snh_Current folio

Three Months Ended
March 31,

Weighted average common shares for basic earnings per share

Effect of dilutive securities: unvested share awards

Weighted average common shares for diluted earnings per share

0001558370-16-005402.txt : 20160505 0001558370-16-005402.hdr.sgml : 20160505 20160505153153 ACCESSION NUMBER: 0001558370-16-005402 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 52 CONFORMED PERIOD OF REPORT: 20160331 FILED AS OF DATE: 20160505 DATE AS OF CHANGE: 20160505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SENIOR HOUSING PROPERTIES TRUST CENTRAL INDEX KEY: 0001075415 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043445278 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15319 FILM NUMBER: 161623376 BUSINESS ADDRESS: STREET 1: TWO NEWTON PLACE STREET 2: 255 WASHINGTON STREET CITY: NEWTON STATE: MA ZIP: 02458 BUSINESS PHONE: 6173323990 MAIL ADDRESS: STREET 1: TWO NEWTON PLACE STREET 2: 255 WASHINGTON STREET CITY: NEWTON STATE: MA ZIP: 02458 10-Q 1 snh-20160331x10q.htm 10-Q snh_Current folio_10Q

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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 March 31, 2016

☐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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):


Large accelerated filer ☒		Accelerated filer ☐

Non—accelerated filer ☐		Smaller reporting company ☐
(Do not check if a smaller reporting company)

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 May 4, 2016: 237,471,559

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SENIOR HOUSING PROPERTIES TRUST

FORM 10-Q

March 31, 2016

INDEX



		Page
PART I	Financial Information

Item 1.	Financial Statements (unaudited)	1

	Condensed Consolidated Balance Sheets — March 31, 2016 and December 31, 2015	1

	Condensed Consolidated Statements of Comprehensive Income — Three Months Ended March 31, 2016 and 2015	2

	Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2016 and 2015	3

	Notes to Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	38

	Warning Concerning Forward Looking Statements	39

	Statement Concerning Limited Liability	43

PART II	Other Information	44

Item 1A.	Risk Factors	44

Item 6.	Exhibits	44

	Signatures	46

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.

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PART I. Financial Information

Item 1. Financial Statements.

SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share and per share data)

(unaudited)


	March 31,		December 31,
	2016		2015
ASSETS
Real estate properties:
Land	$	785,388	$	781,426
Buildings and improvements		6,704,728		6,675,514
		7,490,116		7,456,940
Accumulated depreciation		(1,193,550)		(1,147,540)
		6,296,566		6,309,400
Cash and cash equivalents		39,199		37,656
Restricted cash		6,853		6,155
Acquired real estate leases and other intangible assets, net		580,221		604,286
Other assets, net		231,312		202,593
Total assets	$	7,154,151	$	7,160,090

LIABILITIES AND SHAREHOLDERS’ EQUITY
Unsecured revolving credit facility	$	561,000	$	775,000
Unsecured term loans, net		546,493		546,305
Senior unsecured notes, net		1,720,714		1,478,536
Secured debt and capital leases, net		669,314		679,295
Accrued interest		33,628		16,974
Assumed real estate lease obligations, net		114,507		115,363
Other liabilities		185,751		188,857
Total liabilities		3,831,407		3,800,330

Commitments and contingencies

Shareholders’ equity:
Common shares of beneficial interest, $.01 par value: 300,000,000 shares authorized, 237,471,559 issued and outstanding at March 31, 2016 and December 31, 2015		2,375		2,375
Additional paid in capital		4,531,790		4,531,703
Cumulative net income		1,508,862		1,477,590
Cumulative other comprehensive losses		(8,298)		(32,537)
Cumulative distributions		(2,711,985)		(2,619,371)
Total shareholders’ equity		3,322,744		3,359,760
Total liabilities and shareholders’ equity	$	7,154,151	$	7,160,090

See accompanying notes.

