Concentration of Credit Risk
As of December 31, 2013, Atria, Sunrise, Brookdale Senior Living and Kindred managed or operated approximately 19.9%, 13.9%, 9.7% and 3.2%, respectively, of our real estate investments based on gross book value (excluding properties classified as held for sale as of December 31, 2013). Seniors housing communities constituted approximately 64.2% of our real estate investments based on gross book value (excluding properties classified as held for sale), while MOBs, skilled nursing and other facilities, and hospitals collectively comprised the remaining 35.8%. Our properties were located in 46 states, the District of Columbia and two Canadian provinces as of December 31, 2013, with properties in only one state (California) accounting for more than 10% of our total revenues and total 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) (in each case excluding amounts in discontinued operations) for the years ended December 31, 2013, 2012 and 2011, respectively.
Triple-Net Leased Properties
For the years ended December 31, 2013, 2012 and 2011, approximately 5.6%, 6.3% and 7.7%, respectively, of our total revenues and 9.2%, 10.5% and 12.5%, respectively, of our total NOI (in each case excluding amounts in discontinued operations) were derived from our lease agreements with Brookdale Senior Living. For the same periods, approximately 8.1%, 10.3% and 14.3%, respectively, of our total revenues and 13.4%, 17.1% and 23.4%, respectively, of our total NOI (in each case excluding amounts in discontinued operations) were derived from our lease agreements with Kindred. Each of our leases with Brookdale Senior Living and the Kindred Master Leases is a triple-net lease that obligates the tenant to pay all property-related expenses, including maintenance, utilities, repairs, taxes, insurance and capital expenditures, and to comply with the terms of the mortgage financing documents, if any, affecting the properties. In addition, each of these leases has guaranty and cross-default provisions tied to other leases with the same tenant or its affiliates, as well as bundled lease renewals.
The properties we lease to Brookdale Senior Living and Kindred accounted for a significant portion of our triple-net leased properties segment revenues and NOI and had a meaningful impact on our total revenues and NOI for the year ended December 31, 2013. If either Brookdale Senior Living or Kindred becomes unable or unwilling to satisfy its obligations to us or to renew its leases with us upon expiration of the terms thereof, our financial condition and results of operations could decline and our ability to service our indebtedness and to make distributions to our stockholders could be limited. We cannot assure you that Brookdale Senior Living and Kindred will have sufficient assets, income and access to financing to enable them to satisfy their respective obligations to us, and any failure, inability or unwillingness by Brookdale Senior Living or Kindred to do so could have a material adverse effect on our business, financial condition, results of operations and liquidity, our ability to service our indebtedness and other obligations and 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 assure you that Brookdale Senior Living and Kindred will elect to renew their respective leases with us upon expiration of the leases or that we will be able to reposition any non-renewed properties on a timely basis or on the same or better economic terms, if at all.
In September 2013, we entered into favorable agreements with Kindred to extend the leases with respect to 48 of the 108 licensed healthcare assets whose current lease term was originally scheduled to expire on April 30, 2015 (the “2015 Renewal Assets”). The 48 re-leased properties consist of 26 skilled nursing facilities and 22 long-term acute care hospitals. New annual rent, commencing October 1, 2014, will be $95.9 million, an increase of $15 million over then current annual base rent. On October 1, 2013, Kindred also paid us $20 million, which will be amortized over the new lease terms.
We have launched a comprehensive project to re-lease to qualified healthcare operators or otherwise reposition the remaining 60 skilled nursing facilities included in the 2015 Renewal Assets (the “Marketed Assets”). As part of our agreements, we and Kindred agreed to accelerate the expiration of the lease term for the Marketed Assets to September 30, 2014. Kindred is required to continue to perform all of its obligations, including without limitation, payment of all rental amounts, under the applicable Kindred Master Lease for the Marketed Assets until expiration of the current lease term. Subject to the terms of our agreements, we have the flexibility to transition the Marketed Assets either before or after the September 30, 2014 lease expiration date. 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.
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, 2013 (excluding properties included in investments in unconsolidated entities and properties classified as held for sale as of December 31, 2013):
Senior Living Operations
As of December 31, 2013, Atria and Sunrise, collectively, provided comprehensive property management and accounting services with respect to 237 of our seniors housing communities, for which we pay annual management fees pursuant to long-term management agreements.
As managers, Atria and Sunrise do not lease our properties, and, therefore, 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, expertise, technical resources and information systems, proprietary information, good faith and judgment to manage our senior living operations efficiently and effectively. We also rely on our managers to set appropriate resident fees and otherwise operate our seniors housing communities in compliance with the terms of our management agreements and all applicable laws and regulations. Although we have various rights as the property owner under our management agreements, including various rights to terminate and exercise remedies under the agreements as provided therein, Atria’s or Sunrise’s failure, inability or unwillingness to satisfy its respective 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 equity ownership or any adverse developments in their businesses and affairs or financial condition could have a Material Adverse Effect on us.
Our 34% ownership interest in Atria entitles us to certain rights and minority protections, as well as the right to appoint two directors to the Atria board of directors.
Brookdale Senior Living, Kindred, Atria and Sunrise Information
Each of Brookdale Senior Living and Kindred 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 Brookdale Senior Living and Kindred contained or referred to in this Annual Report on Form 10-K has been derived from SEC filings made by Brookdale Senior Living or Kindred, as the case may be, or other publicly available information, or was provided to us by Brookdale Senior Living or Kindred, and we have not verified this information through an independent investigation or otherwise. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you of its accuracy. We are providing this data for informational purposes only, and you are encouraged to obtain Brookdale Senior Living’s and Kindred’s publicly available filings, which can be found at the SEC’s website at www.sec.gov.
Neither Atria nor Sunrise is currently subject to the reporting requirements of the SEC. The information related to Atria and Sunrise contained or referred to in this Annual Report on Form 10-K has been derived from publicly available information or was provided to us by Atria or Sunrise, as the case may be, and we have not verified this information through an independent investigation or otherwise. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you of its accuracy.