10-Q 1 snh_063018x10qxdocument.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
 
FORM 10-Q
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 
OR
 
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-15319
 
SENIOR HOUSING PROPERTIES TRUST
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland
 
04-3445278
(State or Other Jurisdiction of Incorporation or
Organization)
 
(IRS Employer Identification No.)
 
Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634
(Address of Principal Executive Offices) (Zip Code)
 
617-796-8350
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☒
 
Accelerated filer ☐
 
 
 
Non—accelerated filer ☐
 
Smaller reporting company ☐
(Do not check if a smaller reporting company)
 
 
 
 
 
Emerging growth company ☐
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒
 
Number of registrant’s common shares outstanding as of August 6, 2018: 237,643,781




SENIOR HOUSING PROPERTIES TRUST
FORM 10-Q
 
June 30, 2018
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
References in this Quarterly Report on Form 10-Q to the Company, we, us or our include Senior Housing Properties Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.




PART I.  Financial Information
 
Item 1.  Financial Statements.
 
SENIOR HOUSING PROPERTIES TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(unaudited)
 
 
 
June 30,
 
December 31,
 
 
2018
 
2017
ASSETS
 
 

 
 

Real estate properties:
 
 

 
 

Land
 
$
847,028

 
$
824,879

Buildings and improvements
 
7,140,704

 
6,999,884

 
 
7,987,732

 
7,824,763

Accumulated depreciation
 
(1,555,754
)
 
(1,454,477
)
 
 
6,431,978

 
6,370,286

 
 
 
 
 
Cash and cash equivalents
 
30,657

 
31,238

Restricted cash
 
108,704

 
16,083

Acquired real estate leases and other intangible assets, net
 
472,272

 
472,265

Other assets, net
 
392,025

 
404,147

Total assets
 
$
7,435,636

 
$
7,294,019

 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

Unsecured revolving credit facility
 
$
64,000

 
$
596,000

Unsecured term loans, net
 
547,873

 
547,460

Senior unsecured notes, net
 
2,214,856

 
1,725,662

Secured debt and capital leases, net
 
843,623

 
805,404

Accrued interest
 
26,015

 
17,987

Assumed real estate lease obligations, net
 
91,080

 
96,018

Other liabilities
 
204,616

 
228,300

Total liabilities
 
3,992,063

 
4,016,831

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Equity:
 
 

 
 

Equity attributable to common shareholders:
 
 
 
 
Common shares of beneficial interest, $.01 par value: 300,000,000 shares authorized, 237,643,781 and 237,630,409 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
 
2,376

 
2,376

Additional paid in capital
 
4,609,522

 
4,609,316

Cumulative net income
 
2,213,533

 
1,766,495

Cumulative other comprehensive income
 
(281
)
 
87,231

Cumulative distributions
 
(3,545,818
)
 
(3,360,468
)
Total equity attributable to common shareholders
 
3,279,332

 
3,104,950

Noncontrolling interest:
 
 
 
 
Total equity attributable to noncontrolling interest
 
164,241

 
172,238

Total equity
 
3,443,573

 
3,277,188

Total liabilities and equity
 
$
7,435,636

 
$
7,294,019

 See accompanying notes.

1


SENIOR HOUSING PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands, except per share data)
(unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 

 
 

 
 

 
 

Rental income
 
$
174,585

 
$
166,647

 
$
348,313

 
$
333,090

Residents fees and services
 
102,663

 
98,366

 
204,750

 
196,484

Total revenues
 
277,248

 
265,013

 
553,063

 
529,574

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Property operating expenses
 
110,092

 
102,795

 
218,235

 
203,851

Depreciation and amortization
 
72,300

 
69,669

 
142,639

 
142,844

General and administrative
 
29,078

 
22,922

 
54,196

 
38,005

Acquisition and certain other transaction related costs
 
77

 

 
97

 
292

Impairment of assets
 
548

 
5,082

 
548

 
5,082

Total expenses
 
212,095

 
200,468

 
415,715

 
390,074

 
 
 
 
 
 
 
 
 
Operating income
 
65,153

 
64,545

 
137,348

 
139,500

 
 
 
 
 
 
 
 
 
Dividend income
 
659

 
659

 
1,318

 
1,319

Unrealized gains and losses on equity securities, net
 
23,265

 

 
50,506

 

Interest and other income
 
60

 
76

 
114

 
195

Interest expense
 
(44,813
)
 
(40,800
)
 
(88,365
)
 
(84,289
)
Loss on early extinguishment of debt
 

 
(7,353
)
 
(130
)
 
(7,353
)
Income from continuing operations before income tax expense and equity in earnings of an investee
 
44,324

 
17,127

 
100,791

 
49,372

Income tax expense
 
(105
)
 
(99
)
 
(365
)
 
(191
)
Equity in earnings of an investee
 
7

 
374

 
51

 
502

Income before gain on sale of properties
 
44,226

 
17,402

 
100,477

 
49,683

Gain on sale of properties
 
80,762

 

 
261,916

 

Net income
 
124,988

 
17,402

 
362,393

 
49,683

Net income attributable to noncontrolling interest
 
(1,401
)
 
(1,360
)
 
(2,784
)
 
(1,486
)
Net income attributable to common shareholders
 
$
123,587

 
$
16,042

 
$
359,609

 
$
48,197

 
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 

 
 

 
 

 
 

Unrealized gain (loss) on investments in available for sale securities
 

 
(4,995
)
 

 
19,050

Amounts reclassified from cumulative other comprehensive income to net income
 

 
5,082

 

 
5,082

Equity in unrealized (loss) gain of an investee
 
10

 
58

 
(83
)
 
180

Other comprehensive (loss) income
 
10

 
145

 
(83
)
 
24,312

Comprehensive income
 
124,998

 
17,547

 
362,310

 
73,995

Comprehensive income attributable to noncontrolling interest
 
(1,401
)
 
(1,360
)
 
(2,784
)
 
(1,486
)
Comprehensive income attributable to common shareholders
 
$
123,597

 
$
16,187

 
$
359,526

 
$
72,509

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding (basic)
 
237,487

 
237,399

 
237,483

 
237,395

Weighted average common shares outstanding (diluted)
 
237,529

 
237,445

 
237,506

 
237,433

 
 
 
 
 
 
 
 
 
Per common share amounts (basic and diluted):
 
 

 
 

 
 

 
 

Net income attributable to common shareholders
 
$
0.52

 
$
0.07

 
$
1.51

 
$
0.20

 
See accompanying notes.