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SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)


	Three Months Ended
	March 31,
	2016		2015
Revenues:
Rental income	$	161,421	$	145,784
Residents fees and services		96,954		82,793
Total revenues		258,375		228,577

Expenses:
Property operating expenses		97,949		85,794
Depreciation		71,223		53,707
General and administrative		10,863		10,574
Acquisition related costs		439		1,158
Impairment of assets		7,390		—
Total expenses		187,864		151,233

Operating income		70,511		77,344

Interest and other income		64		75
Interest expense		(39,280)		(35,942)
Loss on early extinguishment of debt		(6)		(1,409)
Income from continuing operations before income tax expense and equity in earnings of an investee		31,289		40,068
Income tax expense		(94)		(110)
Equity in earnings of an investee		77		72
Income from continuing operations		31,272		40,030
Discontinued operations:
Loss from discontinued operations		—		(241)
Net income		31,272		39,789

Other comprehensive income:
Unrealized gain on investments in available for sale securities		24,187		1,448
Equity in unrealized gain of an investee		52		45
Other comprehensive income		24,239		1,493
Comprehensive income	$	55,511	$	41,282

Weighted average common shares outstanding (basic)		237,315		221,375
Weighted average common shares outstanding (diluted)		237,329		221,397

Per common share amounts (basic and diluted):
Income from continuing operations	$	0.13	$	0.18
Loss from discontinued operations		—		(0.00)
Net income	$	0.13	$	0.18

See accompanying notes.

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SENIOR HOUSING PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)


	Three Months Ended
	March 31,
	2016		2015
Cash flows from operating activities:
Net income	$	31,272	$	39,789
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		71,223		53,707
Amortization of deferred financing fees and debt discounts and premiums		1,356		1,650
Straight line rental income		(4,561)		(3,509)
Amortization of acquired real estate leases and other intangible assets		(1,254)		(1,198)
Loss on early extinguishment of debt		6		1,409
Impairment of assets		7,390		—
Other non-cash adjustments		(985)		(105)
Equity in earnings of an investee		(77)		(72)
Change in assets and liabilities:
Restricted cash		(698)		2,860
Other assets		664		(7,751)
Accrued interest		16,654		11,938
Other liabilities		1,821		6,828
Cash provided by operating activities		122,811		105,546

Cash flows from investing activities:
Real estate acquisitions and deposits		(23,651)		(509,045)
Real estate improvements		(23,173)		(12,339)
Proceeds from sale of properties		644		250
Cash used for investing activities		(46,180)		(521,134)

Cash flows from financing activities:
Proceeds from issuance of common shares, net		—		659,750
Proceeds from issuance of senior unsecured notes		250,000		—
Proceeds from borrowings on revolving credit facility		98,000		515,000
Repayments of borrowings on revolving credit facility		(312,000)		(595,000)
Repayment of other debt		(9,957)		(32,440)
Loss on early extinguishment of debt settled in cash		—		(1,409)
Payment of debt issuance costs		(8,517)		(583)
Distributions to shareholders		(92,614)		(79,530)
Cash (used for) provided by financing activities		(75,088)		465,788

Increase in cash and cash equivalents		1,543		50,200
Cash and cash equivalents at beginning of period		37,656		27,594
Cash and cash equivalents at end of period	$	39,199	$	77,794

Supplemental cash flow information:
Interest paid	$	21,269	$	22,354
Income taxes paid		—		—

Non-cash investing activities:
Acquisitions funded by assumed debt		—		(29,955)

Non-cash financing activities:
Assumption of mortgage notes payable		—		29,955
Issuance of common shares		—		808

See accompanying notes.

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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, 2015, or our Annual Report. In the opinion of our management, all adjustments, which include only normal recurring adjustments, considered necessary for a fair presentation 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. We have made reclassifications to the prior years’ condensed consolidated financial statements to conform to the current year’s presentation. These reclassifications had no effect on net income or shareholders’ equity.

Note 2. Recent Accounting Pronouncements

On January 1, 2016, we adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, No. 2015-02, Consolidation. Among other things, this update changed how an entity determines the primary beneficiary of a variable interest entity. The implementation of this update did not have an impact in our condensed consolidated financial statements.

On January 1, 2016, we adopted FASB ASU, No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability, and ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which addresses the presentation of debt issuance costs related to line of credit arrangements. The implementation of these updates resulted in the reclassification of certain of our capitalized debt issuance costs as an offset to the associated debt liability in our condensed consolidated balance sheets. The classification of capitalized debt issuance costs related to our unsecured revolving credit facility remains unchanged in accordance with ASU No. 2015-15. As of December 31, 2015, debt issuance costs related to our unsecured term loans, senior unsecured notes and secured debt and capital leases of $3,695, $16,530 and $3,664, respectively, were reclassified from assets to an offset to the associated debt liability in our condensed consolidated balance sheets.

On January 1, 2016, we adopted FASB ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The implementation of this update did not have an impact in our condensed consolidated financial statements.

