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Commitments and Contingencies | 12 Months Ended
--- | ---
Dec. 31, 2013
Commitments and Contingencies. |
Commitments and Contingencies | (12) Commitments and Contingencies Legal Proceedings From time to time, the Company is a party to legal proceedings, lawsuits and other claims that arise in the ordinary course of the Company's business. Except as described in this Note 12, the Company is not aware of any other legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company's business, prospects, financial condition, results of operations or cash flows. The Company's policy is to accrue legal expenses as they are incurred. On May 3, 2007, Ventas, Inc. ("Ventas") filed a complaint against the Company in the United States District Court for the Western District of Kentucky alleging, among other things, that the Company interfered with Ventas's prospective business advantage in connection with Ventas's 2007 acquisition of Sunrise Senior Living Real Estate Investment Trust ("Sunrise REIT"). Ventas sought compensatory damages in excess of $300 million plus punitive damages. Prior to the jury deliberations, the District Court dismissed, among other rulings, Ventas's claim for punitive damages. On September 4, 2009, the jury returned a verdict in favor of Ventas in the amount of approximately $102 million. The Company recognized $102 million as a provision for litigation expense during the three months ended September 30, 2009. Both Ventas and the Company appealed various rulings of the District Court and the jury verdict to the United States Sixth Circuit Court of Appeals. On May 17, 2011, the Sixth Circuit Court of Appeals held that the District Court erred by not submitting Ventas's claim for punitive damages to the jury, and affirmed the District Court's judgment in all other respects. On August 23, 2011, the Company paid Ventas $102 million resulting from the jury verdict. On November 9, 2011, the Company and Ventas settled all claims relating to the litigation and the Company paid $125 million to Ventas in addition to the $102 million paid in August 2011. Concentration of Credit Risk Concentrations of credit risks arise when one or more operators, tenants or obligors related to the Company's investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of risks. The Company does not have significant foreign operations. The following table provides information regarding the Company's concentrations with respect to certain operators and tenants; the information provided is presented for the gross assets and revenues that are associated with certain operators and tenants as percentages of the respective segment's and total Company's assets and revenues: Segment Concentrations:
|  | Percentage of Senior Housing Gross Assets |  | Percentage of Senior Housing Revenues |
--- | --- | --- | --- | --- | ---
|  | December 31, |  | Year Ended December 31, |
Operators |  | 2013 |  | 2012 |  | 2013 |  | 2012 |  | 2011 |
Emeritus Corporation ("Emeritus")(1) |  |  | 37 |  |  | 37 |  |  | 35 |  |  | 23 |  |  | 24 |
Sunrise(2) |  |  | 17 |  |  | 18 |  |  | 13 |  |  | 16 |  |  | 19 |
HCR ManorCare(3) |  |  | 11 |  |  | 11 |  |  | 10 |  |  | 11 |  |  | 10 |
Brookdale Senior Living ("Brookdale")(4) |  |  | 11 |  |  | 11 |  |  | 12 |  |  | 14 |  |  | 22 |
|  | Percentage of Post-Acute/ Skilled Nursing Gross Assets |  | Percentage of Post-Acute/ Skilled Nursing Revenues |
--- | --- | --- | --- | --- | ---
|  | December 31, |  | Year Ended December 31, |
Operators |  | 2013 |  | 2012 |  | 2013 |  | 2012 |  | 2011 |
HCR ManorCare(3) |  |  | 89 |  |  | 90 |  |  | 83 |  |  | 91 |  |  | 85 |
Total Company Concentrations:
|  | Percentage of Total Company Assets |  | Percentage of Total Company Revenues |
--- | --- | --- | --- | --- | ---
|  | December 31, |  | Year Ended December 31, |
Operators |  | 2013 |  | 2012 |  | 2013 |  | 2012 |  | 2011 |
HCR ManorCare(3) |  |  | 32 |  |  | 31 |  |  | 28 |  |  | 30 |  |  | 28 |
Emeritus(1) |  |  | 14 |  |  | 14 |  |  | 13 |  |  | 8 |  |  | 7 |
Sunrise(2) |  |  | 7 |  |  | 7 |  |  | 5 |  |  | 5 |  |  | 6 |
Brookdale(4) |  |  | 4 |  |  | 4 |  |  | 4 |  |  | 5 |  |  | 7 |
(1) Percentage of total revenues from Emeritus for the year ended December 31, 2012 includes partial results for the Blackstone JV acquisition. Assuming that full-year results were included for this acquisition in the Company's 2012 revenues, the percentage of segment revenues and total revenues would be 37% and 12%, respectively. (2) Certain of the Company's properties are leased to tenants who have entered into management contracts with Sunrise to operate the respective property on their behalf. The Company's concentration of gross assets includes properties directly leased to Sunrise and properties that are managed by Sunrise on behalf of third party tenants. (3) On April 7, 2011, the Company completed the acquisition of HCR ManorCare's real estate assets, which included the settlement of the Company's HCR ManorCare debt investments, see Notes 3 and 7 for additional information. (4) Percentages do not include senior housing facilities that Brookdale operates on the Company's behalf under a RIDEA structure. On September 1, 2011, the Company completed a strategic venture with Brookdale that includes the operation of 37 Company-owned senior living communities previously leased to or operated by Horizon Bay Retirement Living ("Horizon Bay"). As part of this transaction, Brookdale acquired Horizon Bay and: (i) assumed an existing triple-net lease for nine HCP communities; (ii) entered into a new triple-net lease related to four HCP communities; (iii) assumed Horizon Bay's management of three HCP communities, one of which was recently developed by HCP; and (iv) entered into management contracts and a joint venture agreement for a 10% interest in the real estate and operations for 21 of the Company's communities in a RIDEA structure. In connection with these transactions, the Company purchased approximately