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Related Person Transactions
 6 Months Ended
Jun. 30, 2012
Related Person Transactions  
Related Person Transactions

Note 11.  Related Person Transactions

 

We have no employees.  Personnel and various services we require to operate our business are provided to us by RMR.  We have two agreements with RMR to provide management and administrative services to us: (1) a business management agreement and (2) a property management agreement.  Under our business management agreement with RMR, we acknowledge that RMR also provides management services to other companies, which include Five Star and CWH.  One of our Managing Trustees, Mr. Barry Portnoy, is Chairman, majority owner and an employee of RMR.  Our other Managing Trustee, Mr. Adam Portnoy, is the son of Mr. Barry Portnoy, and an owner, President, Chief Executive Officer and a director of RMR.  Each of our executive officers is also an officer of RMR, and our President and Chief Operating Officer, Mr. David Hegarty, is a director of RMR.  Certain of Five Star’s executive officers and CWH’s executive officers are officers of RMR.  Our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR provides management services.  Mr. Barry Portnoy serves as a managing director or managing trustee of those companies and Mr. Adam Portnoy serves as a managing trustee of a majority of those companies.

 

Pursuant to our business management agreement with RMR, we incurred expenses of $6,367 and $5,572 for the three months ended June 30, 2012 and 2011, respectively, and $12,727 and $10,390 for the six months ended June 30, 2012 and 2011, respectively.  These amounts are included in general and administrative expenses in our condensed consolidated statements of income and comprehensive income.  In March 2012, we issued 20,462 common shares to RMR in satisfaction of the incentive fee RMR earned for services provided to us during 2011, in accordance with the terms of the business management agreement.  In connection with our property management agreement with RMR, we incurred property management and construction supervision fees of $1,424 and $1,057 for the three months ended June 30, 2012 and 2011, respectively, and $2,770 and $2,081 for the six months ended June 30, 2012 and 2011, respectively.  These amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

 

Five Star is our former 100% owned subsidiary.  In 2001, we distributed substantially all of Five Star’s then outstanding shares of common stock to our shareholders.  We are Five Star’s largest stockholder and, as of the date of this report, we owned 4,235,000 shares of common stock of Five Star, or approximately 8.8% of Five Star’s outstanding shares of common stock.  One of our Managing Trustees, Mr. Barry Portnoy, is also a managing director of Five Star.  RMR provides management services to both us and Five Star.

 

Five Star is our largest tenant and manages several senior living communities for us.  As of June 30, 2012, we leased 188 senior living communities and two rehabilitation hospitals to Five Star and Five Star managed 24 senior living communities for our account.

 

Under Five Star’s leases with us, Five Star pays us rent consisting of 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, 2012 was $196,371, excluding percentage rent.  We recognized total rent from Five Star of $48,942 and $46,789 for the three months ended June 30, 2012 and 2011, respectively, and $97,753 and $93,488 for the six months ended June 30, 2012 and 2011, respectively.  As of June 30, 2012 and December 31, 2011, our rents receivable from Five Star were $17,518 and $17,313, respectively, and are included in other assets on our condensed consolidated balance sheets.  During the six months ended June 30, 2012, pursuant to the terms of our existing leases with Five Star, we purchased $14,093 of improvements made to properties leased to Five Star, and, as a result, the annual rent payable to us by Five Star increased by approximately $1,137.

 

Five Star began managing communities for our account in June 2011 in connection with our acquisition of certain senior living communities at that time.  Since that time, we have acquired additional communities that are being managed by Five Star.  Five Star manages our managed communities pursuant to long term management agreements.  We and Five Star have entered into a pooling agreement that combines our management agreements with Five Star.  The pooling agreement aggregates the determination of fees and expenses of the various communities that are subject to that pooling agreement, including determination of our return of our invested capital and Five Star’s incentive fees.  We incurred management fees of $1,080 and $2,148 for the three and six months ended June 30, 2012, respectively, and $25 for the three and six months ended June 30, 2011, with respect to the communities Five Star manages for our account.  We expect that we may enter into additional management arrangements with Five Star for senior living communities that we may acquire in the future on terms similar to those management arrangements we currently have with Five Star, including, as further disclosed in Note 3—Real Estate Properties and below, with respect to the 10 Communities we currently lease to Sunrise.  Five Star’s management of the 10 Communities we currently lease to Sunrise is subject to conditions and may not occur; there can be no assurances that Five Star will manage additional senior living communities for our account.

 

We currently lease 14 senior living communities to a subsidiary of Sunrise.  As previously reported, in May 2012, we and Five Star entered into the Operations Transfer Agreement with Sunrise.  Pursuant to the Operations Transfer Agreement, we and Sunrise agreed to accelerate the December 31, 2013 termination date of 10 of our leases with Sunrise, which leases relate to the 10 Communities.  The Operations Transfer Agreement also contemplates that we will lease the 10 Communities to our TRSs and Five Star will begin to operate the 10 Communities as a manager for our account, pursuant to long term management agreements.  The Operations Transfer Agreement provides that these transactions will occur when we and Five Star have obtained regulatory approvals to operate the applicable 10 Communities.  We expect the long term management agreement with Five Star for each of the 10 Communities will be on terms substantially similar to the management agreements previously entered into between us and Five Star for communities that include assisted living units and which are owned by our TRSs and managed by Five Star, and may be included in our pooling agreement with Five Star for our managed communities.