In January 2016, the FASB issued 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. This update is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted subject to

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

certain conditions. Currently, changes in fair value of these investments are recorded through other comprehensive income. Under this ASU, these changes will be recorded through earnings. We are continuing to evaluate this guidance, but we expect the implementation of this guidance will affect the accounting for changes in the fair value of available for sale equity investments we hold in our condensed consolidated financial statements.

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 March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, which identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU No. 2016-09 is effective for reporting periods beginning after December 15, 2016. We are currently assessing the potential impact that the adoption of ASU No. 2016-09 will have in our condensed consolidated financial statements.

Note 3. Real Estate Properties

At March 31, 2016, we owned 428 properties (454 buildings) located in 43 states and Washington, D.C. We have accounted for, or expect to account for, the following acquisitions as business combinations unless otherwise noted.

Acquisitions:

In February 2016, we acquired one property (three buildings) leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or MOBs, located in Minnesota with approximately 128,000 square feet for a purchase price of approximately $22,700, excluding closing costs. We funded this acquisition using cash on hand and borrowings under our revolving credit facility. The accounting for this acquisition was as follows:


					Cash Paid								Acquired
		Number	Number		plus						Acquired		Real Estate				Premium
		of	of	Square	Assumed				Buildings and		Real Estate		Lease		Assumed		on Assumed
Date	Location	Properties	Buildings	Feet (000’s)	Debt (1)		Land		Improvements		Leases (2)		Obligations (2)		Debt		Debt
Feb-16	Minnesota	1	3	128	$	22,700	$	4,074	$	15,223	$	5,163	$	(1,760)	$	—	$	—

		1	3	128	$	22,700	$	4,074	$	15,223	$	5,163	$	(1,760)	$	—	$	—

⁽¹⁾

This amount includes the cash we paid plus the debt we assumed, if any, as well as various closing settlement adjustments, but excludes closing costs.

⁽²⁾

The weighted average amortization periods for acquired lease intangible assets and assumed real estate lease obligations were 6.4 years and 7.3 years, respectively.

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

The allocation of the purchase price of the acquisition shown above is based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. These amounts preliminarily allocated to assets acquired and liabilities assumed may change from those used in these condensed consolidated financial statements.

In May 2016, we acquired one senior living community located in Georgia with 38 private pay units for a purchase price of approximately $8,400, excluding closing costs. We acquired this community using a taxable REIT subsidiary, or TRS, structure and we have entered a management agreement with Five Star Quality Care Inc., or, together with its subsidiaries, Five Star, to manage this community. We funded this acquisition using cash on hand and borrowings under our revolving credit facility. See Note 10 for further information regarding our management arrangements with Five Star.

Also in May 2016, we acquired one MOB (one building) located in Florida with approximately 183,000 square feet for a purchase price of approximately $45,000, excluding closing costs. We funded this acquisition using cash on hand and borrowings under our revolving credit facility.

Impairment:

We periodically evaluate our assets for impairments. Impairment indicators may include declining tenant or resident occupancy, weak or declining profitability of our properties, cash flow 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 March 31, 2016, we recorded impairment charges of $4,391 to write off acquired lease intangible assets associated with lease defaults at two of our triple net leased senior living communities, which were leased to two third party private operators as of March 31, 2016. In April 2016 we reached an agreement with one of these tenants and its guarantor to settle past due amounts, terminate the lease and transfer operations. As part of this agreement, we received an amount of $2,365, and entered into a management agreement with Five Star to operate this community on our behalf under a TRS structure. We expect that Five Star will assume operations of the other lease defaulted community on our behalf under a TRS structure in the second quarter of 2016. We also recorded impairment charges of $2,999 to reduce the carrying values of one MOB and one land parcel to their estimated sales prices less costs to sell. In March 2016, we sold this land parcel as described further below under “Dispositions.” The remaining carrying value of these properties is recoverable as of March 31, 2016.

See Note 10 for further information regarding our management arrangements with Five Star.

Discontinued Operations and Properties Held for Sale:

As of March 31, 2016, we had one senior living community with 140 living units and one MOB with approximately 65,000 square feet classified as held for sale. The real estate assets of this senior living community and MOB are included in other assets in our condensed consolidated balance sheets and have an aggregate net book value of approximately $7,125 at March 31, 2016. In February 2016, we entered an agreement to sell the senior living community for approximately $9,500, which amount does not include potential closing costs we may incur. This sale is subject to conditions; accordingly, we can provide no assurance that we will sell this property, that the sale will not be delayed or that the terms will not change.

