10-Q 1 snh10q_3rdq.txt 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, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number 001-15319 SENIOR HOUSING PROPERTIES TRUST (Exact name of registrant as specified in its charter) Maryland 04-3445278 (State or other (IRS Employer jurisdiction of incorporation) Identification No.) 400 Centre Street, Newton, Massachusetts 02458 (Address of principal executive offices) (Zip Code) 617-796-8350 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Number of Common Shares outstanding at November 7, 2002: 58,436,900 shares of beneficial interest, $0.01 par value. SENIOR HOUSING PROPERTIES TRUST
FORM 10-Q SEPTEMBER 30, 2002 INDEX PART I Financial Information Page --------------------- ---- Item 1. Consolidated Financial Statements (unaudited).................................................... 1 Consolidated Balance Sheets - September 30, 2002 and December 31, 2001........................... 1 Consolidated Statements of Income - Three and Nine Months Ended September 30, 2002 and 2001...... 2 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2002 and 2001............ 3 Notes to Consolidated Financial Statements....................................................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 14 Item 4. Controls and Procedures.......................................................................... 14 PART II Other Information Item 5. Other Information................................................................................ 15 Item 6. Exhibits and Reports on Form 8-K................................................................. 15 Certain Important Factors........................................................................ 16 Signatures....................................................................................... 17 Certifications................................................................................... 18
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) September 30, December 31, 2002 2001 ---------------- ----------------- (unaudited) (audited) ASSETS Real estate properties, at cost: Land $140,070 $59,308 Buildings and improvements 1,032,269 533,891 ---------------- ----------------- 1,172,339 593,199 Less accumulated depreciation 116,658 124,252 ---------------- ----------------- 1,055,681 468,947 Cash and cash equivalents 14,054 352,026 Restricted cash 14,253 10,201 Other assets 28,421 36,129 ---------------- ----------------- $1,112,409 $867,303 ================ ================= LIABILITIES AND SHAREHOLDERS' EQUITY Unsecured revolving bank credit facility $33,000 $-- Senior unsecured notes, net of discount 243,712 243,607 Secured debt and capital leases 32,637 9,100 Prepaid rent 7,372 7,114 Security deposits 1,520 1,520 Other liabilities 11,157 3,944 ---------------- ----------------- Total liabilities 329,398 265,285 Commitments and contingencies Trust preferred securities 27,394 27,394 Shareholders' equity: Common shares of beneficial interest, $0.01 par value: 58,436,900 and 43,421,700 shares issued and outstanding, respectively 584 434 Additional paid-in capital 853,637 658,348 Cumulative net income 91,049 55,691 Cumulative distributions (191,189) (141,936) Unrealized gain on investments 1,536 2,087 ---------------- ----------------- Total shareholders' equity 755,617 574,624 ---------------- ----------------- $1,112,409 $867,303 ================ =================
See accompanying notes 1 SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Revenues: Rental income $28,244 $11,087 $83,040 $33,302 FF&E reserve income 1,843 -- 5,345 -- Facilities' operations -- 56,319 -- 167,428 Interest and other income 290 408 1,077 897 ------------- ----------- ----------- -------------- Total revenues 30,377 67,814 89,462 201,627 ------------- ----------- ----------- -------------- Expenses: Interest 6,607 900 20,428 4,900 Depreciation 7,989 4,825 23,215 14,464 Facilities' operations -- 54,453 -- 162,347 General and administrative - Recurring 1,936 1,081 5,861 3,189 - Related to foreclosures and lease terminations -- -- -- 4,167 ------------- ----------- ----------- -------------- Total 16,532 61,259 49,504 189,067 ------------- ----------- ----------- -------------- Income from continuing operations before distributions on trust preferred securities 13,845 6,555 39,958 12,560 Distributions on trust preferred securities 703 687 2,109 749 ------------- ----------- ----------- -------------- Income from continuing operations 13,142 5,868 37,849 11,811 Loss from discontinued operations -- 346 2,491 703 ------------- ----------- ----------- -------------- Net income $13,142 $5,522 $35,358 $11,108 ============= =========== =========== ============== Weighted average shares outstanding 58,437 29,277 55,735 27,049 ============= =========== =========== ============== Basic and diluted earnings per share: Basic and diluted earnings per share: Income from continuing operations $0.22 $0.20 $0.68 $0.44 ============= =========== =========== ============== Loss from discontinued operations $-- $0.01 $0.05 $0.03 ============= =========== =========== ============== Net income $0.22 $0.19 $0.63 $0.41 ============= =========== =========== ==============