2


SENIOR HOUSING PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 

 
 

Net income
 
$
362,393

 
$
49,683

Adjustments to reconcile net income to cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
142,639

 
142,844

Amortization of debt issuance costs and debt discounts and premiums
 
2,953

 
2,803

Straight line rental income
 
(6,023
)
 
(6,865
)
Amortization of acquired real estate leases and other intangible assets
 
(2,797
)
 
(2,610
)
Loss on early extinguishment of debt
 
130

 
7,353

Impairment of assets
 
548

 
5,082

Gain on sale of properties
 
(261,916
)
 

Unrealized gains and losses on equity securities, net
 
(50,506
)
 

Other non-cash adjustments
 
(1,886
)
 
(1,887
)
Equity in earnings of an investee
 
(51
)
 
(502
)
Change in assets and liabilities:
 
 

 
 

Other assets
 
4,742

 
7,094

Accrued interest
 
8,028

 
(985
)
Other liabilities
 
(19,130
)
 
9,487

Net cash provided by operating activities
 
179,124

 
211,497

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Real estate acquisitions and deposits
 
(129,493
)
 
(15,146
)
Real estate improvements
 
(41,061
)
 
(57,067
)
Proceeds from sale of properties
 
332,389

 

Net cash provided by (used in) investing activities
 
161,835

 
(72,213
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from issuance of senior unsecured notes, net
 
491,560

 

Proceeds from borrowings on revolving credit facility
 
429,000

 
501,000

Repayments of borrowings on revolving credit facility
 
(961,000
)
 
(394,000
)
Repayment of other debt
 
(7,832
)
 
(302,476
)
Loss on early extinguishment of debt settled in cash
 
(130
)
 
(5,485
)
Payment of debt issuance costs
 
(4,296
)
 

Repurchase of common shares
 
(90
)
 
(11
)
Proceeds from noncontrolling interest, net
 

 
255,813

Distributions to noncontrolling interest
 
(10,781
)
 
(3,483
)
Distributions to shareholders
 
(185,350
)
 
(185,284
)
Net cash used in financing activities
 
(248,919
)
 
(133,926
)
 
 
 
 
 
Increase in cash and cash equivalents and restricted cash
 
92,040

 
5,358

Cash and cash equivalents and restricted cash at beginning of period
 
47,321

 
35,578

Cash and cash equivalents and restricted cash at end of period
 
$
139,361

 
$
40,936

 
 
 
 
 

See accompanying notes.

3


SENIOR HOUSING PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(amounts in thousands)
(unaudited)
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Supplemental cash flows information:
 
 
 
 
Interest paid
 
$
77,385

 
$
82,470

Income taxes paid
 
$
439

 
$
441

 
 
 
 
 
Non-cash investing activities:
 
 
 
 
Acquisitions funded by assumed debt
 
$
(44,386
)
 
$

 
 
 
 
 
Non-cash financing activities:
 
 
 
 
Assumption of mortgage notes payable
 
$
44,386

 
$

Supplemental disclosure of cash and cash equivalents and restricted cash:
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amount shown in the condensed consolidated statements of cash flows:
 
 
As of June 30,
 
 
2018
 
2017
Cash and cash equivalents
 
$
30,657

 
$
27,160

Restricted cash
 
108,704

 
13,776

Total cash and cash equivalents and restricted cash shown in the statements of cash flows
 
$
139,361

 
$
40,936


See accompanying notes.



4

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

 
Note 1.  Basis of Presentation
The accompanying condensed consolidated financial statements of Senior Housing Properties Trust and its subsidiaries, or we, us, or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2017, or our Annual Report.  
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and impairment of real estate and intangible assets.
In March 2017, we entered a joint venture with a sovereign investor for one of our properties leased to medical providers, medical related business, clinics and biotech laboratory tenants, or MOBs (two buildings), located in Boston, Massachusetts. We have determined that this joint venture is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification. We concluded that we must consolidate this VIE because we have the power to direct the activities that most significantly impact the VIE’s economic performance and we have the obligation to absorb losses of, and the right to receive benefits from, the VIE that could be significant to the VIE, and therefore are the primary beneficiary of the VIE. The assets of this VIE were $1,080,268 and $1,102,986 as of June 30, 2018 and December 31, 2017, respectively, and consist primarily of the net real estate owned by the joint venture. The liabilities of this VIE were $716,127 and $720,678 as of June 30, 2018 and December 31, 2017, respectively, and consist primarily of the debt securing the property. The sovereign investor's interest in this consolidated entity is reflected as noncontrolling interest in our condensed consolidated financial statements. See Note 6 for further information about this joint venture.
Note 2.  Recent Accounting Pronouncements
On January 1, 2018, we adopted FASB Accounting Standards Update, or ASU, No. 2014-09 (and related clarifying guidance issued by the FASB), Revenue From Contracts With Customers, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU No. 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” While ASU No. 2014-09 specifically references contracts with customers, it may apply to certain other transactions such as the sale of real estate or equipment. A substantial portion of our total revenues, including residents fees and services which relate to contracts with residents for housing services at properties leased to our taxable REIT subsidiaries, or TRSs, consists of rental income from leasing arrangements, which is specifically excluded from ASU No. 2014-09. Our contracts with residents that are within the scope of ASU No. 2014-09 are generally short term in nature. We have adopted ASU No. 2014-09 using the modified retrospective approach. The adoption of ASU No. 2014-09 did not have a material impact on the amount or timing of our revenue recognition in our condensed consolidated financial statements.
On January 1, 2018, we adopted FASB ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. The implementation of ASU No. 2016-01 resulted in the reclassification of historical changes in the fair value of our available for sale equity securities of $86,572 from cumulative other comprehensive income to cumulative net income. We also reclassified $841 from cumulative other comprehensive income to cumulative net income for our share of cumulative other comprehensive income of our equity method investee. Effective January 1, 2018, changes in the fair value of our equity securities are recorded through earnings in accordance with ASU No. 2016-01.

5

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

On January 1, 2018, we adopted FASB ASU No. 2016-18, Restricted Cash, which requires companies to show the changes in the total of cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU No. 2016-18 also requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. As a result, amounts included in restricted cash in our condensed consolidated balance sheets are presented with cash and cash equivalents in our condensed consolidated statements of cash flows to the related captions in the condensed consolidated balance sheets. Restricted cash totaled $108,704 and $13,776 as of June 30, 2018 and 2017, respectively. The implementation of ASU No. 2016-18 resulted in a $9,947 decrease to net cash provided by operating activities for the six months ended June 30, 2017. The adoption of ASU No. 2016-18 did not change our balance sheet presentation.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have in our condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements. We currently expect to adopt the standard using the modified retrospective approach.
In June 2018, the FASB issued ASU No. 2018-7, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. ASU No. 2018-7 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2018-7 will have in our condensed consolidated financial statements.
Note 3.  Real Estate Properties
At June 30, 2018, we owned 443 properties (469 buildings) located in 42 states and Washington, D.C.
Acquisitions:
We have accounted for our 2018 acquisitions as acquisitions of assets unless otherwise noted. We funded our 2018 acquisitions using cash on hand and borrowings under our revolving credit facility, unless otherwise noted.
MOBs:
In January 2018, we acquired three MOBs (three buildings) located in Kansas, Missouri and California with a total of approximately 400,000 square feet for an aggregate purchase price of approximately $91,698, including closing costs of $544.
In March 2018, we acquired one MOB (one building) located in Virginia with approximately 135,000 square feet for a purchase price of approximately $23,275, including our assumption of a $11,050 mortgage note and closing costs of $525.