Results of operations for properties sold or held for sale are included in discontinued operations in our condensed consolidated statements of comprehensive income when the criteria for discontinued operations in the

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

Presentation of Financial Statements Topic of the FASB Accounting Standards Codification are met. The senior living communities which we are or were offering for sale during the periods presented did not meet the criteria for discontinued operations and are included in continuing operations.

Dispositions:

In March 2016, we sold a land parcel, previously classified as held for sale, for approximately $700, excluding closing costs. In February 2015, we sold one vacant senior living community for approximately $250, excluding closing costs.

Note 4. Investments in Available for Sale Securities

As of March 31, 2016, we owned 4,235,000 common shares of Five Star. We classify these shares as available for sale securities and carry them at fair market value in other assets in our condensed consolidated balance sheets, with unrealized gains and losses reported as a component of shareholders’ equity. Our historical cost basis for these shares is $14,230. At March 31, 2016, our investment in Five Star had a fair value of $9,698, resulting in an unrealized loss of $4,532 based on Five Star’s quoted share price at March 31, 2016 ($2.29 per share).

In addition, at March 31, 2016, we owned 2,637,408 shares of class A common stock of The RMR Group Inc., or RMR Inc. We also classify these shares of RMR Inc. as available for sale securities and carry them at fair value in other assets in our condensed consolidated balance sheets, with unrealized gains and losses reported as a component of shareholders’ equity. Our historical cost basis for these shares is $69,826. At March 31, 2016, our investment in RMR Inc. had a fair value of $65,962, resulting in an unrealized loss of $3,864 based on RMR Inc.’s quoted share price at March 31, 2016 ($25.01 per share).

See Notes 7 and 10 below for further information regarding our investments in available for sale securities.

Note 5. Indebtedness

Our principal debt obligations at March 31, 2016 were: (1) outstanding borrowings under our $1,000,000 revolving credit facility; (2) six 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) $350,000 principal amount at an annual interest rate of 5.625% due 2042 and (f) $250,000 principal amount at an annual interest rate of 6.25% due 2046; (3) our $350,000 principal amount term loan due 2020; (4) our $200,000 principal amount term loan due 2022; and (5) $657,744 aggregate principal amount of mortgages (excluding premiums, discounts and net debt issuance costs) secured by 55 of our properties (56 buildings) with maturity dates between 2016 and 2043. The 55 mortgaged properties (56 buildings) had a carrying value (before accumulated depreciation) of $1,074,085 at March 31, 2016. We also had two properties subject to capital leases with lease obligations totaling $11,988 at March 31, 2016; these two properties had a carrying value (before accumulated depreciation) of $36,015 at March 31, 2016, and the capital leases expire in 2026.

In February 2016, we issued $250,000 of 6.25% senior unsecured notes due 2046, and raised net proceeds of approximately $241,483 after underwriting discounts and expenses. We used the net proceeds of this offering to repay amounts outstanding under our revolving credit facility and for general business purposes.

We have a $1,000,000 unsecured revolving credit facility that is available for general business purposes, including acquisitions. The maturity date of our revolving credit facility is January 15, 2018 and, subject to the payment of an extension fee and meeting other conditions, we have an option to extend the stated maturity date by an additional year to January 15, 2019. Our revolving credit facility provides that we can borrow, repay and re-borrow funds available

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SENIOR HOUSING PROPERTIES TRUST

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(dollar amounts in thousands, except per share data or as otherwise stated)

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 LIBOR plus a premium, which was 130 basis points as of March 31, 2016, plus a facility fee of 30 basis points per annum on the total amount of lending commitments. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of March 31, 2016, the annual interest rate payable on borrowings under our revolving credit facility was 1.7%, and the weighted average annual interest rates for borrowings under our revolving credit facility were 1.7% and 1.5% for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, we had $561,000 outstanding and $439,000 available for borrowing, and as of May 4, 2016, we had $621,000 outstanding and $379,000 available for borrowing under our revolving credit facility. We incurred interest expense and other associated costs related to our revolving credit facility of $3,682 and $939 for the three months ended March 31, 2016 and 2015, respectively. Our revolving credit facility includes an accordion feature pursuant to which maximum borrowings under the facility may be increased to up to $1,500,000 in certain circumstances.

