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, 1999
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 [ ] No [X]
Number of Common Shares outstanding at November 11, 1999:
26,001,500 shares of beneficial interest, $0.01 par value.
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
PART I Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998 1
Consolidated Statements of Income - Three and Nine Months Ended
September 30, 1999 and 1998 2
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II Other Information
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 13
<PAGE>
<TABLE>
<CAPTION>
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share)
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Real estate properties:
Land $ 69,673 $ 69,673
Buildings and improvements 662,720 662,720
--------- ---------
732,393 732,393
Accumulated depreciation (111,343) (94,616)
--------- ---------
621,050 637,777
Real estate mortgages receivable 37,540 37,826
Cash and cash equivalents 170 139
Other assets 11,681 10,554
--------- ---------
$ 670,441 $ 686,296
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Formation debt due to HRPT Properties Trust $ 200,000 $--
Deferred rents and other deferred revenues 26,981 28,266
Security deposits 15,235 15,235
Other liabilities 773 726
Shareholder's equity:
Common shares of beneficial interest, $0.01 par value:
50,000,000 shares authorized, 26,000,000 shares and 26,374,760
shares issued and outstanding, respectively 260 264
Additional paid-in capital 427,192 --
Ownership interest of HRPT Properties Trust -- 641,805
--------- ---------
Total shareholder's equity 427,452 642,069
--------- ---------
$ 670,441 $ 686,296
========= =========
</TABLE>
See accompanying notes
1
<PAGE>
<TABLE>
<CAPTION>
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental income $21,185 $20,271 $63,594 $60,595
Interest and other income 1,436 1,440 4,317 4,326
------- ------- ------- -------
Total revenues 22,621 21,711 67,911 64,921
------- ------- ------- -------
Expenses:
Interest 4,771 4,942 14,763 14,205
Depreciation 5,520 4,578 16,727 13,680
General and administrative 1,154 1,179 3,413 3,353
------- ------- ------- -------
Total expenses 11,445 10,699 34,903 31,238
------- ------- ------- -------
Net income $11,176 $11,012 $33,008 $33,683
======= ======= ======= =======
</TABLE>
See accompanying notes
2
<PAGE>
<TABLE>
<CAPTION>
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine Months Ended September 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 33,008 $ 33,683
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation 16,727 13,680
Changes in assets and liabilities:
Other assets (1,127) (98)
Deferred rents and other deferred revenues (1,285) (403)
Other liabilities 47 48
--------- ---------
Cash provided by operating activities 47,370 46,910
--------- ---------
Cash flows from investing activities:
Repayments of mortgage loans 286 217
--------- ---------
Cash provided by investing activities 286 217
--------- ---------
Cash flows from financing activities:
Owner's net distribution (47,625) (47,127)
--------- ---------
Cash used for financing activities (47,625) (47,127)
--------- ---------
Increase in cash and cash equivalents 31 --
Cash and cash equivalents at beginning of period 139 --
--------- ---------
Cash and cash equivalents at end of period $ 170 $--
========= =========
Non-cash investing activities:
Real estate acquisitions $-- $ (9,298)
Non-cash financing activities:
Formation debt due to HRPT Properties Trust 200,000 --
Owner's (distribution) contribution (200,000) 9,298
</TABLE>
See accompanying notes
3
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SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
At September 30, 1999, Senior Housing Properties Trust was a 100% owned
subsidiary of HRPT Properties Trust ("HRPT"). The consolidated financial
statements of Senior Housing Properties Trust ("Senior Housing") include the
accounts of 81 properties and 12 mortgage receivables (the "Properties").
HRPT organized Senior Housing as a Maryland real estate investment
trust on December 16, 1998. At the time of its organization, Senior Housing
issued 26.4 million shares to HRPT for consideration of $263,748. Subsequently,
0.4 million shares were cancelled and 26 million shares are currently issued and
outstanding.
As of December 31, 1998 and for a substantial portion of the periods
presented, the Properties and Senior Housing were owned by HRPT. On or about
June 30, 1999, the Properties were transferred by HRPT to several of its 100%
owned subsidiaries. Effective as of September 1, 1999, HRPT transferred 100%
ownership of the several subsidiaries which own the Properties to Senior
Housing. On October 12, 1999, HRPT distributed 13.2 million of its 26 million
Senior Housing shares to HRPT's shareholders (the "Spin-Off"). Senior Housing
filed an effective registration statement on Form S-11 with the Securities and
Exchange Commission to effect the Spin-Off (the "Registration Statement").