See accompanying notes 2 SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Nine Months Ended September 30, ------------------------------------- 2002 2001 --------------- ----------------- Cash flows from operating activities: Net income $35,358 $11,108 Adjustments to reconcile net income to cash provided by operating activities: Depreciation expense 23,215 14,464 Loss from discontinued operations 2,491 703 Amortization of deferred finance costs and debt discounts 876 -- FF&E reserve income (5,345) -- Changes in assets and liabilities: Other assets 3,305 (11,734) Prepaid rent 258 9,419 Other liabilities 4,276 (8,534) --------------- ----------------- Cash provided by operating activities 64,434 15,426 --------------- ----------------- Cash flows from investing activities: Real estate acquired (552,277) -- Equipment purchases -- (1,861) --------------- ----------------- Cash used for investing activities (552,277) (1,861) --------------- ----------------- Cash flows from financing activities: Proceeds from issuance of common shares, net 195,210 42,277 Proceeds from issuance of trust preferred securities -- 27,394 Proceeds from borrowings on credit facility 347,000 43,000 Proceeds from issuance of mortgage debt -- 9,100 Repayments of credit facility (314,000) (109,000) Repayment of debt (25,000) -- Deferred finance costs (4,086) (1,583) Distributions to shareholders (49,253) (24,362) --------------- ----------------- Cash provided by (used for) financing activities 149,871 (13,174) --------------- ----------------- Decrease in cash and cash equivalents (337,972) 391 Cash and cash equivalents at beginning of period 352,026 515 Cash and cash equivalents at facilities' operations, beginning of period -- 7,178 --------------- ----------------- Cash and cash equivalents at end of period $14,054 $8,084 =============== ================= Supplemental cash flow information: Cash paid for interest $16,500 $5,887 Non-cash investing and financing activities: Debt assumed in acquisition 49,055 -- Real estate acquired in a property exchange (43,308) -- Real estate disposed of in a property exchange, net 43,308 -- Capital expenditure deposits in restricted cash 4,319 -- Purchases of fixed assets with restricted cash (5,163) --
See accompanying notes 3 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The accompanying consolidated financial statements of Senior Housing Properties Trust and its subsidiaries (the "Company") have been prepared without audit. Certain information and footnote disclosures required by generally accepted accounting principles for complete financial statements have been condensed or omitted. The Company believes the disclosures made are adequate to make the information presented not misleading. However, the accompanying financial statements should be read in conjunction with the financial statements and notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances between Senior Housing Properties Trust and its subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Note 2. Spin-Off of Five Star Quality Care, Inc. ("Five Star") On December 31, 2001, the Company distributed substantially all of its ownership of Five Star Quality Care, Inc., one of its wholly-owned subsidiaries which operated facilities prior to that date for the Company's account, to the Company's shareholders (the "Five Star Spin-Off"). At the time of the Five Star Spin-Off, the Company entered a lease with Five Star for facilities previously operated by Five Star for the Company's account. Prior to the Five Star Spin-Off, the Company recognized facilities' operations revenues and facilities' operations expenses on a consolidated basis as well as rental income from third parties. Subsequent to the Five Star Spin-Off, the Company recognizes only rental income. Note 3. Summary of Significant Accounting Policies EARNINGS PER COMMON SHARE. Earnings per common share is computed using the weighted average number of shares outstanding during the period. The Company has no common share equivalents, instruments convertible into common shares or other dilutive instruments. NEW ACCOUNTING PRONOUNCEMENTS. In 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 142 "Goodwill and Other Intangible Assets" ("FAS 142") and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). The Company's adoption of FAS 142 and FAS 144 on January 1, 2002, had no effect on the Company's financial position or results of operations at that time. In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("FAS 145"). The provisions of this standard eliminate the requirement that a gain or loss from the extinguishment of debt be classified as a extraordinary item, unless it can be considered unusual in nature and infrequent in occurrence. The Company will implement FAS 145 on January 1, 2003, which implementation is expected to have no impact on the Company's financial position or results of operations. DEFERRED PERCENTAGE RENTS. The Securities and Exchange Commission Staff Accounting Bulletin No. 101 ("SAB 101") generally requires the Company to recognize percentage rental income received for the first, second and third quarters in the fourth quarter. Percentage rent deferred for the three and nine months ended September 30, 2002 and 2001, were $791,000 and $832,000, and $2.3 million and $2.1 million, respectively. RECLASSIFICATIONS. Reclassifications have been made to the prior year's financial statements to conform to the current year's presentation. Note 4. Real Estate Properties At September 30, 2002, the Company owned 111 properties in 28 states all of which were leased to third party operators. During the second quarter of 2002, Five Star closed a nursing home facility it leases from the Company under a multi facility lease. Under the terms of the lease, the annual rent payable to the 4 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Company will be reduced by 10% of the net proceeds from the sale if this property is sold. The Company has classified this real estate asset as held for sale and has recorded a loss from discontinued operations related to this property, which includes historical depreciation expense as well as an impairment loss write down of $2.5 million based on the Company's estimate of fair value, net of selling costs, of the real estate associated with this property. Note 5. Comprehensive Income The following is a reconciliation of net income to comprehensive income for the three and nine months ended September 30, 2002 and 2001 (dollars in thousands):
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------ ----------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Net income $13,142 $5,522 $35,358 $11,108 Other comprehensive income: Change in unrealized gain on investments (755) (1,590) (551) 577 ----------- ---------------- --------------- ----------------- Comprehensive income $12,387 $3,932 $34,807 $11,685 =========== ================ =============== =================