We have a $200,000 unsecured term loan, which we borrowed in 2015. This term loan matures in September 2022 and is prepayable without penalty beginning September 29, 2017. This term loan requires annual interest to be paid at LIBOR plus a premium of 180 basis points that is subject to adjustment based upon changes to our credit ratings. As of March 31, 2016, the annual interest rate payable for amounts outstanding under this term loan was 2.2%. The weighted average annual interest rate for amounts outstanding under this term loan was 2.3% for the three months ended March 31, 2016. We incurred interest expense and other associated costs related to this term loan of $1,127 for the three months ended March 31, 2016. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $400,000 in certain circumstances.

In addition to our $200,000 term loan, we also have a $350,000 unsecured term loan, which we borrowed in 2014. This term loan matures in January 2020 and is prepayable without penalty at any time. This term loan requires annual interest to be paid at LIBOR plus a premium of 140 basis points that is subject to adjustment based upon changes to our credit ratings. As of March 31, 2016, the annual interest rate payable on amounts outstanding under this term loan was 1.8%. The weighted average annual interest rate for amounts outstanding under this term loan was 1.9% and 1.6% for the three months ended March 31, 2016 and 2015, respectively. We incurred interest expense and other associated costs related to this term loan of $1,614 and $1,374 for three months ended March 31, 2016 and 2015, respectively. This term loan includes an accordion feature under which maximum borrowings may be increased to up to $700,000 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, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business manager 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 March 31, 2016.

In December 2014, we entered an agreement to acquire 38 senior living communities. Simultaneous with entering this agreement, we obtained a bridge loan commitment for $700,000. In February 2015, we terminated the bridge loan commitment and we recognized a loss of $1,409 on early extinguishment of debt in the first quarter of 2015 in connection with that termination.

In January 2016, we prepaid at par plus accrued interest a $6,115 mortgage note with a maturity date in April 2016 and an annual interest rate of 5.97% which was secured by one of our properties. In April 2016, we prepaid at par

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(dollar amounts in thousands, except per share data or as otherwise stated)

plus accrued interest an $18,000 mortgage note with a maturity date in July 2016 and an annual interest rate of 4.65% which was secured by one of our properties.

Note 6. Shareholders’ Equity

On February 23, 2016, we paid a regular quarterly distribution to common shareholders of $0.39 per share, or approximately $92,614, that was declared on January 11, 2016 and was payable to shareholders of record on January 22, 2016. On April 13, 2016, we declared a regular quarterly distribution payable to common shareholders of record on April 25, 2016, of $0.39 per share, or approximately $92,614. We expect to pay this distribution on or about May 19, 2016.

Note 7. Fair Value of Assets and Liabilities

The table below presents certain of our assets measured at fair value at March 31, 2016, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset:


							Significant
			Quoted Prices in Active		Significant Other		Unobservable
			Markets for Identical		Observable Inputs		Inputs
Description	Total		Assets (Level 1)		(Level 2)		(Level 3)
Recurring Fair Value Measurements
Assets:
Investments in available for sale securities(1)	$	75,660	$	75,660	$	—	$	—
Non-Recurring Fair Value Measurements
Assets:
Assets held for sale(2)	$	2,421	$	—	$	—	$	2,421

⁽¹⁾

Our investments in available for sale securities include our 4,235,000 common shares of Five Star and our 2,637,408 shares of RMR Inc. class A common stock. The fair values of these shares are based upon quoted prices at March 31, 2016 in active markets (Level 1 inputs). Our historical cost basis for our Five Star and RMR Inc. shares is $14,230 and $69,826, respectively, as of March 31, 2016. The unrealized losses of $4,532 for our Five Star shares and $3,864 for our RMR Inc. shares as of March 31, 2016 are included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets. We evaluated the decline in the fair value of the Five Star and RMR Inc. shares and determined that based on the severity and duration of the decline, and our ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, we do not consider these investments to be other-than-temporarily impaired at March 31, 2016.

⁽²⁾

Assets held for sale consist of one MOB held for sale as of March 31, 2016. The MOB is recorded at its estimated fair value less costs to sell. We used an accepted offer from a third party to purchase this property to determine its fair value as of March 31, 2016.

