling $9.1 million which require interest at prime
less a discount. Changes in U.S. dollar based short-term rates, specifically
LIBOR and prime will impact our operating results. 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.
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.
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SENIOR HOUSING PROPERTIES TRUST
CERTAIN IMPORTANT FACTORS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS STATEMENTS WHICH CONSTITUTE
FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. THESE FORWARD LOOKING STATEMENTS INCLUDE REFERENCES TO THE POSSIBLE
EXPANSION OF OUR PORTFOLIO, THE PERFORMANCE OF OUR TENANTS AND PROPERTIES, OUR
ABILITY TO OBTAIN A NEW REVOLVING BANK CREDIT FACILITY, OUR ABILITY TO CONDUCT
FUTURE BUSINESS TRANSACTIONS WITH FIVE STAR ON REASONABLE COMMERICAL TERMS, OUR
ABILITY TO PAY INTEREST AND PRINCIPAL AND MAKE DISTRIBUTIONS, OUR POLICIES AND
PLANS REGARDING INVESTMENTS, FINANCINGS, MANAGEMENT OF INTEREST RATE RISK AND
OTHER MATTERS, OUR TAX STATUS AS A REAL ESTATE INVESTMENT TRUST, OUR ABILITY TO
APPROPRIATELY BALANCE THE USE OF DEBT AND EQUITY AND TO ACCESS CAPITAL MARKETS
OR OTHER SOURCES OF FUNDS AND OTHER STATEMENTS OR IMPLICATIONS ARISING FROM SUCH
STATEMENTS. ALSO, WHENEVER WE USE WORDS SUCH AS "BELIEVE", "EXPECT",
"ANTICIPATE", "INTEND", "PLAN", "ESTIMATE" OR SIMILAR EXPRESSIONS, WE ARE MAKING
FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE NOT GUARANTEES
OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY THE FORWARD LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS. SUCH FACTORS INCLUDE, WITHOUT
LIMITATION, THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS
(INCLUDING PREVAILING INTEREST RATES) ON US AND OUR TENANTS, COMPLIANCE WITH AND
CHANGES TO REGULATIONS AND PAYMENT POLICIES WITHIN THE REAL ESTATE, SENIOR
HOUSING AND HEALTHCARE INDUSTRIES, CHANGES IN FINANCING TERMS, COMPETITION
WITHIN THE REAL ESTATE, SENIOR HOUSING AND HEALTHCARE INDUSTRIES, AND CHANGES IN
FEDERAL, STATE AND LOCAL LEGISLATION. THE ACCOMPANYING INFORMATION CONTAINED IN
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING UNDER THE HEADING "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES. YOU SHOULD
NOT RELY UPON FORWARD LOOKING STATEMENTS EXCEPT AS STATEMENTS OF OUR PRESENT
INTENTIONS AND OF OUR PRESENT EXPECTATIONS WHICH MAY OR MAY NOT OCCUR.
THE ARTICLES OF AMENDMENT AND RESTATEMENT ESTABLISHING SENIOR HOUSING
PROPERTIES TRUST, DATED SEPTEMBER 20, 1999, A COPY OF WHICH, TOGETHER WITH ALL
AMENDMENTS THERETO, 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 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.
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SENIOR HOUSING PROPERTIES TRUST
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
12.1 Computation of Ratios of Earnings to Interest (before
distributions on trust preferred securities) and Earnings to
Fixed Charges.
(b) Reports on Form 8-K:
During the first quarter of 2002, we filed the following
Current Reports on Form 8-K:
(i) Current Report on Form 8-K, dated December 31, 2001 (filed
January 24, 2002), relating to (1) the Crestline Transaction;
(2) Five Star Spin-Off; (3) the commencement of two leases
with subsidiaries of Five Star for 56 properties and 31
properties, respectively; (4) the resignation and election of
a Trustee and (5) filing certain documents as exhibits thereto
(Items 2, 5 and 7).
(ii) Current Report on Form 8-K, dated February 13, 2002 (filed
February 19, 2002), relating to (1) the issuance and sale of
15 million of our common shares of beneficial interest; (2)
the filing of articles of amendment to our declaration of
trust to increase our authorized shares; (3) a summary of
certain federal income tax and ERISA considerations relating
to the acquisition, ownership and disposition of our shares
and (4) filing certain documents as exhibits thereto (Items 5
and 7).
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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: May 3, 2002
By: /s/John R. Hoadley
John R. Hoadley
Treasurer and Chief Financial Officer
Dated: May 3, 2002
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