Note 6. Unrealized Gain on Investments As of September 30, 2002, the Company owned one million HRPT Properties Trust ("HRPT") common shares and 35,000 shares of Five Star, which are carried at fair market value in Other Assets. The Unrealized Gain On Investments shown on the Consolidated Balance Sheets represents the difference between HRPT's and Five Star's quoted market prices on the date they were acquired ($6.50 and $7.26 per share, respectively) and on September 30, 2002 ($8.25 and $1.15 per share, respectively). Note 7. Segment Information After the Five Star Spin-Off, the Company has one reportable segment, leasing. During 2001, the Company had two reportable segments, leasing and facilities' operations. The following table is a summary of these reportable segments as of and for the three and nine months ended September 30, 2001. Because the Company only operated in one segment for the three and nine months ended September 30, 2002, a comparative table is not presented (dollars in thousands):
Three Months Ended September 30, 2001 ------------ -------------- --------------- -------------- Facilities' Leasing Operations Unallocated Total ------------ -------------- --------------- -------------- Revenues $11,087 $56,319 $408 $67,814 Interest expense -- -- 900 900 Depreciation expense 3,284 1,541 -- 4,825 Facilities' operations expense -- 54,453 -- 54,453 General and administrative expenses - Recurring 1,081 -- -- 1,081 - Related to foreclosures and lease terminations -- -- -- -- ------------ -------------- --------------- -------------- Income before distributions on trust preferred securities $6,722 $325 $(492) $6,555 ============ ============== =============== ==============
5 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Nine Months Ended September 30, 2001 ------------ -------------- --------------- -------------- Facilities' Leasing Operations Unallocated Total ------------ -------------- --------------- -------------- Revenues $33,302 $167,428 $897 $201,627 Interest expense -- -- 4,900 4,900 Depreciation expense 9,850 4,614 -- 14,464 Facilities' operations expense -- 162,347 -- 162,347 General and administrative expenses - Recurring 3,189 -- -- 3,189 - Related to foreclosures and lease terminations -- -- 4,167 4,167 ------------ -------------- --------------- -------------- Income before distributions on trust preferred securities $20,263 $467 $(8,170) $12,560 ============ ============== =============== ============== Real estate properties, at cost $448,562 $149,303 -- $597,865
Note 8. Indebtedness and Capital Lease Obligations On June 27, 2002, the Company entered into a new revolving bank credit facility to replace its previous credit facility which had been scheduled to mature in September 2002. The new credit facility matures in November 2005 and may be extended to November 2006 upon the payment of an extension fee. The new credit facility permits borrowings up to $250.0 million, which amount may be expanded to $500.0 million in certain circumstances. Drawings under the new credit facility are unsecured. Funds may be drawn, repaid and redrawn until maturity, and no principal repayment is due until maturity. The interest rate (3.26% at September 30, 2002) on borrowings under the new credit facility are calculated as a spread above LIBOR or the prime rate. The new credit facility is available for acquisitions, working capital and general business purposes. As of September 30, 2002, $33.0 million was outstanding and $217.0 million was available for drawing under the new credit facility. The Company's secured debt and capital leases totaled $32.6 million at September 30, 2002. This debt consists of $9.1 million of mortgages due in July 2003 secured by two properties, $14.7 million of bonds due in December 2027 secured by one property and capital lease obligations of $8.8 million affecting two properties leased to May 2016. Note 9. Commitments and Contingencies In connection with obtaining regulatory approval for the acquisition and lease of one senior living property, the Company provided a guaranty and a security interest in that property for certain prepaid service obligations to residents; and the Company is contingently liable in the event the tenant (Five Star) or operator (Marriott) of this property fail to provide these future services. In addition, the Company guarantees approximately $11.4 million of surety bonds and insurance premiums for this tenant. Note 10. Shareholders' Equity On August 22, 2002, the Company paid a distribution to shareholders of $0.31 per share, or $18.1 million. On October 8, 2002, the Company declared a distribution of $0.31 per share, or $18.1 million, which will be paid to shareholders on or about November 21, 2002. Note 11. Subsequent Events On October 25, 2002, the Company acquired nine senior living properties for approximately $62.9 million. These properties contain 750 independent and assisted living units. Simultaneously, the Company leased these nine properties to Five Star through December 2019, plus a renewal option term of 15 years thereafter, for annual minimum rent of $6.3 million, plus percentage rent starting in 2005 equal to four percent (4%) of gross revenues at each facility in excess of gross revenues at such facility in 2004. The Company funded this acquisition by drawing under its revolving bank credit facility and cash on hand. In addition to this new lease transaction, Five Star and the Company amended the existing lease for the 31 properties owned by the Company, leased to Five Star and managed 6 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) by Marriott Senior Living Services, Inc. Under that lease, Marriott, as manager, periodically deposits into escrow accounts a percentage of the gross revenues at the leased properties as a capital expense reserve. Historically, these escrow accounts have been owned by the Company but controlled by Marriott and Five Star. As a result of the lease amendment, the escrow accounts will be owned by Five Star and the Company will have security and remainder interests in these accounts and in property purchased with funding from these accounts. Payments into these escrow accounts were previously reported by the Company as FF&E reserve income. Effective October 1, 2002, the Company will not longer have any FF&E reserve income. The amount of funding in these escrow accounts will not be changed, and all of the escrowed funds will continue to be used for capital expenditures at these leased properties. 