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Concentration of Credit Risk | 12 Months Ended
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Dec. 31, 2011
Concentration of Credit Risk |
Concentration of Credit Risk |
Note 3—Concentration of Credit Risk As of December 31, 2011, Atria, Sunrise, Brookdale Senior Living and Kindred managed or operated approximately 19.0%, 14.4%, 13.0% and 5.0%, respectively, of our real estate investments based on their gross book value (including amounts held for sale as of December 31, 2011). Also, as of December 31, 2011, seniors housing communities constituted approximately 66.7% of our real estate portfolio based on gross book value (including amounts held for sale as of December 31, 2011), with skilled nursing facilities, hospitals, MOBs and other healthcare assets collectively comprising the remaining 33.3%. Our properties were located in 46 states, the District of Columbia and two Canadian provinces as of December 31, 2011, with properties in only one state (California) accounting for more than 10% of our total revenues or net operating income ("NOI", which is defined as total revenues, excluding interest and other income, less property-level operating expenses and medical office building services costs) (including amounts in discontinued operations) for the year ended December 31, 2011. Properties in two states (California and Illinois) each accounted for more than 10% of our total revenues or NOI (including amounts in discontinued operations related to properties held for sale at December 31, 2009) for the years ended December 31, 2010 and 2009, respectively. Triple-Net Leased Properties For the years ended December 31, 2011, 2010 and 2009, approximately 14.3%, 24.2% and 26.2%, respectively, of our total revenues and 23.2%, 35.6% and 38.5%, respectively, of our total NOI (including amounts in discontinued operations) were derived from our lease agreements with Kindred. For the same periods, approximately 8.2%, 11.9% and 12.9%, respectively, of our total revenues and 13.4%, 17.3% and 19.1%, respectively, of our total NOI (including amounts in discontinued operations) were derived from our lease agreements with Brookdale Senior Living. Each of the Kindred Master Leases and our leases with Brookdale Senior Living is a triple-net lease pursuant to which the tenant is required to pay all property-level expenses and to comply with the terms of the mortgage financing documents, if any, affecting the properties. Because the properties we lease to Kindred and Brookdale Senior Living account for a significant portion of our total revenues and NOI, our financial condition and results of operations could be weakened and our ability to service our indebtedness and to make distributions to our stockholders could be limited if either Kindred or Brookdale Senior Living were unable or unwilling to satisfy its obligations to us or to renew its leases with us upon expiration of the terms thereof. We cannot provide any assurance that either Kindred or Brookdale Senior Living will have sufficient assets, income and access to financing to enable them to satisfy their respective obligations to us, and any inability or unwillingness by Kindred or Brookdale Senior Living to do so could have a material adverse effect on our business, financial condition, results of operations and liquidity, on our ability to service our indebtedness and other obligations and on our ability to make distributions to our stockholders, as required for us to continue to qualify as a REIT (a "Material Adverse Effect"). We also cannot provide any assurance that either Kindred or Brookdale Senior Living will elect to renew its respective leases with us upon expiration of their terms or that we will be able to reposition any properties that are not renewed on a timely basis or on the same or better economic terms, if at all. The 197 properties we lease to Kindred pursuant to the Kindred Master Leases are grouped into bundles or renewal groups (each, a "renewal group") containing a varying number of properties. All properties within a single renewal group have the same primary lease term of ten to fifteen years (commencing May 1, 1998), and each renewal group is subject to three successive five-year renewal terms at the tenant's option, provided certain conditions are satisfied. The current lease term for ten renewal groups covering a total of 89 properties leased to Kindred (the "Renewal Assets") will expire on April 30, 2013 unless Kindred provides us with renewal notices with respect to one or more of those bundles on or before April 30, 2012. In November 2011, we received renewal notices from Kindred with respect to two renewal groups covering a total of sixteen Renewal Assets (the "Early Renewal Assets") and collectively representing approximately $23 million of current annual base rent. In December 2011, we initiated a fair market rental reset process with respect to certain Early Renewal Assets. While we believe that aggregate annual base rent for those Early Renewal Assets is likely to increase as a result of the reset process, we cannot provide any assurance regarding the final determination of fair market rent, which is highly speculative and may be influenced by a variety of factors. In addition, in certain cases Kindred may have the right to revoke its renewal of those Early Renewal Assets for which we initiated the fair market rental reset process. The remaining eight renewal groups covering a total of 73 Renewal Assets collectively represent approximately $99 million of current annual base rent, and each renewal group contains six or more properties, including at least one hospital. Kindred is required to continue to perform all of its obligations under the applicable Kindred Master Lease for the Renewal Assets within any renewal group that is not renewed until expiration of the term on April 30, 2013, including without limitation payment of all rental amounts. Therefore, as to any renewal group for which we do not receive a renewal notice, we will have at least one year to arrange for the repositioning of the applicable Renewal Assets with new operators. Moreover, we own or have the rights to all licenses and CONs at the properties, and Kindred has extensive and detailed obligations to cooperate and ensure an orderly transition of the properties to another operator. Pursuant to the terms of the Kindred Master Leases, we will have a unilateral group-by-group option to initiate a fair market rental reset process with respect to four of the eight remaining renewal groups covering a total of 37 Renewal Assets and collectively representing approximately $43 million of current annual base rent (the "Remaining Reset Assets") should Kindred provide renewal notices with respect to one or more of those renewal groups. If we initiate the fair market rental reset process for any renewal group comprising the Remaining Reset Assets, the annual base rent for the assets in that renewal group for the first year of the renewal term (commencing May 1, 2013) will be the higher of the contractually escalated rent and fair market rent, as determined by the appraisal