In addition to the assets described in the table above, our financial instruments include cash and cash equivalents, restricted cash, other assets, an unsecured revolving credit facility, unsecured term loans, senior unsecured notes, secured mortgage debt and capital leases and other unsecured obligations and liabilities. At March 31, 2016 and

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(dollar amounts in thousands, except per share data or as otherwise stated)

December 31, 2015, the fair values of these financial instruments approximated their carrying values in our condensed consolidated financial statements, except as follows:


	As of March 31, 2016				As of December 31, 2015
Description	Carrying Amount (1)		Estimated Fair Value		Carrying Amount (1)		Estimated Fair Value
Senior unsecured notes	$	1,720,714	$	1,771,365	$	1,478,536	$	1,548,613
Secured mortgage debt and capital leases (2)		669,314		715,740		679,295		724,615
	$	2,390,028	$	2,487,105	$	2,157,831	$	2,273,228

⁽¹⁾

Includes unamortized debt issuance costs, premiums and discounts.

⁽²⁾

We assumed certain of these secured mortgage debts in connection with our acquisitions of certain properties. We recorded the assumed mortgages at estimated fair value on the date of acquisition and we are amortizing the fair value adjustments, if any, to interest expense over the respective terms of the mortgages to reduce interest expense to the estimated market interest rates as of the date of acquisition.

We estimate the fair values of our senior unsecured notes using an average of the bid and ask price of our outstanding six issuances of senior unsecured notes (Level 2 inputs as defined in the fair value hierarchy under GAAP) on or about March 31, 2016. We estimate the fair values of our secured mortgage debts by using discounted cash flow analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined as defined 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 8. Segment Reporting

As of March 31, 2016, we have four operating segments, of which three are separate reporting segments. The first reporting segment includes triple net senior living communities that provide short term and long term residential care and other services for residents. The second reporting segment includes managed senior living communities that provide short term and long term residential care and other services for residents. The third reporting segment includes MOBs. Our fourth segment includes the remainder of our operations, including certain properties that offer wellness,

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(dollar amounts in thousands, except per share data or as otherwise stated)

fitness and spa services to members, which we do not consider to be sufficiently material to constitute a separate reporting segment, and all of our other operations.


	For the Three Months Ended March 31, 2016
	Triple Net
	Leased		Managed
	Senior Living		Senior Living				All Other
	Communities		Communities		MOBs		Operations		Consolidated

Revenues:
Rental income	$	65,308	$	—	$	91,582	$	4,531	$	161,421
Residents fees and services		—		96,954		—		—		96,954
Total revenues		65,308		96,954		91,582		4,531		258,375

Expenses:
Property operating expenses		363		72,178		25,408		—		97,949
Depreciation		19,401		20,018		30,856		948		71,223
General and administrative		—		—		—		10,863		10,863
Acquisition related costs		—		—		—		439		439
Impairment of assets		4,391		—		2,999		—		7,390
Total expenses		24,155		92,196		59,263		12,250		187,864

Operating income (loss)		41,153		4,758		32,319		(7,719)		70,511

Interest and other income		—		—		—		64		64
Interest expense		(6,382)		(2,564)		(953)		(29,381)		(39,280)
Loss on early extinguishment of debt		—		(6)		—		—		(6)
Income (loss) before income tax expense and equity in earnings of an investee		34,771		2,188		31,366		(37,036)		31,289
Income tax expense		—		—		—		(94)		(94)
Equity in earnings of an investee		—		—		—		77		77
Net income (loss)	$	34,771	$	2,188	$	31,366	$	(37,053)	$	31,272

	As of March 31, 2016
	Triple Net
	Leased		Managed
	Senior Living		Senior Living				All Other
	Communities		Communities		MOBs		Operations		Consolidated
Total assets	$	2,238,090	$	1,252,520	$	3,359,385	$	304,156	$	7,154,151

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(dollar amounts in thousands, except per share data or as otherwise stated)


	For the Three Months Ended March 31, 2015
	Triple Net
	Leased		Managed
	Senior Living		Senior Living				All Other
	Communities		Communities		MOBs		Operations		Consolidated
Revenues:
Rental income	$	55,251	$	—	$	86,001	$	4,532	$	145,784
Residents fees and services		—		82,793		—		—		82,793
Total revenues		55,251		82,793		86,001		4,532		228,577

Expenses:
Property operating expenses		—		62,403		23,391		—		85,794
Depreciation		15,125		8,460		29,174		948		53,707
General and administrative		—		—		—		10,574		10,574
Acquisition related costs		—		—		—		1,158		1,158
Total expenses		15,125		70,863		52,565		12,680		151,233