The consolidated financial statements include the accounts of Senior
Housing and of the several subsidiaries which own its Properties. Operating
results and cash flows for the Properties have been presented on a combined
basis with those of Senior Housing for the period prior to September 1, 1999.
Note 2. Basis of Presentation
Until the Spin-Off, all of Senior Housing was owned by HRPT, and HRPT's
historical basis has been presented. Prior to the Spin-Off, substantially all of
the rental income and mortgage interest income received by HRPT from the tenants
and mortgagors of Senior Housing was deposited in and commingled with HRPT's
general funds, and cash required by Senior Housing was provided by HRPT.
Interest expense has been allocated based on HRPT's historical interest expense
as a percentage of HRPT's average historical costs of real estate investments
and actual interest expense calculated on the formation debt due to HRPT
discussed in note 7. General and administrative expenses of HRPT were allocated
to Senior Housing based on HRPT's investment advisory agreement formula and
other costs are allocated based on historical expenses as a percentage of HRPT's
average historical costs of real estate investments. In the opinion of
management, the methods for allocating interest and general and administrative
expenses are reasonable. It is not practicable to estimate additional costs that
would have been incurred by Senior Housing as a separate entity.
Note 3. Interim Financial Statements
The financial statements of Senior Housing have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 1998 included in the
Registration Statement. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for interim periods are not
necessarily indicative of the results that may be expected for the full year.
Note 4. Pro Forma Information
The following unaudited pro forma consolidated statements of operations
for the three and nine month periods ended September 30, 1999 and 1998 are
presented to include the effects of the Spin-Off and borrowings of $200 million
under the bank credit facility (see note 7), as if these transactions had
occurred on January 1, 1998. Comparative pro forma consolidated statements of
income for the three and nine month periods ended September 30, 1998 are
presented due to the significance of the Spin-Off and related transactions.
4
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SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This pro forma information is based in part upon information contained
in, and should be read in conjunction with, the Registration Statement. In
management's opinion, all material pro forma adjustments necessary to reflect
the effects of the Spin-Off and the related transactions have been made. This
pro forma information does not purport to present actual results of operations
if these transactions had occurred on such dates or to project results of
operations for any future period.
<TABLE>
<CAPTION>
Pro Forma Consolidated Statements of Income
(dollars in thousands, except per share)
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental income $21,185 $20,271 $63,594 $60,595
Interest and other income 1,436 1,440 4,317 4,326
------- ------- ------- -------
Total revenues 22,621 21,711 67,911 64,921
------- ------- ------- -------
Expenses:
Interest 3,845 3,845 11,535 11,535
Depreciation 5,520 4,578 16,727 13,680
General and administrative 1,154 1,179 3,413 3,353
------- ------- ------- -------
Total expenses 10,519 9,602 31,675 28,568
------- ------- ------- -------
Net income $12,102 $12,109 $36,236 $36,353
======= ======= ======= =======
Shares outstanding 26,000 26,000 26,000 26,000
======= ======= ======= =======
Per share:
Net income $ 0.47 $ 0.47 $ 1.39 $ 1.40
======= ======= ======= =======
</TABLE>
Funds from operations for the three months ended September 30, 1999,
were $17.6 million, or $0.68 per share, and $16.7 million, or $0.64 per share,
for the three months ended September 30, 1998. Funds from operations for the
nine months ended September 30, 1999, were $53.0 million, or $2.04 per share,
and $50.0 million, or $1.92 per share, for the nine months ended September 30,
1998.
Note 5. Commitments and Contingencies
At September 30, 1999, Senior Housing had commitments aggregating $3.7
million to fund or finance improvements to the Properties.
Note 6. Transactions with Affiliates
Concurrent with the Spin-Off in October 1999, Senior Housing entered an
investment advisory agreement with Reit Management & Research, Inc. ("Reit
Management") to provide investment, management and administrative services. Reit
Management is owned by Gerard M. Martin and Barry M. Portnoy, who serve as
managing trustees of Senior Housing. Reit Management is paid based on a formula
of invested assets and is also entitled to an incentive fee paid in restricted
shares based on a formula of growth in per share funds from operations.
