Leases and Management Agreements with Five Star

3 Months Ended

Mar. 31, 2017

Risks and Uncertainties [Abstract]

Leases and Management Agreements with Five Star

Leases and Management Agreements with Five Star

Our Senior Living Communities Leased by Five Star. We are Five Star’s largest landlord and Five Star is our largest tenant. As of March 31, 2017 and 2016, we leased 185 and 177 senior living communities to Five Star, respectively. We lease senior living communities to Five Star pursuant to five leases with Five Star. We recognized total rental income from Five Star of $50,985, and $48,108 for the three months ended March 31, 2017 and 2016, respectively. These amounts exclude percentage rent payments we received from Five Star of $1,445 and $1,473 for the three months ended March 31, 2017 and 2016, respectively. We determine actual percentage rent due under our Five Star leases annually and recognize any resulting amount as rental income at year end when all contingencies are met. As of March 31, 2017 and December 31, 2016, we had rents receivable from Five Star of $16,987 and $18,320, respectively, which amounts are included in other assets in our condensed consolidated balance sheets.

Pursuant to the terms of our leases with Five Star, for the three months ended March 31, 2017 and 2016, we funded $8,082 and $5,755, respectively, of improvements to communities leased to Five Star. As a result, the annual rent payable to us by Five Star increased by approximately $648 and $462 for the three months ended March 31, 2017 and 2016, respectively.

In June 2016, we entered into an agreement with Five Star pursuant to which, on June 29, 2016, we purchased seven senior living communities from Five Star for an aggregate purchase price of $112,350, and we simultaneously leased these communities back to Five Star under a new long term lease agreement.

Rental income from Five Star represented 19.3% of our total revenues for the three months ended March 31, 2017, and the properties Five Star leases from us represented 29.6% of our real estate investments, at cost, as of March 31, 2017.

Our Senior Living Communities Managed by Five Star. Five Star managed 68 and 60 senior living communities for our account as of March 31, 2017 and 2016, respectively. We lease our senior living communities that are managed by Five Star and include assisted living units or SNF beds to our TRSs and Five Star manages these communities pursuant to long term management agreements. We incurred management fees payable to Five Star of $3,299 and $2,804 for the three months ended March 31, 2017 and 2016, respectively. These amounts are included in property operating expenses in our condensed consolidated statements of comprehensive income.

Simultaneously with the June 2016 sale and leaseback transaction, we and Five Star terminated three of our four then existing pooling agreements and entered into 10 new pooling agreements that combine our management agreements with Five Star for senior living communities that include assisted living units. Pursuant to these management agreements and the new pooling agreements, Five Star receives management fees equal to either 3% or 5% of the gross revenues realized at the applicable communities, reimbursement for its direct costs and expenses related to such communities, annual incentive fees if certain operating results at those communities are achieved and fees for its supervision of capital expenditure projects at those communities equal to 3% of amounts funded by us.

Under the new pooling agreements, the calculations of Five Star's fees and of our annual minimum return related to management agreements that include assisted living units that became effective before May 2015 and had been pooled under one of the previously existing pooling agreements are generally the same as they were under the previously existing pooling agreements. However, for certain communities, the new pooling agreements reduced our annual minimum return, and also, with respect to 10 communities, reset the annual minimum returns we receive before Five Star is paid incentive fees to specified amounts. For those management agreements that include assisted living units that became effective from and after May 2015, the new pooling agreements increased the management fees Five Star receives from 3% to 5% of the gross revenues realized at the applicable communities, and changed the potential annual incentive fees from 35% to 20% of the annual net operating income of the applicable communities remaining after we realize our requisite annual minimum returns.