6

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

The table below represents the purchase price allocations (including net closing adjustments) of the MOB acquisitions that closed during the six months ended June 30, 2018, as described above:
Date
 
Location
 
Number of Properties
 
Number of Buildings
 
Square Feet  (000’s)
 
Cash Paid Plus Assumed Debt (1)
 
Land
 
Building and Improvements
 
Acquired Real Estate Leases (2)
 
Assumed Debt
January 2018
 
3 States
 
3
 
3
 
400

 
$
91,698

 
$
16,873

 
$
54,605

 
$
20,220

 
$

March 2018
 
Virginia
 
1
 
1
 
135

 
23,275

 
2,863

 
11,105

 
9,307

 
11,050

 
 
 
 
4
 
4
 
535

 
$
114,973

 
$
19,736

 
$
65,710

 
$
29,527

 
$
11,050

(1)
Cash paid plus assumed debt, if any, includes closing costs.
(2)
The weighted average amortization period for acquired real estate leases as of the acquisition dates was 5.8 years.
Senior Living Community Acquisitions:
In November 2017, we entered a transaction agreement with Five Star Senior Living Inc., or Five Star, pursuant to which we agreed to acquire six senior living communities from Five Star. In December 2017, we acquired two of these senior living communities located in Alabama and Indiana with a combined 229 living units for $39,457, including closing costs of $307. In January 2018, we acquired one of these senior living communities located in Tennessee with 88 living units for $19,868, including closing costs of $201. In February 2018, we acquired one of these senior living communities located in Arizona with 127 living units for $22,622, including our assumption of approximately $16,748 of mortgage debt principal and closing costs of $372. In June 2018, we acquired the remaining two of these senior living communities located in Tennessee with a combined 151 living units for $23,860, including our assumption of approximately $16,588 of mortgage debt principal and closing costs of $560. In connection with our acquisitions of these senior living communities, we entered management and pooling agreements with Five Star for Five Star to manage these senior living communities for us.
The table below represents the purchase price allocations (including net closing adjustments) of the senior living community acquisitions that closed during the six months ended June 30, 2018, as described above:
Date
 
Location
 
Leased/Managed
 
Number of Properties
 
Units
 
Cash Paid Plus Assumed Debt (1)
 
Land
 
Building and Improvements
 
FF&E
 
Acquired Real Estate Intangible Assets 
 
Assumed Debt
 
Premium on Assumed Debt
January 2018
 
Tennessee
 
Managed
 
1
 
88

 
$
19,868

 
$
580

 
$
14,884

 
$
1,209

 
$
3,195

 
$

 
$

February 2018
 
Arizona
 
Managed
 
1
 
127

 
22,622

 
2,017

 
17,123

 
390

 
4,451

 
16,748

 
(1,359
)
June 2018
 
Tennessee
 
Managed
 
2
 
151

 
23,860

 
965

 
17,910

 
1,628

 
3,843

 
16,588

 
(486
)
 
 
 
 
 
 
4
 
366

 
$
66,350

 
$
3,562

 
$
49,917

 
$
3,227

 
$
11,489

 
$
33,336

 
$
(1,845
)
(1)
Cash paid plus assumed debt, if any, includes closing costs.
Impairment:
We periodically evaluate our assets for impairments. Impairment indicators may include declining tenant or resident occupancy, weak or declining profitability from the property, decreasing tenant cash flows or liquidity, our decision to dispose of an asset before the end of its estimated useful life, and legislative, market or industry changes that could permanently reduce the value of an asset. If indicators of impairment are present, we evaluate the carrying value of the affected asset by comparing it to the expected future undiscounted net cash flows to be generated from that asset. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the asset to its estimated fair value.
During the three months ended June 30, 2018, we recorded an impairment charge of $548 to write off an acquired lease intangible asset associated with a lease default at one of our triple net leased senior living communities, which was leased to a third party private operator. In June 2018, we reached an agreement with this tenant and its guarantor to settle past due

7

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

amounts, terminate the lease and transfer operations, and, in connection with this agreement, we received $2,150. We entered a management agreement with Five Star to operate this community for our account under a TRS structure.

We did not record any impairment charges for our real estate properties during the six months ended June 30, 2017. See Note 5 for further information regarding other than temporary impairment losses recorded in 2017 relating to our investments in equity securities.