5
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SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Indebtedness
In consideration of the transfers by HRPT of 100% ownership of certain
of the subsidiaries which own the Properties, Senior Housing agreed to pay $200
million to HRPT (the "Formation Debt"). The Formation Debt bears interest at
HRPT's weighted average cost of debt (7.1% at September 30, 1999).
In September 1999, Senior Housing entered an agreement for a $350
million, three-year, interest only bank credit facility. The bank credit
facility is secured by first mortgages on 18 of Senior Housing's properties and
matures in 2002. The interest rate is LIBOR plus 2.0% per annum and will
increase by 0.25% if Senior Housing's debt to total capital, as defined, exceeds
50%. The bank credit facility is available for acquisitions, working capital and
for general business purposes. On October 13, 1999, $200 million was borrowed
under the bank credit facility and used to pay the Formation Debt due to HRPT.
Note 8. Shareholder's Equity
On September 21, 1999, Senior Housing's trustees declared a
distribution on common shares with respect to the quarter ended September 30,
1999 of $0.60 per share, or approximately $15.6 million, which will be paid on
or about November 22, 1999 to shareholders of record as of October 20, 1999.
In October 1999, the three independent trustees were each granted and
issued 500 shares as part of their annual fee. The shares granted to the
trustees vest immediately.
6
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SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion presents an analysis of the results of
operations of the properties we owned for the three and nine months ended
September 30, 1999 and 1998. This discussion includes references to funds from
operations. Funds from operations, or "FFO", as defined in the white paper on
funds from operations which was approved by the Board of Governors of NAREIT in
March 1995, is net income computed in accordance with GAAP, before gains or
losses from sales of properties and extraordinary items, plus depreciation and
amortization and after adjustment for unconsolidated partnerships and joint
ventures. We consider FFO to be an appropriate measure of performance for an
equity REIT, along with cash flow from operating activities, financing
activities and investing activities, because it provides investors with an
indication of an equity REIT's ability to incur and service debt, make capital
expenditures, pay distributions and fund other cash needs. We compute FFO in
accordance with the standards established by NAREIT which may not be comparable
to FFO reported by other REITs that do not define the term in accordance with
the current NAREIT definition or that interpret the current NAREIT definition
differently. FFO does not represent cash generated by operating activities in
accordance with GAAP and should not be considered as an alternative to net
income, determined in accordance with GAAP, as an indication of financial
performance or the cash flow from operating activities, determined in accordance
with GAAP, as a measure of liquidity.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Versus 1998
For the three months ended September 30, 1999, compared to the three
months ended September 30, 1998, total revenues increased by $910,000, total
expenses increased by $746,000 and net income increased by $164,000. Total
revenues increased due to rent generated from the acquisition of five properties
in September 1998. Total expenses increased primarily because of higher
depreciation of $942,000 due to property acquisitions. Net income was $11.2
million and $11.0 million for the three months ended September 30, 1999 and
1998, respectively. On pro forma 26 million average shares outstanding, net
income per share would have been $0.43 and $0.42 for the three months ended
September 30, 1999 and 1998, respectively.
Funds from operations increased by $1.1 million for the three months
ended September 30, 1999, compared to the prior period due to income from five
properties acquired in September 1998.
Nine Months Ended September 30, 1999 Versus 1998
For the nine months ended September 30, 1999, compared to the nine
months ended September 30, 1998, total revenues increased by $3.0 million, total
expenses increased by $3.7 million and net income decreased by $675,000. Total
revenues increased due to rent generated from the acquisition of five properties
in September 1998. Total expenses increased primarily because of higher
depreciation of $3.0 million due to property acquisitions and higher allocated
interest expense as a result of increased borrowings by HRPT Properties Trust
("HRPT"). Net income was $33.0 million and $33.7 million for the nine months
ended September 30, 1999 and 1998, respectively. On pro forma 26 million average
shares outstanding, net income per share would have been $1.27 and $1.30 for the
nine months ended September 30, 1999 and 1998, respectively.
Funds from operations increased by $2.4 million for the nine months
ended September 30, 1999, compared to the prior period due to income from five
properties acquired in September 1998.