one million shares of Brookdale's common stock in June 2011 (see Note 10 for additional information regarding these marketable equity securities). To mitigate credit risk of leasing properties to certain senior housing and post-acute/skilled nursing operators, leases with operators are often combined into portfolios that contain cross-default terms, so that if a tenant of any of the properties in a portfolio defaults on its obligations under its lease, the Company may pursue its remedies under the lease with respect to any of the properties in the portfolio. Certain portfolios also contain terms whereby the net operating profits of the properties are combined for the purpose of securing the funding of rental payments due under each lease. At December 31, 2013 and 2012, the Company's gross real estate assets in the state of California, excluding assets held-for-sale, represented approximately 23% and 21% of the Company's total assets, respectively. For the year ended December 31, 2013, the Company's revenues derived from properties located in the states of California, Texas and Florida represented approximately 21%, 11% and 9% of the Company's total revenues, respectively. DownREIT LLCs In connection with the formation of certain DownREIT limited liability companies ("LLCs"), members may contribute appreciated real estate to a DownREIT LLC in exchange for DownREIT units. These contributions are generally tax-deferred, so that the pre-contribution gain related to the property is not taxed to the member. However, if a contributed property is later sold by the DownREIT LLC, the unamortized pre-contribution gain that exists at the date of sale is specifically allocated and taxed to the contributing members. In many of the DownREITs, the Company has entered into indemnification agreements with those members who contributed appreciated property into the DownREIT LLC. Under these indemnification agreements, if any of the appreciated real estate contributed by the members is sold by the DownREIT LLC in a taxable transaction within a specified number of years, the Company will reimburse the affected members for the federal and state income taxes associated with the pre-contribution gain that is specially allocated to the affected member under the Code ("make-whole payments"). These make-whole payments include a tax gross-up provision. These indemnification agreements have expiration terms that range through 2033. Credit Enhancement Guarantee Certain of the Company's senior housing facilities serve as collateral for $112 million of debt (maturing May 1, 2025) that is owed by a previous owner of the facilities. This indebtedness is guaranteed by the previous owner who has an investment grade credit rating. These senior housing facilities, which are classified as DFLs, had a carrying value of $374 million as of December 31, 2013. Environmental Costs The Company monitors its properties for the presence of hazardous or toxic substances. The Company is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Company's business, financial condition or results of operations. The Company carries environmental insurance and believes that the policy terms, conditions, limitations and deductibles are adequate and appropriate under the circumstances, given the relative risk of loss, the cost of such coverage and current industry practice. General Uninsured Losses The Company obtains various types of insurance to mitigate the impact of property, business interruption, liability, flood, windstorm, earthquake, environmental and terrorism related losses. The Company attempts to obtain appropriate policy terms, conditions, limits and deductibles considering the relative risk of loss, the cost of such coverage and current industry practice. There are, however, certain types of extraordinary losses, such as those due to acts of war or other events that may be either uninsurable or not economically insurable. In addition, the Company has a large number of properties that are exposed to earthquake, flood and windstorm occurrences for which the related insurances carry high deductibles. Tenant Purchase Options Certain leases, including DFLs, contain purchase options whereby the tenant may elect to acquire the underlying real estate. Annualized base rent from leases subject to purchase options, summarized by the year the purchase options are exercisable are as follows (dollars in thousands):
Year |  | Annualized Base Rent(1) |  | Number of Properties |
--- | --- | --- | --- | --- | ---
2014 |  | $ | 21,541 |  |  | 11 |
2015 |  |  | 55,397 |  |  | 35 |
2016 |  |  | 40,098 |  |  | 18 |
2017 |  |  | 6,969 |  |  | 3 |
2018 |  |  | 19,204 |  |  | 5 |
Thereafter |  |  | 102,367 |  |  | 62 |
|  | $ | 245,576 |  |  | 134 |
(1) Represents the most recent month's base rent including additional rent floors and cash income from direct financing leases annualized for 12 months. Base rent does not include tenant recoveries, additional rents in excess of floors and non-cash revenue adjustments (i.e., straight-line rents, amortization of above and below market lease intangibles, DFL interest accretion and deferred revenues). Rental Expense The Company's rental expense attributable to continuing operations for the years ended December 31, 2013, 2012 and 2011 was approximately $8 million, $7 million and $6 million, respectively. These rental expense amounts include ground rent and other leases. Ground leases generally require fixed annual rent payments and may also include escalation clauses and renewal options. These leases have terms that are up to 99 years, excluding extension options. Future minimum lease obligations under non-cancelable ground and other operating leases as of December 31, 2013 were as follows (in thousands):
Year |  | Amount |
--- | --- | --- | ---
2014 |  | $ | 6,303 |
2015 |  |  | 5,781 |
2016 |  |  | 4,620 |
2017 |  |  | 3,880 |
2018 |  |  | 3,659 |
Thereafter |  |  | 195,883 |
|  | $ | 220,126 |

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