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Related Person Transactions
 6 Months Ended
Jun. 30, 2011
Related Person Transactions  
Related Person Transactions

Note 12.  Related Person Transactions

 

Five Star is our former subsidiary, our largest tenant and manages several senior living communities for us.  We are Five Star’s largest shareholder and as of June 30, 2011, we owned 4,235,000 shares of common stock of Five Star, which represented approximately 8.9% of Five Star’s outstanding shares of common stock.  Reit Management & Research LLC, or RMR, provides management services to both us and Five Star.  One of our Managing Trustees is also a managing director of Five Star and our other Trustees also serve as trustees of other companies managed by RMR.

 

As of June 30, 2011, we leased 187 senior living communities and two rehabilitation hospitals to Five Star.  Under Five Star’s leases with us, Five Star pays us rent based on minimum annual rent amounts plus percentage rent based on increases in gross revenues at certain properties.  Five Star’s total minimum annual rent payable to us under those leases as of June 30, 2011 was $192,915, excluding percentage rent.  For the three and six months ended June 30, 2011 and 2010, the total rent we recognized from Five Star was $46,789 and $93,483, respectively, and $46,220 and $92,310, respectively.  As of June 30, 2011 and December 31, 2010, our rents receivable from Five Star were $16,815 and $16,762, respectively, and are included in other assets in our condensed consolidated balance sheets.  Additional information regarding our leases with Five Star appears in our Annual Report.

 

In March 2011, we agreed to acquire 20 senior living communities located in five states in the Southeast United States for approximately $304,000, excluding closing costs.  In May 2011, we entered into agreements for Five Star to manage 15 of these 20 communities under long term contracts.

 

In June 2011, we acquired 14 of these 20 communities for approximately $196,594, excluding closing costs, and in July 2011 we acquired three of these communities for approximately $44,671, excluding closing costs.  Five Star manages 10 of the communities we acquired in June and two of the communities acquired in July and leases the other five communities acquired for initial rent of approximately $6,923 per annum.  If we acquire the three remaining communities, Five Star will manage them.  For the three months ended June 30, 2011, we paid net $25 in management fees to Five Star and these management fees are included in property operating expenses in our condensed consolidated statements of income.  The terms of the management agreements and leases between us and Five Star were approved by special committees of each of our Board of Trustees and Five Star’s board of directors composed solely of our Independent Trustees and Five Star’s independent directors who are not also Trustees or directors of the other party and who were represented by separate counsel.

 

In May 2011, we acquired one senior living community located in Rockford, Illinois with 73 living units for approximately $7,500, excluding closing costs.  We leased this property to Five Star and added this property to our Five Star Lease No. 1, which has a current term expiring in 2024, for initial rent of approximately $608 per annum.  Percentage rent, based on increases in gross revenues at this property, will commence in 2013.  We funded this acquisition using cash on hand and borrowings under our revolving credit facility.

 

During the three and six months ended June 30, 2011, pursuant to the terms of our existing leases with Five Star, we purchased $4,485 and $15,322, respectively, of improvements made to our properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $359 and $1,228, respectively.

 

During the second quarter of 2011, we sold three skilled nursing facilities in Georgia with a total of 329 licensed beds and one assisted living community in Pennsylvania with 70 licensed living units for an aggregate sales price of $18,800, excluding closing costs.  Each of these communities was previously leased to Five Star, and as a result of these sales, Five Star’s annual rent to us decreased by approximately $1,864.

 

As discussed in Note 5, “Loan Receivable”, in May 2011, we and Five Star entered into the Bridge Loan, under which we agreed to lend Five Star up to $80,000.  The terms of the Bridge Loan were reviewed and approved by special committees of each of our Board of Trustees and Five Star’s board of directors composed solely of our Independent Trustees and Five Star’s independent directors who are not also Trustees or directors of the other party and who were represented by separate counsel.  As of June 30, 2011 and July 28, 2011, there was $9,000 and $24,000, respectively, outstanding on this Bridge Loan.  We recognized interest income from this Bridge Loan of $58 in the three months ended June 30, 2011, which is included in interest and other income in our condensed consolidated statements of income.

 

We have no employees.  Instead, services that might be provided to us by employees are provided to us by RMR.  RMR provides both business and property management services to us under a business management agreement and a property management agreement.  Pursuant to our business management agreement with RMR, we incurred expenses of $5,572 and $10,390, and $4,187 and $8,405, for the three and six months ended June 30, 2011 and 2010, respectively; these amounts are included in general and administrative expenses in our condensed consolidated statements of income.  Pursuant to our property management agreement with RMR, we incurred expenses of $1,057 and $2,081, and $551 and $1,104, for the three and six months ended June 30, 2011 and 2010, respectively; these amounts are included in property operating expenses in our condensed consolidated statements of income.

 

We, RMR, Five Star, CWH and other companies to which RMR provides management services each currently owns approximately 14.29% of AIC.  All of our Trustees and all of the trustees and directors of the other shareholders of AIC currently serve on the board of directors of AIC.  RMR, in addition to being a shareholder, provides management and administrative services to AIC pursuant to a management and administrative services agreement with AIC. 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.  As of June 30, 2011, we have invested approximately $5,209 in AIC.  We may invest additional amounts in AIC in the future if the expansion of this insurance business requires additional capital, but we are not obligated to do so.  We carry this investment in our condensed consolidated balance sheets in other assets at $5,202 and $5,076 as of June 30, 2011 and December 31, 2010, respectively.  During the three and six months ended June 30, 2011 and 2010, we recognized income of $46 and $83 and a loss of $(24) and $(52), respectively, related to this investment.  AIC has designed a combination property insurance program for us and other AIC shareholders in which AIC participates as a reinsurer. Our total premiums under this program for the policy years expiring May 31, 2011 and 2012 were $275 and $1,170 (the increase primarily arises from the increase in our insurable assets), respectively.  We are currently investigating possibilities to expand our insurance relationships with AIC to include other types of insurance. By participating in this insurance business with RMR and the other companies to which RMR provides management services, we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro-rata share of any profits of this insurance business.

 

For more information about our related person transactions, including our dealings with Five Star, RMR, CWH, AIC, our Managing Trustees and their affiliates and about the risks which may arise as a result of these and other related person transactions, please see our Annual Report and our other filings made with the SEC, and, in particular, the sections captioned “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Related Person Transactions” in our Annual Report and the information regarding our Trustees and executive officers and the section captioned “Related Person Transactions and Company Review of Such Transactions” in our Proxy Statement dated February 24, 2011 relating to our 2011 Annual Meeting of Shareholders, or our Proxy Statement.  Our Annual Report and Proxy Statement are available at the SEC’s website: www.sec.gov.