NOTE 17. 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 credit risks. The Company does not have significant foreign operations.

The following tables provide information regarding the Company’s concentrations with respect to certain tenants:


	Percentage of				Percentage of
	SH NNN Gross Assets				SH NNN Revenues
	September 30,		December 31,		Three Months Ended September 30,				Nine Months Ended September 30,
Tenant	2016		2015		2016		2015		2016		2015
Brookdale	54	%	53	%	60	%	59	%	59	%	58	%


	Percentage of				Percentage of
	QCP Gross Assets				QCP Revenues
	September 30,		December 31,		Three Months Ended September 30,				Nine Months Ended September 30,
Tenant	2016		2015		2016		2015		2016		2015
HCRMC(1)	96	%	96	%	94	%	95	%	94	%	95	%


	Percentage of				Percentage of
	Total Company Gross Assets				Total Company Revenues
	September 30,		December 31,		Three Months Ended September 30,				Nine Months Ended September 30,
Tenant	2016		2015		2016		2015		2016		2015
HCRMC(1)	24	%	24	%	18	%	21	%	18	%	23	%
Brookdale(2)	13	%	13	%	10	%	9	%	10	%	10	%

(1)

Subsequent to the Spin-Off on October 31, 2016, the Company’s concentration in HCRMC was reduced to less than 10 percent.

(2)

Excludes senior housing facilities operated by Brookdale in the Company’s SHOP segment, as discussed below.

As of September 30, 2016 and December 31, 2015, Brookdale managed or operated approximately 13% and 13%, respectively, of the Company’s real estate investments based on gross assets. Because an operator manages the Company’s facilities in exchange for the receipt of a management fee, the Company is not directly exposed to the credit risk of its operators in the same manner or to the same extent as its triple-net tenants. As of September 30, 2016, Brookdale provided comprehensive facility management and accounting services with respect to 107 of the Company’s senior housing facilities and 15 CCRCs owned by the CCRC JV, for which the Company or JV pay annual management fees pursuant to long-term management agreements. Most of the management agreements have terms ranging from 10 to 15 years, with three to four 5-year renewal periods. 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 SEC and is required to file annual reports containing audited financial information and quarterly reports containing unaudited financial information with the SEC. 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 on the SEC’s website at www.sec.gov.

To mitigate the credit risk of leasing properties to certain 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.