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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 001-15319
SENIOR HOUSING PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 04-3445278
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
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 November 13, 2000:
25,916,100 shares of beneficial interest, $0.01 par value.
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SENIOR HOUSING PROPERTIES TRUST
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
Page
----
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PART I Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 1
Consolidated Statements of Income - Three and Nine Months Ended September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows -Nine Months Ended September 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II Other Information
Item 2. Changes in Securities 13
Item 6. Exhibits and Reports on Form 8-K 13
Certain Important Factors 14
Signatures 15
</TABLE>
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<TABLE>
<CAPTION>
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
(unaudited)
September 30, December 31,
2000 1999
-------------- ------------
<S> <C> <C>
ASSETS
Real estate properties, at cost
Land $ 69,036 $ 69,673
Buildings and improvements 632,404 639,066
--------- ---------
701,440 708,739
Less accumulated depreciation (115,678) (108,709)
--------- ---------
585,762 600,030
Real estate mortgages receivable, net of loan loss reserve of $14,500
in 1999 -- 22,939
Cash and cash equivalents 7,028 17,091
Investment in HRPT Properties Trust 7,125 --
Net investment in facilities' operations 23,902 --
Other assets 8,771 13,940
--------- ---------
$ 632,588 $ 654,000
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $ 201,000 $ 200,000
Deferred rents 9,040 26,715
Security deposits 235 15,235
Accrued expenses, other liabilities and deferred credit 24,126 2,644
Shareholders' equity:
Common shares of beneficial interest, $0.01 par value:
25,916,100 shares and 26,001,500 shares issued and outstanding
at September 30, 2000, and December 31, 1999, respectively 259 260
Additional paid-in capital 444,638 444,511
Cumulative net loss (562) (19,764)
Cumulative distributions (46,773) (15,601)
Unrealized gain on investment in HRPT Properties Trust 625 --
--------- ---------
Total shareholders' equity 398,187 409,406
--------- ---------
$ 632,588 $ 654,000
========= =========
</TABLE>
See accompanying notes
1
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<TABLE>
<CAPTION>
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,
--------------------------------- --------------------------------
2000 1999 2000 1999
------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income $13,624 $21,185 $49,880 $63,594
Other real estate income 1,228 -- 1,228 --
Interest and other income 356 1,436 1,329 4,317
------- ------- ------- -------
Total revenues 15,208 22,621 52,437 67,911
------- ------- ------- -------
Expenses:
Interest 4,196 4,771 12,595 14,763
Depreciation 5,062 5,520 15,379 16,727
General and administrative 1,576 1,154 5,261 3,413
------- ------- ------- -------
Total expenses 10,834 11,445 33,235 34,903
------- ------- ------- -------
Net income $ 4,374 $11,176 $19,202 $33,008
======= ======= ======= =======
Weighted average shares outstanding 25,912 26,000 25,979 26,000
======= ======= ======= =======
Basic and diluted earnings per share data:
Net income $ 0.17 $ 0.43 $ 0.74 $ 1.27
======= ======= ======= =======
</TABLE>
See accompanying notes
2
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<TABLE>
<CAPTION>
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine Months Ended September 30,
-------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,202 $ 33,008
Adjustments to reconcile net income to cash provided by
operating activities:
Other real estate income (1,228) --
Depreciation 15,379 16,727
Changes in assets and liabilities:
Other assets 2,249 (1,127)
Deferred rents (700) (1,285)
Accrued expenses, other liabilities and deferred credit 2,297 47
--------- ---------
Cash provided by operating activities 37,199 47,370
--------- ---------
Cash flows from investing activities:
Proceeds from sale of real estate, net 12,178 --
Equipment purchases (179) --
Repayments of mortgage loans -- 286
Investment in facilities' operations (29,089) --
--------- ---------
Cash (used for) provided by investing activities (17,090) 286
--------- ---------
Cash flows from financing activities:
Repayment of credit facility (22,000) --
Draws on credit facility 23,000 --
Owner's net distribution -- (47,625)
Distributions to shareholders (31,172) --
--------- ---------
Cash used for financing activities (30,172) (47,625)
--------- ---------
(Decrease)increase in cash and cash equivalents (10,063) 31
Cash and cash equivalents at beginning of period 17,091 139
--------- ---------
Cash and cash equivalents at end of period $ 7,028 $ 170
========= =========
Supplemental cash flow information:
Non-cash financing activities:
Formation debt due to HRPT Properties Trust $-- $ 200,000
Owner's distribution -- (200,000)
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 --
</TABLE>
See accompanying notes
3
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SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization
Senior Housing Properties Trust ("Senior Housing"), a Maryland real estate
investment trust, was organized on December 16, 1998, as a 100% owned subsidiary
of HRPT Properties Trust ("HRPT"). On October 12, 1999, HRPT distributed 50.7%
of its ownership in Senior Housing to HRPT shareholders (the "Spin-Off"). Prior
to the Spin-Off, the assets of Senior Housing were owned by HRPT. These
consolidated financial statements are presented as if Senior Housing was a
separate legal entity from HRPT prior to the Spin-Off, although no such entity
existed until October 12, 1999.