7 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, 2002 and 2001. This discussion includes references to funds from operations, or FFO. We compute FFO as net income plus depreciation and amortization, non-recurring items and results from discontinued operations. In calculating FFO, we also add percentage rents deferred pursuant to SAB 101 described in Note 3 to our financial statements. Our method of computing FFO may not be comparable to FFO reported by other REITs that define the terms differently. We consider FFO to be an appropriate measure of performance for a REIT, along with cash flow from operating activities, financing activities and investing activities, because it provides investors with an indication of a REIT's operating performance and its ability to incur and service debt, make capital expenditures, pay distributions and fund other cash needs. Our FFO is an important factor considered by our Board of Trustees in determining the amount of our distributions to shareholders. FFO does not represent cash generated by operating activities in accordance with generally accepted accounting principles, or GAAP, and should not be considered as an alternative to net income or cash flow from operating activities as a measure of financial performance or liquidity. The following discussion should be read in conjunction with our Annual Report on Form 10-K. PORTFOLIO OVERVIEW The following tables present an overview of our portfolio as of September 30, 2002, except when different periods are specifically indicated:
Current % of Current # of Dollars % of Dollars Annual Rent Annual Rent Properties # Units/Beds Invested Invested Revenues Revenues ---------- ------------ -------- -------- -------- --------- Facility Type(1) ---------------- IL Communities 45 11,521 $937,698 79.9% $94,137 81.2% Stand alone SNF 61 6,168 186,872 16.0% 13,049 11.2% Hospitals 2 364 43,553 3.7% 8,700 7.5% Stand alone AL 3 196 4,216 0.4% 164 0.1% --------------------------------------------------------------------------------------- Total 111 18,249 $1,172,339 100.0% $116,050 100.0% ======================================================================================= Rent Coverage -------- Tenant/Operator (2) --------------- Five Star/Marriott 31 7,491 $612,226 52.2% $63,000 54.3% 1.1x Marriott Senior Living Services 14 4,030 325,472 27.8% 31,137 26.8% 1.5x HEALTHSOUTH 2 364 43,553 3.7% 8,700 7.5% 3.3x(3) Five Star Quality Care 55 5,110 141,421 12.1% 7,000 6.1% 2.3x Genesis Health Ventures 1 150 13,007 1.1% 1,483 1.3% 1.9x Integrated Health Services 1 140 15,598 1.3% 1,200 1.0% 2.0x 5 private companies 7 964 21,062 1.8% 3,530 3.0% 2.5x --------------------------------------------------------------------------------------- Total 111 18,249 $1,172,339 100.0% $116,050 100.0% ======================================================================================= Last 12 Months Ended August 31, 2002 ------------------------------------------------------------------------ Rent Occupancy Coverage(2) % Private Pay % Medicare % Medicaid ------------ ------------ --------------- ------------ -------------- Total Portfolio 89.0% 1.5x 76% 15% 9% (weighted average by rent)
(1) IL communities means senior living properties where the majority of living units are independent living apartments. Stand alone SNF means skilled nursing facilities. Stand alone AL means assisted living facilities. 8 SENIOR HOUSING PROPERTIES TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (2) Rent coverage is calculated as operating cash flow from facility operations, before subordinated charges and capex reserves, divided by rent payable to us. Coverage is calculated based upon the last twelve months ended August 31, 2002, operating results or the most recent tenant operating results available to us. (3) The rent coverage for HEALTHSOUTH presented is the most recent data available to us from HEALTHSOUTH. In August 2002, HEALTHSOUTH announced that a new interpretation of Medicare billing requirements will result in a reduction of its income. We have requested that HEALTHSOUTH provide a calculation of the impact of the new Medicare billing requirements upon the income received at the two hospitals owned by us and leased by HEALTHSOUTH. Based upon statements made by HEALTHSOUTH, we do not believe that these new billing requirements will result in a material decline in rent coverage at our owned hospitals; however, the requested calculations have not yet been provided by HEALTHSOUTH. RESULTS OF OPERATIONS Three Months Ended September 30, 2002, Compared to Three Months Ended September 30, 2001 Total revenues for the three months ended September 30, 2002, were $30.4 million, compared to total revenues of $67.8 million for the three months ended September 30, 2001. Included in total revenues for the three months ended September 30, 2001, are revenues from facilities' operations of $56.3 million. During 2001, Five Star Quality Care, Inc., one of our wholly owned subsidiaries, operated facilities for our account. On December 31, 2001, we distributed substantially all of our ownership of Five Star to our shareholders and Five Star became a separate public company (the "Five Star Spin-Off"). In connection with the Five Star Spin-Off, Five Star leased the facilities from us which it previously operated for our account; and, as a result, after the Five Star Spin-Off, we do not have facilities' operations revenues or expenses. Rental income for the three months ended September 30, 2002, was $28.2 million compared to rental income of $11.1 million for the three months ended September 30, 2001, an increase of $17.1 million. This increase is due to our acquisition and lease of 31 properties on January 11, 2002, for annual rent of $63.0 million