Note 3. Real Estate Properties

Our real estate properties, excluding those classified as held for sale, at cost, consisted of land of $683,979, buildings and improvements of $5,318,178 and FF&E, of $236,454 as of December 31, 2014; and land of $623,756, buildings and improvements of $4,423,517 and FF&E, of $216,352 as of December 31, 2013. Accumulated depreciation was $848,605 and $135,245 for buildings and improvements and FF&E, respectively, as of December 31, 2014; and $723,258 and $117,502 for buildings and improvements and FF&E, respectively, as of December 31, 2013.

The future minimum lease payments due to us during the current terms of our leases as of December 31, 2014, are $475,705 in 2015, $465,664 in 2016, $446,673 in 2017, $416,539 in 2018, $385,874 in 2019 and $2,796,142 thereafter.

Triple Net Senior Living Communities Acquisitions:

We did not acquire any triple net senior living communities during 2014. During 2013, we acquired one triple net senior living community with 150 living units for approximately $22,350, including the assumption of approximately $12,266 of mortgage debt and excluding closing costs. Details of this acquisition are as follows:


				Cash Paid
		Number		plus				Buildings								Premium
		of	Units/	Assumed				and				Intangible		Assumed		on Assumed
Date	Location	Properties	Beds	Debt(1)		Land		Improvements		FF&E		Assets		Debt		Debt
Triple Net Senior Living Communities Acquisitions during the year ended December 31, 2014:
There were no triple net senior living communities acquisitions during the year ended December 31, 2014

Triple Net Senior Living Communities Acquisitions during the year ended December 31, 2013:
January 2013(2)	WA	1	150	$	22,350	$	5,120	$	16,562	$	669	$	1,039	$	12,266	$	1,040
		1	150	$	22,350	$	5,120	$	16,562	$	669	$	1,039	$	12,266	$	1,040

(1)

Cash paid plus assumed debt, if any, excludes closing costs.

(2)

We leased this property to a subsidiary of Stellar Senior Living, LLC, or Stellar, for an initial term expiring in 2028 for initial rent of approximately $1,732 per year. Percentage rent, based on increases in gross revenues at this property, will commence in 2016.

Managed Senior Living Communities Acquisitions:

During 2014, we acquired two senior living communities with a total of 228 living units for total purchase prices of approximately $47,430, excluding closing costs. During 2013, we acquired five managed senior living communities with a total of 374 living units for total purchase prices of approximately $62,999, excluding closing costs. Subsidiaries of Five Star, which we refer to together with Five Star, collectively, in these notes to our consolidated financial statements as Five Star, manage these communities pursuant to long term management agreements. As of December 31, 2014, we own 46 managed senior living communities that are managed by Five Star. We use the TRS structure authorized by the Real Estate Investment Trust Investment Diversification and Empowerment Act for nearly all of our managed senior living communities, which we began acquiring in June 2011. Details of these acquisitions are as follows:


				Cash Paid
		Number		plus				Buildings								Premium
		of	Units/	Assumed				and				Intangible		Assumed		on Assumed
Date	Location	Properties	Beds	Debt(1)		Land		Improvements		FF&E		Assets		Debt		Debt
Managed Senior Living Communities Acquisitions during the year ended December 31, 2014:
December 2014	WI	1	52	$	7,000	$	188	$	5,862	$	101	$	849	$	—	$	—
December 2014	WI	1	176		40,430		2,615		34,957		588		2,270		—		—
		2	228	$	47,430	$	2,803	$	40,819	$	689	$	3,119	$	—	$	—
Managed Senior Living Communities Acquisitions during the year ended December 31, 2013:
August 2013	GA	1	93	$	22,030	$	1,548	$	18,666	$	803	$	1,013	$	—	$	—
October 2013	Various	3	213		29,004		2,242		23,861		612		2,289		—		—
November 2013	WI	1	68		11,965		1,365		9,628		199		773		—		—
		5	374	$	62,999	$	5,155	$	52,155	$	1,614	$	4,075	$	—	$	—

(1)

Cash paid plus assumed debt, if any, excludes closing costs. The allocation of the purchase price of our 2014 acquisitions shown above is based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. The final amounts allocated to assets acquired and liabilities assumed could change significantly from those used in these consolidated financial statements.