At September 30, 2000, Senior Housing owned 90 properties in 24 states and
operated in a single segment.
Note 2. Interim Financial Statements
The quarterly financial statements of Senior Housing have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 1999, included in the
Annual Report on Form 10-K. In the opinion of management, all adjustments
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 3. Summary of Significant Accounting Policies
BASIS OF PRESENTATION. Prior to the Spin-Off, all of Senior Housing, including
its properties and mortgages, was owned by HRPT, and transactions in those
periods have been presented on HRPT's historical basis. Prior to the Spin-Off,
substantially all the rental income and mortgage interest income received by
HRPT from the tenants and mortgagors of Senior Housing was deposited in and
commingled with HRPT's general funds. Funds for capital investments and other
cash required by Senior Housing were provided by HRPT. Prior to the Spin-Off,
interest expense was allocated based on HRPT's historical interest expense as a
percentage of HRPT's average historical costs of real estate investments.
General and administrative costs of HRPT for the periods prior to the Spin-Off
were allocated to Senior Housing based on HRPT's investment advisory agreement
formula and other costs were allocated based on historical costs as a percentage
of HRPT's average historical costs of real estate investments. In the opinion of
management, the methods for allocating interest and general and administrative
expenses were reasonable. It was not practical to estimate additional costs that
would have been incurred by Senior Housing as a separate entity.
In December 1999 the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Accounting for Contingent Rent in Interim Financial Periods"
("SAB 101"). Senior Housing has adopted the provisions of SAB 101 prospectively
as of January 1, 2000. If Senior Housing had elected the adoption retroactively
to January 1, 1999, for the three and nine months ended September 30, 1999, net
income would have been $10.5 million ($0.40/share) and $30.9 million
($1.19/share), respectively. SAB 101 will have no impact on Senior Housing's
annual results of operations, rather the accounting changes required by SAB 101
are expected to defer recognition of percentage rental income from the first,
second and third quarters to the fourth quarter within a fiscal year.
EARNINGS PER COMMON SHARE. Because Senior Housing's operations were included in
the consolidated financial statements of HRPT prior to the Spin-Off, there were
no shareholder equity accounts for Senior Housing prior to 1999. Common shares
outstanding of 26.0 million at October 12, 1999, have been included in the
earnings per share calculation as if the shares were outstanding for all periods
prior to October 12, 1999. Earnings per common share are computed using the
weighted average number of shares outstanding during the period. Senior Housing
has no common share equivalents, instruments convertible into common shares or
other dilutive instruments.
4
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SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Comprehensive Income
The following is a reconciliation of net income to comprehensive income for the
three and nine months ended September 30, 2000 and 1999: (in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------ ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Net income $4,374 $11,176 $19,202 $33,008
Other comprehensive income:
Unrealized gain on
investment in HRPT 625 -- 625 --
----------------- --------------- ----------------- ----------------
Comprehensive income $4,999 $11,176 $19,827 $33,008
================= ================ ================= ================
</TABLE>
Note 5. Tenant Defaults
Senior Housing previously leased four nursing facilities to Sun Healthcare
Group, Inc. ("Sun"), three of which facilities were subleased to Frontier Group,
Inc. ("Frontier") and the fourth was subleased to a regional operator in
Washington State. Frontier filed for bankruptcy in July 1999 and Sun filed for
bankruptcy in October 1999. A receiver was appointed to operate the Frontier
nursing homes and some rents due Senior Housing for all four facilities were
unpaid. In February 2000 Senior Housing sold the three Frontier properties.
Claims against Sun, Frontier and the Frontier receiver have been settled. Senior
Housing's claims against the regional operator in Washington State remain
pending. Future income realized by Senior Housing will be adversely impacted by
the loss of rental income from the three sold properties.