and our lease to Five Star of facilities which had been previously operated for our account for annual rent of $7.0 million. This increase was partially offset by a decrease in annual rent from HEALTHSOUTH of $10.3 million to $8.7 million effective January 2, 2002, in connection with a property exchange and lease extension. FF&E reserve income for the three months ended September 30, 2002, was $1.8 million compared to zero for the three months ended September 30, 2001. The lease for certain properties acquired in January 2002 required a varying percentage of gross revenues be paid to us as additional rent which is escrowed for future capital expenditures at these leased facilities. This lease was modified, effective October 1, 2002, as described in Note 11 to the accompanying financial statements. Total expenses for the three months ended September 30, 2002, were $16.5 million, compared to total expenses of $61.3 million for the three months ended September 30, 2001, a decrease of $44.8 million. Total expenses for the three months ended September 30, 2001, include expenses from facilities' operations of $54.5 million. Subsequent to the Five Star Spin-Off, we no longer have any facilities' operations expenses. Interest expense for the three months ended September 30, 2002, was $6.6 million compared to interest expense for the three months ended September 30, 2001, of $900,000, an increase of $5.7 million. This increase was primarily due to our issuance of $245.0 million of 8 5/8% senior unsecured notes in December 2001 and our assumption of debt in connection with the January 2002 acquisition of properties. The increase was partially offset by a decrease in the weighted average interest rate on our revolving bank credit facility. Depreciation expense for the three months ended September 30, 2002, was $8.0 million compared to depreciation expense for the three months ended September 30, 2001, of $4.8 million, an increase of $3.2 million. Recurring general and administrative expense for the three months ended September 30, 2002, was $1.9 million compared to recurring general and administrative expense for the three months ended September 30, 2001, of $1.1 million, an increase of $855,000. These increases were primarily due to our acquisition of properties in January 2002. 9 SENIOR HOUSING PROPERTIES TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Distributions on trust preferred securities for the three months ended September 30, 2002 were $703,000 compared to $687,000 for the three months ended September 30, 2001. The increase is due to our issuance of the trust preferred securities in July 2001. Net income was $13.1 million, or $0.22 per share, for the three months ended September 30, 2002, compared to $5.5 million, or $0.19 per share, for the three months ended September 30, 2001, an increase of $7.6 million, or $0.03 per share. This increase is primarily the consequence of the net changes in revenues and expenses resulting from the January 2002 acquisition, the Five Star Spin-Off and our issuance of senior notes and trust preferred securities in 2001, as described above, and the increase in the weighted average number of our shares outstanding between the 2001 and 2002 periods. FFO for the three months ended September 30, 2002, was $21.9 million compared to $11.6 million for the three months ended September 30, 2001. The increase in FFO of $10.3 million is due primarily to the same factors that created the increase in net income. FFO for the three months ended September 30, 2002 and 2001, are calculated as follows (dollars in thousands):
2002 2001 -------------------- ------------- Net income $ 13,142 $ 5,522 Add: Depreciation expense 7,989 4,825 Deferred percentage rents 791 832 Non-cash charges -- 61 Loss from discontinued operations -- 346 -------------------- ------------- Funds From Operations(1) $21,922 $ 11,586 ==================== ============= (1) For periods after October 1, 2002, we will change our historical method of calculating FFO. Through the quarter ended September 30, 2002, our FFO included FF&E reserve income which was historically paid to us but escrowed for future capital expenditures at certain leased properties. As described in Note 11 to the accompanying financial statements, we entered into an agreement to amend the lease pursuant to which our tenant, Five Star, will retain title to the FF&E escrow accounts while we retain security and remainder interests in the escrow accounts and in property purchased with funding from those accounts. Accordingly, effective October 1, 2002, our FFO will no longer include FF&E reserve income. In order to facilitate comparison of future FFO with historical results, the historical FFO presentation in future periods will eliminate FF&E reserve income. If this change were implemented in the results presented above, FFO for the three months ended September 30, 2002, would have been $20.1 million.
Nine Months Ended September 30, 2002, Compared to Nine Months Ended September 30, 2001 Total revenues for the nine months ended September 30, 2002, were $89.5 million, compared to total revenues of $201.6 million for the nine months ended September 30, 2001. Included in total revenues for the nine months ended September 30, 2001, are revenues from facilities' operations of $167.4 million. During 2001, Five Star, one of our wholly owned subsidiaries, operated facilities for our account. On December 31, 2001, we distributed substantially all of our ownership of Five Star to our shareholders and Five Star became a separate public company. In connection with the Five Star Spin-Off, Five Star leased the facilities from us which it previously operated for our account; and, as a result, after the Five Star Spin-Off, we do not have facilities' operations revenues or expenses. Rental income for the nine months ended September 30, 2002, was $83.0 million compared to rental income of $33.3 million for the nine months ended September 30, 2001, an increase of $49.7 million. This increase is due to our acquisition and lease of 31 properties on January 11, 2002, for annual rent of $63.0 million and our lease to Five Star of facilities which had been previously operated for our account for annual rent of $7.0 million. This increase was partially offset by a decrease in annual rent from HEALTHSOUTH of $10.3 million to $8.7 million effective January 2, 2002, as described above. 