See Note 5 for further information regarding the arrangements we have with Five Star regarding the lease, operations and management of our senior living communities.

MOB Acquisitions:

During 2014, we acquired two MOBs (three buildings) with a total of 1,776,277 square feet for total purchase prices of approximately $1,156,963 including the assumption of approximately $15,630 of mortgage debt and excluding closing costs. During 2013, we acquired six MOBs (seven buildings) with a total of 385,171 square feet for total purchase prices of approximately $117,475, excluding closing costs. Details of these acquisitions are as follows:


				Cash Paid								Acquired
		Number		plus				Buildings		Acquired		Real Estate				Premium
		of	Square	Assumed				and		Real Estate		Lease		Assumed		on Assumed
Date	Location	Properties	Feet (000's)	Debt(1)		Land		Improvements		Leases		Obligations		Debt		Debt
MOB Acquisitions during the year ended December 31, 2014:
April 2014	TX	1	125	$	32,932	$	3,141	$	23,142	$	7,672	$	10	$	15,630	$	1,013
May 2014	MA	1	1,651		1,124,031		52,643		786,524		403,349		118,485		—		—
		2	1,776	$	1,156,963	$	55,784	$	809,666	$	411,021	$	118,495	$	15,630	$	1,013
MOB Acquisitions during the year ended December 31, 2013:
February 2013	WA	1	145	$	38,000	$	5,639	$	27,213	$	6,736	$	1,588	$	—	$	—
March 2013	MS	1	72		14,600		1,269		12,516		1,498		683		—		—
August 2013(2)	MA	1	105		49,500		4,559		44,941		—		—		—		—
December 2013	FL	3	63		15,375		2,432		11,165		1,778		—		—		—
		6	385	$	117,475	$	13,899	$	95,835	$	10,012	$	2,271	$	—	$	—

(1)

Cash paid plus assumed debt, if any, excludes closing costs. The allocation of the purchase price of certain of our 2014 acquisitions shown above is based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. Consequently, amounts preliminarily allocated to assets acquired and liabilities assumed could change significantly from those used in these consolidated financial statements.

(2)

This acquisition is accounted for as an asset purchase.

In January 2015, we acquired 23 MOBs (23 buildings) with approximately 2,200,000 square feet for $539,000, including the assumption of approximately $30,000 of mortgage debt, and excluding closing costs. The 23 properties were purchased from Select Income REIT, or SIR, in connection with the acquisition by SIR of Cole Corporate Income Trust, Inc., or CCIT.

In December 2014, we entered into an agreement to acquire 38 senior living communities with 3,466 units located in 16 states for $790,000, excluding closing costs, and including the assumption of approximately $153,000 of mortgage debt with a weighted average interest rate of 4.8%. Eighteen of the 38 communities, with 1,847 living units, are currently leased to six senior living operators, none of which are currently SNH tenants. The remaining 20 communities, with 1,619 living units, are currently managed by six senior living operators (including one manager who also leases), none of which are currently SNH managers. The closing of this acquisition is contingent upon closing conditions; accordingly, we can provide no assurance that we will purchase these properties.

In January, June, and October 2014, we sold six properties, including three skilled nursing facilities and three assisted living facilities which were previously classified as held for sale, for combined sales prices of $15,650, excluding closing costs, and recognized an aggregate gain on sale on these properties of approximately $5,452. Also, in April, June, and September 2014, we sold three MOBs (3 buildings) that were previously included in discontinued operations for combined sales prices of $11,675. We recognized no gain or loss on any of these three sales. In August and December 2013, we sold three properties, including one skilled nursing facility and two rehabilitation hospitals which were previously classified as held for sale, for combined sales prices of $92,550, excluding closing costs, and recognized an aggregate gain on sale of these properties of approximately $37,392.

In February 2015, we sold one senior living community located in Pennsylvania for a sale price of $250, excluding closing costs.

