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SNH > SEC Filings for SNH > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for SENIOR HOUSING PROPERTIES TRUST

Form 10-K for SENIOR HOUSING PROPERTIES TRUST


3-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in this Annual Report on Form 10-K.

PORTFOLIO OVERVIEW

    The following tables present an overview of our portfolio (dollars in
thousands, except living unit / bed or square foot data):

                                                 Number of             Investment                  Investment per
                                Number of      Units/Beds or            Carrying     % of Total     Unit/Bed or                        % of
(As of December 31, 2013)(1)    Properties      Square Feet             Value(2)     Investment    Square Foot(3)     2013 NOI(4)    2013 NOI
Facility Type
Independent living(5)                    62            15,176          $ 1,878,786        35.7%    $       123,800    $    160,287       35.6%
Assisted living(5)                      156            11,531            1,345,645        25.5%    $       116,698         115,469       25.6%
Nursing homes(5)                         47             4,919              202,696         3.8%    $        41,207          18,663        4.1%


Subtotal short and long term
residential care communities            265            31,626            3,427,127        65.0%    $       108,364         294,419       65.3%
MOBs                                     96         7,881,797            1,668,219        31.6%    $           212         138,427       30.8%
Wellness centers                         10           812,000  sq. ft.     180,017         3.4%    $           222          17,577        3.9%


Total                                   371                            $ 5,275,363       100.0%                       $    450,423      100.0%




Tenant/Operator/Managed
Properties(8)
Five Star (Lease No. 1)                  90             6,626              688,718        13.1%    $       103,942          60,029       13.3%
Five Star (Lease No. 2)                  51             7,200              682,054        12.9%    $        94,730          62,059       13.8%
Five Star (Lease No. 3)                  17             3,281              352,380         6.7%    $       107,400          35,271        7.8%
Five Star (Lease No. 4)                  29             3,335              388,298         7.4%    $       116,431          35,239        7.8%


Subtotal Five Star                      187            20,442            2,111,450        40.1%    $       103,290         192,598       42.7%
Sunrise/Marriott(6)                       4             1,619              126,326         2.4%    $        78,027          14,523        3.2%
Brookdale                                18               894               61,122         1.2%    $        68,369           9,076        2.0%
6 private senior living
companies (combined)                     12             1,620               94,502         1.8%    $        58,335           9,875        2.2%
Managed senior living
communities(7)                           44             7,051            1,033,727        19.5%    $       146,607          68,347       15.2%


Subtotal short and long term
residential care communities            265            31,626            3,427,127        65.0%            108,364         294,419       65.3%
Multi-tenant MOBs                        96         7,881,797  sq. ft.   1,668,219        31.6%    $           212         138,427       30.8%
Wellness centers                         10           812,000  sq. ft.     180,017         3.4%    $           222          17,577        3.9%


Total                                   371                              5,275,363       100.0%    $                       450,423        100%


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Tenant/Managed Property Operating Statistics(8)

                                                      Rent Coverage          Occupancy
                                                     2013      2012       2013       2012
Five Star (Lease No. 1)                               1.19x     1.21x      84.5%      85.5%
Five Star (Lease No. 2)                               1.14x     1.26x      81.6%      83.0%
Five Star (Lease No. 3)                               1.65x     1.69x      88.2%      89.2%
Five Star (Lease No. 4)                               1.17x     1.20x      85.9%      86.3%


Subtotal Five Star                                    1.26x     1.31x      84.3%      85.3%
Sunrise/Marriott(6)                                   1.93x     1.88x      92.7%      93.2%
Brookdale                                             2.50x     2.37x      95.3%      94.0%
6 private senior living companies (combined)          1.96x     2.69x      84.8%      83.3%
Managed senior living communities(7)                     NA        NA      87.4%      87.2%


Subtotal short and long term residential care
communities                                           1.38x     1.42x      85.7%      86.3%
Multi-tenant MOBs                                        NA        NA      95.0%      93.3%
Wellness centers                                      2.23x     2.19x     100.0%     100.0%


Total                                                 1.43x     1.47x


(1)
Excludes properties classified as discontinued operations.