10 SENIOR HOUSING PROPERTIES TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) FF&E reserve income for the nine months ended September 30, 2002, was $5.3 million compared to zero for the nine months ended September 30, 2001. The lease for certain properties acquired in January 2002 required a varying percentage of gross revenues be paid to us as additional rent which is escrowed for future capital expenditures at these leased facilities. This lease was modified, effective October 1, 2002, as described in Note 11 to the accompanying financial statements. Total expenses for the nine months ended September 30, 2002, were $49.5 million, compared to total expenses of $189.1 million for the nine months ended September 30, 2001, a decrease of $139.6 million. Total expenses for the nine months ended September 30, 2001, include expenses from facilities' operations of $162.3 million. Subsequent to the Five Star Spin-Off, we no longer have any facilities' operations expenses. Interest expense for the nine months ended September 30, 2002, was $20.4 million compared to interest expense for the nine months ended September 30, 2001, of $4.9 million, an increase of $15.5 million. This increase was primarily due to our issuance of $245.0 million of 8 5/8% senior unsecured notes in December 2001 and our assumption of debt in connection with our purchase of properties in January 2002. The increase was partially offset by a decrease in the weighted average interest rate on our revolving bank credit facility. Depreciation expense for the nine months ended September 30, 2002, was $23.2 million compared to depreciation expense for the nine months ended September 30, 2001, of $14.5 million, an increase of $8.7 million. Recurring general and administrative expense for the nine months ended September 30, 2002, was $5.9 million compared to recurring general and administrative expense for the nine months ended September 30, 2001, of $3.2 million, an increase of $2.7 million. These increases were primarily due to our acquisition of properties in January 2002. During the nine months ended September 30, 2001, we incurred nonrecurring general and administrative costs totaling approximately $4.2 million. These costs were incurred in connection with the establishment of operating systems for foreclosed and repossessed properties, which systems were distributed to shareholders in the Five Star Spin-Off. Distributions on trust preferred securities for the nine months ended September 30, 2002, were $2.1 million compared to $749,000 for the nine months ended September 30, 2001. The increase is due to our issuance of the trust preferred securities in June and July 2001. During the nine months ended September 30, 2002, we recorded a loss from discontinued operations of $2.5 million related to a facility leased to Five Star under a multi property lease which was closed during the second quarter and is held for sale. The loss includes historical depreciation expense as well as an impairment write down of the real estate associated with this property. For the 2001 period, amounts were reclassified from depreciation expense and facilities' operations revenues and expenses to the loss from discontinued operations. Under the terms of this lease, the annual rent will be reduced by 10% of the net proceeds which we receive when this facility is sold. Net income was $35.4 million, or $0.63 per share, for the nine months ended September 30, 2002, compared to $11.1 million, or $0.41 per share, for the nine months ended September 30, 2001, an increase of $24.3 million, or $0.23 per share. This increase is primarily the result of the changes in revenues and expenses resulting from the January 2002 acquisition and the Five Star Spin-Off and the issuance of senior notes and trust preferred securities in 2001, as described above, and the increase in weighted average number of shares outstanding between the 2001 and 2002 periods. FFO for the nine months ended September 30, 2002, was $63.4 million compared to $32.9 million for the nine months ended September 30, 2001. The increase in FFO of $30.5 million is due primarily to the same factors that created the increase in net income. 11 SENIOR HOUSING PROPERTIES TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) FFO for the nine months ended September 30, 2002 and 2001, are calculated as follows (dollars in thousands):
2002 2001 --------------- --------------- Net income $ 35,358 $ 11,108 Add: Depreciation expense 23,215 14,464 Deferred percentage rents 2,313 2,365 Non-cash charges -- 125 General and administrative expenses related to foreclosures and lease terminations -- 4,167 Loss from discontinued operations 2,491 703 --------------- --------------- Funds From Operations(1) $ 63,377 $ 32,932 =============== =============== (1) For periods after October 1, 2002, we will change our historical method of calculating FFO. Through the quarter ended September 30, 2002, our FFO included FF&E reserve income which was historically paid to us but escrowed for future capital expenditures at certain leased properties. As described in Note 11 to the accompanying financial statements, we entered into an agreement to amend the lease pursuant to which our tenant, Five Star, will retain title to the FF&E escrow accounts while we retain security and remainder interests in the escrow accounts and in property purchased with funding from those accounts. Accordingly, effective October 1, 2002, our FFO will no longer include FF&E reserve income. In order to facilitate comparison of future FFO with historical results, the historical FFO presentation in future periods will eliminate FF&E reserve income. If this change were implemented in the results presented above, FFO for the nine months ended September 30, 2002, would have been $58.0 million.