Dispositions:
In March 2018, we sold two senior living communities that were leased to Sunrise Senior Living LLC, or Sunrise, for an aggregate sales price of $217,000, excluding closing costs, resulting in a gain of $181,154. In May 2018, we sold one senior living community leased to Sunrise for a sales price of $96,000, excluding closing costs, resulting in a gain of $78,856. We recognized rental income of $728 and $3,505 during the three and six months ended June 30, 2018, respectively, related to these three senior living communities. We currently have $94,348 of proceeds from the sale of a senior living community in May 2018 that are being held in trust for our benefit to fund future acquisitions by us. These proceeds from the sale are classified as restricted cash in our condensed consolidated balance sheets.
In June 2018, we sold one skilled nursing facility, or SNF, a type of senior living community, that was leased to Five Star and one senior living community that was leased to a private operator, where the tenant exercised its purchase option, for a combined sales price of approximately $21,865, excluding closing costs, resulting in a net gain of $1,906. Pursuant to the terms of our lease with Five Star, our annual rental income decreased by $650 from the sale of the SNF that was previously leased to Five Star. We recognized rental income of $331 and $664 during the three and six months ended June 30, 2018, respectively, related to the senior living community that was leased to a private operator.
Note 4.  Indebtedness
Our principal debt obligations at June 30, 2018 were: (1) outstanding borrowings under our $1,000,000 unsecured revolving credit facility; (2) seven public issuances of senior unsecured notes, including: (a) $400,000 principal amount at an annual interest rate of 3.25% due 2019, (b) $200,000 principal amount at an annual interest rate of 6.75% due 2020, (c) $300,000 principal amount at an annual interest rate of 6.75% due 2021, (d) $250,000 principal amount at an annual interest rate of 4.75% due 2024, (e) $500,000 principal amount at an annual interest rate of 4.75% due 2028, (f) $350,000 principal amount at an annual interest rate of 5.625% due 2042 and (g) $250,000 principal amount at an annual interest rate of 6.25% due 2046; (3) our $350,000 principal amount unsecured term loan due 2020; (4) our $200,000 principal amount unsecured term loan due 2022; and (5) $833,594 aggregate principal amount of mortgages (excluding premiums, discounts and net debt issuance costs) secured by 26 of our properties (27 buildings) with maturity dates between 2018 and 2043. The 26 mortgaged properties (27 buildings) had a carrying value (before accumulated depreciation) of $1,266,093 at June 30, 2018. We also had two properties subject to capital leases with lease obligations totaling $10,270 at June 30, 2018; these two properties had a carrying value (before accumulated depreciation) of $36,248 at June 30, 2018, and the capital leases expire in 2026.
In February 2018, we issued $500,000 of 4.75% senior unsecured notes due 2028, raising net proceeds of approximately $487,264 after underwriting discounts and expenses. We used the net proceeds of this offering to reduce amounts outstanding under our revolving credit facility.
In January 2018, we prepaid, at par plus accrued interest, a mortgage note secured by one of our properties with an outstanding principal balance of approximately $4,338, a maturity date in September 2043 and an annual interest rate of 4.38%. In July 2018, we prepaid, at par plus accrued interest, mortgage notes secured by 12 of our properties with an aggregate outstanding principal balance of approximately $90,602, maturity dates in October 2018 and a weighted average annual interest rate of 5.0%. In July 2018, we gave notice of our intention to prepay, at par plus accrued interest, a mortgage note secured by one of our properties with an outstanding principal balance of approximately $6,360, a maturity date in January 2019 and an annual interest rate of 4.69%. We expect to make this prepayment in September 2018.
We have a $1,000,000 revolving credit facility that is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is January 15, 2022, and, subject to the payment of an extension fee and meeting other conditions, we have the option to extend the maturity date of the facility for an additional year. Our revolving credit facility provides that we can borrow, repay and re-borrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. Our revolving credit facility requires annual interest to be paid on borrowings at

8

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

the rate of LIBOR plus a premium of 120 basis points, plus a facility fee of 25 basis points per annum on the total amount of lending commitments under the facility. The interest rate premium and facility fee are each subject to adjustment based upon changes to our credit ratings. As of June 30, 2018, the annual interest rate payable on borrowings under our revolving credit facility was 3.2%. The weighted average annual interest rates for borrowings under our revolving credit facility were 3.0% and 2.3% for the three months ended June 30, 2018 and 2017, respectively, and 2.7% and 2.2% for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, we had $64,000 outstanding and $936,000 available for borrowing, and as of August 6, 2018, we had $125,000 outstanding and $875,000 available for borrowing under our revolving credit facility. We incurred interest expense and other associated costs related to our revolving credit facility of $1,504 and $3,129 for the three months ended June 30, 2018 and 2017, respectively, and $5,581 and $5,959 for the six months ended June 30, 2018 and 2017, respectively. The facility also includes a feature pursuant to which in certain circumstances maximum borrowings under the facility may be increased to up to $2,000,000.
Our $350,000 term loan matures in January 2020, and is prepayable without penalty at any time. This term loan requires annual interest to be paid at the rate of LIBOR plus a premium of 140 basis points, subject to adjustment based upon changes to our credit ratings. At June 30, 2018, the annual interest rate payable on amounts outstanding under this term loan was 3.4%. The weighted average annual interest rate for amounts outstanding under this term loan was 3.4% and 2.5% for the three months ended June 30, 2018 and 2017, respectively, and 3.2% and 2.3% for the six months ended June 30, 2018 and 2017, respectively. We incurred interest expense and other associated costs related to this term loan of $3,077 and $2,268 for the three months ended June 30, 2018 and 2017, respectively, and $5,843 and $4,311 for the six months ended June 30, 2018 and 2017, respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $700,000 in certain circumstances.
Our $200,000 term loan matures in September 2022, and is prepayable without penalty at any time. This term loan requires annual interest to be paid at the rate of LIBOR plus a premium of 135 basis points, subject to adjustment based upon changes to our credit ratings. At June 30, 2018, the annual interest rate payable on amounts outstanding under this term loan was 3.4%. The weighted average annual interest rate for amounts outstanding under this term loan was 3.3% and 2.9% for the three months ended June 30, 2018 and 2017, respectively, and 3.2% and 2.8% for the six months ended June 30, 2018 and 2017, respectively. We incurred interest expense and other associated costs related to this term loan of $1,738 and $1,488 for the three months ended June 30, 2018 and 2017, respectively, and $3,302 and $2,847 for the six months ended June 30, 2018 and 2017, respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $400,000 in certain circumstances.
Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as, in the case of our revolving credit facility and term loan agreements, a change of control of us, as defined, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business and property manager. Our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements also contain a number of covenants, including covenants that restrict our ability to incur debts, and generally require us to maintain certain financial ratios, and our revolving credit facility and term loan agreements restrict our ability to make distributions under certain circumstances. We believe we were in compliance with the terms and conditions of the respective covenants under our revolving credit facility and term loan agreements and our senior unsecured notes indentures and their supplements at June 30, 2018.

9

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

Note 5.  Fair Value of Assets and Liabilities
The table below presents certain of our assets measured at fair value at June 30, 2018, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset: 
 
 
 
 
Fair Value at Reporting Date Using
 
 
 
 
Quoted Prices in 
 
 
 
Significant
 
 
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
 
Identical Assets
 
Observable Inputs
 
Inputs
Description
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Recurring Fair Value Measurements
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
       Investment in RMR Inc. (1)
 
$
206,905

 
$
206,905

 
$

 
$

Investment in Five Star (2)
 
$
6,353

 
$
6,353

 
$

 
$

(1)
Our 2,637,408 shares of class A common stock of The RMR Group Inc., or RMR Inc., which are included in other assets in our condensed consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs). Our historical cost basis for these shares is $69,826 as of June 30, 2018. During the three and six months ended June 30, 2018, we recorded an unrealized gain of $22,418 and $50,506, respectively, to adjust the carrying value of our investment in RMR Inc. class A common shares to their fair value.
(2)
Our 4,235,000 common shares of Five Star, which are included in other assets in our condensed consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs). Our historical cost basis and fair value for these shares is $6,353 as of June 30, 2018. During the three and six months ended June 30, 2018, we recorded an unrealized gain of $847 and $0, respectively, to adjust the carrying value of our investment in Five Star common shares to their fair value. During each of the three and six months ended June 30, 2017, we recorded a loss on impairment of $5,082 to reduce the carrying value of our Five Star investment to its estimated fair value in accordance with applicable GAAP standards at that time.
In addition to the assets described in the table above, our financial instruments at June 30, 2018 and December 31, 2017 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, term loans, senior unsecured notes, secured debt and capital leases and other unsecured obligations and liabilities. The fair values of these financial instruments approximated their carrying values in our condensed consolidated financial statements as of such dates, except as follows: 
 
