Related Person Transactions

9 Months Ended

Sep. 30, 2011

Related Person Transactions

Related Person Transactions

Note 12.  Related Person Transactions

Five Star is our former subsidiary, our largest tenant and manages several senior living communities for us.  We are Five Star’s largest shareholder and as of the date of this report, we owned 4,235,000 shares of common stock of Five Star, which represents approximately 8.9% of Five Star’s outstanding shares of common stock.

As of September 30, 2011, we leased 188 senior living communities and two rehabilitation hospitals to Five Star.  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 September 30, 2011 was $194,598, excluding percentage rent.

In March 2011, we agreed to acquire 20 senior living communities located in five states in the southeastern United States for approximately $304,000, excluding closing costs.  In May 2011, we entered into long term contracts with Five Star to manage 15 of these 20 communities.

In June 2011, we acquired 14 of these 20 communities for approximately $196,594, excluding closing costs, in July 2011 we acquired three of these communities for approximately $44,671, excluding closing costs, and in August 2011, we acquired one of these communities for approximately $17,158, excluding closing costs.  Five Star manages for our account 10 of the communities we acquired in June, two of the communities acquired in July and the one community acquired in August and leases the other five communities acquired for initial rent of approximately $6,984 per annum.  If we acquire the two remaining communities, Five Star has agreed to manage them.  For the three and nine months ended September 30, 2011, we paid net $326 and $351, respectively, in management fees to Five Star and these management fees are included in property operating expenses in our condensed consolidated statements of income.

In July 2011, we agreed to acquire nine senior living communities located in six states for approximately $478,000, excluding closing costs.  Following these acquisitions, we expect eight of these communities to be leased to our TRS and all nine communities to be managed by Five Star under long term management contracts on terms similar to the terms of the existing senior living community management contracts between us and Five Star.

For the three and nine months ended September 30, 2011 and 2010, the total rent we recognized from Five Star was $48,392 and $141,875, respectively, and $46,388 and $138,698, respectively.  As of September 30, 2011 and December 31, 2010, our rents receivable from Five Star were $17,434 and $16,762, respectively, and are included in other assets in our condensed consolidated balance sheets.  Additional information regarding our leases with Five Star appears in our Annual Report.  During the three and nine months ended September 30, 2011, pursuant to the terms of our existing leases with Five Star, we purchased $10,554 and $25,877, 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 $845 and $2,073, respectively.

As discussed above in Note 5. Loan Receivable, in May 2011, we and Five Star entered into the Bridge Loan, under which we agreed to lend Five Star up to $80,000.  During the quarter ended September 30, 2011, Five Star borrowed an aggregate of $39,000 under the Bridge Loan.  As of September 30, 2011, $48,000 aggregate principal amount was outstanding and no additional amounts remain available for borrowing under the Bridge Loan.  We recognized interest income from this Bridge Loan of $187 and $245 in the three and nine months ended September 30, 2011, respectively, which is included in interest and other income in our condensed consolidated statements of income.

We were a 100% owned subsidiary of CWH until our common shares were distributed to CWH’s shareholders in 1999.  We currently own 250,000 common shares of CWH.  In September 2011, we acquired 13 MOBs located in eight states with 1.3 million square feet from CWH, for an aggregate purchase price of approximately $167,000, excluding closing costs.

Special committees of each of our Board of Trustees and CWH’s board of trustees, composed solely of our Independent Trustees and CWH’s independent trustees who are not also trustees of the other party, and who were represented by separate counsel negotiated the terms of the purchases of the 13 MOBs, reviewed and approved this MOB purchase from CWH.  Also, the purchase prices for the MOBs were established by reference to an appraisal by a nationally recognized real estate appraisal firm.  Similarly, the terms of the management agreements, leases and Bridge Loan between us and Five Star were reviewed and approved by special committees of each of our Board of Trustees and Five Star’s board of directors composed solely of Independent Trustees or independent directors who are not also trustees or directors of the other party and who were represented by separate counsel.