Senior Housing previously leased 26 nursing homes to Mariner Post-Acute Network,
Inc. ("Mariner"). Mariner filed for bankruptcy in January 2000. In June 2000
Senior Housing's restructuring agreement with Mariner was approved by the
bankruptcy court. Full implementation of this restructuring is contingent upon
Senior Housing obtaining regulatory approvals in the states where these
properties are located. In accordance with the restructuring agreement, as of
July 1, 2000:
o Mariner's lease obligations for all 26 properties owned by Senior
Housing and previously operated by Mariner were terminated.
o A $15.0 million cash security deposit, 1,000,000 common shares of HRPT
and 100,000 common shares of Senior Housing which secured Mariner's
obligations were retained by Senior Housing.
o Senior Housing assumed operating responsibilities for 17 of the 26
properties. Ownership of five of the properties was transferred to
Mariner. The four remaining properties were previously subleased to
two private companies and Senior Housing is negotiating with these two
private companies for their continued operation of those properties or
to assume operations for its own account.
Senior Housing previously leased or mortgaged 39 nursing homes operated by
Integrated Health Services, Inc. ("IHS"). IHS filed for bankruptcy in February
2000. In July 2000 Senior Housing's restructuring agreement with IHS was
approved by the bankruptcy court. Full implementation of this restructuring is
contingent upon Senior Housing obtaining regulatory approvals in the states
where these properties are located. The restructuring provides that:
o IHS paid Senior Housing $600,000 per month for the use and occupancy
of Senior Housing's properties from the date of IHS's bankruptcy
filing until June 30, 2000.
o The lease for one property was amended to provide a new ten-year term
and rent at $1.2 million per year, effective January 1, 2000.
o Senior Housing's mortgage investment secured by one property was
cancelled effective July 1, 2000, and IHS continues to own and operate
that property.
5
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SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
o IHS's lease and mortgage obligations to Senior Housing for the
additional 37 properties were terminated as of July 1, 2000.
o IHS conveyed nine properties to Senior Housing which were previously
owned by IHS free of debt effective July 1, 2000.
o In addition, a subsidiary of HEALTHSOUTH Corporation ("HEALTHSOUTH"),
was a guarantor of the lease obligations for four properties owned by
Senior Housing and leased to IHS. HEALTHSOUTH assumed the tenancy for
these four properties and for one property that was conveyed to Senior
Housing by IHS. Annual minimum rents under these five leases total
approximately $10.0 million. These leases expire in 2006 and provide
for rental increases based on increases in net patient revenues.
o Senior Housing assumed operating responsibility for 41 properties
effective July 1, 2000.
The bankruptcy filings and restructuring agreements with Mariner and IHS are
expected to adversely impact Senior Housing's revenues and net income which may
be realized in the future compared to the rental income and mortgage interest
which Senior Housing previously received from Mariner and IHS.
Note 6. Report of Tenant's Financial Condition
On June 22, 2000, Multicare, Inc., a non-consolidated subsidiary of Genesis
Health Ventures, Inc., ("Multicare") filed for bankruptcy. Multicare leases one
property from Senior Housing. Senior Housing's annual rent from this property is
$1.5 million. As of October 31, 2000, Multicare is current on its rent
obligations to Senior Housing.
Note 7. Investment in HRPT Properties Trust/Unrealized Gain on Investment
As a result of the restructuring agreement with Mariner described in Note 5
above, one million shares of HRPT which were owned by Mariner and previously
pledged to secure Mariner's lease obligations were transferred to Senior Housing
on July 1, 2000. The Unrealized Gain On Investment shown on the balance sheet
represents the difference between the market price of these HRPT shares on July
1, 2000 ($6.50 per share), and on September 30, 2000 ($7.125 per share).
Note 8. Net Investment in Operating Facilities/Other Real Estate Income
As described in Notes 5 and 12, Senior Housing assumed operating responsibility
for 58 nursing homes effective July 1, 2000. The capital invested in these
operations is included on Senior Housing's balance sheet as Net Investment In
Facilities' Operations. The net income from these facilities' operations is
shown on Senior Housing's income statements as Other Real Estate Income. The
following is summary financial data for Senior Housing's investment in these
facilities' operations (in thousands):
<TABLE>
<CAPTION>
Balance Sheet Data Operating Income Data
(as of 9/30/00) (for the three months ended 9/30/00)
------------------------------------------------------- --------------------------------------------------
<S> <C> <C> <C>
Current assets $41,158 Revenues $55,515
Property and equipment, net 7,536 Expenses 54,287
-------------------- --------------------
Total assets $48,694 Other real estate income $ 1,228
==================== ====================
Current liabilities $24,792
Net investment in facilities'
operations 23,902
--------------------
Total liabilities and net
investment in operating
facilities $48,694
====================
</TABLE>
6
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SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9. Indebtedness
At September 30, 2000, Senior Housing had a $350 million, three-year, interest
only, revolving secured bank credit facility. The bank credit facility matures
in 2002. The interest rate is LIBOR plus a premium (8.62% at September 30,
2000). The bank credit facility is available for acquisitions, working capital
and for general business purposes. As of September 30, 2000, $201 million was
outstanding and $149 million was available under the credit facility. See Note
13 below.