(2)
Amounts are before depreciation, but after impairment write downs, if any.

(3)
Represents investment carrying value divided by the number of living units, beds or leased square feet at December 31, 2013.

(4)
NOI is defined and calculated by reportable segment and reconciled to net income below in this Item 7. 2013 NOI presented in the above tables excludes $156 of NOI related to the skilled nursing facility we sold on August 1, 2013 and $10,981 of NOI related to the two rehabilitation hospitals we sold on December 31, 2013.

(5)
Senior living properties are categorized by the type of living units or beds which constitute a majority of the living units or beds at the property.

(6)
Marriott International, Inc., or Marriott, guarantees the lessee's obligations under these leases.

(7)
These 44 senior living communities are managed by Five Star. The occupancy for the twelve month period ended or, if shorter, from the date of acquisitions through December 31, 2013 was 87.4%.

(8)
Operating data for multi-tenant MOBs are presented as of December 31, 2013 and 2012; operating data for other properties, tenants and managers are presented based upon the operating results provided by our tenants and managers for the 12 months ended September 30, 2013 and September 30, 2012, or the most recent prior period for which tenant and manager operating results are available to us. Rent coverage is calculated as operating cash flow from our tenants' operations of our properties, before subordinated charges, if any, divided by rents payable to us. We have not independently verified our tenants' operating data. The table excludes data for periods prior to our ownership of some of these properties.

We have four operating segments, of which three are separately reportable operating segments: (i) triple net senior living communities that provide short term and long term residential care and dining services for residents,
(ii) managed senior living communities that provide short term and long term residential care and dining services for residents and (iii) MOBs. The "All Other" category


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includes amounts related to corporate business activities and the operating results of certain properties that offer fitness, wellness and spa services to members.

Triple Net Senior Living Communities.

    The following chart presents a summary of our triple net senior living
property leases as of December 31, 2013 (dollars in thousands). This summary
should be read in conjunction with the more detailed description of our leases
set forth below.

                                                        Undepreciated      Net Book      Annualized
                          Number of                     Carrying Value     Value of        Rental          Lease        Renewal
Tenant                    Properties     Units/Beds     of Properties     Properties     Income(1)      Expiration      Options
Five Star Quality                                                                                                      2 for
Care, Inc. (Lease                                                                                                      15 years
No. 1)(2)                          90          6,626    $       688,718   $   569,947    $    60,157     12/31/2024    each.
Five Star Quality                                                                                                      2 for
Care, Inc. (Lease                                                                                                      10 years
No. 2)                             51          7,200            682,054       505,224         64,361      6/30/2026    each.
Five Star Quality                                                                                                      2 for
Care, Inc. (Lease                                                                                                      15 years
No. 3)(3)                          17          3,281            352,380       252,404         35,400     12/31/2028    each.
Five Star Quality                                                                                                      2 for
Care, Inc. (Lease                                                                                                      15 years
No. 4)(4)                          29          3,335            388,298       302,899         35,387      4/30/2017    each.
Sunrise / Marriott                                                                                                     3 for
International, Inc.(5)                                                                                                 5 years
                                    4          1,619            126,326        70,651         14,523     12/31/2018    each.
Brookdale Senior                                                                                                       2 for
Living, Inc.                                                                                                           15 years
                                   18            894             61,122        44,000          9,077     12/31/2017    each.
Stellar Senior                                                                                                         2 for
Living, LLC(6)                                                                                           7/31/2027 &   10 years
                                    5            661             58,415        56,688          4,890      1/8/2028     each.
ABE Briarwood Corp.                 1            140             15,598         5,286            937     12/31/2015    None.
HealthQuest, Inc.                                                                                                      1 for
                                    3            361              7,589         3,574          1,424      6/30/2021    10 years.
Covenant Care, LLC                                                                                                     1 for
                                    1            180              3,503         1,827          1,174      9/30/2015    15 years.
Evergreen Washington                                                                                                   1 for
Healthcare, LLC                     1            103              5,193         2,455            930     12/31/2015    10 years.
The MacIntosh Company                                                                                                  1 for
                                    1            175              4,204         2,430            599      6/30/2019    10 years.