LIQUIDITY AND CAPITAL RESOURCES
In September 1999, our registration statement on Form S-11 was declared
effective by the Securities and Exchange Commission relating to the distribution
of 13.2 million of our common shares to HRPT's shareholders (the "Spin-Off").
Prior to the Spin-Off, we had 26 million common shares outstanding, all of which
were owned by HRPT. On October 12, 1999, HRPT distributed 13.2 million of our
common shares to HRPT's shareholders of record on October 8, 1999. Our common
shares now trade on the New York Stock Exchange under the symbol "SNH".
7
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SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
At September 30, 1999, we had cash and cash equivalents of $170,000 and
pursuant to the Spin-Off in October 1999, we received $18.5 million from HRPT.
For the nine months ended September 30, 1999 and 1998, cash flows from operating
activities were $47.4 million and $46.9 million, respectively, cash flows from
investing activities were $286,000 and $217,000, respectively, and cash used for
financing activities was $47.6 million and $47.1 million, respectively. We
expect the cash transferred to us ($18.5 million) from HRPT and future cash
flows from operating activities will be sufficient to meet our short-term and
long-term working capital requirements including our first distribution of $15.6
million or $0.60 per share for the quarter ending on September 30, 1999, which
we will pay on or about November 22, 1999.
On September 1, 1999, we agreed to pay HRPT $200 million (the
"Formation Debt") in connection with the transfer to us of HRPT's 100% ownership
of the several subsidiaries that owned our properties. The Formation Debt bore
interest at HRPT's weighted average cost of debt (7.1% as of September 30, 1999)
and was paid to HRPT on October 13, 1999.
In September 1999, we entered into an agreement for a $350 million,
three-year, interest only bank credit facility secured by first mortgages on 18
properties. The interest rate is LIBOR plus 2.0% per annum and will increase by
0.25% if our debt to total capital, as defined, exceeds 50%. The bank credit
facility is available for acquisitions, working capital and for general business
purposes. We have the ability to repay and redraw amounts under this bank credit
facility until its maturity in 2002. Our bank credit facility documentation has
customary representations, warranties, covenants and event of default
provisions. The material restrictive financial covenants requires us to:
- limit debt to no more than 60% of total capital, as defined;
- maintain a ratio of net income plus interest expense and
depreciation to interest expense of at least 1.5; and
- maintain a tangible net worth, as defined, of $450 million,
subject to increases based on equity issuances.
After the Spin-Off, we borrowed $200 million under this bank credit
facility, which we used to pay the Formation Debt to HRPT. We currently have
$150 million available for acquisitions, working capital and general business
purposes.
Total assets decreased by $15.9 million from $686.3 million as of
December 31, 1998, to $670.4 million as of September 30, 1999. The decrease is
primarily due to depreciation on real estate properties.
After completion of the Spin-Off, in both the short-term and the
long-term, we intend to acquire additional senior housing properties. These
purchases will be initially funded with excess working capital, if any, and
proceeds of borrowings under the bank credit facility. After properties are
acquired, bank credit facility borrowings may be repaid with long-term debt or
equity capital. After completion of the Spin-Off, we have: $200 million of debt
outstanding; book equity of $443.9 million; and total real estate assets, at
historical cost, of $770 million. In these circumstances, we believe that we
will have sufficient access to capital markets to meet our growth objectives and
refinance our debt as needed. However, access to growth capital will depend upon
numerous facts, including some beyond our control; and we can provide no
assurance that we will be able to raise additional capital in sufficient
amounts, or at appropriate costs, to fund growth or to repay debt in both the
short-term and the long-term.
8
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SENIOR HOUSING PROPERTIES TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Year 2000
Our in-house computer systems are limited to software and hardware
developed by third parties and installed, operated and monitored by our
investment advisor, Reit Management & Research, Inc. ("Reit Management"). All of
the computer systems, which are limited to information systems, were installed
within the last two years. All of the critical enterprise wide systems are
warrantied in writing to be year 2000 compliant by the manufacturers and have
been tested by Reit Management. These systems include the network hardware, the
network operating system, the desktop operating system, business application
software, financial accounting software and communication software. Other than
those operated by our tenants, we have no critical non-information technology
systems, and no such systems are provided to us by Reit Management. All costs
associated with our computer systems are borne by Reit Management.