Note 10. Shareholders' Equity
Senior Housing has reserved 1,300,000 shares of its common shares for possible
issuance under the terms of an Incentive Share Award Plan (the "Award Plan"). In
May 2000 the three Independent Trustees were each awarded 500 common shares
under the Award Plan as part of their annual fee. On August 1, 2000, 13,100
common shares were awarded pursuant to the Award Plan to Senior Housing's
officers and certain employees of REIT Management & Research, Inc. ("RMR"), the
investment advisor to Senior Housing. The shares awarded to Senior Housing's
officers and employees of RMR vest over a three-year period. The shares awarded
to the Trustees vest immediately. At September 30, 2000, 1,283,900 of Senior
Housing's common shares remain reserved for issuance under the Award Plan.
On August 24, 2000, Senior Housing paid a distribution to shareholders of $0.30
per share, or $7.8 million. On October 5, 2000, Senior Housing declared a
distribution of $0.30 per share, or $7.8 million, which will be distributed to
shareholders on or about November 21, 2000.
In connection with the restructuring with Mariner, Senior Housing received
100,000 of its own common shares and, effective July 1, 2000, these shares were
cancelled.
Note 11. Management Agreements
Five Star Quality Care, Inc. ("Five Star"), a recently formed company owned by
Barry Portnoy and Gerard Martin, Senior Housing's Managing Trustees, is
currently managing all of the nursing home businesses which Senior Housing
obtained in the restructurings with Mariner and IHS. Under applicable Internal
Revenue Code provisions, a REIT such as Senior Housing is allowed to operate
foreclosure properties and properties received from defaulting tenants for its
own account for up to three months and thereafter for up to four years provided
the REIT engages an independent contractor to manage the operations on market
terms. Five Star is an independent contractor to Senior Housing within the
meaning of these applicable laws. During the first three months Senior Housing
assumed the operations for the 58 facilities, Five Star managed these properties
and incurred $2.3 million of costs and Five Star was paid $2.3 million by Senior
Housing.
Note 12. Contingencies
The restructuring agreements entered by Senior Housing with Mariner and IHS are
contingent, in part, upon Senior Housing and its affiliates obtaining licenses
and other governmental approvals necessary to operate the 58 affected nursing
homes. Senior Housing has applied for all of the required licenses and as of
November 1, 2000, the required licenses for 22 of these facilities have been
received. Required licenses for the remaining facilities which are located in
six states are pending and are expected to be received. If Senior Housing is
unable to obtain the licenses necessary to operate these nursing homes, the
restructuring agreements with Mariner and IHS may have to be renegotiated or
Senior Housing may have to identify another licensed operator to lease or
purchase these properties. A failure to obtain necessary licenses would have
adverse financial consequences to Senior Housing.
A substantial majority of the revenues at the 58 nursing homes now operated by
Senior Housing is received from the Federal Medicare program and from various
state Medicaid programs. Until Senior Housing received or receives the required
licenses to operate these nursing homes, billings for these patients were and
are made through Mariner and IHS as licensees, respectively. Applicable
provisions of Federal and some state laws allow paying agents for
7
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SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
these Medicare and Medicaid programs to recoup amounts owed by Mariner and IHS
to these programs for historical overpayments from current payments despite the
bankruptcy filings by Mariner and IHS. Also, some state nursing home licensing
agencies have in the past required that a successor nursing home licensee, such
as Senior Housing, agree to assume financial responsibility for a predecessor
licensee's obligations due to those state Medicaid programs. Senior Housing has
negotiated agreements with the U.S. Department of Justice to limit Senior
Housing's liabilities for obligations of Mariner and IHS to the Federal Medicare
program and those agreements have been approved by the bankruptcy courts. As
Senior Housing seeks licenses and new Medicaid provider agreements in the states
where these 58 nursing homes are located, Senior Housing has attempted to
eliminate or mitigate its financial responsibility for obligations of Mariner
and IHS to those states.
Three of the 41 nursing homes formerly operated by IHS are currently licensed to
an affiliate of RMR, Advisors Healthcare Group, Inc. ("AHG"). AHG assumed
responsibility as the licensee of these properties as an accommodation to Senior
Housing and to the predecessor of IHS. IHS was the manager of these three
properties and was financially responsible for all operating profits and losses
of these properties after rent due Senior Housing; and IHS guaranteed that rent.
As a result of the IHS bankruptcy, some historical operating expenses of these
nursing homes have not been paid and may not be paid by IHS. Some of these
creditors have asserted claims against AHG and Senior Housing. Senior Housing
and AHG have defended against these claims based upon the contractual
arrangements with IHS and the IHS bankruptcy; nonetheless, the outcome of such
claims can not be predicted at this time. Similarly, Senior Housing has paid
certain creditor claims arising at the nursing homes previously operated by
Mariner and IHS in order to maintain patient services.
