CONCENTRATION OF CREDIT RISK

9 Months Ended

Sep. 30, 2023

NOTE 3—CONCENTRATION OF CREDIT RISK

As of September 30, 2023, Atria, Sunrise, Brookdale Senior Living, Ardent and Kindred managed or operated approximately 23.6%, 9.3%, 7.6%, 5.1% and 0.8%, respectively, of our consolidated real estate investments based on gross book value (excluding properties classified as held for sale as of September 30, 2023). Because Atria and Sunrise manage our properties in exchange for a management fee from us, we are not directly exposed to their credit risk in the same manner or to the same extent as triple-net tenants like Brookdale Senior Living, Ardent and Kindred.

Based on gross book value, approximately 10.6% and 55.0% of our consolidated real estate investments were senior housing communities included in the triple-net leased properties and SHOP reportable business segments, respectively (excluding properties classified as held for sale as of September 30, 2023). Outpatient medical buildings, research centers, inpatient rehabilitation facilities (“IRFs”) and long-term acute care facilities (“LTACs”), health systems, skilled nursing facilities (“SNFs”) and secured loans receivable and investments collectively comprised the remaining 34.4%. Our consolidated properties were located in 47 states, the District of Columbia, seven Canadian provinces and the United Kingdom as of September 30, 2023, with properties in one state (California) accounting for more than 10% of our total consolidated revenues and net operating income (“NOI,” which is defined as total revenues, less interest and other income, property-level operating expenses and third party capital management expenses) for each of the three months ended September 30, 2023 and 2022. See “Non-GAAP Financial Measures” included elsewhere in this Quarterly Report on Form 10-Q for additional disclosure and a reconciliation of net income attributable to common stockholders, as computed in accordance with GAAP, to NOI.

Triple-Net Leased Properties

The properties we triple-net leased to Brookdale Senior Living, Ardent and Kindred accounted for a significant portion of total revenues and total NOI for the three months ended September 30, 2023 and 2022. The following table reflects the concentration risk related to our triple-net leased properties including assets held for sale for the periods presented:


	For the Three Months Ended September 30,
	2023		2022
Contribution as a Percentage of Total Revenues (1):
Brookdale Senior Living	3.3	%	3.6	%
Ardent	2.9		3.1
Kindred	2.9		3.3
Contribution as a Percentage of Total NOI (2):
Brookdale Senior Living	7.6	%	8.0	%
Ardent	6.8		7.0
Kindred	6.8		7.4

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(1)Total revenues include third party capital management revenues, income from loans and investments and interest and other income.

(2)See “Non-GAAP Financial Measures” included elsewhere in this Quarterly Report on Form 10-Q for additional disclosure and a reconciliation of net income attributable to common stockholders, as computed in accordance with GAAP, to NOI.

Each of our leases with Brookdale Senior Living, Ardent and Kindred 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 our Brookdale Senior Living, Ardent and Kindred leases is guaranteed by a corporate parent.

Kindred Lease

As of September 30, 2023, we leased 29 properties to Kindred pursuant to a single, triple-net master lease agreement (together with certain other agreements related to such master lease, collectively, the “Kindred Lease”). As of September 30, 2023, the Kindred Lease represented approximately 6.8% of the Company’s Total NOI.

Pursuant to the Kindred Lease, the 29 properties are divided into two groups. The first group is composed of 6 properties (“Group 1”) and the second group is composed of 23 properties (“Group 2”). The existing term of the Kindred Lease expires on April 30, 2028 for Group 1 and April 30, 2025 for Group 2. Kindred has the option to renew the Kindred Lease for the Group 1 properties for two 5-year extensions at the greater of escalated rent and fair market rent by providing written notice no later than one year prior to the applicable expiration date. Kindred currently has the option to renew the Kindred Lease for the Group 2 properties for one 5-year extension by providing written notice to us before May 1, 2024. The Kindred Lease is guaranteed by a parent company.

The COVID-19 pandemic led to elevated volumes and financial performance at the properties. As the pandemic receded, the financial performance has declined, largely driven by significantly elevated labor expense, including contract labor, and lower volumes. While we believe that Kindred has taken and is taking targeted actions to attempt to improve the performance of the properties, there can be no assurance that Kindred will be able to do so. See also “Part I—Item 1A. Risk Factors—Risks Related to Our Business Operations and Strategy—If we need to replace any of our tenants or managers, we may be unable to do so on as favorable terms, if at all, and we could be subject to delays, limitations and expenses, which could adversely affect our business, financial condition and results of operations”, “Part I—Item 1A. Risk Factors—Risks Related to Our Business Operations and Strategy—A significant portion of our revenues and operating income is dependent on a limited number of tenants and managers, including Brookdale Senior Living, Ardent, Kindred, Atria and Sunrise” and “Part I—Item 1A. Risk Factors—Risks Related to Our Business Operations and Strategy—We face potential adverse consequences from the bankruptcy, insolvency or financial deterioration of our tenants, managers, borrowers and other obligors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Senior Housing Operating Portfolio

As of September 30, 2023, Atria and Sunrise, collectively, provided comprehensive property management and accounting services with respect to 313 of our 583 consolidated senior housing communities, for which we pay annual management fees pursuant to long-term management agreements.

As of September 30, 2023, Atria and its subsidiaries, including Holiday, managed a pool of 221 senior housing communities for Ventas. Ventas has the right to terminate the management contract for 70 of the communities on short notice.

As of September 30, 2023, Sunrise managed 92 communities for Ventas pursuant to multiple management agreements (collectively, the “Sunrise Management Agreements”). Our Sunrise Management Agreements have initial terms expiring between 2035 and 2040. Ventas has the ability to terminate some or all of the Sunrise Management Agreements under certain circumstances.

We rely on our managers’ personnel, expertise, technical resources and information systems, proprietary information, good faith and judgment to manage our senior housing operating portfolio efficiently and effectively. We also rely on our managers to set appropriate resident fees, provide accurate property-level financial results in a timely manner and otherwise operate our senior housing communities in compliance with the terms of our management agreements and all applicable laws and regulations.