 

In May 2012, we acquired a senior living community in South Carolina that we previously disclosed we had agreed to acquire, with 59 assisted living units, for approximately $8,059, excluding closing costs, and entered into a long term management agreement with Five Star to manage this community for our account on terms substantially consistent with the terms of our other management agreements that we have previously entered into with Five Star for communities that include assisted living units.  Also, in July 2012, we acquired a senior living community in South Carolina that we previously disclosed we had agreed to acquire, with 232 assisted living units, for approximately $37,273, excluding closing costs, and entered into a long term management agreement with Five Star to manage this community for our account on terms substantially consistent with the terms of our other management agreements with Five Star for communities that include assisted living units and these management agreements were added to our pooling agreement with Five Star for our managed communities.

 

As discussed above in Note 5—Loan Receivable, in May 2011, we and Five Star entered into the Bridge Loan, under which we lent to Five Star $80,000 to fund a portion of Five Star’s purchase of six senior living communities.  In April 2012, Five Star repaid in full the $38,000 principal amount then outstanding under the Bridge Loan, resulting in the termination of the Bridge Loan.  We recognized interest income from the Bridge Loan of $39 and $314 for the three and six months ended June 30, 2012, respectively, and we recognized interest income of $58 for the three and six months ended June 30, 2011.

 

CWH was formerly our parent.  We were spun off to CWH’s shareholders in 1999.  As of the date of this report, we owned 250,000 common shares of CWH.  One of our Managing Trustees, Mr. Barry Portnoy, is a managing trustee of CWH.  Our other Managing Trustee, Mr. Adam Portnoy, is a managing trustee and the President of CWH.  In addition, one of our Independent Trustees, Mr. Frederick Zeytoonjian, is also an independent trustee of CWH.  RMR provides management services to both us and CWH.

 

As previously reported, CWH previously granted us a right of first refusal to purchase certain of CWH’s properties if CWH sought to sell them.  Between November 2010 and January 2011, we purchased 27 properties (approximately 2,803,000 square feet of rental space), which were majority leased as MOBs from CWH for total sale prices of $470,000, excluding closing costs.  In September 2011, we acquired from CWH 13 additional properties (approximately 1,310,000 square feet), which were located in eight states and majority leased as MOBs for total sale prices of $167,000, excluding closing costs.  Certain of the properties included in these purchases were subject to the right of first refusal granted to us by CWH referred to above.  In connection with our September 2011 purchase of 13 properties from CWH, we and CWH terminated our existing right of first refusal, as we have purchased substantially all of the properties that were subject to that right of first refusal.

 

We, RMR, Five Star, CWH and four other companies to which RMR provides management services each currently own 12.5% of Affiliates Insurance Company, or AIC, an Indiana insurance company.  One of those four other companies became a shareholder of AIC during the quarter ended June 30, 2012.  All of our Trustees and nearly all of the trustees and directors of the other AIC shareholders currently serve on the board of directors of AIC.  RMR 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.  Our investment in AIC had a carrying value of $5,408 and $5,291 as of June 30, 2012 and December 31, 2011, respectively.  We recognized income of $76 and $46 for the three months ended June 30, 2012 and 2011, respectively, and $121 and $83 for the six months ended June 30, 2012 and 2011, respectively, related to this investment.  We and the other shareholders of AIC have purchased property insurance providing $500,000 of coverage pursuant to an insurance program arranged by AIC and with respect to which AIC is a reinsurer of certain coverage amounts.  This program was modified and extended in June 2012 for a one year term and we paid a premium, including taxes and fees, of $4,438 in connection with that renewal, which amount may be adjusted from time to time in response to our acquisition and disposition of properties that are included in this program.  We are also currently investigating the possibilities to expand our insurance relationships with AIC to include other types of insurance.  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.  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 further information about these and other such relationships and related person transactions, please see elsewhere in this Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” in Part I, Item 2 and “Warning Concerning Forward Looking Statements,” and our Annual Report, our Proxy Statement for our 2012 Annual Meeting of Shareholders dated February 21, 2012, or our Proxy Statement, and our other filings with the SEC, including Note 5 to our consolidated financial statements included in our Annual Report, the sections captioned “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” and “Warning Concerning Forward Looking Statements” of our Annual Report and the section captioned “Related Person Transactions and Company Review of Such Transactions” and the information regarding our Trustees and executive officers in our Proxy Statement.  In addition, please see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise from these transactions and relationships.  Our filings with the SEC, including our Annual Report and our Proxy Statement, are available at the SEC’s website at www.sec.gov.  In addition, copies of certain of our agreements with these parties, including our business management agreement and property management agreement with RMR, our leases, forms of management agreements and related pooling agreement and Bridge Loan with Five Star, various agreements we have with CWH and our shareholders agreement with AIC and its shareholders, are also publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website.