The amounts of the security deposits and of other assets transferred to Senior
Housing by its bankrupt tenants, net of the book values of assets transferred to
Mariner and IHS as described in Note 5 above, have been included in Accrued
Expenses, Other Liabilities And Deferred Credit on the September 30, 2000,
balance sheet to cover the costs incurred to assume operations of the 58 nursing
homes, including any liabilities of the former tenants for which Senior Housing
may be responsible, the costs and expenses of obtaining the nursing home
licenses, and the legal, accounting and other costs arising from the tenant
bankruptcies. Senior Housing believes that the net values it has received under
these agreements with its bankrupt former tenants will be sufficient to cover
all of these charges and may result in a gain. Due to the number of
contingencies associated with obtaining licenses and Medicare and Medicaid
provider agreements, any gain has been deferred until Senior Housing can
reasonably estimate the total costs it will incur and the amount of liabilities
it may be required to assume.
Eight of the 41 nursing homes delivered to Senior Housing by IHS were not
previously owned or mortgaged by Senior Housing. These properties were
transferred to Senior Housing by IHS as partial compensation for its defaults
under mortgages and leases. Because these properties were not owned or mortgaged
by Senior Housing they do not constitute foreclosure property under Internal
Revenue Code provisions which permit REITs to operate nursing homes. To comply
with laws applicable to REITs these nursing homes are now operated by
corporations which are 99% beneficially owned by Senior Housing and 1%
beneficially owned by Senior Housing's Managing Trustees, Barry Portnoy and
Gerard Martin, who also control 100% of the voting power of these corporations.
Senior Housing is now studying various forms of business organizations which may
permit the continued operation of these corporations for its benefit after
January 1, 2001, when the REIT Modernization Act of 1999 becomes effective and
so called 99/1 corporations are no longer an acceptable means for REITs to
operate nursing homes.
Note 13. Subsequent Events
On October 31, 2000, Senior Housing sold four independent living properties
which were leased to Brookdale Living Communities, Inc. for $123 million. Senior
Housing acquired these properties in December 1996 and May 1997 for a total
investment of $101.9 million. After taking account of previously recorded
depreciation, Senior Housing recorded a gain on sale of approximately $27
million. Proceeds from the sale were used to reduce amounts outstanding under
Senior Housing's bank credit facility. The four sold properties were part of the
collateral security for the bank credit facility and the capacity of the bank
credit facility was adjusted to a maximum of $270 million. The amount
outstanding under the bank credit facility after application of the sales
proceeds on October 31, 2000, was $71 million and $199 million was available to
draw.
8
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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 our results of operations for
the three and nine months ended September 30, 2000 and 1999. This discussion
includes references to funds from operations. Funds from operations, or "FFO",
as defined in the white paper on funds from operations which was approved by the
Board of Governors of the National Association of Real Estate Investment Trusts
("NAREIT") in March 1995 and as clarified from time to time, is net income
computed in accordance with Generally Accepted Accounting Principles ("GAAP"),
before extraordinary items, plus depreciation and amortization and after
adjustment for unconsolidated partnerships and joint ventures. We consider FFO
to be an appropriate measure of performance for an equity REIT, along with cash
flow from operating activities, financing activities and investing activities,
because it provides investors with an indication of an equity REIT's ability to
incur and service debt, make capital expenditures, pay distributions and fund
other cash needs. We believe that we compute FFO in accordance with the
definition established by NAREIT. The NAREIT definition was established before
the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101,
which requires deferral of contingent rent in interim financial statements of
income. We include estimates of contingent rent in our calculation of FFO in
interim statements. The way we calculate FFO may not be comparable to FFO
reported by other REITs that define the term differently. FFO does not represent
cash generated by operating activities in accordance with GAAP and should not be
considered as an alternative to net income, determined in accordance with GAAP,
as an indication of financial performance or the cash flow from operating
activities, determined in accordance with GAAP, or as a measure of liquidity.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000, Compared to Three Months Ended September
30, 1999
For the three months ended September 30, 2000, compared to the three months
ended September 30, 1999, total revenues decreased to $15.2 million from $22.6
million. This decrease is primarily due to the tenant bankruptcies and the
settlement and restructuring agreements described below. The revenues for the
three months ended September 30, 2000, include other real estate income of $1.2
million. This other real estate income represents the net operating income we
realized as a result of nursing home operations which we undertook on July 1,
2000.