 
As of June 30, 2018
 
As of December 31, 2017
Description
 
Carrying Amount (1)
 
Estimated Fair Value
 
Carrying Amount (1)
 
Estimated Fair Value
Senior unsecured notes
 
$
2,214,856

 
$
2,268,429

 
$
1,725,662

 
$
1,810,882

Secured debts(2)
 
833,353

 
798,986

 
794,710

 
783,353

 
 
$
3,048,209

 
$
3,067,415

 
$
2,520,372

 
$
2,594,235

(1)
Includes unamortized debt issuance costs, premiums and discounts.
(2)
We assumed certain of these secured debts in connection with our acquisitions of certain properties. We recorded the assumed secured debts at estimated fair value on the date of assumption and we are amortizing the fair value adjustments, if any, to interest expense over their respective terms to adjust interest expense to the estimated market interest rates as of the date of assumption.
We estimated the fair value of our two issuances of senior unsecured notes due 2042 and 2046 based on the closing price on The Nasdaq Stock Market LLC, or Nasdaq, (a Level 1 input) as of June 30, 2018. We estimated the fair values of our five issuances of senior unsecured notes due 2019, 2020, 2021, 2024 and 2028 using an average of the bid and ask price on or about June 30, 2018 (Level 2 inputs as defined in the fair value hierarchy under GAAP). We estimated the fair values of our secured debts by using discounted cash flows analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined

10

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.
Note 6. Noncontrolling Interest
In March 2017, we entered a joint venture with a sovereign investor for one of our MOBs (two buildings) located in Boston, Massachusetts. The investor contributed approximately $261,009 for a 45% equity interest in the joint venture, and we retained the remaining 55% equity interest in the joint venture. Net proceeds from this transaction were approximately $255,931, after transaction costs. We continue to effectively control this property and therefore continue to account for this property on a consolidated basis in our condensed consolidated financial statements under the VIE model.
We recognized a noncontrolling interest in our condensed consolidated balance sheets of approximately $181,859 as of completion of the transaction, which was equal to 45% of the aggregate carrying value of the total equity of the property immediately prior to the transaction. The difference between the net proceeds received from this transaction and the noncontrolling interest recognized, which was approximately $74,072, was reflected as an increase in additional paid in capital in our condensed consolidated balance sheets upon the closing of the transaction. The portion of the joint venture's net income and comprehensive income not attributable to us, or $1,401 and $1,360 for the three months ended June 30, 2018 and 2017, respectively, and $2,784 and $1,486 for the six months ended June 30, 2018 and 2017, respectively, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income. We made aggregate cash distributions to our joint venture partner of $5,113 and $3,483 for the three months ended June 30, 2018 and 2017, respectively, and $10,781 and $3,483 for the six months ended June 30, 2018 and 2017, respectively, which are reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. As of June 30, 2018, this joint venture held real estate assets with an aggregate net book value of $754,732, subject to mortgage notes of $620,000.
In assessing whether we have a controlling interest in this joint venture arrangement and are required to consolidate the accounts of the joint venture entity, we considered the members' rights to residual gains and obligation to absorb losses, which activities most significantly impact the economic performance of the entity and which member has the power to direct those activities.
Note 7.  Shareholders’ Equity
Share Based Compensation:
On January 1, 2018, we purchased 4,628 of our common shares, valued at $19.15 per share, the closing price of our common shares on Nasdaq on December 29, 2017, from a former employee of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.

On March 29, 2018, in accordance with our Trustee compensation arrangements, and in connection with the election of one of our Managing Trustees, we granted 3,000 of our common shares, valued at $15.66 per share, the closing price of our common shares on Nasdaq on that day, to the Managing Trustee who was elected as a Managing Trustee on that day.
On May 22, 2018, in accordance with our Trustee compensation arrangements, we granted 3,000 of our common shares, valued at $16.56 per share, the closing price of our common shares on Nasdaq on that day, to each of our five Trustees as part of their annual compensation.
Distributions:
On February 22, 2018, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,674, that was declared on January 19, 2018 and was payable to shareholders of record on January 29, 2018. On May 17, 2018, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,676, that was declared on April 19, 2018 and was payable to shareholders of record on April 30, 2018. On July 19, 2018, we declared a regular quarterly distribution payable to common shareholders of record on July 30, 2018, of $0.39 per share, or approximately $92,681. We expect to pay this distribution on or about August 16, 2018.

11

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

Note 8.  Segment Reporting
As of June 30, 2018, we have four operating segments, of which three are separate reporting segments. We aggregate the reporting units in each of our MOBs, our triple net leased senior living communities and our managed senior living communities into three reporting segments, based on their similar operating and economic characteristics. The first reporting segment includes MOBs where the tenants pay us rent. The second reporting segment includes triple net leased senior living communities that provide short term and long term residential care and other services for residents and with respect to which we receive rents from the operators. The third reporting segment includes managed senior living communities that provide short term and long term residential care and other services for residents where we pay fees to the operator to manage the communities for our account. The fourth segment includes all of our other operations, including certain properties that offer wellness, fitness and spa services to members and with respect to which we receive rents from operators, which we do not consider to be sufficiently material to constitute a separate reporting segment.