Totals                            221         24,575    $     2,393,400   $ 1,817,385    $   228,859


(1)
Annualized rental income is rents pursuant to existing leases as of December 31, 2013. Includes percentage rent totaling $9.2 million based on increases in gross revenues at certain properties.

(2)
Lease No. 1 is comprised of three separate leases. Two of these three leases exist to accommodate our mortgage obligations in effect at the time we acquired the properties; we have agreed with the tenants to combine all three of these leases into one lease when these mortgage financings are paid.

(3)
Lease No. 3 exists to accommodate certain mortgage financing by us.

(4)
Lease No. 4 is comprised of two separate leases. One of these two leases exists to accommodate our mortgage obligations in effect at the time we acquired the property; we have agreed with the tenants to combine both of these leases into one lease when the mortgage financing is paid.

(5)
These properties are leased to Sunrise; this lease is guaranteed by Marriott.

(6)
Stellar Senior Living has two separate leases with different expiration dates.

Five Star Quality Care, Inc. We lease 187 senior living communities to Five Star for annual rent of $195.3 million, including percentage rent based on increases in gross revenues at certain properties ($5.2 million in 2013). Five Star is a public company listed on the NYSE, which was our subsidiary until we distributed its then outstanding shares to our shareholders in 2001. Substantially all of the revenues at most of these senior living communities are paid to Five Star by residents from their private resources. For the year ended December 31, 2013, Five Star paid percentage rent equal to 4% of the increase in gross revenues at our senior living communities over base year gross revenues as specified in the lease terms.


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Lease No. 1 (comprised of three separate leases) expires in 2024 and includes 90 communities, including independent living communities, assisted living communities and skilled nursing facilities, of which nine secure mortgage debt payable to third parties. At December 31, 2013, the annual rent for Lease No. 1 was $60.2 million, including percentage rent of $1.4 million.

Lease No. 2 expires in 2026 and includes 51 communities, including independent living communities, assisted living communities and skilled nursing facilities. At December 31, 2013, the annual rent for Lease No. 2 was $64.4 million, including percentage rent of $1.9 million.

Lease No. 3 expires in 2028 and includes 17 communities, including independent living and assisted living communities, all of which secure mortgage debt payable to FNMA. At December 31, 2013, the annual rent for Lease No. 3 was $35.4 million, including percentage rent of $1.2 million.

Lease No. 4 (comprised of two separate leases) expires in 2017 and includes 29 communities, including independent living communities, assisted living communities and skilled nursing facilities, of which one secures mortgage debt payable to a third party. At December 31, 2013, the annual rent for Lease No. 4 was $35.4 million, including percentage rent of $644,000.

For more information about our dealings and relationships with Five Star, and about the risks which may arise as a result of these related person transactions, please see "Risk Factors-Risks Related to Our Relationships with RMR, Five Star and CWH" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Related Person Transactions" and Note 5 to our Consolidated Financial Statements appearing in Item 15 of this Annual Report on Form 10-K.

Sunrise Senior Living, Inc. At December 31, 2013, we leased four communities which include assisted living, independent living and SNF units to subsidiaries of Sunrise Senior Living Inc., or SSL, that until 2003 were owned by Marriott. These communities are leased through 2018. In January 2013, SSL was acquired by Health Care REIT Inc. and the management company business of SSL was sold to a separate acquirer. References to Sunrise in this Annual Report on Form 10-K include SSL prior to its acquisition and to the management company business of SSL following the acquisition of SSL. At December 31, 2013, the annual rent for this lease was $14.5 million, including percentage rent of $2.0 million based on increases in gross revenues at these communities. Marriott guarantees the rent due to us for these 4 communities.