At December 31, 2014 and 2013, we had recorded intangible lease assets of $577,177, including $47,107 of capitalized above market lease values and $530,070 of the value of in place leases, and $166,247, including $44,279 of capitalized above market lease values and $121,968 of the value of in place leases, and intangible lease liabilities of $138,469 and $22,170, respectively. We recorded intangible lease assets of $414,140 and $17,131 and intangible lease liabilities of $118,495 and $2,271 for properties acquired in 2014 and 2013, respectively. Accumulated amortization of capitalized above market lease values was $22,749 and $16,148 at December 31, 2014 and 2013, respectively. The weighted average remaining amortization period of capitalized above market lease values is approximately 5.3 years. Accumulated amortization of capitalized below market lease values was $15,643 and $9,642 at December 31, 2014 and 2013, respectively. The weighted average amortization period of capitalized below market lease values is approximately 13.4 years. Accumulated amortization of the value of in place leases exclusive of the value of above and below market in place leases was $81,640 and $46,605 at December 31, 2014 and 2013, respectively. The weighted average amortization period of the value of in place leases exclusive of the value of above and below market in place leases is approximately 12.8 years. We expect to recognize net future amortization of these intangible lease assets and liabilities in the amounts of approximately $39,438 in 2015, $37,037 in 2016, $33,362 in 2017, $28,668 in 2018, $25,802 in 2019 and $185,655, thereafter.

Impairment

We periodically evaluate our properties for impairments. Impairment indicators may include declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life and legislative, market or industry changes that could permanently reduce the value of a property. If indicators of impairment are present, we evaluate the carrying value of the affected property by comparing it to the expected future undiscounted net cash flows to be generated from that property. If the sum of these expected future net cash flows is less than the carrying value, we reduce the net carrying value of the property to its estimated fair value.

As of December 31, 2014, we had four senior living communities with 312 living units and one MOB (four buildings) with 323,541 square feet categorized as properties held for sale. During 2014, we recorded net impairment charges of $4,377 to adjust the carrying value of four MOBs (seven buildings) to their aggregate estimated net sale price. The five properties are included in other assets in our consolidated balance sheets and have a net book value (after impairment) of approximately $3,551 at December 31, 2014. During 2013, we recorded an impairment charge of $1,304 to reduce the carrying value of one of our properties to its estimated net sale price. As of December 31, 2013, we had 10 senior living communities with 744 units and four MOBs ( seven buildings) with 831,499 square feet categorized as properties held for sale, of which six of the senior living communities and three of the MOBs were sold during 2014, as noted above. These properties are included in other assets in our condensed consolidated balance sheets and had a net book value (after impairment) of approximately $27,888 at December 31, 2013. During 2012, we recorded an impairment charge of $3,071 to reduce the carrying value of one of our properties to its estimated net sale price. We decided to sell these properties because of what we believe to be unattractive conditions in the markets in which these properties are located or in which they operate. We classify all properties as held for sale in our condensed consolidated balance sheets that meet the applicable criteria for that treatment as set forth in the Property, Plant and Equipment Topic of the FASB Accounting Standards Codification, or the Codification.

Results of operations for properties sold or held for sale are included in discontinued operations in our consolidated statements of operations and comprehensive income once the criteria for discontinued operations in the Presentation of Financial Statements Topic of the Codification are met. The senior living properties which we are or were offering for sale as of the applicable periods do not meet the criteria for discontinued operations as they are included within combination leases with other properties that we expect to continue leasing. Summarized income statement information for the four MOBs (seven buildings) that meet the criteria for discontinued operations is included in discontinued operations as follows:


	For the year ended December 31,
	2014		2013		2012
Rental income	$	3,949	$	9,451	$	10,042
Property operating expenses		(2,587)		(3,609)		(3,567)
Depreciation and amortization		—		(799)		(2,414)
Income from discontinued operations	$	1,362	$	5,043	$	4,061

During 2014 and 2013, pursuant to the terms of our existing leases with Five Star, we purchased $25,804 and $27,208, 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 $2,066 and $2,177, respectively.

We committed $13,883 for expenditures related to 750,000 square feet of leases executed during 2014. Committed and unspent tenant related obligations based on executed leases as of December 31, 2014, were $12,444.