All of our properties are leased on a triple net basis and are not
managed by us. Ninety-seven percent of our tenants are operated by public
companies which have filed reports containing year 2000 preparedness information
with the SEC. The leases require the tenants to conduct the daily operations of
the properties and the scope of the tenants' responsibility includes ensuring
preparedness for the year 2000. Because of our leases, the only actions that we
can take with respect to our properties is to inquire of our tenants, monitor
our tenants' SEC filings and evaluate their year 2000 preparedness plans for all
systems, including financial and nonfinancial systems such as elevators, heating
and ventilation and life safety systems. Six of our nine tenants that operate
97% of our investments have responded in writing to our inquiries regarding
their preparedness for issues related to the year 2000. Based on these responses
and tenant public disclosures which we have reviewed, we believe that our
tenants are in the process of studying their systems and the systems for their
vendors, suppliers and service providers to ensure preparedness but to our
knowledge none of our tenants have yet reported they are year 2000 compliant.
Current levels of preparedness are varied and include partially completed
inventory and assessment of potential risks, testing, implementation of plans
for remediation and reprogramming. While we believe that the efforts of our
tenants described in their responses and in their public filings will be
adequate to address year 2000 concerns, there can be no guarantee that all
tenant operations and those of their vendors and payers, including federal and
state Medicare and Medicaid systems, will be year 2000 compliant on a timely
basis and will not have a material effect on us.
If our efforts and the efforts of our vendors, customers and tenants,
and their customers and vendors to prepare for the year 2000 were ineffective,
the operation of our properties could be subject to significant adverse effects,
including, but not limited to, loss of business and growth opportunities,
reduced revenues and increased expenses which might cause operating losses to
our tenants. Continued or severe operating losses may cause one or more of our
tenants to default on their leases. Numerous lease defaults could jeopardize our
ability to maintain our financial results of operations, meet our financial,
operating and capital obligations and timely pay our distributions to
shareholders.
In particular, the worst case scenario which we can envision at this
time is that some of our tenants may be unable to pay their rents on a timely
basis because some of their payment sources, such as Medicare or Medicaid, are
delayed. In these circumstances, we may be unable to meet our debt obligations
or to timely pay distributions.
We do not currently have a contingency plan in place in the event we,
or our tenants, do not successfully remedy year 2000 compliance issues that are
identified in a timely manner or fail to identify any year 2000 issues. We
continue to evaluate the status of our year 2000 compliance plan and will
determine whether a contingency plan is necessary.
9
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SENIOR HOUSING PROPERTIES TRUST
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market changes in interest rates. Because interest on
all our outstanding debt is at a floating rate, changes in interest rates will
not affect the value of our outstanding debt instruments. However, changes in
interest rates will affect our operating results. For example, the interest rate
payable on our outstanding indebtedness of $200 million at September 30, 1999,
is 7.1% per annum. An immediate 10% change in that interest rate or 71 basis
points, would increase or decrease our costs by $1.4 million, or $0.05 per share
per year:
Impact of Changes in Interest Rates
(dollars in thousands)
Total Interest
Interest Outstanding Expense Per
Rate Per Year Debt Year
-------------- -------------- ----------------
At September 30, 1999 7.10% $200,000 $14,200
10% reduction 6.39% 200,000 12,780
10% increase 7.81% 200,000 15,620
The foregoing table presents a so-called "shock" analysis, which
assumes that the interest rate change by 10%, or 71 basis points, is in effect
for a whole year. If interest rates were to change gradually over one year, the
impact would be less.
We borrow in U.S. dollars and all of our current borrowings are subject
to interest at LIBOR plus a premium. Accordingly, we are vulnerable to changes
in U.S. dollar based short-term rates, specifically LIBOR.
During the past few months, short-term U.S. dollar based interest rates
have tended to rise. We are unable to predict the direction or amount of
interest rate changes during the next year. We have decided not to purchase an
interest rate cap or other hedge to protect against future rate increases, but
we may enter such agreements in the future. Also, we may incur additional debt
at floating or fixed rates, which would increase our exposure to market changes
in interest rates.
We currently own mortgage receivables with a carrying value of $37.5
million. When comparable term market interest rates decline, the value of these
receivables increases; when comparable term market interest rates rise, the
value of these receivables declines. Using discounted cash flow analyses at a
weighted average estimated per year market rate for September 30, 1999 of
10.75%, the estimated fair value of our mortgage receivables was $38.4 million.
