Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2014

Summary of Significant Accounting Policies

BASIS OF PRESENTATION

BASIS OF PRESENTATION.  Our consolidated financial statements include the accounts of Senior Housing Properties Trust, or SNH, we, us or our, and our subsidiaries, all of which are 100% owned directly or indirectly by us. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated.

REAL ESTATE PROPERTIES

REAL ESTATE PROPERTIES.  We record properties at our cost and provide depreciation on real estate investments on a straight line basis over estimated useful lives generally ranging from 7 to 12 years for furniture, fixtures and equipment, or FF&E, and up to 40 years for buildings and improvements. We estimate the purchase price allocations and the useful lives of our properties. In some circumstances, we engage independent real estate appraisal firms to provide market information and evaluations which are relevant to our purchase price allocations and determinations of useful lives; however, we are ultimately responsible for the purchase price allocations and determinations of useful lives.

We allocated the purchase prices of our properties to land, building and improvements based on determinations of the fair values of these assets assuming the properties are vacant. We determined the fair value of each property using methods similar to those used by independent appraisers. For properties qualifying as acquired businesses under Accounting Standards Codification 805 Business Combinations, we allocate a portion of the purchase price of our properties to above market and below market leases based on the present value (using an interest rate which reflects the risks associated with acquired in place leases at the time each property was acquired by us) of the difference, if any, between (i) the contractual amounts to be paid pursuant to the acquired in place leases and (ii) our estimates of fair market lease rates for the corresponding leases, measured over a period equal to the terms of the respective leases. We allocated a portion of the purchase price to acquired in place leases and tenant relationships based upon market estimates to lease up the property based on the leases in place at the time of purchase. We allocated this aggregate value between acquired in place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant's lease. However, we have not separated the value of tenant relationships from the value of acquired in place leases because such value and related amortization expense is immaterial to the accompanying consolidated financial statements. In making these allocations, we considered factors such as estimated carrying costs during the expected lease up periods, including real estate taxes, insurance and other operating income and expenses and costs, such as leasing commissions, legal and other related expenses, to execute similar leases in current market conditions at the time a property was acquired by us. If the value of tenant relationships becomes material in the future, we may separately allocate those amounts and amortize the allocated amount over the estimated life of the relationships.

We amortize capitalized above market lease values (included in acquired real estate leases in our consolidated balance sheets) as a reduction to rental income over the remaining non‑cancelable terms of the respective leases. We amortize capitalized below market lease values (presented as acquired real estate lease obligations in our consolidated balance sheets) as an increase to rental income over the non‑cancelable periods of the respective leases. Such amortization resulted in an increase in rental income of $2,322 during the year ended December 31, 2014, reduction in rental income of $3,656 during the year ended December 31, 2013, and a reduction in rental income of $1,597 during the year ended December 31, 2012. We amortize the value of in place leases exclusive of the value of above market and below market in place leases to expense over the remaining non‑cancelable periods of the respective leases. Such amortization included in depreciation and amortization totaled $38,970,  $22,718,  $19,340, during the years ended December 31, 2014, 2013 and 2012, respectively. If a lease is terminated prior to its stated expiration, the unamortized amount relating to that lease is written off.

CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS.  We carry cash and cash equivalents, consisting of overnight repurchase agreements and short term investments with original maturities of three months or less at the date of purchase, at cost plus accrued interest, which approximates fair value.

RESTRICTED CASH

RESTRICTED CASH.  Restricted cash consists of amounts escrowed for real estate taxes, insurance and capital expenditures at certain of our mortgaged properties and security deposits for residents of our managed senior living communities.

INVESTMENTS IN AVAILABLE FOR SALE SECURITIES

INVESTMENTS IN AVAILABLE FOR SALE SECURITIES.  We own 250,000 common shares, at December 31, 2014, of Equity Commonwealth (formerly known as CommonWealth REIT), or EQC. We also own 4,235,000 common shares, or 8.6% at December 31, 2014, of Five Star Quality Care, Inc., or Five Star. We classify these holdings as available for sale and carry them at fair value, with unrealized gains and losses reported as a separate component of shareholders’ equity. Cumulative other comprehensive income shown in our consolidated balance sheets includes the net unrealized gain or loss on investments determined as the net difference between the market value of these shares of EQC and Five Star calculated by using weighted average quoted market prices on the dates we acquired these shares ($26.00 and $3.36 per share, respectively) and on December 31, 2014 ($25.67 and $4.15 per share, respectively). At December 31, 2014 and 2013, our investment in EQC had a fair value of $6,418 and $5,828, respectively, including an unrealized loss of $83 and $673, respectively. At December 31, 2014 and 2013, our investment in Five Star had a fair value of $17,575 and $23,250, respectively, including an unrealized gain of $3,361 and $9,036, respectively.

EQUITY METHOD INVESTMENTS

EQUITY METHOD INVESTMENTS.  We and the other six current shareholders each currently own 14.3% of Affiliates Insurance Company, or AIC’s, outstanding equity. Although we own less than 20% of AIC, we use the equity method to account for this investment because we believe that we have significant influence over AIC because all of our Trustees are also directors of AIC. Under the equity method, we record our percentage share of net earnings from AIC in our consolidated statements of income and comprehensive income. If we determine there is an “other than temporary impairment” in the fair value of this investment, we would record a charge to earnings. In evaluating the fair value of this investment, we have considered, among other things, the assets and liabilities held by AIC, AIC’s overall financial condition and earning trends, and the financial condition and prospects for the insurance industry generally. See Note 5 for a further discussion of our investment in AIC.