Brookdale Senior Living, Inc. We lease 18 assisted living communities to a subsidiary of Brookdale Senior Living, Inc., or Brookdale, until 2017. At December 31, 2013, the annual rent for this lease was $9.1 million per year, including percentage rent of $2.1 million based on increases in gross revenues at these communities. Residents pay a large majority of the revenues at these communities from their private resources. Brookdale guarantees this rent to us.

Stellar Senior Living, LLC. We lease five communities, including independent and assisted living units, to subsidiaries of Stellar Senior Living, LLC, or Stellar, until 2027 and 2028. At December 31, 2013, the annual rent for these leases was $4.9 million per year. Recognition of percentage rent, based on increases in gross revenues at these communities, will commence in 2014. Residents pay a large majority of the revenues at these communities from their private resources. Stellar is owned by a former officer of Five Star and of RMR and he has personally guaranteed Stellar's rent due to us.

ABE Briarwood Corp. We lease one skilled nursing facility in Canonsburg, PA to a subsidiary of ABE Briarwood Corp., a privately owned company, for $937,000 of annual rent until December 31, 2015. Our property is sub-leased to THI of Pennsylvania at Greenery of Canonsburg, LLC, a subsidiary of another private company, THI of Baltimore, Inc. Our lease is guaranteed by ABE Briarwood Corp., IHS Long Term Care, Inc. and THI of Baltimore, Inc., and is secured by a security deposit of $600,000.

HealthQuest, Inc. We lease two skilled nursing facilities and one independent living community located in Huron and Sioux Falls, SD to HealthQuest, Inc., a privately owned company, until 2021. The


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lease is guaranteed by the individual shareholder of HealthQuest, Inc. The rent payable to us is approximately $1.4 million per year and will increase at agreed upon times during the lease term.

Covenant Care, LLC. We lease one skilled nursing facility in Fresno, CA to a subsidiary of Covenant Care, LLC, a privately owned company, for $1.2 million of annual rent until 2015. The rent is scheduled to increase at agreed upon times during the lease term. Covenant Care, LLC guarantees the lease and has secured its obligation with a security deposit of $900,000.

Evergreen Washington Healthcare, LLC. We lease one skilled nursing facility in Seattle, WA to a subsidiary of Evergreen Washington Healthcare, LLC, a privately owned company, until 2015. The rent payable to us is approximately $930,000 per year and will increase at agreed upon times during the lease term. Evergreen Washington Healthcare, LLC guarantees this lease and its lease obligations are secured by a security deposit of $385,000.

The MacIntosh Company. We lease one skilled nursing facility in Grove City, OH to The MacIntosh Company for $599,000 per year until 2019. A management company affiliate of this tenant and the former and current majority shareholders of the tenant guarantee this lease.

Managed senior living communities.

We lease 42 managed senior living communities with 6,821 living units to our TRS. These 42 communities and two others with 230 living units are all managed for our account by Five Star under long term agreements. These communities had an undepreciated carrying value of $1.0 billion and a net book value of $907.6 million at December 31, 2013. We derive our revenues at these managed senior living communities primarily from services to residents and we record revenues when services are provided. Our share of the net operating results of our managed senior living communities in excess of the minimum returns due to us, or additional returns, are generally determined annually. We recognize additional returns due to us under our management agreements at year end when all contingencies are met and the income is earned. We had no additional returns in 2013. With the exception of the management agreement for a senior living community in New York, the management agreements for the communities Five Star manages for our account provide Five Star with a management fee equal to 3% of the gross revenues realized at the communities, plus reimbursement for Five Star's direct costs and expenses related to the communities and an incentive fee equal to 35% of the annual net operating income of the communities after we realize an annual return equal to 8% of our invested capital. The management agreements generally expire on December 31, 2031, and are subject to automatic renewal for two consecutive 15 year terms, unless earlier terminated or timely notice of nonrenewal is delivered. The management agreements provide that we and Five Star each have the option to terminate the contracts upon the acquisition by a person or group of more than 9.8% of the other's voting stock and upon other change in control events affecting the other party, as defined in those documents, including the adoption of any shareholder proposal (other than a precatory proposal) or the election to the board of directors or board of trustees of any individual if such proposal or individual was not approved, nominated or appointed, as the case may be, by vote of a majority of the board of directors or board of trustees in office immediately prior to the making of such proposal or the nomination or appointment of such individual.