An immediate 10% change in the market rate of interest, or 108 basis
points, applicable to our mortgage receivables at September 30,1999, would
affect the fair value of those receivables as follows:
Carrying Value
Interest Rate of Mortgage Estimated
Per Year Receivables Fair Value
--------------- ------------------ ---------------
(dollars in thousands)
Estimated market 10.75% $37,540 $38,372
10% reduction 9.67% 37,540 40,917
10% increase 11.83% 37,540 36,057
If the market rate changes occurred gradually over time, the effect of
these changes would be realized gradually. Because our mortgage receivables are
fixed rate instruments, changes in market interest rates will have no effect on
our operating results unless these receivables are sold. At this time, we expect
to hold our existing mortgages to their maturity and not to realize any profit
or loss from trading these mortgage receivables. Also, we do not presently
expect to expand our mortgage investments.
The interest rate changes that affect the valuations of our mortgages
are U.S. dollar long-term rates for corporate obligations of companies with
ratings similar to our mortgagors.
10
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SENIOR HOUSING PROPERTIES TRUST
Part II Other Information
Item 5. Other Information
Mariner Post-Acute Network, Inc., which leases 11% of our investments
and pays 18% of annual rents, reported a loss of $405.7 million for the quarter
ended June 30, 1999 and in October 1999 announced that it did not make interest
payment on its bank credit facility and some of its senior subordinated debt.
Integrated Health Services, Inc., which leases 29% of our investments and pays
30% of annual rents, reported a loss of $4.6 million for the quarter ended June
30, 1999 and in November 1999 announced that it did not make interest payment on
some of its senior subordinated debt. Genesis Health Ventures, Inc., which
leases 2% of our investments and pays 2% of annual rents, reported a loss of
$1.0 million for the quarter ended June 30, 1999. As of November 12, 1999, all
of these tenants were in compliance with their obligations to us.
One of our smaller tenants, The Frontier Group ("Frontier"), a
privately held company which leases 2% of our investments and pays 2% of annual
rents. Sun Healthcare Group, Inc. ("Sun Healthcare") is also obligated under
this lease. In July 1999 and October 1999, Frontier and Sun Healthcare,
respectively filed for reorganization under Chapter 11 of the Bankruptcy Code.
Currently, these nursing homes are being operated by a court appointed receiver.
We are negotiating to collect rent, including arrearages of approximately $1.1
million through November 1, 1999, from Sun Healthcare, Frontier or the receiver
and to find a substitute tenant or for a possible sale of the properties. Also,
we are preparing, if necessary, to operate these properties for our own account
until the properties are leased to a substitute tenant or sold to a third party.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
None.
11
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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 Securities Exchange Act of
1934, as amended. Those statements appear in a number of places in this Form
10-Q and include statements regarding our intent, belief or expectations with
respect to the Spin-Off, the declaration or payment of dividends, the
consummation of additional acquisitions, policies and plans regarding
investments, financings or other matters, our qualification and continued
qualification as a real estate investment trust or trends affecting our or any
of our property's financial condition or results of operations. Readers are
cautioned that any such forward looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contained in the forward looking statements as a
result of various factors. Such factors include without limitation changes in
financing terms, our ability or inability to complete acquisitions and financing
transactions, results of operations of our properties, the ability of some of
our tenants to restructure their debt obligations to third parties and general
changes in economic conditions not presently contemplated. The information
contained in this Form 10-Q, including the information under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", identifies other important factors that could cause differences.
The Declaration of Trust establishing the Company, dated DECEMBER 16,
1998, a copy of which, together with all amendments thereto (the "Declaration"),
is duly filed in the Office of the Department of Assessments and Taxation of the
State of Maryland, provides that the name "SENIOR HOUSING Properties Trust"
refers to the trustees under the Declaration collectively as trustees, but not
individually or personally, and that no trustee, officer, shareholder, employee
or agent of the Company shall be held to any personal liability, jointly or
severally, for any obligation of, or claim against, the Company. All persons
dealing with the Company, in any way, shall look only to the assets of the
Company for the payment of any sum or the performance of any obligation.
12
<PAGE>
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 15, 1999
By: /s/ Ajay Saini
Ajay Saini
Treasurer and Chief Financial Officer
Dated: November 15, 1999
13
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