DEFERRED FINANCING FEES

DEFERRED FINANCING FEES.  We capitalize issuance costs related to borrowings and amortize them over the terms of the respective loans. During 2014, we capitalized $8,039 of issuance costs, including $5,021 related to our two issuances of senior notes in April 2014, as well as $2,819 related to our $350,000 term loan entered into in May 2014, and $199 related to our assumption of a mortgage loan in May 2014. During 2013, we capitalized $3,326 of issuance costs, including $3,078 related to the amendment of our revolving credit facility in September 2013 and $248 related to our assumption of a mortgage loan during 2013. During 2012, we capitalized $12,608 of issuance costs, including $11,439 related to our $350,000 senior notes issued in July 2012, $1,125 related to our assumption of mortgage loans during 2012 and $44 related to our $300,000 senior notes issued in December 2011. During 2014, we wrote off $357 of unamortized deferred financing fees in connection with our prepayment of the outstanding principal balances of two mortgage loans totaling $23,234 in October and December 2014. During 2013, we wrote off $538 of unamortized deferred financing fees in connection with the amendment of our revolving credit facility in September 2013. During 2012, we wrote off $3,897 of unamortized deferred financing fees in connection with our prepayment of approximately $199,197 of the outstanding principal balance of our $512,934 Federal National Mortgage Association, or FNMA, mortgage financing we closed in August 2009. The unamortized gross balance of deferred financing fees and related accumulated amortization was $50,479 and $19,930, and $42,797 and $14,822 at December 31, 2014 and 2013, respectively. The weighted average amortization period is approximately 12.7 years. We expect that the amortization expense relating to the unamortized gross balance of deferred financing fees for the five years subsequent to December 31, 2014 will be $5,469 in 2015, $4,803 in 2016, $4,523 in 2017, $3,127 in 2018, $2,389 in 2019 and $10,238, thereafter.

DEFERRED LEASING COSTS

DEFERRED LEASING COSTS.  Deferred leasing costs include brokerage, legal and other fees associated with our entering leases and are amortized on a straight line basis over the terms of the respective leases. Deferred leasing costs are included in other assets on our consolidated balance sheets. The unamortized gross balance of deferred leasing costs and related accumulated amortization was $14,844 and $3,722, and $10,542 and $2,687 at December 31, 2014 and 2013, respectively. The weighted average amortization period is approximately 7.5 years. We expect that the amortization expense for the five years subsequent to December 31, 2014 will be $1,945 in 2015, $1,789 in 2016, $1,527 in 2017, $1,358 in 2018, $1,180 in 2019 and $3,183, thereafter. In 2014, we also incurred legal fees of approximately $140 related to the negotiation of leases which have not yet been entered and we have not yet begun to amortize.

REVENUE RECOGNITION

REVENUE RECOGNITION.  We recognize rental income from operating leases on a straight line basis over the term of each lease agreement. We recognize percentage rents when realizable and earned, which is generally during the fourth quarter of the year. For the years ended December 31, 2014, 2013 and 2012, percentage rents earned aggregated $10,155,  $9,226, and $10,859, respectively.

As of December 31, 2014, we own 46 senior living communities, including 36 communities that we acquired since June 2011 and the ten senior living communities formerly leased to Sunrise Senior Living, Inc., or Sunrise, that are managed by Five Star. We refer to these 46 communities as the managed senior living communities. We derive our revenues at these 46 managed senior living communities primarily from services to residents and we record revenues when services are provided.

EARNINGS PER COMMON SHARE

PER COMMON SHARE AMOUNTS.  We calculate basic per common share, or EPS, by dividing allocable net income by the weighted average number of common shares outstanding during the period. We calculate diluted earnings per share using the more dilutive of the two class method or the treasury stock method.

USE OF ESTIMATES

USE OF ESTIMATES.  Accounting principles generally accepted in the United States requires us to make estimates and assumptions that may affect the amounts reported in these financial statements and related notes. The actual results could differ from these estimates.

INCOME TAXES

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 nearly all of our managed senior living communities to our wholly owned taxable REIT subsidiaries, or TRSs, that, unlike most of our subsidiaries, file separate tax returns 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 incurred by us, despite our REIT status.

The Income Taxes Topic of the Codification prescribes how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Tax benefits are recognized to the extent that it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that has a greater than 50% likelihood of being realized upon settlement. We classify interest and penalties related to uncertain tax positions, if any, in our financial statements as a component of general and administrative expense.

SEGMENT REPORTING

SEGMENT REPORTING.  As of December 31, 2014, we have four operating segments, of which three are separately reportable operating segments. The first operating segment includes triple net senior living communities that provide short term and long term residential care and dining services for residents. The second operating segment includes managed senior living communities that provide short term and long term residential care and dining services for residents. The third operating segment includes properties where medical related activities occur but where residential overnight stays and dining services are not provided. Properties in this segment include those leased to medical providers, medical related businesses, clinics and biotech laboratory tenants, or MOBs. The fourth operating segment includes the operating results of certain properties that offer fitness, wellness and spa services to members, which we do not consider to be sufficiently material as to constitute a separate reporting segment.

See Note 10 for further information regarding our reportable operating segments.

NEW ACCOUNTING PRONOUNCEMENTS

NEW ACCOUNTING PRONOUNCEMENTS.  In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.  This update amends the criteria for reporting discontinued operations to, among other things, raise the threshold for disposals to qualify as discontinued operations. This update is effective for interim and annual reporting periods, beginning after December 15, 2014, with early adoption permitted.  We currently expect that, when adopted, this update will reduce the number of any future property dispositions we may make to be presented as discontinued operations in our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. This update is effective for interim and annual reporting periods beginning after December 15, 2016.  We are currently in the process of evaluating the impact, if any, the adoption of this update will have on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances. This update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter with early adoption permitted. The implementation of this update is not expected to cause any significant changes to our consolidated financial statements.