Total expenses for the three months ended September 30, 2000, were $10.8 million
compared to total expenses for the three months ended September 30, 1999, of
$11.4 million. Interest expense in 2000 was $575,000 lower because actual
interest expense incurred during 2000 was less than HRPT Properties Trust's
("HRPT") interest expense allocated to us in 1999. Depreciation expense was
lower in 2000 by $458,000 compared to 1999 because we sold three properties in
February 2000, a reduction in asset values as a result of an impairment loss
recorded at December 31, 1999, and the net effect of the assets disposed of
versus assets acquired in the restructurings. General and administrative expense
increased by $422,000 for the 2000 period versus the 1999 period because actual
expenses which we incurred were greater than HRPT's 1999 general and
administrative expenses allocated to us and because of increased professional
fees arising from the tenant bankruptcies described below.
Sun Healthcare Group, Inc. ("Sun") previously leased four nursing homes from us.
Sun filed for bankruptcy in October 1999. Three of our four properties leased to
Sun were subleased to Frontier Group, Inc. ("Frontier"). Frontier filed for
bankruptcy in July 1999. We sold the three Frontier subleased properties in
February 2000. Our remaining property leased to Sun was subleased to a private
company nursing home operator. Prior to September 30, 2000, we reached
settlements with the court appointed receiver for Frontier and with Sun
concerning rental arrearages. We are currently in negotiations with the
subtenant of the remaining property formerly leased to Sun. That subtenant has
paid only part of the rent due for the three months in September 30, 2000; and
these negotiations may result in a new lease or in our assuming the operations
of this property.
Mariner Post-Acute Network, Inc. ("Mariner") previously leased 26 nursing homes
from us. Mariner filed for bankruptcy in January 2000. We entered a
restructuring agreement with Mariner effective July 1, 2000. Pursuant to this
restructuring we transferred title to five nursing homes to Mariner and we
cancelled the leases for 17 nursing homes and assumed those operations. The
remaining four properties were subleased by Mariner to two separate private
companies which continue to pay rent to us directly. Also as part of this
restructuring we retained a $15 million security deposit, one million shares of
HRPT Properties Trust previously owned by Mariner and 100,000 of our shares, all
of which were pledged to us to secure Mariner's lease obligations.
9
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SENIOR HOUSING PROPERTIES TRUST
We previously leased or mortgaged 39 nursing homes to Integrated Health
Services, Inc. ("IHS"). In February 2000 IHS filed for bankruptcy. As part of a
restructuring agreement with IHS effective July 1, 2000: (i) we released IHS
from its mortgage obligations to us for one property; (ii) the lease for one
property was amended and extended; (iii) IHS paid us some of its rental
arrearages and transferred to us nine nursing homes which it owned free of debt;
(iv) four of the nursing homes which were previously leased to IHS and one
nursing home delivered to us by IHS were leased to HEALTHSOUTH Corporation; and
(v) we assumed operating responsibility for 41 nursing homes which we formerly
leased or mortgaged to IHS or which we received from IHS.
The following chart summarizes our total portfolio of properties and the impact
upon our revenues of these tenant bankruptcies and the settlement and
restructuring agreements during the three months ended September 30, 2000, and
the comparable period in 1999:
<TABLE>
<CAPTION>
Three Months Ended September 30
($ in 000's)
2000 1999
--------------------------------------------------------
No. of No. of
Tenant Properties Revenues Properties Revenues1
------ ---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Marriott International, Inc.2 14 $ 7,012 14 $ 7,012
Brookdale Living Communities, Inc. 4 2,768 4 2,768
Genesis Health Ventures,
Inc./Multicare Companies, Inc. 1 365 1 362
Two private company tenants 2 169 2 164
Sun Healthcare Group, Inc.:
- Frontier Group, Inc -- -- 3 540
- One subtenant 1 63 1 171
Mariner Post-Acute Network -- -- 26 3,932
- Two subtenants 4 434 -- --
Integrated Health Services, Inc. 1 300 39 6,970
HEALTHSOUTH Corporation, Inc. 5 2,513 -- --
Operating facilities 58 1,228 -- --
(other real estate income)
-------------------------------------------------------
Totals 90 $14,852 90 $21,919
-------------------------------------------------------
<FN>
1. 1999 period includes $1,435 of mortgage interest income.
2. Excludes approximately $700 of percentage rent recorded in the 1999 period and an
approximately equal amount of percentage rent in the 2000 period which is deferred to the
final quarter of 2000 pursuant to SAB 101.
</FN>
</TABLE>
Net income was $4.4 million in the three months ended September 30, 2000, as
compared to $11.2 million in the three months ended September 30, 1999. This
decrease in net income is primarily the consequence of the changes in revenues
and expenses resulting from the tenant bankruptcies, settlements and
restructurings described above.