 
 
For the Three Months Ended June 30, 2018
 
 
MOBs
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
All Other Operations
 
Consolidated
Revenues:
 
 

 
 

 
 

 
 

 
 

Rental income
 
$
103,854

 
$
66,113

 
$

 
$
4,618

 
$
174,585

Residents fees and services
 

 

 
102,663

 

 
102,663

Total revenues
 
103,854

 
66,113

 
102,663

 
4,618

 
277,248

 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

 
 

Property operating expenses
 
31,183

 

 
78,909

 

 
110,092

Depreciation and amortization
 
36,326

 
20,186

 
14,841

 
947

 
72,300

General and administrative
 

 

 

 
29,078

 
29,078

Acquisition and certain other transaction related costs
 

 

 

 
77

 
77

Impairment of assets
 

 
548

 

 

 
548

Total expenses
 
67,509

 
20,734

 
93,750

 
30,102

 
212,095

 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
36,345

 
45,379

 
8,913

 
(25,484
)
 
65,153

 
 
 
 
 
 
 
 
 
 
 
Dividend income
 

 

 

 
659

 
659

Unrealized gains and losses on equity securities, net
 

 

 

 
23,265

 
23,265

Interest and other income
 

 

 

 
60

 
60

Interest expense
 
(6,113
)
 
(565
)
 
(1,256
)
 
(36,879
)
 
(44,813
)
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee
 
30,232

 
44,814

 
7,657

 
(38,379
)
 
44,324

Income tax expense
 

 

 

 
(105
)
 
(105
)
Equity in earnings of an investee
 

 

 

 
7

 
7

Income (loss) before gain on sale of properties
 
30,232

 
44,814

 
7,657

 
(38,477
)
 
44,226

Gain on sale of properties
 

 
80,762

 

 

 
80,762

Net income (loss)
 
30,232

 
125,576

 
7,657

 
(38,477
)
 
124,988

Net income attributable to noncontrolling interest
 
(1,401
)
 

 

 

 
(1,401
)
Net income (loss) attributable to common shareholders
 
$
28,831

 
$
125,576

 
$
7,657

 
$
(38,477
)
 
$
123,587



12

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

 
 
For the Six Months Ended June 30, 2018
 
 
MOBs
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
All Other Operations
 
Consolidated
Revenues:
 
 

 
 

 
 

 
 

 
 

Rental income
 
$
205,005

 
$
134,088

 
$

 
$
9,220

 
$
348,313

Residents fees and services
 

 

 
204,750

 

 
204,750

Total revenues
 
205,005

 
134,088

 
204,750

 
9,220

 
553,063

 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

 
 

Property operating expenses
 
62,121

 

 
156,114

 

 
218,235

Depreciation and amortization
 
70,711

 
40,381

 
29,652

 
1,895

 
142,639

General and administrative
 

 

 

 
54,196

 
54,196

Acquisition and certain other transaction related costs
 

 

 

 
97

 
97

Impairment of assets
 

 
548

 

 

 
548

Total expenses
 
132,832

 
40,929

 
185,766

 
56,188

 
415,715

 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
72,173

 
93,159

 
18,984

 
(46,968
)
 
137,348

 
 
 
 
 
 
 
 
 
 
 
Dividend income
 

 

 

 
1,318

 
1,318

Unrealized gains and losses on equity securities, net
 

 

 

 
50,506

 
50,506

Interest and other income
 

 

 

 
114

 
114

Interest expense
 
(12,022
)
 
(1,136
)
 
(2,583
)
 
(72,624
)
 
(88,365
)
Loss on early extinguishment of debt
 

 

 
(130
)
 

 
(130
)
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee
 
60,151

 
92,023

 
16,271

 
(67,654
)
 
100,791

Income tax expense
 

 

 

 
(365
)
 
(365
)
Equity in earnings of an investee
 

 

 

 
51

 
51

Income (loss) before gain on sale of properties
 
60,151

 
92,023

 
16,271

 
(67,968
)
 
100,477

Gain on sale of properties
 

 
261,916

 

 

 
261,916

Net income (loss)
 
60,151

 
353,939

 
16,271

 
(67,968
)
 
362,393

Net income attributable to noncontrolling interest
 
(2,784
)
 

 

 

 
(2,784
)
Net income (loss) attributable to common shareholders
 
$
57,367

 
$
353,939

 
$
16,271

 
$
(67,968
)
 
$
359,609


 
 
As of June 30, 2018
 
 
MOBs
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
All Other Operations
 
Consolidated
Total assets
 
$
3,425,719

 
$
2,138,399

 
$
1,340,992

 
$
530,526

 
$
7,435,636



13

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

 
 
For the Three Months Ended June 30, 2017
 
 
MOBs
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
All Other Operations
 
Consolidated
Revenues:
 
 

 
 

 
 

 
 

 
 

Rental income
 
$
94,651

 
$
67,426

 
$

 
$
4,570

 
$
166,647

Residents fees and services
 

 

 
98,366

 

 
98,366

Total revenues
 
94,651

 
67,426

 
98,366

 
4,570

 
265,013

 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

 
 

Property operating expenses
 
27,646

 

 
75,149

 

 
102,795

Depreciation and amortization
 
31,861

 
20,470

 
16,390

 
948

 
69,669

General and administrative
 

 

 

 
22,922

 
22,922

Impairment of assets
 

 

 

 
5,082

 
5,082

Total expenses
 
59,507

 
20,470

 
91,539

 
28,952

 
200,468

 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
35,144

 
46,956

 
6,827

 
(24,382
)
 
64,545

 
 
 
 
 
 
 
 
 
 
 
Dividend income
 

 

 

 
659

 
659

Interest and other income
 

 

 

 
76

 
76

Interest expense
 
(6,250
)
 
(2,211
)
 
(1,176
)
 
(31,163
)
 
(40,800
)
Loss on early extinguishment of debt
 
(59
)
 
(7,294
)
 

 

 
(7,353
)
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee
 
28,835

 
37,451

 
5,651

 
(54,810
)
 
17,127

Income tax expense
 

 

 

 
(99
)
 
(99
)
Equity in earnings of an investee
 

 

 

 
374

 
374

Net income (loss)
 
28,835

 
37,451

 
5,651

 
(54,535
)
 
17,402

Net income attributable to noncontrolling interest
 
(1,360
)
 

 

 

 
(1,360
)
Net income (loss) attributable to common shareholders
 
$
27,475

 
$
37,451

 
$
5,651

 
$
(54,535
)
 
$
16,042


14

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

 
 
For the Six Months Ended June 30, 2017
 
 
MOBs
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
All Other Operations
 
Consolidated
Revenues:
 
 

 
 

 
 

 
 

 
 

Rental income
 
$
189,297

 
$
134,678

 
$

 
$
9,115

 
$
333,090

Residents fees and services
 

 

 
196,484

 

 
196,484

Total revenues
 
189,297

 
134,678

 
196,484

 
9,115

 
529,574

 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

 
 

Property operating expenses
 
54,823

 

 
149,028

 

 
203,851

Depreciation and amortization
 
63,539

 
40,804

 
36,605

 
1,896

 
142,844

General and administrative
 

 

 

 
38,005

 
38,005

Acquisition and certain other transaction related costs
 

 

 

 
292

 
292

Impairment of assets
 

 

 

 
5,082

 
5,082

Total expenses
 
118,362

 
40,804

 
185,633

 
45,275

 
390,074

 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
70,935

 
93,874

 
10,851

 
(36,160
)
 