LIQUIDITY AND CAPITAL RESOURCES On January 11, 2002, we acquired 31 senior living communities. The purchase price was $600.0 million and the total acquisition cost, after closing costs and purchase price adjustments, was $607.1 million. The funding for this acquisition was as follows: $24.1 million of assumed debt; a $25.0 million purchase note; approximately $350.0 million from our available cash; and the balance from borrowings under our revolving bank credit facility. In February 2002, we issued 15,000,000 common shares of beneficial interest, raising net proceeds of $195.2 million. These net proceeds were used to repay the $25.0 million purchase note arising from our acquisition of 31 properties in January 2002, and the remainder was used to repay part of the borrowings outstanding under our revolving bank credit facility. On June 27, 2002, we entered into a new revolving bank credit facility to replace our previous credit facility which was scheduled to mature in September 2002. The new credit facility matures in November 2005 and may be extended by us to November 2006 upon the payment of an extension fee. The new credit facility permits borrowings up to $250.0 million, which amount may be increased to $500.0 million in certain circumstances. Drawings under the new credit facility are unsecured. Funds may be drawn, repaid and redrawn until maturity, and no principal repayment is due until maturity. The interest rates (3.26% at September 30, 2002) on borrowings under the new credit facility are calculated as spreads above LIBOR or the prime rate which vary with the amounts of our debt outstanding and credit ratings. The new credit facility is available for acquisitions, working capital and for general business purposes. As of September 30, 2002, $33.0 million was outstanding and $217.0 million was available for drawing under the new credit facility. As described in Note 11 to the accompanying financial statements, in October 2002 we acquired nine properties for approximately $62.9 million which was funded by drawing under our revolving bank credit facility and cash on hand, and, at November 7, 2002, there was $80.0 million outstanding and $170.0 million available for drawing under our revolving bank credit facility. 12 SENIOR HOUSING PROPERTIES TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Funding for our current expenses and distributions to shareholders is provided primarily by our leasing operations. Minimum rents are generally received monthly or quarterly, from our tenants and percentage rents are received monthly, quarterly or annually. We believe that our current cash, cash equivalents, future cash from leasing activities and availability under our revolving bank credit facility will be sufficient to meet our short term and long term capital requirements, including the distribution to shareholders of $18.1 million, or $0.31 per share, for the quarter ended September 30, 2002, which we declared on October 8, 2002 and will pay on or about November 21, 2002. To the extent we borrow on our bank credit facility and, as the maturity dates of our credit facility and term debt approach over the longer term, we will explore alternatives for the repayment of amounts due. Such alternatives may include incurring new debt and issuing new equity securities. On January 30, 2002, our shelf registration statement for the issuance of up to $2.0 billion of equity and debt securities was declared effective by the SEC. As of September 30, 2002, $1.8 billion was available under this effective shelf registration statement. An effective shelf registration statement allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities. Although there can be no assurance that we will consummate any securities offering or other financing, we believe we will have access to various types of financing with which to finance acquisitions and to pay our debt and other obligations. Debt and Trust Preferred Covenants Our principal debt obligations at September 30, 2002, were our unsecured revolving bank credit facility and our $245.0 million of publicly held unsecured debt. Our public debt is governed by an indenture. This indenture and our bank credit agreement contain a number of financial ratio covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties in excess of calculated amounts, require us to maintain a minimum net worth, as defined, restrict our ability to make distributions under certain circumstances and require us to maintain other ratios, as defined. Our trust preferred securities are governed by an indenture which is generally less restrictive than the indenture governing our public debt and the terms of our revolving bank credit facility. At September 30, 2002, we were in compliance with all of the covenants under our indentures and our credit agreement. None of our indentures, our revolving bank credit facility or our other debt obligations contain provisions for acceleration or otherwise which would be triggered by a change in our debt ratings. However, the interest rate payable under the revolving bank credit facility may change as our debt ratings change. Our public debt indenture contains cross default provisions to any other debts equal to or in excess of $10.0 million; and similarly, a default on any of our public indentures would constitute a default under our bank credit agreement. As of September 30, 2002, we have no commercial paper, derivatives, swaps, hedges, joint ventures or partnerships. Seasonality Nursing home and assisted living operations have historically reflected modest seasonality. During calendar fourth quarter holiday periods residents at such facilities are sometimes discharged to join in family celebrations and admission decisions are often deferred. The first quarter of each calendar year usually coincides with increased illness among residents which can result in increased costs or discharges to hospitals. As a result of these factors and others, these operations sometimes produce greater earnings in the second and third quarters of each calendar year and lesser earnings in the fourth and first calendar quarters. We do not expect these seasonal differences to have a material impact upon the ability of our tenants to pay our rent. 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in our exposure to market risk since December 31, 2001, other than an increase in the amount outstanding on our revolving credit facility. The following table shows the impact a 10% change in interest rates would have on our interest expense for our floating rate debt:
Total Interest Rate Outstanding Interest Per Year Debt Expense Per Year --------------- -------------- --------------- At September 30, 2002 3.26% $33,000 $1,076 10% reduction 2.93% $33,000 $ 967 10% increase 3.59% $33,000 $1,185