10
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SENIOR HOUSING PROPERTIES TRUST
FFO for the three months ended September 30, 2000, was $10.2 million, or $0.39
per share, compared to $16.7 million, or $0.64 per share, for the same period in
1999. The decrease of $6.5 million, or $0.25 per share, is due to the factors
discussed above. Cash flows provided by operating activities and cash available
for distribution may not necessarily equal funds from operations as cash flows
are affected by factors not included in the funds from operations calculation,
such as changes in assets and liabilities.
Nine Months Ended September 30, 2000, Compared to Nine Months Ended September
30, 1999
For the nine months ended September 30, 2000, compared to the nine months ended
September 30, 1999, total revenues decreased by $15.5 million, total expenses
decreased by $1.7 million and net income decreased by $13.8 million. Revenues
decreased because of the sale of three properties in February 2000 and the
reduced rent and interest received as a result of the tenant bankruptcies and
the settlement and restructuring agreements described above. Total expenses
decreased due to a decrease in interest expense of $2.2 million and depreciation
expense of $1.3 million, offset by an increase in general and administrative
expenses of $1.8 million. The decrease in interest expense is primarily because
interest expense actually incurred during 2000 was less than HRPT's interest
expense in 1999 allocated to us. The decrease in depreciation expense is
primarily due to the write down for the impairment of assets at December 31,
1999, the sale of three properties in February 2000 and the net effect of the
assets disposed of versus assets acquired in the restructurings. General and
administrative expenses increased because actual expenses which we incurred were
greater than HRPT's 1999 expenses allocated to us and because of increased
professional fees arising from the tenant bankruptcies.
FFO for the nine months ended September 30, 2000, was $36.7 million, or $1.41
per share, compared to $49.7 million, or $1.91 per share, for the same period in
1999. The decrease of $13 million is due to the factors discussed above. Cash
flows provided by operating activities and cash available for distribution may
not necessarily equal funds from operations as cash flows are affected by other
factors not included in the funds from operations calculation, such as changes
in assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had a $350 million, interest only, secured, revolving
bank credit facility. The interest rate is LIBOR plus a premium (8.62% per annum
at September 30, 2000). 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.
On October 31, 2000, we sold four properties formerly leased to Brookdale Living
Communities, Inc. for $123 million. These properties were part of the collateral
security for our bank credit facility; all of the proceeds of this sale were
used to reduce amounts outstanding under the bank credit facility and the
maximum available amount of this facility was reduced to $270 million. On
October 31, 2000, we had $71 million outstanding and $199 million available for
borrowing under this credit facility.
As a result of the settlements and restructurings with bankrupt tenants
described above, we have paid certain costs and expenses and may have to pay
additional charges to obtain nursing home licenses, to settle historical debts
arising from the nursing home operations which we assumed and otherwise. We
retained collateral previously pledged to us to secure the lease and mortgage
obligations which were defaulted, and we also received other property as partial
compensation for these defaults. We believe that the values transferred to us
under these agreements, net of the values which we transferred to the bankrupt
tenants, will be sufficient to cover all our charges arising from these
transactions and may result in a book gain. However, the revenues and net income
which we expect to receive in the future will be less than the rental income and
mortgage interest which we previously received from these bankrupt tenants. The
working capital required to pay charges and for facility operations which we
assumed as a result of these transactions has been provided by drawings under
our revolving bank credit facility. We believe that additional bank drawings and
cash flow from operating activities will be sufficient to meet the additional
capital needs resulting from these transactions.
At September 30, 2000, we had cash and cash equivalents of $7 million. For the
nine months ended September 30, 2000 and 1999, cash provided by operating
activities was $37.2 million and $47.4 million, respectively; cash (used for)
provided by investing activities was ($17.1) million and $286,000, respectively;
and cash used for financing activities was $30.2 million and $47.6 million,
respectively. We expect that our current cash, cash equivalents, future cash
from operating activities and availability under our bank credit facility will
be sufficient to meet our short-term and long-term capital requirements,
including the distribution of $7.8 million, or $0.30 per share, for the quarter
ended on September 30, 2000, which we will pay on or about November 21, 2000.
11
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
Impact of Inflation
Inflation might have both positive and negative impacts upon our business.
Inflation might cause the value of our real estate investments to increase. In
an inflationary environment, the percentage rents which we receive based upon a
percentage of our tenants' revenues should increase. Similarly, inflation may
tend to increase patient revenues and Medicare and Medicaid rates at the
facilities which we operate. Offsetting these benefits, inflation might cause
our costs of equity and debt capital to increase and wages and other operating
costs at the facilities we operate to increase. An increase in our capital costs
or in our operating costs will result in decreased earnings unless it is offset
by increased revenues. In periods of rapid inflation, nursing home operating
costs usually increase faster than revenues and this fact has an adverse impact
upon operating income. We do not believe it will be possible to eliminate the
adverse impact of rapid inflation upon the results of the facilities' operations
which we have undertaken. 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 agreements was and
will be based on the amount of floating rate debt outstanding and our belief
that material interest rate increases are likely to occur.