process set forth in the Kindred Master Leases. We cannot provide any assurance that Kindred will elect to renew any or all of the remaining eight renewal groups whose lease expires April 30, 2013, that Kindred will not revoke its renewal of the Early Renewal Assets for which we initiated the fair market rental reset process, or that we will be able to reposition any or all non-renewed assets on a timely basis or on the same or better economic terms, if at all. See "Risk Factors—Risks Arising from Our Business—If we must replace any of our tenants or operators, we might be unable to reposition the properties on as favorable terms, or at all, and we could be subject to delays, limitations and expenses, which could have a Material Adverse Effect on us" included in Item 1A of this Annual Report on Form 10-K. The current lease term for the 108 properties leased to Kindred not comprising the Renewal Assets will expire on April 30, 2015, subject to Kindred's two sequential five-year renewal options for those assets. The following table sets forth the future contracted minimum rentals, excluding contingent rent escalations, but including straight-line rent adjustments where applicable, for all of our triple-net and MOB leases as of December 31, 2011 (excluding properties included in investments in unconsolidated entities and properties held for sale as of December 31, 2011):
|  | Kindred |  | Brookdale Senior Living |  | Other |  | Total |
--- | --- | --- | --- | --- | --- | --- | --- | --- | ---
|  | (In thousands) |
2012 |  | $ | 260,530 |  | $ | 161,203 |  | $ | 598,235 |  | $ | 1,019,968 |
2013 |  |  | 181,126 |  |  | 160,018 |  |  | 584,414 |  |  | 925,558 |
2014 |  |  | 142,730 |  |  | 149,316 |  |  | 572,206 |  |  | 864,252 |
2015 |  |  | 48,785 |  |  | 138,514 |  |  | 550,927 |  |  | 738,226 |
2016 |  |  | 1,009 |  |  | 136,846 |  |  | 502,890 |  |  | 640,745 |
Thereafter |  |  | — |  |  | 439,387 |  |  | 2,969,762 |  |  | 3,409,149 |
Total |  | $ | 634,180 |  | $ | 1,185,284 |  | $ | 5,778,434 |  | $ | 7,597,898 |
Senior Living Operations As of December 31, 2011, Atria and Sunrise, collectively, provided comprehensive property management and accounting services with respect to 197 of our seniors housing communities for which we pay an annual management fee pursuant to long-term management agreements. Each management agreement with Atria has a term of ten years commencing in 2011, subject to successive automatic ten-year renewal periods, and each management agreement with Sunrise has a term of 30 years commencing as early as 2004. Under the Sunrise management agreements, our management fee was reduced to 3.75% of revenues generated by the applicable properties for 2011, but will revert to 6% of revenues generated by the applicable properties (with a range of 5% to 7%) for 2012 and thereafter. Because Atria and Sunrise manage, but do not lease, our properties, we are not directly exposed to their credit risk in the same manner or to the same extent as our triple-net tenants. However, we rely on our managers' personnel, good faith, expertise, historical performance, technical resources and information systems, proprietary information and judgment to manage our seniors housing communities efficiently and effectively. We also rely on our managers to set resident fees and otherwise operate those properties in compliance with the terms of our management agreements. Although we have various rights as the property owner under our management agreements, Atria's or Sunrise's inability or unwillingness to satisfy its obligations under those agreements, to efficiently and effectively manage our properties or to provide timely and accurate accounting information with respect thereto could have a Material Adverse Effect on us. In addition, significant changes in Atria's or Sunrise's senior management or any adverse developments in their business and affairs or financial condition could have a Material Adverse Effect on us. Kindred, Brookdale Senior Living, Sunrise and Atria Information Each of Kindred, Brookdale Senior Living and Sunrise is subject to the reporting requirements of the SEC and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited financial information. The information related to Kindred, Brookdale Senior Living and Sunrise contained or referred to in this Annual Report on Form 10-K is derived from SEC filings made by Kindred, Brookdale Senior Living or Sunrise, as the case may be, or from other publicly available information, or has been provided to us by Kindred, Brookdale Senior Living or Sunrise. We have not verified this information either through an independent investigation or by reviewing Kindred's, Brookdale Senior Living's or Sunrise's public filings. We have no reason to believe that this information is inaccurate in any material respect, but we cannot provide any assurance that all of this information is accurate. Kindred's, Brookdale Senior Living's and Sunrise's filings with the SEC can be found at the SEC's website at www.sec.gov. We are providing this data for informational purposes only, and you are encouraged to obtain Kindred's, Brookdale Senior Living's and Sunrise's publicly available filings from the SEC. Atria is not subject to the reporting requirements of the SEC. The information related to Atria contained or referred to in this Annual Report on Form 10-K is derived from publicly available information or has been provided to us by Atria. We have not verified this information through an independent investigation. We have no reason to believe that this information is inaccurate in any material respect, but we cannot provide any assurance that all of this information is accurate.

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- Definition The entire disclosure for any concentrations existing at the date of the financial statements that make an entity vulnerable to a reasonably possible, near-term, severe impact. This disclosure informs financial statement users about the general nature of the risk associated with the concentration, and may indicate the percentage of concentration risk as of the balance sheet date. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 275 -SubTopic 10 -Section 50 -Paragraph 20 -URI http://asc.fasb.org/extlink&oid=6927468&loc=d3e6404-108592 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Statement of Position (SOP) -Number 94-6 -Paragraph 21, 22, 24 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13537-108611 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15A -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 275 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=6927468&loc=d3e6442-108592 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 20 -URI http://asc.fasb.org/extlink&oid=6947722&loc=d3e13531-108611 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 275 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=6927468&loc=d3e6327-108592 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 275 -SubTopic 10 -Section 50 -Paragraph 18 -URI http://asc.fasb.org/extlink&oid=6927468&loc=d3e6351-108592 + Details
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