We have no employees.  Instead, services that might be provided to us by employees are provided to us by RMR.  RMR provides management services to each of CWH and Five Star. One of our Managing Trustees, Barry Portnoy, is Chairman and majority owner of RMR and serves as a managing director of Five Star and a managing trustee of CWH.  Adam Portnoy, our other Managing Trustee, is Mr. Barry Portnoy’s son, is an owner, President and Chief Executive Officer and a director of RMR and is a managing trustee of CWH.  Our President and Chief Operating Officer is a director of RMR.  Each of our and CWH’s and three of Five Star’s executive officers are also officers of RMR.  Frederick N. Zeytoonjian serves as an Independent Trustee of us and of CWH.  Our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR provides management services.  Barry Portnoy serves as a managing director or managing trustee of those companies and Adam Portnoy serves as a managing trustee of a majority of those companies.

RMR provides both business and property management services to us under a business management agreement and a property management agreement.  Pursuant to our business management agreement with RMR, we incurred expenses of $4,865 and $15,241, and $4,317 and $12,715, for the three and nine months ended September 30, 2011 and 2010, respectively; these amounts are included in general and administrative expenses in our condensed consolidated statements of income.  Pursuant to our property management agreement with RMR, we incurred expenses of $1,111 and $3,193, and $561 and $1,665, for the three and nine months ended September 30, 2011 and 2010, respectively.  We are generally responsible for certain expenses incurred by RMR on our behalf.  These amounts are included in property operating expenses in our condensed consolidated statements of income.

We currently own approximately 14.29% of the outstanding equity of AIC.  The other shareholders of AIC are RMR and five other companies to which RMR provides management services, including Five Star and CWH.  All of our Trustees, all of the trustees and directors of the other publicly held AIC shareholders and nearly all of the directors of RMR currently serve on the board of directors of AIC.  RMR provides management and administrative services to 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.  As of September 30, 2011, we have invested approximately $5,209 in AIC.  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.  Our investment had a carrying value of $5,245 and $5,076 as of September 30, 2011 and December 31, 2010, respectively.  During the three and nine months ended September 30, 2011 and 2010 we recognized income of approximately $28 and $111 and income of $35 and a loss of $17, respectively, related to this investment.  In 2010, AIC designed a combination property insurance program for us and other AIC shareholders in which AIC participates as a reinsurer.  That program was modified and extended in June 2011 for a one year term.  Our total premiums under this program for the policy years expiring May 31, 2011 and 2012 were approximately $275 and $1,170, respectively.  We are currently investigating the possibilities to expand our insurance relationships with AIC to include other types of insurance. 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 more information about these and other relationships among us, our Trustees, our executive officers, Five Star, CWH, RMR, AIC, other companies to which RMR provides management services, and others affiliated with or related to them and about the risks which may arise as a result of those and other related person transactions and relationships, please see elsewhere in this report, including Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Related Person Transactions” and “Warning Concerning Forward Looking Statements”, and our Annual Report, our Proxy Statement for our 2011 Annual Meeting of Shareholders dated February 24, 2011, or our Proxy Statement, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, or our Quarterly Report, our Current Reports on Form 8-K dated March 8, 2011, May 13, 2011, June 27, 2011, September 1, 2011, September 23, 2011, October 12, 2011, and our other filings with the SEC including the sections captioned “Business”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Person Transactions” and “Warning Concerning Forward Looking Statements” in our Annual Report and the information regarding our Trustees and executive officers and the section captioned “Related Person Transactions and Company Review of Such Transactions” in our Proxy Statement.  In addition, please see the “Risk Factors” section of our Annual Report for a description of risks which may arise from these transactions and relationships.  Our filings with the SEC, including our Annual Report, our Quarterly Reports, our Proxy Statement and our Current Reports on Form 8-K, are available on the SEC’s website at www.sec.gov.  In addition, copies of certain of our agreements with these parties are also publicly available as exhibits to our public filings with the SEC and accessible at the SEC’s website, including our lease agreements, the Bridge Loan and form of management agreement and related pooling agreement we have with Five Star and our business management and property management agreements with RMR.