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 $201 million at September 30, 2000,
was 8.62% per annum. An immediate 10% change in that interest rate, or 86 basis
points, would increase or decrease our costs by approximately $1.7 million, or
$.07 per share per year:
Impact of Changes in Interest Rates
(dollars in thousands)
Total
Interest Rate Outstanding Interest
Per Year Debt Expense Per
Year
------------- ------------ ------------
At September 30, 2000 8.62% $201,000 $17,326
10% reduction 7.76% $201,000 $15,598
10% increase 9.48% $201,000 $19,055
The foregoing table presents a so-called "shock" analysis, which assumes that
the interest rate change by 10%, or 86 basis points, is in effect for a whole
year. If interest rates were to change gradually over one year, the impact would
be less.
We borrow in U.S. dollars and all of our current borrowings are subject to
interest at LIBOR plus a premium. Accordingly, we are vulnerable to changes in
U.S. dollar based short-term rates, specifically LIBOR.
During the past few years, short-term U.S. dollar based interest rates have
tended to rise. We are unable to predict the direction or amount of interest
rate changes during the next year. We have purchased an interest rate cap
agreement covering all our current debt to protect against rate increases of
LIBOR above 8%. Moreover, we may incur additional debt at floating or fixed
rates in the future which would increase our exposure to market changes in
interest rates.
12
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
Part II. Other Information
Item 2. Changes in Securities
Effective July 1, 2000, the Company retired the 100,000 common shares received
from Mariner in connection with the restructuring with Mariner.
On August 1, 2000, pursuant to our incentive share award plan, our officers and
certain employees of our investment advisor, REIT Management & Research Inc.,
received grants aggregating 13,100 common shares valued at $8.625 per share, the
closing price of our common shares on the New York Stock Exchange on August 1,
2000. The grants were made pursuant to the exemption from registration contained
in Section 4(2) of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated July 1, 2000, relating to (i) the
Company's settlements with Mariner Post-Acute Network, Inc. and its
subsidiaries, and with Integrated Health Services, Inc. and its
subsidiaries, and (ii) the management of certain of the Company's
properties by Five Star Quality Care, Inc. (Item 5).
13
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
CERTAIN IMPORTANT FACTORS
THIS QUARTERLY REPORT ON FORM 10Q 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 ABILITY TO SUCCESSFULLY OPERATE NURSING HOMES, THE
POSSIBILITY THAT WE CAN SUCCESSFULLY NEGOTIATE LEASE TERMS WITH FORMER
SUBTENANTS OF SUN AND MARINER, OUR ABILITY TO ELIMINATE OR LIMIT PAYMENTS TO
MEDICARE AND MEDICAID PROGRAMS FOR PAST OVERPAYMENTS TO MARINER AND IHS AND TO
OTHER CREDITORS OF MARINER AND IHS, THE POSSIBILITY THAT WE WILL OBTAIN ALL
LICENSES AND GOVERNMENTAL APPROVALS NECESSARY FOR OPERATION OF OUR NURSING
HOMES, THE POSSIBLITY THAT OUR SETTLEMENTS AND RESTRUCTURING WITH BANKRUPT
FORMER TENANTS MAY RESULT IN A GAIN, OUR ABILITY TO CONTINUE OPERATING NURSING
HOMES AND REMAIN A REIT AND TO PAY DISTRIBUTIONS, AND OTHER MATTERS. THESE
FORWARD LOOKING STATEMENTS ARE BASED UPON OUR CURRENT BELIEFS AND EXPECTATIONS,
BUT THEY ARE NOT GUARANTEED. WE MAY NOT REALIZE A GAIN FROM THE SETTLEMENTS AND
RESTRUCTURING, WE MAY BE UNABLE 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 FORWARD
LOOKING STATEMENTS.
THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING THE COMPANY, A COPY
OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY
FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF
MARYLAND, PROVIDES THAT THE NAME "SENIOR HOUSING PROPERTIES TRUST" REFERS TO THE
TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR
PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE
COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY
OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH US, IN
ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF SENIOR HOUSING PROPERTIES TRUST FOR
THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
14
<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, Chief Operating Officer and
Acting Chief Financial Officer
Dated: November 14, 2000
By: /s/ John R. Hoadley
John R. Hoadley
Controller, Chief Accounting Officer
Dated: November 14, 2000
15