139,500

 
 
 
 
 
 
 
 
 
 
 
Dividend income
 

 

 

 
1,319

 
1,319

Interest and other income
 

 

 

 
195

 
195

Interest expense
 
(12,570
)
 
(7,550
)
 
(2,352
)
 
(61,817
)
 
(84,289
)
Loss on early extinguishment of debt
 
(59
)
 
(7,294
)
 

 

 
(7,353
)
Income (loss) from continuing operations before income tax expense and equity in earnings of an investee
 
58,306

 
79,030

 
8,499

 
(96,463
)
 
49,372

Income tax expense
 

 

 

 
(191
)
 
(191
)
Equity in earnings of an investee
 

 

 

 
502

 
502

Net income (loss)
 
58,306

 
79,030

 
8,499

 
(96,152
)
 
49,683

Net income attributable to noncontrolling interest
 
(1,486
)
 

 

 

 
(1,486
)
Net income (loss) attributable to common shareholders
 
$
56,820

 
$
79,030

 
$
8,499

 
$
(96,152
)
 
$
48,197

 
As of December 31, 2017
 
MOBs
 
Triple Net Leased Senior Living Communities
 
Managed Senior Living Communities
 
All Other Operations
 
Consolidated
Total assets
$
3,367,485

 
$
2,251,756

 
$
1,273,757

 
$
401,021

 
$
7,294,019


Note 9. Leases and Management Agreements with Five Star
Our Senior Living Communities Leased by Five Star. We are Five Star’s largest landlord and Five Star is our largest tenant. As of June 30, 2018 and 2017, we leased 184 and 185 senior living communities to Five Star, respectively. We lease senior living communities to Five Star pursuant to five leases. We recognized total rental income payable by Five Star of $51,692 and $51,123 for the three months ended June 30, 2018 and 2017, respectively, and $103,450 and $102,108 for the six months ended June 30, 2018 and 2017, respectively. These amounts exclude percentage rent payments we received from Five Star of $1,289 and $1,392 for the three months ended June 30, 2018 and 2017, respectively, and $2,664 and $2,837 for the six months ended June 30, 2018 and 2017, respectively. We determine actual percentage rent due under our Five Star leases annually and recognize any resulting amount as rental income at year end when all contingencies are met. As of June 30, 2018 and December 31, 2017, we had rents receivable from Five Star of $17,198 and $18,539, respectively, which amounts are included in other assets in our condensed consolidated balance sheets. Rental income from Five Star represented 18.6% and 18.7% of

15

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

our total revenues for the three and six months ended June 30, 2018, respectively, and the properties Five Star leases from us represented 26.9% of our real estate investments, at cost, as of June 30, 2018.
Pursuant to the terms of our leases with Five Star, for the six months ended June 30, 2018 and 2017, we funded $8,529 and $19,308, respectively, of improvements to communities leased to Five Star. As a result, the annual minimum rent payable to us by Five Star increased by approximately $680 and $1,547 as of June 30, 2018 and 2017, respectively.
Our Senior Living Communities Managed by Five Star. As of June 30, 2018 and 2017, Five Star managed 75 and 68 senior living communities for our account, respectively. We lease our senior living communities that are managed by Five Star and include assisted living units or SNF units to our TRSs and Five Star manages these communities pursuant to long term management agreements. See Note 3 above for certain senior living communities we acquired since December 2017 and which are managed by Five Star for our account. In addition, in June 2018, Five Star began managing for our account a senior living community we own located in California with 98 living units after the previous tenant defaulted on its lease with us pursuant to a management agreement and our existing Pooling Agreement No. 12 with Five Star, which we and Five Star amended and restated to include that senior living community. Pursuant to the terms of the management agreement for this senior living community and our Amended and Restated Pooling Agreement No. 12 with Five Star, we will pay Five Star a management fee equal to 5% of the gross revenues realized at this community plus reimbursement for Five Star’s direct costs and expenses related to its operation of this community, as well as an annual incentive fee equal to 20% of the annual net operating income, or NOI, of the community remaining after we realize an annual minimum return of $1,000 plus 7% of our invested capital for this community in excess of $500 made after the date Five Star began managing this community, and that our annual minimum return for this community will not be used in determining whether or not there is a priority return shortfall, as defined, under the pooling agreement until 2019. We incurred management fees payable to Five Star of $3,533 and $3,554 for the three months ended June 30, 2018 and 2017, respectively, and $7,027 and $7,117 for the six months ended June 30, 2018 and 2017, respectively. These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.
Five Star also provides certain other services directly to residents at some of the senior living communities it manages for us, such as rehabilitation services. At senior living communities Five Star manages for us where Five Star provides rehabilitation services on an outpatient basis, the residents, third party payers or government programs pay Five Star for those rehabilitation services. At senior living communities Five Star manages for us where Five Star provides both inpatient and outpatient rehabilitation services, we generally pay Five Star for these services and charges for these services are included in amounts charged to residents, third party payers or government programs. We incurred fees payable to Five Star of $1,660 and $1,886 for the three months ended June 30, 2018 and 2017, respectively, and $3,359 and $3,868 for the six months ended June 30, 2018 and 2017, respectively, for rehabilitation services Five Star provided at senior living communities it manages for us; we include these amounts in property operating expenses in our condensed consolidated statement of comprehensive income.    
Note 10. Business and Property Management Agreements with RMR LLC
We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to the property level operations of our MOBs. We also have a subsidiary level management agreement with RMR LLC related to one of our MOBs located in Boston, Massachusetts, which we entered in connection with the joint venture arrangement for that MOB. Under that agreement, our subsidiary pays RMR LLC certain business management fees directly, which fees are credited against the business management fees payable by us to RMR LLC.
Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $26,489 and $20,431 for the three months ended June 30, 2018 and 2017, respectively, and $49,813 and $33,212 for the six months ended June 30, 2018 and 2017, respectively. The net business management fees we recognized for the three and six months ended June 30, 2018 include $725 and $1,450, respectively, of management fees related to our subsidiary level management agreement with RMR LLC entered in connection with our joint venture arrangement and $17,610 and $31,957, respectively, of estimated 2018 incentive fees based on our common share total return, as defined in our business management agreement, as of June 30, 2018. Although we recognized estimated incentive fees in accordance with GAAP, the actual amount of incentive fees for 2018, if any, will be based on our common share total return, as defined in our business management agreement, for the three year period ending December 31, 2018, and will be payable in 2019. The net business management fees for the three and six months ended June 30, 2017, included $725 and $787, respectively, of management fees related to our subsidiary level