The foregoing table shows the impact of an immediate change in floating interest rates. If interest rates were to change gradually over time, the impact would be spread over time. Our exposure to fluctuations in interest rates has increased since September 30, 2002, and it may increase further in the future if we incur debt to fund acquisitions or otherwise. Item 4. Controls and Procedures a) Within the 90 days prior to the date of this report, management of the Company carried out an evaluation, under the supervision and with the participation of our Managing Trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based upon that evaluation, our Managing Trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings. b) There have been no significant changes in the Company's internal controls or in other factors that could significantly affect those controls since the Company's evaluation of these controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 14 SENIOR HOUSING PROPERTIES TRUST Part II. Other Information Item 5. Other Information We currently own 45 senior living communities which are operated by Marriott Senior Living Services, Inc. ("Marriott"). Fourteen of these communities with 4,030 living units are leased to Marriott to 2013 and that lease is guaranteed by Marriott International, Inc. ("Marriott International"). The remaining 31 communities with 7,491 living units are leased to Five Star to 2017 and managed by Marriott. Marriott International has not guaranteed Five Star's lease to us. The financial results and rent coverage realized at the 31 communities which are leased to Five Star and managed by Marriott have declined during 2002. Recently, however, Marriott International has stated that its profits from its senior living business in 2002 have been improving and that it is considering divesting its senior living business. Also, we are aware that some owners of hotels managed by Marriott International have brought litigation to challenge cost allocations to their hotels and to capture certain profits realized by Marriott International from their hotels. As a result, we and Five Star have asked Marriott to explain allocation formulas for costs shared by our communities and other businesses operated by affiliates of Marriott International, to justify certain charges to these communities, to detail profits made by affiliates of Marriott International from purchases directed by Marriott for the account of these communities and for additional information and actions. In response to the first inquiry Marriott paid $409,337 to Five Star and provided some of the requested information. We are continuing to pursue these inquiries. We intend to monitor Marriott International's divestment efforts and the responses we receive to our inquiries, and to enforce our rights and remedies relative to these 31 communities. All rent obligations due to us from Five Star for these 31 communities are current, and we do not believe that cancellation of the Marriott management contracts would materially jeopardize our ability to collect rent for these communities. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 12.1 Computation of Ratios of Earnings to Interest (before distributions on trust preferred securities) and Earnings to Fixed Charges. 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [18 U.S.C. Sec. 1350]. (b) Reports on Form 8-K: During the third quarter of 2002, we did not file any Current Reports on Form 8-K. 15 SENIOR HOUSING PROPERTIES TRUST CERTAIN IMPORTANT FACTORS THIS QUARTERLY REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND THE FEDERAL SECURITIES LAWS. THESE FORWARD LOOKING STATEMENTS INCLUDE REFERENCES TO OUR TENANTS' ABILITY TO PAY OUR RENTS, OUR ABILITY TO PURCHASE ADDITIONAL PROPERTIES AND OUR ABILITY TO RAISE CAPITAL AND OTHER MATTERS. HOWEVER, OUR TENANTS MAY EXPERIENCE LOSSES AND BECOME UNABLE TO PAY OUR RENTS; WE MAY BE UNABLE TO IDENTIFY PROPERTIES WHICH WE WANT TO BUY OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES OR LEASE TERMS FOR NEW PROPERTIES; AND WE MAY BE UNABLE TO RAISE CAPITAL. THESE UNEXPECTED RESULTS COULD OCCUR BECAUSE OF MANY DIFFERENT REASONS, SOME OF WHICH, SUCH AS CHANGES IN OUR TENANTS' INSURANCE COSTS OR THEIR MEDICARE AND MEDICAID RATES, OR CHANGES IN THE CAPITAL MARKETS OR THE ECONOMY GENERALLY, ARE BEYOND OUR CONTROL. SIMILARLY, WE DO NOT BELIEVE THAT A TERMINATION OF THE MARRIOTT MANAGEMENT CONTRACTS WILL JEOPARDIZE OUR ABILITY TO COLLECT RENTS FOR THE 31 SENIOR LIVING COMMUNITIES MANAGED BY MARRIOTT. HOWEVER, FIVE STAR MAY BE UNABLE TO EFFECTIVELY MANAGE THESE COMMUNITIES WITHOUT ASSISTANCE FROM MARRIOTT, THE MANAGEMENT CONTRACT TERMINATIONS COULD RESULT IN LITIGATION BETWEEN MARRIOTT AND FIVE STAR OR US, OR MARRIOTT MAY SEEK LARGE TERMINATION PAYMENTS OR DAMAGES WHICH MAKE IT DIFFICULT FOR FIVE STAR TO OPERATE OR OTHERWISE ADVERSELY AFFECT US. FORWARD LOOKING STATEMENTS ARE ONLY EXPRESSIONS OF OUR PRESENT EXPECTATIONS AND INTENTIONS. FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR, AND THEY MAY NOT OCCUR. INVESTORS SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS. THE ARTICLES OF AMENDMENT AND RESTATEMENT ESTABLISHING SENIOR HOUSING PROPERTIES TRUST, DATED SEPTEMBER 20, 1999, TOGETHER WITH ALL AMENDMENTS THERETO, AS DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT THE NAME "SENIOR HOUSING PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION OF TRUST AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SENIOR HOUSING PROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SENIOR HOUSING PROPERTIES TRUST. ALL PERSONS DEALING WITH SENIOR HOUSING PROPERTIES TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF SENIOR HOUSING PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. 16 SENIOR HOUSING PROPERTIES TRUST 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 8, 2002 By: /s/John R. Hoadley John R. Hoadley Treasurer and Chief Financial Officer Dated: November 8, 2002 17 I, Barry M. Portnoy, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Senior Housing Properties Trust; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: 1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; 2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and 3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): 1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 8, 2002 /s/Barry M. Portnoy Barry M. Portnoy Managing Trustee 18 I, Gerard M. Martin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Senior Housing Properties Trust; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: 1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; 2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and 3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): 1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 8, 2002 /s/Gerard M. Martin Gerard M. Martin Managing Trustee 19 I, David J. Hegarty, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Senior Housing Properties Trust; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: 1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; 2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and 3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): 1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 8, 2002 /s/David J. Hegarty David J. Hegarty President and Chief Operating Officer 20 I, John R. Hoadley, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Senior Housing Properties Trust; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: 1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; 2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and 3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): 1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 8, 2002 /s/John R. Hoadley John R. Hoadley Treasurer and Chief Financial Officer 21