Operating income (loss)		40,126		11,930		33,436		(8,148)		77,344

Interest and other income		—		—		—		75		75
Interest expense		(5,985)		(2,019)		(1,768)		(26,170)		(35,942)
Loss on extinguishment of debt		—		—		—		(1,409)		(1,409)
Income (loss) before income tax expense and equity in earnings of an investee		34,141		9,911		31,668		(35,652)		40,068
Income tax expense		—		—		—		(110)		(110)
Equity in earnings of an investee		—		—		—		72		72
Income (loss) from continuing operations		34,141		9,911		31,668		(35,690)		40,030
Discontinued operations:
Loss from discontinued operations		—		—		(241)		—		(241)
Net income (loss)	$	34,141	$	9,911	$	31,427	$	(35,690)	$	39,789

	As of December 31, 2015
	Triple Net
	Leased		Managed
	Senior Living		Senior Living				All Other
	Communities		Communities		MOBs		Operations		Consolidated
Total assets	$	2,251,212	$	1,260,425	$	3,362,214	$	286,239	$	7,160,090

Note 9. Significant Tenant

Five Star is our most significant tenant. Rental income from Five Star represented 18.6% of our total revenues for the three months ended March 31, 2016, and the properties Five Star leases from us represented 28.7% of our total investments, at cost, as of March 31, 2016. As of March 31, 2016, Five Star also managed 60 senior living communities for our account. See Note 10 for further information relating to our leases and management arrangements with Five Star.

Note 10. Related Person Transactions

We have relationships and historical and continuing transactions with Five Star, RMR LLC and others related to them, including other companies to which RMR LLC provides management services and which have trustees,

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(dollar amounts in thousands, except per share data or as otherwise stated)

directors and officers who are also our trustees or officers. These relationships include Select Income REIT, or SIR, from which we acquired 23 MOBs in January 2015. For further information about these and other such relationships and certain other related person transactions, please refer to our Annual Report.

Five Star: Five Star was our 100% owned subsidiary until we distributed its common shares to our shareholders in 2001. We are Five Star’s largest stockholder. As of March 31, 2016, we owned 4,235,000 of Five Star’s common shares, representing approximately 8.6% of Five Star’s outstanding common shares. Five Star is our largest tenant and a manager of certain of our senior living communities.

As of March 31, 2016, we leased 177 senior living communities to Five Star. We recognized total rental income from Five Star of $48,108 and $47,691 for the three months ended March 31, 2016 and 2015, respectively. These amounts exclude estimated percentage rent payments of $1,473 and $1,456 for the three months ended March 31, 2016 and 2015, respectively, received from Five Star. 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. During the three months ended March 31, 2016 and 2015, pursuant to the terms of our leases with Five Star, we purchased $5,755 and $4,060, respectively, of improvements to properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $462 and $328, respectively. As of March 31, 2016 and December 31, 2015, our rents receivable from Five Star were $16,022 and $17,466, respectively, and those amounts are included in other assets in our condensed consolidated balance sheets.

As of March 31, 2016 and 2015, Five Star managed 60 and 46 senior living communities for our account, respectively. We incurred management fees payable to Five Star of $2,804 and $2,523 for the three months ended March 31, 2016 and 2015, respectively. These amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income.

In May 2016, we acquired one senior living community located in Georgia with 38 private pay units for a purchase price of approximately $8,400, excluding closing costs. We acquired this community using a TRS structure and entered a management agreement with Five Star to manage this community on terms substantially consistent with our other management agreements with Five Star for senior living communities that include assisted living units.

The tenants for two senior living communities we acquired in 2015 have defaulted their leases. For one of these senior living communities, which is located in North Carolina and has 87 living units, we have entered into a management agreement with Five Star to manage this community on terms substantially consistent with our other management agreements with Five Star for senior living communities that include assisted living units. The other senior living community with a defaulted lease is located in Alabama and has 163 living units; we expect that Five Star will assume operations of the other lease defaulted community on our behalf under a TRS structure and that we will enter into a management agreement with Five Star to manage this community on terms substantially consistent with our other management agreements with Five Star for senior living communities that include assisted living units, in the second quarter of 2016.

We expect that we may amend certain provisions of our management arrangements with Five Star as circumstances affecting the managed communities change and that we may enter into leases and additional management arrangements with Five Star for senior living communities that we may acquire in the future.