16

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

management agreement with RMR LLC and $10,760 and $14,026, respectively, of estimated 2017 incentive fees based on our common share total return, as defined in our business management agreement, as of June 30, 2017. In January 2018, we paid RMR LLC an incentive fee of $55,740 for 2017. These amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income. 
Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $2,984 and $2,708 for the three months ended June 30, 2018 and 2017, respectively, and $5,805 and $4,888 for the six months ended June 30, 2018 and 2017, respectively. These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.
We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. Our property level operating expenses, including certain payroll and related costs incurred by RMR LLC, are generally incorporated into rents charged to our tenants. We reimbursed RMR LLC $3,172 and $2,383 for property management related expenses for the three months ended June 30, 2018 and 2017, respectively, and $5,951 and $4,763 for the six months ended June 30, 2018 and 2017, respectively, which amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income. In addition, we are responsible for our share of RMR LLC's costs for providing our internal audit function. The amounts recognized as expense for internal audit costs were $69 and $67 for the three months ended June 30, 2018 and 2017, respectively, and $138 and $134 for the six months ended June 30, 2018 and 2017, respectively, which amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.
Note 11. Related Person Transactions
 
We have relationships and historical and continuing transactions with Five Star, RMR LLC, RMR Inc., Affiliates Insurance Company, or AIC, and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also our Trustees or officers. 
Five Star.  We are currently one of Five Star’s largest stockholders. As of June 30, 2018, we owned 4,235,000 of Five Star’s common shares, or approximately 8.4% of Five Star’s outstanding common shares. Five Star is our largest tenant and the manager of our managed senior living communities. RMR LLC provides management services to both us and Five Star. As of June 30, 2018, a subsidiary of ABP Trust, the controlling shareholder of RMR Inc., owned 35.6% of Five Star's outstanding common shares. Adam D. Portnoy, one of our Managing Trustees, is the sole trustee of ABP Trust and a managing director of Five Star. See Note 9 for further information regarding our relationships, agreements and transactions with Five Star and Note 5 for further information regarding our investment in Five Star.
Our Manager, RMR LLC. We have two agreements with RMR LLC to provide management services to us. See Note 10 for further information regarding our management agreements with RMR LLC.
RMR Inc. RMR LLC is a majority owned subsidiary of RMR Inc. and RMR Inc. is the managing member of RMR LLC. Adam D. Portnoy, one of our Managing Trustees, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director, president and chief executive officer of RMR Inc., and an officer of RMR LLC. Jennifer B. Clark, our other Managing Trustee, also serves as a managing director and as executive vice president, general counsel and secretary of RMR Inc. and an officer of ABP Trust and RMR LLC. Other officers of RMR LLC also serve as our officers. As of June 30, 2018, we owned 2,637,408 shares of class A common stock of RMR Inc.  See Note 5 for further information regarding our investment in RMR Inc.
AIC. We, ABP Trust, Five Star and four other companies to which RMR LLC provides management services currently own AIC in equal amounts. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC; we also have a one year standalone insurance policy that provides coverage for our MOB (two buildings) located in Boston, Massachusetts that is owned in our joint venture arrangement, which we obtained as a part of this insurance program. We (including our consolidated joint venture) currently expect to pay, as of June 30, 2018, aggregate annual premiums, including taxes and fees, of approximately $4,613 in connection with this insurance program for the policy year ending June 30, 2019, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.

17

SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar amounts in thousands, except per share data or as otherwise stated)

As of June 30, 2018 and December 31, 2017, our investment in AIC had a carrying value of $8,153 and $8,185, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income related to our investment in AIC, which is presented as equity in earnings of an investee in our condensed consolidated statements of comprehensive income. Our other comprehensive income includes our proportionate part of unrealized gains on securities that are owned by AIC related to our investment in AIC.
For further information about these and other such relationships and certain other related person transactions, refer to our Annual Report.
Note 12.  Income Taxes
We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, and as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We do, however, lease certain managed senior living communities to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated federal corporate income tax return and are subject to federal and state income taxes. Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state income taxes we incur despite our taxation as a REIT. During the three months ended June 30, 2018 and 2017, we recognized income tax expense of $105 and $99, respectively, and during the six months ended June 30, 2018 and 2017, we recognized income tax expense of $365 and $191, respectively.
Note 13. Weighted Average Common Shares
The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands): 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Weighted average common shares for basic earnings per share
 
237,487

 
237,399

 
237,483

 
237,395

Effect of dilutive securities: unvested share awards
 
42

 
46

 
23

 
38

Weighted average common shares for diluted earnings per share
 
237,529

 
237,445

 
237,506

 
237,433



18


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and with our Annual Report.
We are a REIT organized under Maryland law. At June 30, 2018, we owned 443 properties (469 buildings) located in 42 states and Washington, D.C. At June 30, 2018, the undepreciated carrying value of our properties, which represents the gross book value of our real estate assets before depreciation and purchase price allocations, less impairment write downs, was $8.7 billion. For the three months ended June 30, 2018, 97% of our NOI came from properties where a majority of the revenues are derived from our tenants' and residents’ private resources. 
PORTFOLIO OVERVIEW
The following tables present an overview of our portfolio (dollars in thousands, except investment per unit or square foot data):
(As of June 30, 2018)
 
Number of Properties
 
Number of Units or Square Feet
 
 
 
Carrying Value of Investment(1)
 
% of Total Investment
 
Investment per Unit or Square Foot(2)
 
Q2 2018 Revenues (3)
 
% of Q2 2018 Revenues
 
Q2 2018 NOI (3)(4)
 
% of Q2 2018 NOI 
Facility Type
 
 

 
 

 
 
 
 

 
 

 
 

 
 
 
 
 
 

 
 

Independent living (5)
 
68

 
15,231

 
 
 
$
2,350,649

 
27.1
%
 
$
154,333

 
$
89,253

 
32.5
%
 
$
44,209

 
26.7
%
Assisted living (5)
 
198

 
14,564

 
 
 
2,149,968

 
24.8
%
 
$
147,622

 
73,539

 
26.6
%
 
39,674

 
24.0
%
Skilled nursing facilities (5)
 
38

 
4,033

 
 
 
184,520

 
2.1
%
 
$
45,753

 
4,240

 
1.5
%
 
4,240

 
2.6
%
Subtotal senior living communities
 
304

 
33,828

 
 
 
4,685,137

 
54.0
%
 
$
138,499

 
167,032

 
60.6
%
 
88,123

 
53.3
%
MOBs (6)
 
129

 
12,599,579

 
sq. ft.
 
3,797,362

 
43.9
%
 
$
301

 
103,854

 
37.7
%
 
72,671

 
43.9
%
Wellness centers
 
10

 
812,000

 
sq. ft.
 
178,110

 
2.1
%