In connection with the management agreements, we and Five Star have entered into four pooling agreements: three pooling agreements which combine our management agreements for communities that include assisted living units, or the AL Pooling Agreements, and a fourth pooling agreement, which combines our management agreements for communities consisting only of independent living units, or the IL Pooling Agreement. We entered into the initial AL Pooling Agreement in May 2011, the second AL Pooling Agreement in October 2012 and the third AL Pooling Agreement in November 2013. Each of our first and second AL Pooling Agreements includes 20 identified communities. The third AL Pooling Agreement includes the management agreements for the remaining communities that


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include assisted living units that Five Star currently manages (other than with respect to the senior living community in New York described above). We entered into the IL Pooling Agreement in August 2012 and that agreement currently includes management agreements for two communities that have only independent living units. Each of the AL Pooling Agreements and the IL Pooling Agreement combines the determination of fees and expenses of the various communities that are subject to such pooling agreement, including determinations of our return of our invested capital and Five Star's incentive fees.

Properties Leased to Medical Providers, Medical Related Businesses, Clinics and Biotech Laboratory Tenants (MOBs).

At December 31, 2013, we owned 96 multi-tenant MOBs (119 buildings) located in 24 states and Washington, D.C., excluding four properties (seven buildings) classified in discontinued operations. These properties range in size from 1,700 to 256,000 square feet and have a total of 7.9 million square feet. Leases at these properties have current terms expiring between 2014 and 2034, plus renewal options in some cases. The annual rent payable to us by tenants of these 96 MOBs (119 buildings) is $209.3 million per year, including some scheduled increases and reimbursements of certain operating and tax expenses and excluding lease value amortization.

During the year ended December 31, 2013, we entered into MOB lease renewals for 537,015 square feet and new leases for 234,479 square feet, at weighted average rental rates that were 0.2% below rents previously charged for the same space. These leases produce average net rent of $24.22 per square foot. Average lease terms for leases entered into during 2013 were 5.1 years. Commitments for tenant improvement, leasing commission costs and concessions for leases we entered into during 2013 totaled $11.3 million, or $14.60 per square foot on average (approximately $2.87 per square foot per year of the lease term).


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The following chart presents a summary of our MOB properties by state as of December 31, 2013 (dollars in thousands):

                                                                                                           % of Total
                                                            Undepreciated      Net Book      Annualized    Annualized
                 Number of      Number of                   Carrying Value     Value of        Rental        Rental
State            Properties     Buildings      Sq. Ft.      of Properties     Properties     Income(1)      Income(1)
Arizona                    2             2       222,771    $        18,825   $    17,907    $     2,939           1.4 %
California                 4             9       820,743            392,924       365,132         45,651          21.9 %
Colorado                   2             3        77,113             17,057        16,447          2,720           1.3 %
Connecticut                2             2        96,962             10,244         9,609          1,091           0.5 %
District of
Columbia                   2             2       212,335             64,384        59,934         10,482           5.0 %
Florida                    6            11       320,318             56,491        54,035          5,852           2.8 %
Georgia                    5             5       325,544             57,208        54,216          7,069           3.4 %
Hawaii                     1             1       203,447             66,991        64,904          7,942           3.8 %
Illinois                   2             3       262,836             39,710        37,696          6,671           3.2 %
Indiana                    1             1        94,238             16,236        15,486          2,395           1.1 %
Maryland                   2             2       133,976             22,391        21,208          3,238           1.5 %
Massachusetts             18            20       969,660            209,273       194,282         24,372          11.6 %
Minnesota                  5             5       375,497             46,318        44,016          7,196           3.4 %
Mississippi                1             1        71,983             12,960        12,740          1,973           0.9 %
New Mexico                 1             2       292,043             34,476        32,030          4,870           2.3 %
. . .
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