D&R Yonkers LLC: In order to accommodate certain requirements of New York healthcare licensing laws, one of our TRSs subleases a part of a senior living community we own that is managed by Five Star to D&R Yonkers LLC. D&R Yonkers LLC is owned by our President and Chief Operating Officer and Five Star’s treasurer and chief financial officer. Our transactions and balances with D&R Yonkers LLC are eliminated upon consolidation for accounting purposes and are not separately stated and do not appear in our condensed consolidated financial statements.

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(dollar amounts in thousands, except per share data or as otherwise stated)

RMR LLC: Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $8,347 and $8,869 for the three months ended March 31, 2016 and 2015, respectively. No incentive fees were estimated to be payable to RMR LLC for the three months ended March 31, 2016 and 2015, respectively. The net business management fees we recognized for the 2016 and 2015 periods are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.

In accordance with the terms of our business management agreement, we issued 39,467 of our common shares to RMR LLC for the three months ended March 31, 2015 as payment for a part of the business management fee we recognized for that period. Beginning June 2015, all management fees under our business management agreement are paid in cash.

Pursuant to our property management agreement with RMR LLC, we recognized aggregate net property management and construction supervision fees of $2,546 and $2,438 for the three months ended March 31, 2016 and 2015, 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 are generally incorporated into rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. We reimbursed RMR LLC $2,128 and $1,387 for property management related expenses for the three months ended March 31, 2016 and 2015, respectively; these amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income.

We have historically awarded share grants to certain RMR LLC employees under our equity compensation plans. In addition, under our business management agreement we reimburse RMR LLC for our allocable costs for internal audit services. The amounts recognized as expense for share grants to RMR LLC employees and internal audit costs were $585 and $461 for the three months ended March 31, 2016 and 2015, respectively; these amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.

We lease office space to RMR LLC in certain of our properties for its property management offices. Pursuant to our lease agreements with RMR LLC, we recognized rental income from RMR LLC for leased office space of approximately $52 for the three months ended March 31, 2016. We did not lease any property to, and did not recognize any rental income from, RMR LLC for the three months ended March 31, 2015.

RMR Inc.: In June 2015, we and three other real estate investment trusts, or REITs, to which RMR LLC provides management services, or collectively, the Other REITs, participated in a transaction whereby we and the Other REITs each acquired shares of class A common stock of RMR Inc. and simultaneously amended our business and property managements with RMR LLC to, among other things, provide for continuing 20 year terms. RMR Inc. is the managing member of RMR LLC and RMR LLC is a subsidiary of RMR Inc. The controlling shareholder of RMR Inc., ABP Trust, is owned by our Managing Trustees.

In connection with our acquisition of shares of class A common stock of RMR Inc., we recorded a liability for the amount by which the estimated fair value of these shares exceeded the price we paid for these shares; this liability is included in accounts payable and other liabilities in our condensed consolidated balance sheets. We are amortizing this liability ratably through December 31, 2035 as a reduction to our management fees expense. For the three months ended March 31, 2016, we amortized $943 of this liability, which is reflected in the net business management and property management fee amounts for the period. As of March 31, 2016, the unamortized amount of this liability was $74,762.

As of March 31, 2016, we own 2,637,408 shares of class A common stock of RMR Inc. We receive dividends on these shares as declared and paid by RMR Inc. to all holders of shares of RMR Inc. class A common stock. We did

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not receive any dividends on these shares during the three months ended March 31, 2016. However, on April 13, 2016, RMR Inc. declared a dividend of $0.2993 on its shares of class A common stock payable to shareholders of record on April 25, 2016. RMR Inc. has stated that this dividend represents a regular quarterly dividend of $0.25 per share of class A common stock for the quarter ended March 31, 2016 plus a pro rata dividend of $0.0493 per share of class A common stock for the period from December 14, 2015 to December 31, 2015. RMR Inc. has stated that it expects to pay this dividend on or about May 19, 2016.

AIC: We and six other companies to which RMR LLC provides management services each own in equal amounts Affiliates Insurance Company, or AIC. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC.

As of March 31, 2016, our investment in AIC had a carrying value of $6,956; this amount is included in other assets in our condensed consolidated balance sheets. We recognized income of $77 and $72 related to our investment in AIC for the three months ended March 31, 2016 and 2015, respectively. Our other comprehensive loss includes our proportional part of unrealized gains on securities held for sale which are owned by AIC of $52 and $45 for the three months ended March 31, 2016 and 2015, respectively.

Note 11. Income Taxes

We have elected to be taxed as a 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 March 31, 2016 and 2015, we recognized income tax expense of $94 and $110, respectively.

Note 12. 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):