Concentration of Credit Risk

9 Months Ended

Sep. 30, 2011

Concentration of Credit Risk [Abstract]

CONCENTRATION OF CREDIT RISK

NOTE 3 — CONCENTRATION OF CREDIT RISK

As of September 30, 2011, Atria, Sunrise, Brookdale Senior Living and Kindred managed or operated approximately 18.7%, 14.4%, 13.0% and 5.0%, respectively, of our properties based on their gross book value. Also, as of September 30, 2011, seniors housing communities constituted approximately 66.2% of our real estate portfolio based on gross book value, with skilled nursing facilities, hospitals, MOBs and other healthcare assets collectively comprising the remaining 33.8%. Our properties were located in 46 states, the District of Columbia and two Canadian provinces as of September 30, 2011, with properties in only one state (California) accounting for more than 10% of our total revenues or 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) for the three months then ended.

Triple-Net Leased Properties

For the three months ended September 30, 2011 and 2010, approximately 11.3% and 23.5%, respectively, of our total revenues and 18.3% and 34.8%, respectively, of our total NOI (including amounts in discontinued operations) were derived from our four Kindred Master Leases. For the same periods, approximately 8.1% and 11.3%, respectively, of our total revenues and 13.1% and 16.8%, respectively, of our total NOI (including amounts in discontinued operations) were derived from our lease agreements with Brookdale Senior Living. Each of the Kindred Master Leases and our leases with Brookdale Senior Living is a triple-net lease pursuant to which the tenant is required to pay all property-related expenses and to comply with the terms of the mortgage financing documents, if any, affecting the properties.

Because the properties we lease to Kindred and Brookdale Senior Living account for a significant portion of our total revenues and NOI, Kindred’s and Brookdale Senior Living’s financial condition and ability and willingness to satisfy their obligations under their respective leases and other agreements with us, and their willingness to renew those leases upon expiration of the terms thereof, have a notable impact on our results of operations and ability to service our indebtedness and to make distributions to our stockholders. We cannot assure you that either Kindred or Brookdale Senior Living will have sufficient assets, income and access to financing to enable it to satisfy its obligations, and any inability or unwillingness on its part to do so could have a material adverse effect on our business, financial condition, results of operations and liquidity, on our ability to service our indebtedness and other obligations and on 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 either Kindred or Brookdale Senior Living will elect to renew its leases with us upon expiration of the initial base terms or any renewal terms thereof or that, if some or all of those leases are not renewed, we will be able to reposition the affected properties on a timely basis or on the same or better terms, if at all.

The properties we lease to Kindred pursuant to the Kindred Master Leases are grouped into bundles containing a varying number of properties. All properties within a single bundle have the same primary lease term of ten to fifteen years from May 1, 1998 and, provided certain conditions are satisfied, each bundle is subject to three five-year renewal terms at the tenant’s option. The current lease term for ten bundles covering a total of 89 triple-net properties (the “Renewal Assets”) leased to Kindred will expire on April 13, 2013 unless Kindred provides us with renewal notices with respect to one or more of those bundles on or before April 30, 2012. The ten bundles expiring in 2013 each contain six or more properties, including at least one hospital, and collectively represent $122.8 million of annual base rent from May 1, 2011 through April 30, 2012. Kindred is required to continue to perform all of its obligations under the applicable lease for the properties within any bundle that is not renewed until expiration of the term on April 30, 2013, including without limitation payment of all rental amounts. Therefore, as to any bundles for which we do not receive a renewal notice, we will have at least one year to arrange for the repositioning of the applicable properties with new operators. Moreover, we own or have the rights to all licenses and certificates of need at the properties, and Kindred has extensive and detailed obligations to cooperate and ensure an orderly transition of the properties to another operator. While we believe that aggregate current rents for the Renewal Assets approximate current market rents, we cannot assure you that Kindred will elect to renew any or all of the bundles comprising the Renewal Assets or, if Kindred does not renew one or more of such bundles that we will be able to reposition the affected properties on a timely basis or on the same or better terms, if at all.

Six of the ten bundles up for renewal in 2013, containing 53 assets and representing $66 million of annual base rent, are in the second five-year renewal period and, therefore, we have a unilateral bundle-by-bundle option to initiate a fair market rental reset process on any of these six bundles that may be renewed by Kindred. If we elect to initiate the fair market rental reset process for any of these six renewal bundles, the renewal rent will be the higher of contract rent and fair market rent determined by an appraisal process set forth in the applicable Kindred Master Lease. In certain cases following initiation by us of a fair market rental reset process respecting a renewal bundle, Kindred may have the right to revoke its renewal of that particular bundle.

The determination of the market rent, whether on re-leasing or under the reset process, is dependent on and may be influenced by a variety of factors and is highly speculative, and there can be no assurances regarding what market rent may be for any of the Renewal Assets.

Senior Living Operations

As of September 30, 2011, Sunrise and Atria, collectively, provided comprehensive property management and accounting services with respect to 196 of our seniors housing communities for which we pay an annual management fee pursuant to long-term management agreements. Each management agreement with Sunrise has a term of 30 years, and each management agreement with Atria has a term of ten years, subject to successive automatic ten-year renewal periods. While Sunrise and Atria do not lease properties from us and, therefore, we are not directly exposed to credit risk with respect to those entities, any inability by Sunrise or Atria 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. Although we have various rights as the property owner under our management agreements, we rely on Sunrise’s and Atria’s personnel, good faith, expertise, historical performance, technical resources and information systems, proprietary information and judgment to manage our seniors housing communities efficiently and effectively. We also rely on Sunrise and Atria to set resident fees and otherwise operate those properties in compliance with our management agreements. Sunrise’s or Atria’s inability or unwillingness to satisfy its obligations under our management agreements, changes in Sunrise’s or Atria’s senior management or any adverse developments in Sunrise’s or Atria’s business and affairs or financial condition could have a Material Adverse Effect on us.

Kindred, Brookdale Senior Living, Sunrise and Atria Information

Each of Kindred, Brookdale Senior Living and Sunrise 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 Kindred, Brookdale Senior Living and Sunrise contained or referred to in this Quarterly Report on Form 10-Q is derived from filings made by Kindred, Brookdale Senior Living or Sunrise, as the case may be, with the SEC or other publicly available information, or has been provided to us by Kindred, Brookdale Senior Living or Sunrise. We have not verified this information either through an independent investigation or by reviewing Kindred’s, Brookdale Senior Living’s or Sunrise’s public filings. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you that all of this information is accurate. Kindred’s, Brookdale Senior Living’s and Sunrise’s filings with the SEC can be found at the SEC’s website at www.sec.gov. We are providing this data for informational purposes only, and you are encouraged to obtain Kindred’s, Brookdale Senior Living’s and Sunrise’s publicly available filings from the SEC.

Atria is not subject to the reporting requirements of the SEC. The information related to Atria contained or referred to within this Quarterly Report on Form 10-Q has been provided to us by Atria. We have not verified this information through an independent investigation. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you that all of this information is accurate.