NOTE 14. Segment Disclosures

The Company evaluates its business and makes resource allocations based on its five business segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital. Under the medical office segment, the Company invests through the acquisition and development of medical office buildings (“MOBs”), which generally require a greater level of property management. Otherwise, the Company primarily invests, through the acquisition and development of real estate, in single tenant and operator properties and debt issued by tenants and operators in these sectors. The accounting policies of the segments are the same as those described under Summary of Significant Accounting Policies (see Note 2). There were no intersegment sales or transfers during the years ended December 31, 2014, 2013 and 2012. The Company evaluates performance based upon property net operating income from continuing operations (“NOI”), adjusted NOI (or “cash NOI”) and interest income of the combined investments in each segment.

Non-segment assets consist primarily of corporate assets including cash and cash equivalents, restricted cash, accounts receivable, net, marketable equity securities, deferred financing costs and, if any, real estate held for sale. Interest expense, depreciation and amortization and non-property specific revenues and expenses are not allocated to individual segments in determining the Company’s segment-level performance.

Summary information for the reportable segments follows (in thousands):

For the year ended December 31, 2014:


			Resident				Investment
	Rental		Fees and		Interest		Management		Total				Adjusted
Segments	Revenues(1)		Services		Income		Fee Income		Revenues		NOI(2)		(Cash) NOI(2)
Senior housing	$	621,114	$	241,965	$	14,249	$	—	$	877,328	$	695,672	$	617,475
Post-acute/skilled nursing		555,322		—		60,242		—		615,564		553,235		484,094
Life science		314,114		—		—		4		314,118		251,034		240,959
Medical office		370,956		—		—		1,805		372,761		222,757		221,351
Hospital		86,508		—		—		—		86,508		82,678		83,121
Total	$	1,948,014	$	241,965	$	74,491	$	1,809	$	2,266,279	$	1,805,376	$	1,647,000

For the year ended December 31, 2013:


			Resident				Investment
	Rental		Fees and		Interest		Management		Total				Adjusted
Segments	Revenues(1)		Services		Income		Fee Income		Revenues		NOI(2)		(Cash) NOI(2)
Senior housing	$	602,506	$	146,288	$	11,621	$	—	$	760,415	$	653,191	$	594,492
Post-acute/skilled nursing		541,805		—		73,595		—		615,400		539,320		467,508
Life science		296,879		—		—		4		296,883		239,923		228,475
Medical office		352,334		—		—		1,843		354,177		212,958		210,811
Hospital		72,060		—		943		—		73,003		68,198		79,752
Total	$	1,865,584	$	146,288	$	86,159	$	1,847	$	2,099,878	$	1,713,590	$	1,581,038

For the year ended December 31, 2012:


			Resident				Investment
	Rental		Fees and		Interest		Management		Total				Adjusted
Segments	Revenues(1)		Services		Income		Fee Income		Revenues		NOI(2)		(Cash) NOI(2)
Senior housing	$	481,559	$	139,073	$	3,503	$	—	$	624,135	$	529,209	$	478,671
Post-acute/skilled nursing		530,037		—		19,993		—		550,030		529,562		453,456
Life science		289,664		—		—		4		289,668		236,491		226,997
Medical office		333,008		—		—		1,891		334,899		200,876		195,761
Hospital		80,198		—		1,040		—		81,238		76,685		75,104
Total	$	1,714,466	$	139,073	$	24,536	$	1,895	$	1,879,970	$	1,572,823	$	1,429,989

(1)

Represents rental and related revenues, tenant recoveries, and income from DFLs.

(2)

NOI and Adjusted NOI are non-GAAP supplemental financial measures used to evaluate the operating performance of real estate. The Company defines NOI as rental and related revenues, including tenant recoveries, resident fees and services, and income from DFLs, less property level operating expense; NOI excludes all other financial statement amounts included in net income as presented below. The Company believes NOI provides relevant and useful information because it reflects only income and operating expense items that are incurred at the property level and presents them on an unleveraged basis. Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL accretion, amortization of market lease intangibles and lease termination fees. Adjusted NOI is oftentimes referred to as “cash NOI.” The Company uses NOI and adjusted NOI to make decisions about resource allocations and to assess and compare property level performance. The Company believes that net income is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income as defined by GAAP because it does not reflect various excluded items. Further, the Company’s definition of NOI may not be comparable to the definition used by other REITs or real estate companies, as those companies may use different methodologies for calculating NOI.

The following is a reconciliation from reported net income to NOI and adjusted (cash) NOI (in thousands):


	Year ended December 31,
	2014		2013		2012
Net income	$	936,591	$	985,006	$	846,842
Interest income		(74,491)		(86,159)		(24,536)
Investment management fee income		(1,809)		(1,847)		(1,895)
Interest expense		439,742		435,252		416,172
Depreciation and amortization		459,995		423,312		353,704
Acquisition and pursuit costs		17,142		6,191		10,981
General and administrative		82,175		103,042		68,414
Impairments		—		—		7,878
Gains on sales of real estate, net of income taxes		(3,288)		—		—
Other income, net		(7,528)		(18,216)		(2,976)
Income taxes		250		5,815		(1,654)
Equity income from unconsolidated joint ventures		(49,570)		(64,433)		(54,455)
Impairments of investments in unconsolidated joint ventures		35,913		—		—
Total discontinued operations		(29,746)		(74,373)		(45,652)
NOI		1,805,376		1,713,590		1,572,823
Straight-line rents		(41,032)		(39,587)		(47,311)
DFL accretion		(77,568)		(86,055)		(94,240)
Amortization of market lease intangibles, net		(949)		(6,646)		(2,232)
Lease termination fees		(38,816)		(217)		(636)
NOI adjustments related to discontinued operations		(11)		(47)		1,585
Adjusted (Cash) NOI	$	1,647,000	$	1,581,038	$	1,429,989

The Company’s total assets by segment were (in thousands):


	December 31,
Segments	2014		2013
Senior housing	$	8,383,345	$	7,803,085
Post-acute/skilled nursing		6,875,122		6,266,938
Life science		4,154,789		3,986,187
Medical office		2,988,888		2,686,069
Hospital		640,253		639,357
Gross segment assets		23,042,397		21,381,636
Accumulated depreciation and amortization		(2,600,072)		(2,257,188)
Net segment assets		20,442,325		19,124,448
Assets held for sale, net		—		9,819
Other nonsegment assets		927,615		941,603
Total assets	$	21,369,940	$	20,075,870

At both December 31, 2014 and 2013, goodwill of $50 million was allocated to segment assets as follows: (i) senior housing—$31 million, (ii) post-acute/skilled nursing—$3 million, (iii) medical office—$11 million, and (iv) hospital—$5 million. The Company completed the required annual impairment test during the fourth quarter ended December 31, 2014; no impairment was recognized based on the results of this impairment test.

Concentration of Credit Risk

Concentrations of credit risk arise when one or more tenants, operators or obligors related to the Company’s investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of risks. The Company does not have significant foreign operations.

The following table provides information regarding the Company’s concentrations with respect to certain tenants and operators; the information provided is presented for the gross assets and revenues that are associated with certain tenants and operators as percentages of their respective segment’s and total Company’s gross assets and revenues:


	Percentage of		Percentage of
	Senior Housing Gross Assets		Senior Housing Revenues
	December 31,		Year Ended December 31,
Operators	2014	2013	2014	2013	2012
Brookdale (1)	36	48	37	46	37
HCRMC	11	11	8	10	11


	Percentage of Post-Acute/		Percentage of Post-Acute/
	Skilled Nursing Gross Assets		Skilled Nursing Revenues
	December 31,		Year Ended December 31,
Operators	2014	2013	2014	2013	2012
HCRMC	82	89	85	83	91


	Percentage of Total		Percentage of
	Company Gross Assets		Total Company Revenues
	December 31,		Year Ended December 31,
Operators	2014	2013	2014	2013	2012
HCRMC	31	32	26	28	30
Brookdale (1)	13	19	14	17	12

(1)

On July 31, 2014, Brookdale completed its acquisition of Emeritus. These percentages of segment gross assets, total gross assets, segment revenues and total revenues, for all periods presented are prepared on a pro forma basis to reflect the combined concentration for Brookdale and Emeritus, as if the merger had occurred as of the beginning of the periods presented. On August 29, 2014, the Company and Brookdale amended or terminated all former leases with Emeritus and entered into two RIDEA joint ventures (see Note 3). Percentages do not include senior housing facilities that Brookdale manages (is not a tenant) under a RIDEA structure.

As of January 1, 2015, Brookdale provided comprehensive facility management and accounting services with respect to 69 of the Company’s senior housing facilities and 14 CCRCs owned by the CCRC JV, for which the Company or joint venture pay annual management fees pursuant to long-term management agreements. Most of the management agreements have terms ranging from 10 to 15 years, with 5-year renewals. The base management fees are 4.5% to 5.0% of gross revenues (as defined) generated by the RIDEA facilities. In addition, there are incentive management fees payable to Brookdale if operating results of the RIDEA properties exceed pre-established EBITDAR (as defined) thresholds.

Brookdale is subject to the registration and reporting requirements of the U.S. Securities and Exchange Commission (“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 Brookdale contained or referred to in this report has been derived from SEC filings made by Brookdale or other publicly available information, or was provided to the Company by Brookdale, and the Company has not verified this information through an independent investigation or otherwise. The Company has no reason to believe that this information is inaccurate in any material respect, but the Company cannot assure the reader of its accuracy. The Company is providing this data for informational purposes only, and encourages the reader to obtain Brookdale’s publicly available filings, which can be found at the SEC’s website at www.sec.gov.

To mitigate the credit risk of leasing properties to certain senior housing and post-acute/skilled nursing operators, leases with operators are often combined into portfolios that contain cross-default terms, so that if a tenant of any of the properties in a portfolio defaults on its obligations under its lease, the Company may pursue its remedies under the lease with respect to any of the properties in the portfolio. Certain portfolios also contain terms whereby the net operating profits of the properties are combined for the purpose of securing the funding of rental payments due under each lease.

At both December 31, 2014 and 2013, the Company’s gross real estate assets in the state of California, excluding assets held for sale, represented approximately 23% of the Company’s total gross assets. At both December 31, 2014 and 2013, the Company’s gross real estate assets in the state of Texas, excluding assets held for sale, represented approximately 13% of the Company’s total gross assets. For the years ended December 31, 2014, 2013 and 2012, the Company’s revenues derived from properties located in the states of California represented approximately 23%, 21% and 22% of the Company’s total revenues, respectively. For the years ended December 31, 2014, 2013 and 2012, the Company’s revenues derived from properties located in the states of Texas represented approximately 12%, 11% and 11% of the Company’s total revenues, respectively.